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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File Number:
December 31, 2000 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value Nasdaq
Securities registered pursuant to Section 12(g) of the Act:
None
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant as of March 15, 2001 was $5,257,408.
As of March 15, 2001 there were 9,066,365 shares of common stock, $.01 par
value, outstanding.
Documents incorporated by reference
Portions of the definitive Proxy Statement for the registrant's 2001
Annual Meeting of Shareholders to be held on May 22, 2001, are incorporated by
reference in Part III of this Form 10-K.
Table of Contents
Page
Part I
Item 1. Business........................................................Page 1
Item 2. Properties.....................................................Page 13
Item 3. Legal Proceedings..............................................Page 13
Item 4. Submission of Matters to a Vote of Security Holders............Page 13
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters ....................................................Page 14
Item 6. Selected Consolidated Financial Data...........................Page 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................Page 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....Page 23
Item 8. Financial Statements and Supplementary Data....................Page 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................Page 23
Part III
General ................................................................Page 24
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ...................................................Page 24
Signatures..............................................................Page 25
Index to Consolidated Financial Statements and Schedule.....................F-1
Index to Exhibits...........................................................E-1
PART I
ITEM 1. BUSINESS
General Development of the Business
Except as otherwise indicated, references to the "Company" refer to DSI
Toys, Inc. and its four wholly owned Hong Kong subsidiaries, DSI(HK) Limited
("DSI(HK)"), Meritus Industries Limited, RSP Products Limited and Elite Dolls
Limited. 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 (e.g., a
reference to fiscal 2000 is a reference to the fiscal year ended December 31,
2000). Effective December 31, 1999, the Company changed its fiscal year end from
January 31 to a calendar year end.
The Company designs, develops, markets and distributes high quality,
innovative dolls, toys and consumer electronics products. Core products include
youth electronics such as Tech-Link(R) brand communications products,
eoBRAIN(TM) brand hand-held electronic companions, Kawasaki(R) brand musical
instruments, GearHead(R) brand remote control vehicles and a full range of doll
brands including Sweet Faith(R), Pride and Joy(TM), Too Cute Twins(TM), Hush
Li'l Baby(R), Little Darlings(TM), and the Elite(R) brand of Lifetime Play
Dolls(TM) and Fashion Buzz(TM) Air Nails Salon(TM) activity sets.
Meritus Acquisition
Effective January 7, 2000, the Company acquired by way of merger Meritus
Industries, Inc. ("Meritus"), a privately held toy manufacturer headquartered in
Fairfield, New Jersey, engaged in the manufacturing and marketing of dolls, doll
houses, doll accessories, and Girls' Toys. Pursuant to the terms of the merger,
the Company acquired all of the issued and outstanding stock of Meritus for
533,208 shares of the Company's Common Stock and $2.8 million in other
consideration paid to the shareholders of Meritus. Contemporaneously with the
merger, the Company satisfied $4.4 million of Meritus' debt.
As a result of the merger, the Company added the Baby Beans(R) brand soft
bean bag dolls, Forever Girl Friends(R) brand accessories for 11-1/2" fashion
dolls, and Little Darlings(TM) brand value-priced action feature dolls to its
product offerings, as well as the Elite Dolls(TM) brand, which was created by
Meritus specifically to manufacture and market Lifetime Play Dolls(TM), a line
of exquisite 18" dolls and accessories suitable for playing or collecting. The
brands acquired from Meritus are available at retail toy outlets and specialty
stores and are sold in more than 40 countries worldwide.
Also 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).
The Company was incorporated in Texas in 1970. Its executive offices are
located at 1100 West Sam Houston Parkway, North, Houston, Texas, telephone (713)
365-9900. The Company maintains its primary worldwide website at
www.dsitoys.com.
Description of Business Segments and Products
The Company has three major product categories which represent the
Company's operating segments: Juvenile Audio Products, Girls' Toys and Boys'
Toys. Notwithstanding the foregoing, because these operating segments all have
similar economic characteristics, the Company has one reportable business
segment. For additional information with respect to the Company's business
segment reporting, see Note 12 to the Consolidated Financial Statements.
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Juvenile Audio Products
The Juvenile Audio Product category consists of Youth Communications
products and Musical Instruments. Products in the Youth Communications line
include walkie-talkies, wrist watch walkie-talkies, and audio products. The
portfolio of brands in this category include Tech-Link(R) and Micro Link(TM)
communications products, Harley-Davidson(R) walkie-talkies and bike alarms, and
the Company's new eoBRAIN(TM) brand hand-held electronic companions. The Musical
Instrument line includes the branded category of Kawasaki(R) guitars, drum pads,
saxophones, keyboards and mixer keyboards and Josie and The Pussycats(TM)
guitars, keyboards, drum pads and tambourines.
Girls' Toys
The Girls' Toys product category includes dolls, plush toys, play sets,
accessories, and activity toys. The Girls' Toys portfolio of brands includes
Sweet Faith(R), Pride & Joy(TM), Dear Grace(TM), Good Will(TM), Precious
Prayers(TM), Little Darlings(TM), Hush Li'l Baby(R), Baby Beans(R) and the
Elite(R) brand of Lifetime Play Dolls(TM). New introductions for 2001 in this
category include the Too Cute Twins(TM), Susie So Smart(TM), and "Happy Birthday
to You" dolls, Kitty Kitty Kittens(R) plush toys, and the unique Fashion
Buzz(TM) Air Nails Salon(TM) activity set.
Boys' Toys
The Boys' Toys product category includes remote control and infra-red
control vehicles. The portfolio of brands in this product category are
GearHead(TM) remote control vehicles, including the Insector(TM), and the new
unique ultra-articulated Street Savage(TM). The GearHead(TM) brand also includes
GearHead(TM)Jr. infra-red control vehicles.
Product Introductions
New product introductions during 2000 included the Insector(TM) R/C
vehicles, the Micro Link(TM) walkie-talkie wrist watch, the Data Dawg(TM)
interactive pet, the Kawasaki(R) Bang-A-Boom(TM) percussion instrument and the
Good Will(TM), Dear Grace(TM), Precious Prayers(TM), and Hush Li'l Baby(R)
dolls. Additionally, the Company acquired the following product lines in
connection with the Meritus acquisition: the Baby Beans(R) brand soft bean bag
dolls, the Forever Girl Friends(R) brand accessories for 11 1/2" fashion dolls,
and the Elite Dolls(TM) brand of 18" dolls and accessories.
The following table depicts the Company's net sales, as a percentage of
total net sales, by product category for the fiscal years indicated.
Product Category 2000 1999 1998
----- ----- -----
Juvenile Audio Products 39.5% 61.0% 72.6%
Girls' Toys 39.8 14.5 5.8
Boys' Toys 18.0 19.0 14.5
Other 2.7 5.5 7.1
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The significant increase in Girls' Toys as a percentage of net sales
reflects the acquisition of Meritus and its product lines in January 2000.
Meritus was engaged in the development, manufacture and marketing of Girls' Toys
only. Excluding the Meritus items, Girls' Toys would be 29.1% of sales, and
Juvenile Audio Products, Boys' Toys and Other would be 46.5%, 21.2%, and 3.2%
respectively.
Between 30% and 40% of the Company's products (by dollar volume of net
sales) are replaced each year through the introduction of new products. As a
result of this turnover, product development is critical to the Company's
business. The Company develops both proprietary and non-proprietary products.
The Company's proprietary product lines consist of products that (i) are
licensed from outside inventors and designers, (ii) incorporate trademarks
licensed to the Company, (iii) are designed in-house, or (iv) are
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manufactured using Company owned tooling, dies and molds based on a
proprietary design or idea owned by the Company or the inventor. Proprietary
toys accounted for approximately 78%, 72%, and 47% of the Company's net sales
for fiscal 2000, 1999, and 1998, respectively. The Company's proprietary
products generally yield higher gross margins to the Company than
non-proprietary products.
Non-proprietary products are defined by the Company as toys designed and
manufactured by independent toy manufacturers and marketed by the Company,
usually on an exclusive basis in the Company's primary markets. The Company
selects its non-proprietary products after an evaluation of several factors,
including the quality and pricing of the product, as well as whether the product
presents an opportunity for the Company to utilize packaging and marketing to
differentiate the product from other toys. The Company often markets these toys
under in-house brands, such as Tech-Link(R) and My Music Maker(R).
Non-proprietary products accounted for approximately 22%, 28%, and 53% of the
Company's net sales for fiscal 2000, 1999 and 1998, respectively.
Customers
The Company made sales to over 750 different customers in approximately 50
countries during fiscal 2000. The table below sets forth the Company's net sales
by geographic area as a percentage of total net sales for the specified fiscal
years.
Geographic Area 2000 1999 1998
----- ----- -----
United States 81.1% 77.4% 79.0%
All Foreign Countries 18.9 22.6 21.0
The Company's principal customers are retailers, including mass
merchandising discounters such as Wal-Mart, Kmart and Target, specialty toy
retailers such as Toys "R" Us, Kay Bee Toy & Hobby, FAO Schwarz, ZanyBrainy, and
QVC, and deep discount stores such as Family Dollar Stores, Inc., Consolidated
Stores Corporation and Value City Department Stores, Inc. The Company's top five
customers accounted for approximately 46% of the Company's net sales in fiscal
2000. Wal-Mart and Toys "R" Us accounted for 18.1% and 11.5%, respectively, of
the Company's net sales during fiscal 2000. In fiscal 1999, Wal-Mart accounted
for 20.8% of the Company's annual net sales. The only customers that accounted
for more than 10% of the Company's annual net sales in Fiscal 1998 were Wal-Mart
(18.7%) and Toys "R" Us (10.6%). During fiscal 2000, the Company's sales to Toys
"R" Us, Wal-Mart, Kmart, Target and Kay-Bee Toy & Hobby, the five largest toy
retailers in the United States, increased as a percentage of the Company's net
sales to 46.1% compared to 42.5% of net sales during fiscal 1999 and 46.3% of
net sales during fiscal 1998. The Company does not have long-term contractual
arrangements with its customers.
The increase in sales in the United States as a percentage of the total
net sales reflects the effects of the addition of Meritus, which historically
has had minimal international sales. Notwithstanding the foregoing, within the
United States the Company and Meritus had very similar customer bases; as a
result there was no change in the Company's top five customers due to the
Meritus acquisition. The increase in sales to Toys "R" Us as a percentage of the
Company's total net sales, however, was significantly due to the additions of
the Meritus product lines.
Marketing and Sales
The Company's selling strategy consists of in-house sales personnel and a
network of independent, commission-based sales representatives. Significant
product presentations are made by either executive management, in the case of
new product presentations, or in-house sales personnel. The independent sales
representatives manage the day-to-day account administration.
New toys are marketed primarily by members of the Company's executive
management and sales department at the Company's showrooms in Hong Kong, New
York and Dallas during major, international toy shows in those cities (Hong Kong
in January, July and September/October, Dallas in January, and New York in
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February and October). The Company also maintains showrooms at its headquarters
in Houston and in New Jersey.
In international markets, the Company generally sells its products to
independent distributors. These distributors retain their own sales
representatives and product showrooms where products are marketed and sold. The
Company also sells directly to international retailers, principally as a result
of contacts made at the Company's showrooms.
Advertising
In recent years, the Company has allocated the majority of its advertising
budget to television promotion, retailer-based programs and print advertising.
The Company utilized a television advertising campaign for the first time in
fiscal 1995 in connection with the introduction of the Rosie(R) doll. Spending
on television advertising in fiscal 1998 was significantly reduced, and in
fiscal 1999, the Company utilized television advertising only to conduct a
market test of its doll, Hush Li'l Baby(R). During 2000, the Company increased
its television advertising with the television promotion of the Insector(TM) R/C
vehicle and Hush Li'l Baby(R) doll as well as conducting a market test of its
doll, Susie So Smart(TM). In addition, during 2000 the Company utilized a
portion of its advertising budget on print advertising for the Pride & Joy(TM)
product line as well as participating in retailer based programs. The Company
expects to expand its promotional programs to include increased television and
consumer magazine advertising of certain, unique proprietary products, as well
as year-round public relations programs, participation in national
consumer-based toy test awards programs, internet linkages where appropriate,
trade advertising and traditional retailer-based ad programs including
cooperative promotional ads, special offers and retail catalogues.
Manufacturing
The Company annually contracts with 30 or more independent manufacturers
located principally in the Peoples' Republic of China (the "PRC") within a
300-mile radius of Hong Kong for the manufacture of its products. The Company
may use more than one manufacturer to produce a single product. The
manufacturers that accounted for more than 10% of the Company's purchases of
products during fiscal 2000 were Potex Toys Manufacturer Ltd. (16.5%), which
manufactured musical instruments and infrared control vehicles; Wah Lung
(14.7%), which manufactured dolls and girls' playsets; Jetwin (14.4%), which
manufactured plush toys and dolls; and Loyal Technology Co. Ltd. (11.3%), which
manufactured walkie-talkies and audio products. Manufacturing commitments are
made on a purchase order basis. The Company does not have long-term contractual
arrangements with its manufacturers.
Decisions related to the choice of manufacturer for non-proprietary
products generally are based on reliability, quality of merchandise, price and
the ability of the manufacturer to meet the Company's or its customers' delivery
requirements. Proprietary products designed by the Company are placed with a
specific manufacturer whose expertise is in that type of toy. The Company
currently has its tooling placed in several different manufacturing facilities
and generally receives delivery 60 to 90 days after its purchase orders are
booked.
One of the Company's subsidiaries, DSI(HK), monitors manufacturing
operations, including quality control, production scheduling and order
fulfillment from the manufacturers. DSI(HK) utilizes a quality control and
assurance staff of degreed engineers and inspectors. As a result of its
merger with Meritus, the Company acquired three additional wholly-owned Hong
Kong subsidiaries: Meritus Industries Limited, RSP Products Limited, and
Elite Dolls Limited, which subsidiaries are engaged in the Company's doll
manufacturing operations. The Company is in the process of consolidating the
three acquired subsidiaries with DSI(HK).
The principal materials used in the production of the Company's products
are plastics, integrated circuits, batteries, corrugated paper (used in
packaging and packing material) and textiles. The Company believes that an
adequate supply of materials used in the manufacture and packaging of its
products is readily available from existing and alternative sources at
reasonable prices.
4
Distribution
The Company distributes its products either FOB Asia or through direct
sales made from inventory maintained at its Houston facilities. For FOB Asia
sales, the customer places its order and provides shipping instructions, and the
toys are then manufactured and shipped directly from the factory to the customer
or its freight consolidator.
Basic, continuous stock toys that are offered by retailers on a year-round
basis generally are shipped to customers by the Company from its inventory in
Houston. In addition, certain faster-selling toys are often shipped directly to
major customers for seasonal selling and are stocked by the Company in Houston
for peak season back-up and continuous supply. The Company also maintains
inventory which is intended for specific customers for peak holiday season
support, as well as some inventory which is available for smaller retailers and
for opportunistic selling strategies.
Most of the Company's larger customers have instituted electronic data
interchange ("EDI") programs to reduce the retailers' inventory carrying
requirements and place more inventory risk on the supplier. When selling toys
out of its Houston inventory, the Company participates in the EDI programs of
most of its customers who have established EDI programs, including Wal-Mart,
Kmart, Toys "R" Us, Target and Kay-Bee Toy & Hobby. Although these programs
require the Company to bear some inventory risk, the Company believes the
programs can be utilized to monitor store inventory levels, schedule production
to meet anticipated reorders and maintain sufficient inventory levels to serve
its customers.
License Agreements
Various license agreements with third parties, including Kawasaki Motors
Corp., U.S.A., ("Kawasaki") Discovery Communications, Inc. ("Discovery Channel")
and inventors, permit the Company to utilize the trademark, character or product
of the licensor in its product line. In return, the Company agrees to pay a
percentage of net sales ("royalty rate") of the licensed product. Typically,
these royalty rates range from 4% to 7% of net sales. Sales of licensed products
such as the Insector(TM) R/C vehicle, the Pride & Joy(TM) brand dolls, and the
Kawasaki(R) musical instruments accounted for approximately 59%, 54% and 24% of
the Company's net sales during fiscal 2000, 1999, and 1998, respectively. The
acquisition of licenses also typically requires the payment of non-refundable
advances and/or guaranteed minimum royalties.
The Company initially entered into a license agreement with Kawasaki
Motors Corp., USA in January of 1994, and that agreement together with
subsequent amendments, and renewals thereof, has authorized the Company to use
the Kawasaki(R) brand name in connection with several different products,
including R/C motorcycles, bicycle accessories, walkie-talkies and a complete
line of electronic musical instruments, including keyboards, guitars and
percussion instruments. The current agreement with Kawasaki expires on December
31, 2002. In addition, the Company has licenses with the World Wrestling
Federation Entertainment, Inc.; Discovery Communications, Inc. (Discovery
Channel(R)); AM General (HUMVEE(R) and HUMMER(R)); and Discovery Channel
Catalogue, LLC (Crocodile Hunter(TM)).
Recently, the Company entered into licensing agreements with the
following companies: (i) Archie Comic Publications, Inc., Riverdale
Productions, Inc., and Universal Studios Licensing, Inc. for the Josie and
The Pussycats(TM)trademark and characters for the marketing and sales of
musical instruments; (ii) Harley-Davidson Motor Company, Inc. for the
Harley-Davidson(R)trademarks and service marks for the marketing and sale of
communication products; (iii) the Timex Corporation for use of the Timex Data
Link(R)system with the eoBRAIN(TM) brand hand-held electronic companions;
(iv) GM Design Center, General Motors Corporation for the Chevrolet Super
Sport Roadster (SSR) trademark and related names, emblems and body designs
for the marketing and sale of R/C vehicles; and (v) Warner/Chappel Music,
Inc. (sublicense) for the "Happy Birthday to You" music and lyrics for the
marketing and sale of dolls, plush toys, and novelty products.
As of December 31, 2000, the aggregate guaranteed royalties payable by the
Company under all of its licenses total approximately $97,000 in fiscal 2001 and
$125,000 thereafter through fiscal 2003.
5
The Company believes that by developing licensed products based
principally on popular properties and trademarks, it can establish a licensed
product portfolio that is characterized by products with a longer life cycle
than is typical in the toy industry. The Company intends to continue to develop
its licensed product lines by targeting licensing opportunities to take
advantage of advertising, publicity and media exposure.
Competition
The toy industry is highly competitive. Dun & Bradstreet categorizes over
1,000 companies as toy manufacturers. Competitive factors include product
appeal, new product introductions, space allocation by the major retailers,
price and order fulfillment capability. The Company competes with many companies
that have greater financial resources and advertising budgets than the Company,
including Mattel, Inc. and Hasbro, Inc., the largest U.S. toy companies. The
Company also considers Trendmaster, Inc., The Lego Company, Inc., Playmates
Toys, Inc., ToyMax International, Inc., Toy Biz, Inc., KIDdesigns, Inc., and MGA
Entertainment to be among its other competitors. In addition, due to the low
barriers to entry into the toy business, the Company competes with many smaller
toy companies, some of which market single products.
Seasonality
Retail sales of toy products are seasonal, with a majority of retail sales
occurring during the Christmas holiday period: September through December. As a
result, shipments of toy products to retailers are typically greater in each of
the third and fourth quarters than in the first and second quarters combined.
This seasonality is increasing as the large toy retailers are becoming more
efficient in their inventory control systems. See "Risk Factors."
In anticipation of this seasonal increase in retail sales, the Company
significantly increases its production in advance of the peak selling period
during the second quarter, with a corresponding build-up of inventory levels.
This results in significant peaks in the second and third quarters in the
respective levels of inventories and accounts receivable, which result in
seasonal working capital financing requirements. See "Seasonal Financing."
Seasonal Financing
The Company's financing of seasonal working capital typically peaks in the
third quarter of the year, when accounts receivable are at their highest due to
increased sales volume and sales programs, and when inventories are at their
highest in anticipation of expected second half sales volume. See "Seasonality."
The Company finances its seasonal working capital requirements by using
internally generated cash and borrowings under its line of credit with State
Street Bank and Trust Company (the "Hong Kong Credit Facility") and its
revolving line of credit (the "Revolver") with Sunrock Capital Corp.
("Sunrock"). The Company entered into an amendment to the Revolver on March 30,
2001, increasing the line of credit from $10 million to $17.5 million.
The Company believes the cash flows from operations and amounts available
under its lines of credit, as well as proceeds from the Investment Warrant (See
Part II, Item 5 - Investment Warrant), will be adequate to meet its seasonal
requirements.
Government and Industry Regulation
The Company is subject to the provisions of the Federal Hazardous
Substances Act and the Federal Consumer Product Safety Act. Such Acts empower
the United States Consumer Products Safety Commission (the "CPSC") to protect
the public from hazardous goods. The CPSC has the authority to exclude from the
market goods that are found to be hazardous and require a manufacturer to
repurchase such goods under certain circumstances. The Company sends samples of
all of its marketed products to independent laboratories to test for compliance
with the CPSC's rules and regulations, as well as with the product standards of
the Toy Manufacturers of America, Inc. ("TMA"). The Company is not required to
comply with the product standards of the TMA but voluntarily does so. Similar
consumer protection laws exist in state and local jurisdictions within the
United States, as well as in certain foreign countries. The Company designs its
products to meet the highest safety standards imposed or recommended both by
government and industry regulatory authorities. To date, the
6
Company has not been found to be in material violation of any governmental
product standard with respect to the Company's products.
Tariffs and Duties
In December 1994, the United States approved a trade agreement pursuant
to which import duties on toys, games, dolls and other specified items were
eliminated, effective January 1, 1995, from products manufactured in all Most
Favored Nation countries (including the PRC). Increases in quotas, duties,
tariffs or other changes or trade restrictions which may be imposed in the
future could have a material adverse effect on the Company's financial
condition, operating results or ability to import products.
On October 12, 2000, federal legislation was signed into law establishing
Permanent Normal Trade Relations with the PRC, thereby eliminating the previous
risk experienced by the Company that the PRC's Most Favored Nation status would
be revoked, which could have subjected the Company to increased duties, supply
disruptions and higher costs of goods.
Intellectual Property
Most of the Company's products and product lines are marketed and sold
under trademarks, trade names and copyrights, including, without limitation: Air
Guitar(R), Baby Beans(R), Big Bam Boom(R), Elite(R), Forever Girlfriends(R),
Gearhead(R), Pride & Joy(TM), Rosie(R), Sweet Faith(R) and Tech-Link(R). The
Company considers its trademarks and trade names to be significant assets in
that they provide product and brand recognition.
The Company customarily seeks trademark, or copyright protection, when
applicable, covering its products and product lines. Several of these trademarks
and copyrights relate to product lines that are significant to the Company's
business and operations. While the Company believes that its rights to these
properties are adequately protected, there can be no assurance that its rights
can be successfully asserted in the future or will not be invalidated,
circumvented or challenged. See "Risk Factors."
Human Resources
As of December 31, 2000, the Company had a total of 101 employees, of
whom 41 were based in Houston, 12 were based in New Jersey and 48 were
employees of DSI(HK).
RISK FACTORS
This Risk Factors section is written to be responsive to the Securities
and Exchange Commission's "Plain English" guidelines. In this section the words
"we", "ours" and "us" refer only to the Company and its subsidiaries and not any
other person.
Changing Consumer Preferences, Reliance on New Product Introduction.
Consumer preferences are difficult to predict and the introduction of new
products is critical in our industry. Our business and operating results depend
largely upon the appeal of our products. A decline in the popularity of our
existing products and product lines or the failure of new products and product
lines to achieve and sustain market acceptance could result in lower overall
revenues and margins, which in turn could have a material adverse effect on our
business, financial condition, and results of operations. Our continued success
in the toy industry will depend on our ability to redesign, restyle and extend
our existing core products and product lines, and to develop, introduce and gain
customer acceptance of new products and product lines. As a result of changing
consumer preferences, individual products typically have short life cycles: two
years or less. There can be no assurance that:
o any of our current products or product lines will continue to be
popular with consumers for any significant period of time;
o any new products and product lines introduced by us will achieve an
adequate degree of market acceptance, or that if such acceptance is
achieved, it will be maintained for any significant period of time;
7
o any new products' life cycles will be sufficient to permit us to
recover development, manufacturing, marketing and other costs of the
products.
Dependence on Limited Number of Customers. A small number of our customers
account for a large share of our net sales. For fiscal 2000, our five largest
customers accounted for approximately 46% of the Company's net sales. Sales to
Wal-Mart, Toys "R" Us and K-Mart, the Company's three largest customers,
accounted for approximately 39% of our net sales during the same period. We
expect to continue to rely on a relatively small number of customers for a
significant percentage of sales for the foreseeable future. If some of these
customers were to cease doing business with us, or to significantly reduce the
amount of their purchases from us, it could have a material adverse effect on
our business, financial condition and results of operations.
Liquidity. Borrowings under the Revolver and the Hong Kong Credit
Facility are utilized by us to finance accounts receivable, inventory, and
other operating and capital requirements. We entered into the Revolver, on
February 21, 1999, and amended the Revolver on March 30, 2001 to increase the
Company's credit line from $10 million to $17.5 million. The Revolver matures
March 31, 2004, and contains covenants relating to our financial condition.
If we fail to maintain compliance with the financial covenants contained in
the Revolver, the maturity date can or will be accelerated, among other
remedies which may be pursued by the lender. The Hong Kong Credit Facility
was obtained on June 6, 1997, is reviewed on an annual basis and may be
canceled based on such review.
Dependence on Independent Designers, Licenses and Other Proprietary
Rights. We are dependent on concepts, technologies and other intellectual
property rights licensed from third parties, such as rights to trademarks, with
respect to several of our proprietary products. For each of these proprietary
products and product lines, we typically enter into a license agreement with the
owner of the intellectual property to permit us to use the intellectual
property. These license agreements typically provide for royalty payments by us
to the licensor based on the net sales of the product incorporating the licensed
property. For fiscal 2000, net sales of products developed and sold under our
license agreements accounted for approximately 59% of our net sales, of which
approximately 13% of net sales were attributable to sales of products
incorporating the Kawasaki(R) trademark. The failure to procure new license
agreements, renew existing license agreements (on commercially reasonable terms,
or at all), or maintain existing license agreements could have a material
adverse effect on our business, financial condition and results of operations.
In addition to the foregoing, we are dependent on our intellectual
property rights and we cannot give assurances that we will be able to
successfully protect such rights. We rely on a combination of trade secret,
copyright, trademark, patent and other proprietary rights laws to protect our
rights to valuable intellectual property related to our proprietary products. We
also rely on license and other agreements that establish ownership rights and to
maintain confidentiality. We cannot assure you that such intellectual property
rights can be successfully asserted in the future or will not be invalidated,
circumvented or challenged. Laws of certain foreign countries in which our
products may be sold do not protect intellectual property rights to the same
extent as the laws of the U.S. The failure to protect our proprietary
information and any successful intellectual property challenges or infringement
proceedings against us could have a material adverse effect on our business,
financial condition and results of operations.
We do not believe that any of our products infringe on the proprietary
rights of third parties in any material respect. There can be no assurance,
however, that third parties will not claim infringement by us with respect to
current or future products. Any such claim, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, which could have a material adverse effect on our business,
financial condition, and results of operations.
Inventory Management. Most of our larger retail customers utilize an
inventory management system to track sales of products and rely on reorders
being rapidly filled by us and other suppliers rather than maintaining large
product inventories. These types of systems put pressure on suppliers like us to
promptly fill customer
8
orders and also shift a significant portion of inventory risk and carrying costs
from the retailer to the supplier. The limited amount of inventory carried by
retailers may serve to reduce or delay retail sales of our products. In
addition, the logistics of supplying more product within shorter time periods
will increase the risk that we fail to achieve tight and compressed shipping
schedules. These inventory management systems require us to accurately forecast
demand for products. The failure to accurately predict and respond to retail
demand could result in our overproducing items, which could in turn result in
price markdowns and increased inventory carrying costs for us, as well as
underproducing more popular items.
Returns and Markdowns. As is customary in the toy industry, we
historically have permitted certain customers to return slow-moving items for
credit and have allowed price reductions as to certain products then held by
retailers in inventory. We expect that we will continue to make such
accommodations in the future. Any significant increase in the amount of returns
or markdowns could have a material adverse effect on our business, financial
condition and results of operations.
Seasonality. Our business is seasonal and therefore our annual operating
results depend, in large part, on our sales during the relatively brief
Christmas holiday season. A substantial portion of our net sales is made to
retailers in anticipation of the Christmas holiday season. This seasonality is
increasing as large toy retailers become more efficient in their control of
inventory levels through quick response management techniques. This seasonal
pattern requires significant use of working capital mainly to manufacture
inventory during the year, prior to the Christmas holiday season, and requires
accurate forecasting of demand for products during the Christmas holiday season.
During fiscal 2000, 71% of the Company's net sales were made during the third
and fourth fiscal quarters. Adverse business or economic conditions during these
periods could adversely affect our results of operations for the full year. In
addition, failure to accurately predict and respond to consumer demand may have
a material adverse effect on our business, financial condition and results of
operations.
International Operations. Our sales and manufacturing operations outside
the United States subject us to risks normally associated with international
operations. Various international risks could negatively impact our
international sales and manufacturing operations, which could have a material
adverse effect on our business, financial condition and results of operations.
For the year ended December 31, 2000, our international net revenues comprised
approximately 19% of our total consolidated net revenues. We expect
international sales to continue to account for a significant portion of our
total revenues. In addition, we utilize third-party manufacturers principally
located in the PRC. Our international sales and manufacturing operations are
subject to the risks normally associated with international operations,
including:
o limitations, including taxes, on the repatriation of earnings;
o political instability, civil unrest and economic instability;
o greater difficulty enforcing intellectual property rights and weaker
laws protecting such rights;
o greater difficulty and expense in conducting business abroad;
o complications in complying with foreign laws and changes in
governmental policies;
o transportation delays and interruptions;
o currency conversion risks and currency fluctuations; and
o the imposition of tariffs.
These risks could negatively impact our international sales and manufacturing
operations, which could have a material adverse effect on our business,
financial condition and results of operations.
During fiscal 2000, four manufacturers accounted for approximately 57% of
our purchases of products. The loss of any of these manufacturers, or a
substantial interruption of our manufacturing arrangements with any of these
manufacturers, could cause a delay in the production of our products for
delivery to our customers and
9
could have a material adverse effect on our business, financial condition and
results of operations. While we believe that our reliance on external sources of
manufacturing can be shifted, over a period of time, to alternative sources of
supply, there can be no assurance that alternate arrangements could be provided
in a timely manner or on terms acceptable to us. Furthermore, the imposition of
trade sanctions by the United Sates or the European Union against a class of
products imported by us from, or the loss of "permanent normal trade relations"
status by the PRC could significantly increase our cost of products imported
into the United States or Europe.
Acquisition Risks. We may from time to time evaluate and pursue
acquisition opportunities on terms that we consider favorable. A successful
acquisition involves an assessment of the business condition and prospects of
the acquisition target, which includes factors beyond our control. This
assessment is necessarily inexact, and its accuracy is inherently uncertain. In
connection with such an assessment, we perform a review that we believe to be
generally consistent with industry practices. This review, however, will not
reveal all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the acquisition target to assess fully its
deficiencies. There can be no assurance that any such acquisition would be
successful or that the operations of the acquisition target could be
successfully integrated with our operations. Any unsuccessful acquisition could
have a material adverse effect on our business, financial condition and results
of operations.
Product Safety, Liability and Regulation. Products that have been or may
be developed or sold by us may expose us to potential liability from personal
injury or property damage claims by end-users of such products. We are not
currently a defendant in any product liability lawsuit; however, there can be no
assurance that such a suit will not be brought in the future against us. We
currently maintain product liability insurance coverage in amounts which we
believe to be sufficient for our business risks. There can be no assurance that
we will be able to maintain such coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate coverage against
all potential claims. Moreover, even if we maintain adequate insurance, any
successful claim could materially and adversely affect our business, financial
condition, and results of operations.
In addition to the foregoing, the CPSC has the authority under certain
federal laws and regulations to protect consumers from hazardous goods. The CPSC
may exclude from the market goods it determines are hazardous and may require a
manufacturer to repurchase such goods under certain circumstances. Some state,
local and foreign governments have similar laws and regulations. In the event
that such laws or regulations change or in the future we are found to have
violated any such law or regulation, the sale of the relevant product could be
prohibited, and we could be required to repurchase such products.
Competition. The toy industry is highly competitive. Many of our
competitors have longer operating histories, broader product lines and greater
financial resources and advertising budgets than us. In addition, the toy
industry has nominal barriers to entry. Competition is based primarily on the
ability to design and develop new toys, procure licenses for popular products,
characters and trademarks, and successfully market products. Many of our
competitors offer similar products or alternatives to our products. Our products
compete with other products for retail shelf space. There can be no assurance
that shelf space in retail stores will continue to be available to support our
existing products or any expansion of our current products and product lines.
There can be no assurance that we will be able to continue to compete
effectively in this marketplace.
Control by Current Management. As of March 15, 2001, our directors and
officers beneficially owned an aggregate of 5,802,961 shares of Common Stock
(excluding convertible securities and the shares underlying same), which
represents approximately 64.0% of the total issued and outstanding shares of
Common Stock of the Company. As a result, it would be extremely difficult, if
not impossible, to obtain majority support for shareholder proposals opposed by
management and the Board of Directors.
Possible Volatility of Stock Price. The market price of the Common Stock
has been and may continue to be highly volatile and has been and could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of new products by us or our competitors, changes in
financial estimates by
10
securities analysts, or other events or factors. In the event our operating
results are below the expectations of public market analysts and investors in
one or more future quarters, it is likely that the price of the Common Stock
would be materially adversely affected. In addition, general market fluctuations
may adversely affect the market price of the Common Stock.
Executive Officers of the Registrant
The current executive officers of the Company, all of whom are appointed
annually by the Board of Directors to serve at the pleasure of the Board, are as
follows:
Name Age Position Executive Officer Since
Michael J. Lyden 58 Chief Executive Officer 1999
and President
Joseph S. Whitaker 60 Senior Vice President, 1999
New Business Development
Yau Wing Kong 53 Managing Director of DSI(HK) 1993
Robert L. Weisgarber 49 Chief Financial Officer 1999
Thomas W. Neville 37 Senior Vice President, 1999
Worldwide Sales
William J. Kerner 46 Vice President, 1999
Research and Development
Beth Reiling 35 Vice President, 2000
Girls Division
Thomas V. Yarnell 47 Administrative Vice President, 1989
Corporate Secretary and
General Counsel
Loyd W. Harlan 64 Vice President, 1999
Operations
E. Thomas Martin 57 Chairman of the Board 1999
Michael J. Lyden has served as Chief Executive Officer and President of
the Company since June 17, 1999. From 1997 through June 1999, he was involved in
marketing and management consulting with Turnberry Associates, a firm he
founded. From 1988 through 1997, Mr. Lyden was employed by Tyco Toys, Inc.,
serving first as Senior Vice President, Business Development, and later as
President of Tyco's U.S. Division and Executive Vice President of Tyco Toys,
Inc.
Joseph S. Whitaker has served as a director and Senior Vice President, New
Business Development of the Company since June 1, 1999. He also serves as Vice
President of, and owns less than a 1% membership interest in MVII, LLC, a
California limited liability company controlled by E. Thomas Martin, Chairman of
the Board of Directors ("MVII"). For the five years prior to joining the
Company, Mr. Whitaker operated a consulting business in La Jolla, California,
providing services related to marketing, licensing and product development to
the toy industry.
11
Yau Wing Kong has served as the Managing Director of the Company's
wholly-owned subsidiary, DSI(HK) since October 1993.
Robert L. Weisgarber has served as Chief Financial Officer of the Company
since March 1999. Prior to his employment by the Company, he served as Executive
Vice President and Chief Financial Officer for SteelWorks, Inc., an office
products manufacturer in Des Moines, Iowa. From 1993 to 1995, he was Vice
President, Administration for Texberry Container Corporation in Houston, Texas.
Thomas W. Neville has served as Senior Vice President, Worldwide Sales of
the Company since October 1999. He has been employed by the Company since
November 1994, serving as Key Accounts Manager from November 1994 through
December 1995; National Sales Manager from December 1995 through December 1997;
and Vice President, Sales from December 1997 until his promotion to his current
position.
William J. Kerner has served as Vice President of Research and Development
of the Company since December 1999. Prior to that, he was Senior Director of
Design for Tyco Toys/Mattel, Inc., MatchBox Division from 1995 through December
1999, and Director of Product Design, Matchbox Division at Tyco from 1992 until
1995.
Beth Reiling has served as Vice President, Girls Division of the Company
since January 2000. Prior to that, Ms. Reiling was the Executive Vice President
and General Manager of Meritus from December 1997 to January 2000, and Vice
President, Marketing from January 1995 to December 1997.
Thomas V. Yarnell has been an employee of the Company since February
1989, serving as Administrative Vice President since October 1989, Corporate
Secretary since April 1991, and General Counsel since December 1995.
Loyd W. Harlan has served as Vice President, Operations of the Company
since October 1999. He has been employed by the Company since May 1991, serving
as Director of Operations from September 1993 until his promotion to his current
position.
E. Thomas Martin has served as the Chairman of the Board of the Company
since June 1, 1999. He is the sole Manager and President of MVII. Mr. Martin is
a director and significant shareholder of Americorp, the parent company of
American Commercial Bank, a multiple branch community bank in Ventura County,
California. Mr. Martin was the Chief Executive Officer and a partner in Martin &
MacFarlane, Inc. and Martin Media, L.P., national outdoor advertising companies,
until their sale to Chancellor Media in September of 1998. Mr. Martin also
manages various real estate ventures. He is the Chairman of the Executive
Committee.
12
ITEM 2. PROPERTIES
Square Type of Expiration
Location Use Feet Possession Dates
- -------------------------------------------------------------------------------------------------------
Houston, Texas Executive Office, Showroom 71,000 Lease 8/31/02
and Principal Warehouse (14,000 Office;
57,000 Warehouse)
Fairfield, New Jersey Administrative Office, 7,460 Lease 9/30/06 (1)
Product Development and
Showroom
New York, New York Showroom 5,148 Lease 4/30/10
Hong Kong Administrative Office and 12,877 Lease 3/23/03
Showroom
Dallas, Texas Showroom 1,080 Lease 5/31/02
Dallas, Texas Showroom 720 Lease 3/31/02
(1) Commencing October 1, 2001, the Company has a right to terminate with
12 months notice to the Lessor.
In addition to the above listed facilities, the Company leases a small
storage facility in Hong Kong, in addition to public warehouse space in Houston
to accommodate fluctuating inventory needs. The foregoing properties consist of
block, cinder block or concrete block buildings which the Company believes are
in good condition and well maintained.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 2000.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded on The Nasdaq Stock Market's
SmallCap Market under the symbol "DSIT." Prior to August 17, 1998, the
Company's Common Stock was traded on The Nasdaq National Market. The table
sets forth, for the periods indicated, the reported high and low close sale
prices of the Company's Common Stock as reported on The Nasdaq SmallCap
Market:
High Low
---- ---
Fiscal Year 1999:
1st Quarter 3.500 1.625
2nd Quarter 4.438 2.656
3rd Quarter 4.344 3.000
4th Quarter 3.500 2.688
Fiscal Year 2000:
1st Quarter 3.750 2.813
2nd Quarter 3.469 2.188
3rd Quarter 2.813 1.875
4th Quarter 2.844 1.188
Stockholders
According to the records of the Company's transfer agent, as of March 15,
2001, there were 97 holders of record of the Company's Common Stock. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.
Dividends and Distributions
The Company has never declared nor paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends on its Common Stock in the
near future. In addition, the Company's credit facility prohibits the payment of
dividends.
Investment Warrant
On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock, in exchange for a
cash purchase price $2.7 million. The Investment Warrant is exercisable for
no additional consideration, in whole on in part, for a ten-year period
beginning June 3, 2002. The Investment Warrant is subject to certain
anti-dilution adjustments, including adjustments in the event the Company
issues securities for a purchase price that is equivalent to less than $1.50
per share of the Company Common Stock. In connection with the issuance of the
Investment Warrant, the Company and MVII entered into a Registration Rights
Agreement, pursuant to which MVII was granted piggyback registration rights
with respect to the shares of the Company Common Stock underlying the
Warrant, under certain circumstances. Shares of Common Stock acquired by MVII
upon exercise of the Warrant are subject to the terms of a Shareholders' and
Voting Agreement dated as of April 5, 1999, among MVII and certain of the
Company's other shareholders. Proceeds from the sale of the Investment
Warrant were used by the Company for current working capital.
14
The Investment Warrant was issued by the Company to MVII 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, (ii) MVII's principals have adequate financial means
to bear the risk of MVII's additional investment in the Company and can be
described as sophisticated, (iii) MVII was the only offeree in the
transaction, (iv) MVII acquired the Investment Warrant for investment and not
with a view toward distribution, (v) the Investment Warrant contains
restrictions on resale of the Investment Warrant and the Common Stock issued
upon exercise of the Investment Warrant, and (vi) no underwriters were
involved nor were any underwriters' commissions paid in connection with the
transactions.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company. The selected consolidated financial data were derived from the
Company's consolidated financial statements. All dollar amounts are stated in
thousands, except per share data.
The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this report.
Statement of Operations Data: December 31, December 31, January 31, January 31, January 31,
2000 1999 1999 1998 1997
------------ ------------ ----------- ----------- -----------
Net sales $ 70,438 $ 47,560 $ 52,723 $ 73,624 $ 63,219
Income (loss) before income taxes and
extraordinary item (1,326) 2,150 (1,337) (7,392) 3,106
Income (loss) before extraordinary item (849) 1,281 (1,004) (5,062) 1,886
Net income (loss) (849) 1,281 (1,004) (5,543) 1,886
Basic earnings (loss) per share before
extraordinary item $ (.09) $ .17 $ (.17) $ (.97) $ .54
Basic earnings (loss) per share $ (.09) $ .17 $ (.17) $ (1.06) $ .54
Diluted earnings (loss) per share before
extraordinary item $ (.09) $ .16 $ (.17) $ (.97) $ .50
Diluted earnings (loss) per share $ (.09) $ .16 $ (.17) $ (1.06) $ .50
Balance Sheet Data: December 31, December 31, January 31, January 31, January 31,
2000 1999 1999 1998 1997
------------ ------------ ----------- ----------- -----------
Working capital $ 4,536 $ 6,326 $ 391 $ 6,265 $ 2,621
Total assets 29,999 15,027 11,411 19,929 14,395
Long-term debt, including capital leases 10,755 2,393 2,541 7,495 14,203
Total liabilities 22,072 8,038 10,549 18,049 24,738
Shareholders' equity (deficit) 7,927 6,989 861 1,880 (10,343)
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto, and the information included
elsewhere herein.
The Company designs, develops, markets and distributes high quality,
innovative dolls, toys and consumer electronics products. Core products include
youth electronics such as Tech-Link(R) brand communications products,
eoBRAIN(TM) brand hand held electronic companions, Kawasaki(R) brand musical
instruments, GearHead(R) brand remote control vehicles and a full range of doll
brands including Sweet Faith(R), Pride and Joy(TM), Too Cute Twins(TM), Hush
Li'l Baby(R), Little Darlings(TM),and the Elite(R) brand of Lifetime Play
Dolls(TM) and Fashion Buzz(TM) Air Nails Salon(TM) activity sets. The Company's
web sites can be reached at www.dsitoys.com.
The Company has three major product categories: Juvenile Audio Products,
Girls' Toys and Boys' Toys.
Juvenile Audio Products
The Juvenile Audio Product category consists of Youth Communications
products and Musical Instruments. Products in the Youth Communications line
include walkie-talkies, wrist watch walkie-talkies, and audio products. The
portfolio of brands in this category include Tech-Link(R) and Micro Link(TM)
communications products, Harley-Davidson(R) walkie-talkies and bike alarms
and the Company's new eoBRAIN(TM) brand hand-held electronic companions. The
Musical Instrument line includes the branded category of Kawasaki(R) guitars,
drum pads, saxophone, keyboards and mixer keyboards plus the Josie and The
Pussycats(TM) musical products brand.
Girls' Toys
The Girls' Toys product category includes dolls, plush toys, play sets,
accessories, and activity toys. The Girls' Toys portfolio of brands includes
Sweet Faith(R), Pride & Joy(TM), Dear Grace(TM), Good Will(TM), Precious
Prayers(TM), Little Darlings(TM), Hush Li'l Baby(R), Baby Beans(R) and the
Elite(R) brand of Lifetime Play Dolls(TM). New introductions for 2001 in this
category include Too Cute Twins(TM), Susie So Smart(TM), and "Happy Birthday to
You" dolls, Kitty Kitty Kittens(R) plush toys, and the unique Fashion Buzz(TM)
Air Nails Salon(TM) activity set.
Boys' Toys
The Boys' Toys product category includes remote control and infra-red
control vehicles. The portfolio of brands in this product category are
GearHead(TM) remote control vehicles, including Insector(TM), and the new
unique ultra-articulated Street Savage(TM). The GearHead(TM) brand also
includes GearHead(TM) Jr. infra-red control vehicles.
17
Results of Operations
The following table sets forth the Company's results of operations as a
percentage of net sales for the fiscal years indicated:
2000 1999 1998
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 71.1 71.6 79.8
----- ----- -----
Gross profit 28.9 28.4 20.2
Selling, general and administrative expenses 28.9 22.8 21.3
----- ----- -----
Operating income (loss) 0.0 5.6 (1.1)
Interest expense (2.1) (1.3) (1.6)
Other income 0.2 0.2 0.3
----- ----- -----
Income (loss) before income taxes and
extraordinary item (1.9) 4.5 (2.5)
Benefit from (provision for) income taxes .7 1.8 (0.6)
----- ----- -----
Net income (loss) (1.2) 2.7 (1.9)
===== ===== =====
Fiscal Year 2000 Compared to Fiscal Year 1999
All component changes are affected by the change in the Company's fiscal
year in 1999 (fiscal 2000 reflects 12 months activity versus 11 months activity
in fiscal 1999).
Net Sales. Net sales during fiscal 2000 increased $22.9 million, or 48.1%,
to $70.4 million, from $47.6 million in fiscal 1999. A substantial portion of
this increase, $10.6 million, was due to the acquisition of Meritus and its
product lines. Excluding these Meritus items, net sales increased $12.3 million
or 25.8% compared to fiscal 1999, primarily due to increased sales of Girls'
Toys.
Net sales of Juvenile Audio Products decreased $1.3 million, or 4.1%,
to $27.8 million during fiscal 2000, from $29.1 million during fiscal 1999.
The major product groups in this category are Youth Communications and
Musical Instruments, providing $14.2 million and $13.6 million, respectively,
in 2000 sales. Decreases occurred in both product groups in 2000, as more
emphasis was placed on branded products like Tech Link(R) and Kawasaki(R),
requiring customers to reposition their inventory from the non-branded
product lines sold in prior years.
Net sales of Girls' Toys increased $21.1 million, or 304.8%, to $28.0
million in fiscal 2000 from $7.0 million in fiscal 1999. Meritus items
contributed $10.6 million of this increase. Excluding these Meritus items,
Girls' Toys net sales increased $10.4 million, or 151.4%, compared to fiscal
1999. With respect to non-Meritus items, the sales increase in Girls' Toys
was driven by the television promoted Hush Li'l Baby(R) doll and the
continued expansion and growth of the Pride and Joy(TM) doll line.
Net sales of Boys' Toys increased $3.8 million, or 40.3%, to $12.7 million
during fiscal 2000 from $8.9 million in fiscal 1999. The increase reflects the
successful introduction of the television promoted Insector(TM) R/C vehicle in
2000, partially offset by decreases in sales of Blockmen(R) and other military
type products.
Net sales of products in other categories decreased $700,000 or 24.7% to
$1.9 million during fiscal 2000 from $2.6 million in fiscal 1999. The decrease
reflects continued reduction in sales of Hoppin' Poppin' Spaceballs(R) and other
hand-held and outdoor games, as well as a decrease in sales of the Talking
Doorbell(R) products introduced in fiscal 1998.
International net sales increased $2.4 million, or 21.7%, to $13.3 million
during fiscal 2000 from $10.9 million in fiscal 1999. International net sales
were 18.9% of total net sales for fiscal 2000 as compared to 22.9% of total net
sales in fiscal 1999.
Gross Profit. Gross profit increased $6.8 million or 50.3% to $20.3
million during fiscal 2000 from $13.5 million in fiscal 1999. Gross profit as a
percentage of net sales increased to 28.9% during fiscal 2000 from
18
28.4% in fiscal 1999. The percentage increase reflects the strategic emphasis
placed on proprietary products such as Pride & Joy(TM) and Hush Li'l Baby(R)
dolls, the Insector (TM) R/C vehicle, and the successful branding of our
Tech-Link(R) walkie-talkie lines in addition to the inclusion of the Meritus
doll lines. Proprietary products have a higher margin, and as a result of the
sales emphasis now comprise an increased percentage of our total net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.5 million to $20.3 million, or 87.7%,
during fiscal 2000 from $10.8 million in fiscal 1999. The increase included
major increases in television and other marketing costs of $3,350,000 and
$385,000, respectively to support sales of our proprietary products. In
addition, the merger with Meritus added employee costs of $2.4 million. Other
operating costs associated with the New Jersey office and associated with the
increased development activity in Girls' Toys were also a substantial part of
the increase. Professional fees, including attorney and accounting costs,
increased $550,000, a portion of which is directly related to the Meritus
merger. A downturn in the general retail climate required the Company to make
an additional provision for noncollectible accounts of $150,000. Travel and
entertainment expense also increased $400,000 due primarily to increased 2001
sales activity and focus on increasing the internal sales responsibility for
major accounts.
Interest Expense. Interest expense increased $855,000 or 138.1% to
$1,473,000 in fiscal 2000 from $619,000 during fiscal 1999. The increase was
due to borrowings associated with the Meritus merger and increased working
capital needs to support the increased 2000 sales.
Income Taxes. In fiscal 2000, the Company generated a loss before income
taxes of $1.3 million compared to a $2.1 million profit before income taxes
during fiscal 1999. As a result, the Company generated a tax benefit of
$477,000 during fiscal 2000 compared to a tax expense of $869,000 in fiscal
1999. The Company expects to realize its 2000 tax benefits from net operating
loss carry forwards and foreign income tax credits by the reduction of tax
liabilities on taxable earning in future years.
Net Income (Loss). The Company's net loss for fiscal 2000 was $849,000
compared to a net income of $1.3 million for fiscal 1999. The 2000 net loss
was due, in part, to less than expected sales of our television promoted
products in relation to television advertising costs and fourth quarter
inventory close-outs of Blockmen(R) and other products introduced in prior
years. As discussed above, the gains made by the Company in net sales and
gross profit were exceeded by substantial increases in selling, general and
administrative expenses. In addition, the financial condition of several
customers required a higher than normal provision for noncollectible accounts
receivable.
Fiscal Year 1999 Compared to Fiscal Year 1998
All component changes are affected by the change in the Company's fiscal
year in 1999 (fiscal 1999 reflects 11 months activity versus 12 months activity
in fiscal 1998).
Net Sales. Net sales during fiscal 1999 decreased $5.1 million, or 9.8%,
to $47.6 million, from $52.7 million in fiscal 1998.
Net sales of Juvenile Audio Products decreased $9.2 million, or 24.2%, to
$29.1 million during fiscal 1999, from $38.3 million during fiscal 1998. The
decrease was primarily attributable to a successful but slower than expected
transition between the Company's old walkie-talkie line and the new Tech-Link(R)
brand.
Net sales of Girls' Toys increased $3.9 million, or 121%, to $7.0 million
in fiscal 1999 from $3.1 million in fiscal 1998. Sales for 1999 were driven by
the introduction of the national magazine promoted Sweet Faith(TM) doll and test
market targeted Hush Li'l Baby(R) doll. Sales for fiscal 1998 were comprised
principally of sales of one non-promoted doll (Baby Learns to Walk)(R) and final
closeouts of 1997 doll inventory.
Net sales of Boys' Toys increased $1.3 million, or 17.1% to $8.9 million
during fiscal 1999 from $7.6 million in fiscal 1998. The increase reflects the
increased sales of Blockmen(R) construction sets, partially offset by a decline
in sales of radio-controlled products.
Net sales of products in other categories decreased $1.1 million or 29.0%
to $2.6 million during fiscal 1999 from $3.7 million in fiscal 1998. The
decrease reflects continued reduction in sales of Hoppin' Poppin'
19
Spaceballs(R), an action game that was TV promoted in fiscal 1997, and a
decrease in pre-school products, partially offset by an increase in sales of the
Talking Doorbell(R) products introduced in fiscal 1998.
International net sales decreased $200,000, or 1.8%, to $10.9 million
during fiscal 1999 from $10.7 million in fiscal 1998. International net sales
were 22.9% of total net sales for fiscal 1999 as compared to 21.0% of total net
sales in fiscal 1998.
Gross Profit. Gross profit increased $2.8 million or 26.0% to $13.5
million during fiscal 1999 from $10.7 million in fiscal 1998. Gross profit as a
percentage of net sales increased to 28.4% during fiscal 1999 from 20.2% in
fiscal 1998. The increase reflects the introduction of proprietary products such
as Sweet Faith(R) dolls and Blockmen(R) construction sets, and the successful
branding of our Tech-Link(R) walkie-talkie lines; which have a higher gross
margin and comprise a larger percentage of our total sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $400,000 to $10.8 million, or 3.4% during
fiscal 1999 from $11.2 million in fiscal 1998. The decrease is primarily related
to decreased expenditures for salaries and travel and entertainment due to the
change in the Company's fiscal year.
Interest Expense. As a result of lower prime interest rates and reduced
borrowing activity, interest expense decreased $256,000, or 29.3%, to $619,000
in fiscal 1999 from $875,000 during fiscal 1998.
Income Taxes. In fiscal 1999, the Company generated a profit before income
taxes of $2.1 million compared to a $1.3 million loss before income taxes during
fiscal 1998. As a result, the Company incurred tax expense of $869,000 during
fiscal 1999 compared to a tax benefit of $333,000 in fiscal 1998. Tax expense
during fiscal 1999 was also impacted by the expiration of $154,000 in foreign
tax credits.
Net Income (Loss). As a result of the foregoing factors, the Company's net
income for fiscal year 1999 was $1.3 million, compared to a net loss of $1.0
million for fiscal 1998.
Liquidity and Capital Resources
The Company historically has funded its operations and capital
requirements by 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 $2.5 million during
fiscal 2000, consisting primarily of increases in accounts receivable and
inventory. Net cash used in investing activities during fiscal 2000 was $1.9
million and was a result of capital expenditures and the acquisition of Meritus,
partially offset by a decrease in other assets. Net cash provided by financing
activities was $4.1 million in 2000 and was a result of related party borrowings
to facilitate the Meritus acquisition, the payment of assumed Meritus debt and
borrowings under revolving lines of credit. The Company's working capital at
December 31, 2000 was $4.5 million and unrestricted cash was $178,000.
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 last two fiscal
quarters. To manage these working capital requirements, the Company maintains
the Hong Kong Credit and the Revolver.
As of December 31, 2000, the Company was not in compliance with certain
of the financial covenants under the Revolver. Sunrock has executed a written
waiver of these covenant violations for the period ending December 31, 2000.
In addition, the Company and Sunrock amended the Revolver on March 30, 2001
resulting in an increase in the maximum loan amount from $10 million to $17.5
million, subject to the availability of sufficient, eligible inventory and
accounts receivable. The terms include interest at the banks prime rate plus
three quarters of one percent (.75%) and maturity on March 31, 2004.
20
On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock, in exchange for a
cash purchase price of $2.7 million. The Investment Warrant is exercisable
for no additional consideration, in whole or in part, for a ten-year period
beginning June 3, 2002. Proceeds from the sale of the Investment Warrant were
used by the Company for current working capital. The Investment Warrant is
subject to anti-dilution provisions.
The Company has budgeted approximately $2.0 million for capital
expenditures for fiscal 2001 consisting primarily of purchases of tools and
molds and information technology systems. At March 15, 2001 the Company had
additional aggregate borrowing capacity of $350,000 under the Revolver and the
Hong Kong Credit Facility. Based on projected fiscal 2001 operating results, the
Company believes cash flows from operations and available borrowings under the
Revolver and the Hong Kong Credit Facility, as well as proceeds from the
Investment Warrant, will be sufficient to meet the Company's operating cash
requirements and fund its anticipated capital expenditures. However, there can
be no assurance the Company will meet its projected operating results. In
connection with any future cash needs or acquisition opportunities, the Company
may incur additional debt or issue additional equity or debt securities
depending on market conditions and other factors.
In a series of related transactions with MVII that occurred between April
and June of 1999, the Company received $5 million in exchange for the sale of
approximately 2.5 million shares of the Company's Common Stock. The Company used
those funds to finance the normal business operations of the Company.
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 with Meritus, including the satisfaction of
Meritus' debt, described below.
The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of December 31, 2000, the Company was
required to make an aggregate of approximately $97,000 in payments of guaranteed
royalties under certain licenses in fiscal 2001 and $125,000 thereafter through
fiscal 2003.
Meritus Acquisition
Effective January 7, 2000, the Company acquired Meritus by way of merger.
Pursuant to the terms of the merger, the Company acquired all of the issued and
outstanding stock of Meritus for 533,208 shares of the Company's Common Stock
and $2.8 million in other consideration paid to the shareholders of Meritus.
Contemporaneously with the merger, the Company satisfied $4.4 million of
Meritus' debt. The merger was accounted for using the purchase method; therefore
the Company recorded the acquired assets at their fair market value. Goodwill
generated by the transaction is being amortized over 20 years using the
straight-line method.
As a result of the merger, the Company added the Baby Beans(R) brand soft
bean bag dolls, Forever Girl Friends(R) brand accessories for 11-1/2" fashion
dolls, and Little Darlings(TM) brand value-priced action feature dolls to its
product offerings, as well as the Elite Dolls(TM) brand, which was created by
Meritus specifically to manufacture and market "Lifetime Play Dolls," a line of
exquisite 18" dolls and accessories suitable for playing or collecting.
Inflation
The Company does not believe that inflation in the United States, Europe
or Asia in recent years has had a significant effect on its results of
operations.
Year 2000
During 1999, the Company concluded its efforts to address the Year 2000
issue. In addition to a review of the Company's management information software
("MIS"), EDI software, and local area network and personal computer operating
systems, readiness reviews were completed on customers and vendors. The
21
Company did not experience any Year 2000 issues with its internal operating
systems or with its customers or vendors. In addition, the Company did not
experience any loss in revenues due to the Year 2000 issue.
Cautionary Statement
Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives in this Form 10-K, other
filings or reports with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The Company is
including this Cautionary Statement to make applicable and take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
for any such forward-looking statements. Forward-looking statements can be
identified by the use of terminology such as "believe," "anticipate," "expect,"
"estimate," "may," "will," "should," "project," "continue," "plans," "aims,"
"intends," "likely," or other words or phrases of similar terminology.
Management cautions you that forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. For a discussion of some of the factors that may
cause actual results to differ materially from those suggested by
forward-looking statements, please read carefully the information under Item 1,
"Risk Factors", on pages 7 to 10 of this Form 10-K. In addition to the Risk
Factors and other important factors detailed herein and from time to time in
other reports filed by the Company with the Securities and Exchange Commission,
including Forms 8-K, 10-Q, and 10-K, the following important factors could cause
actual results to differ materially from those suggested by any forward-looking
statements.
Marketplace Risks
o Increased competitive pressure, both domestically and
internationally, which may negatively affect the sales of the
Company's products;
o Changes in public and consumer taste, which may negatively affect
the sales of the Company's products;
o Significant changes in the play patterns of children, whereby they
are increasingly attracted to more developmentally advanced products
at younger ages, which may affect brand loyalty and the perceived
value of and demand for the Company's products; and
o Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of the
Company's products and the costs associated with manufacturing and
distributing these products.
Financing Considerations
o Currency fluctuations, which may affect the Company's reportable
income; significant changes in interest rates, both domestically and
internationally, which may negatively affect the Company's cost of
financing both its operations and investments.
Other Risks
o Changes in laws or regulations, both domestically and
internationally, including those affecting consumer products or
trade restrictions, which may lead to increased costs or
interruption in normal business operations of the Company;
22
o Future litigation or governmental proceedings, which may lead to
increased costs or interruption in normal business operations of the
Company; and
o Labor disputes, which may lead to increased costs or disruption of
any of the Company's operations.
The risks included herein and in Item 1 "Risk Factors" are not exhaustive.
Other sections of this Form 10-K may include additional factors which could
materially and adversely impact the Company's business, financial condition, and
results of operations. Moreover, the Company operates in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for management to predict all such risk factors on the Company's
business, financial condition or results of operations or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedules" included on
page F-1 for information required under this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
General
Information required by Item 10 relating to the executive officers of the
Company appears under the heading "Executive Officers of the Registrant" in Part
I herein. Information required by Item 10 relating to members of the Company's
Board of Directors, as well as information required by Items 11 through 13, is
hereby incorporated by reference to the information under the headings "Election
of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance,"
"Executive Compensation," "Compensation of Certain Named Executive Officers,"
"Management-Employment and Related Agreements," and "Certain Relationships and
Related Transactions" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A and anticipated to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 2000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Reference is made to the Index on page
F-1 for a list of all financial statements filed as part of
this Report.
(a) 2. and (d) Financial Statement Schedules. Reference is made to the Index
on page F-1 for a list of all financial statement schedules
filed as part of this Report.
(a) 3. and (c) Exhibits. Reference is made to the Exhibit Index on page E-1
for a list of all exhibits filed as part of this Report.
(b) Reports on Form 8-K. No reports were filed by the Company on
Form 8-K during the quarterly period ended December 31, 2000.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 2, 2001 By: /s/ Michael J. Lyden
--------------------------------------------------
Michael J. Lyden
President, Chief Executive Officer and Director
Dated: April 2, 2001 By: /s/ Robert L. Weisgarber
--------------------------------------------------
Robert L. Weisgarber
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman
/s/ E. Thomas Martin April 2, 2001
- ------------------------- ------------------------------
E. Thomas Martin
Director
/s/ M.D. Davis April 2, 2001
- ------------------------- ------------------------------
M.D. Davis
Director
/s/ Joseph S. Whitaker April 2, 2001
- ------------------------- ------------------------------
Joseph S. Whitaker
Director
- ------------------------- ------------------------------
Joseph N. Matlock
Director
/s/ Robert L. Burke April 2, 2001
- ------------------------- ------------------------------
Robert L. Burke
Director
/s/ John McSorley April 2, 2001
- ------------------------- ------------------------------
John McSorley
Director
/s/ Walter S. Reiling April 2, 2001
- ------------------------- ------------------------------
Walter S. Reiling
25
DSI TOYS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 2000 and 1999 F-3
Consolidated Statement of Operations for fiscal years 2000, 1999 and 1998 F-4
Consolidated Statement of Cash Flows for fiscal years 2000, 1999 and 1998 F-5
Consolidated Statement of Shareholders' Equity for fiscal years 2000,
1999, and 1998 F-6
Notes to Consolidated Financial Statements F-7
Schedules
II. Valuation and Qualifying Accounts and Reserves S-1
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
Report of Independent Accountants
To the Board of Directors and Shareholders of
DSI Toys, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of DSI
Toys, Inc. and its subsidiaries (the Company) at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 23, 2001
(except as to Note 16, for which date is March 30, 2001)
F-2
DSI Toys, Inc.
Consolidated Balance Sheet
December 31, December 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash $ 177,682 $ 478,970
Restricted cash 150,000 150,000
Accounts receivable, net 6,522,883 3,408,059
Inventories 6,687,195 5,695,240
Prepaid expenses and other current assets 1,740,945 1,383,644
Deferred income taxes 385,000 314,000
------------ ------------
Total current assets 15,663,705 11,429,913
Property and equipment, net 2,415,084 2,000,215
Deferred income taxes 1,780,000 902,000
Goodwill, net 9,754,524
Other assets 385,827 695,237
------------ ------------
$ 29,999,140 $ 15,027,365
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,901,290 $ 3,769,286
Current portion of long-term debt 1,689,911 1,313,787
Current portion of long-term debt due to a related party 1,424,478
Income taxes payable 112,325 428,727
------------ ------------
Total current liabilities 11,128,004 5,511,800
Long-term debt 6,464,268 2,393,236
Long-term debt due to a related party 4,291,037
Deferred income taxes 188,849 133,340
------------ ------------
Total liabilities 22,072,158 8,038,376
------------ ------------
Commitments and Contingencies (Note 11)
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding
Common stock, $.01 par value, 35,000,000 authorized,
9,066,365 and 8,719,060 shares issued and 9,066,365 and
8,533,157 shares outstanding 90,664 87,190
Additional paid-in capital 5,173,465 4,934,919
Common stock warrants 102,500 102,500
Accumulated other comprehensive income (loss) (27,062) (12,626)
Retained earnings 2,587,415 3,436,401
------------ ------------
7,926,982 8,548,384
Less: treasury stock, 185,843 shares, at cost (1,559,395)
------------ ------------
Total shareholders' equity 7,926,982 6,988,989
------------ ------------
$ 29,999,140 $ 15,027,365
============ ============
See accompanying notes to consolidated financial statements.
F-3
DSI Toys, Inc.
Consolidated Statement of Operations
----------------------------------------------------------
Fiscal Year
----------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net Sales $ 70,438,531 $ 47,560,024 $ 52,722,517
Cost of goods sold 50,120,552 34,046,112 42,058,919
------------ ------------ ------------
Gross profit 20,317,979 13,513,912 10,663,598
Selling, general and administrative expenses 20,367,165 10,848,624 11,232,414
------------ ------------ ------------
Operating income (loss) (49,186) 2,665,288 (568,816)
Interest expense (1,473,909) (618,994) (874,907)
Other income 196,661 103,302 106,881
------------ ------------ ------------
Income (loss) before income taxes (1,326,434) 2,149,596 (1,336,842)
Benefit from (provision for) income taxes 477,448 (868,605) 333,000
------------ ------------ ------------
Net income (loss) $ (848,986) $ 1,280,991 $ (1,003,842)
============ ============ ============
Basic earnings per share
Earnings (loss) per share $ (.09) $ 0.17 $ (0.17)
============ ============ ============
Weighted average shares
Outstanding 9,053,382 7,688,964 6,000,000
============ ============ ============
Diluted earnings per share
Earnings (loss) per share $ (.09) $ 0.16 $ (0.17)
============ ============ ============
Weighted average shares
outstanding 9,053,382 7,803,403 6,000,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
DSI Toys, Inc
Consolidated Statement of Cash Flows
----------------------------------------------------------
Fiscal Year
----------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (848,986) $ 1,280,991 $ (1,003,842)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation 1,551,632 728,951 570,779
Amortization and write-off of
debt discount and issuance costs 24,927 36,799
Amortization of goodwill 513,360
Provision for doubtful accounts 222,021 65,528 (17,424)
Loss on abandonment of equipment 32,173 727 200
Deferred income taxes (893,491) 722,340 11,000
Changes in assets and liabilities,
excluding acquisitions:
Accounts receivable (2,413,654) (2,403,862) 6,955,987
Inventories (954,186) (1,487,536) 2,229,714
Income taxes payable (316,402) 156,807 805,554
Prepaid expenses (507,859) (287,174) (609,266)
Accounts payable and accrued liabilities 1,039,373 (3,030,004) (2,940,911)
------------ ------------ ------------
Net cash provided (used) by
operating activities (2,551,092) (4,216,433) 6,001,791
Cash flows from investing activities:
Cash used for acquisition of Meritus (884,033)
Capital expenditures (1,249,944) (1,087,446) (961,304)
Proceeds from sale of equipment 225 225
Decrease (increase) in other assets 273,087 125,408 (104,728)
------------ ------------ ------------
Net cash used in investing
activities (1,860,890) (961,813) (1,065,807)
Cash flows from financing activity:
Net borrowing (repayments) under
revolving lines of credit 4,046,472 329,085 (4,730,655)
Net borrowings on long-term debt 400,684 12,741 15,069
Net borrowings on long-term debt due
to related parties 4,025,515
Payments of assumed Meritus debt (4,382,541)
Net proceeds from issuance of common stock 4,873,548
Debt and stock issue costs 35,000 (85,433) (35,000)
------------ ------------ ------------
Net cash provided (used) by financing
activities 4,125,130 5,129,941 (4,750,586)
Effect of exchange rate changes on cash (14,436) (26,922) (14,891)
------------ ------------ ------------
Net increase (decrease) in cash (301,288) (75,227) 170,507
Cash and cash equivalents, beginning of year 478,970 554,197 383,690
------------ ------------ ------------
Cash and cash equivalents, end of year $ 177,682 $ 478,970 $ 554,197
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
DSI Toys, Inc.
Consolidated Statement of Shareholders' Equity
Accumulated
Common Stock Additional Other
--------------------------- Paid-in Comprehensive Retained Treasury
Shares Amount Capital Warrants Income Earnings Stock
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, January 31, 1998 8,719,000 $ 87,190 $ 21,162,568 $ 102,500 $ 29,187 $ 3,159,252 $(22,660,592)
Comprehensive loss:
Net loss (1,003,842)
Foreign currency
translation
adjustments
net of tax (14,891)
Comprehensive loss
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, January 31, 1999 8,719,000 87,190 21,162,568 102,500 14,296 2,155,410 (22,660,592)
Comprehensive income:
Net income 1,280,991
Foreign currency
translation
adjustments
net of tax (26,922)
Comprehensive income
Issuance of 2,458,491
common shares from
the treasury (15,479,229) 20,479,229
Options exercised (518,189) 621,968
Stock issuance cost (230,231)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 8,719,000 87,190 4,934,919 102,500 (12,626) 3,436,401 (1,559,395)
Comprehensive loss:
Net Loss (848,986)
Foreign Currency
translation
adjustments
net of tax (14,436)
Comprehensive Loss
Issuance of 347,365
common shares and
185,843 common shares
from the treasury 347,365 3,474 238,546 1,559,395
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 9,066,365 $ 90,664 $ 5,173,465 $ 102,500 $ (27,062) $ 2,587,415
============ ============ ============ ============ ============ ============ ============
Totals
------------
Balance, January 31, 1998 $ 1,880,105
Comprehensive loss:
Net loss (1,003,842)
Foreign currency
translation
adjustments
net of tax (14,891)
------------
Comprehensive loss (1,018,733)
------------
Balance, January 31, 1999 861,372
Comprehensive income:
Net income 1,280,991
Foreign currency
translation
adjustments
net of tax (26,922)
------------
Comprehensive income 1,254,069
Issuance of 2,458,491
common shares from
the treasury 5,000,000
Options exercised 103,779
Stock issuance cost (230,231)
------------
Balance, December 31, 1999 6,988,989
Comprehensive loss:
Net Loss (848,986)
Foreign Currency
translation
adjustments
net of tax (14,436)
------------
Comprehensive Loss (863,422)
Issuance of 347,365
common shares and
185,843 common shares
from the treasury 1,801,415
------------
Balance, December 31, 2000 $ 7,926,982
============
See accompanying notes to consolidated financial statements.
F-6
DSI TOYS, INC.
NOTES TO consolidated FINANCIAL STATEMENTS
NOTE 1 - Organization:
DSI Toys, Inc. (the "Company") was incorporated under the laws of the
State of Texas in November 1970. The Company markets and distributes a variety
of toys and children's consumer electronics both within the United States and
internationally, primarily to retailers. The Company's products are manufactured
primarily in the People's Republic of China.
Effective May 1, 1997, the Company's Articles of Incorporation were
amended to (i) authorize the issuance of 5,000,000 shares of $.01 par value
preferred stock, (ii) change the par value of common stock to $.01 and (iii)
reduce the authorized shares of common stock to 20,000,000 shares.
On June 3, 1997, the Company completed its initial public offering (the
"Offering") of 2,500,000 shares of common stock, which provided the Company net
proceeds of $17.7 million. All of the net proceeds were used to repay debt of
the Company. In connection with the Offering, the Company issued warrants to
purchase 250,000 shares of common stock to the lead underwriters. Such warrants
are exercisable at $10.80 per share and expire May 28, 2002.
Effective May 28, 1999, the Company's Articles of Incorporation were
amended to increase the authorized shares of common stock to 35,000,000 shares.
Effective June 1, 1999, the Company consummated transactions with MVII,
LLC ("MVII") pursuant to a Stock Purchase and Sale Agreement dated April 15,
1999. As a result of those transactions, MVII made a total investment of $12
million in the Company's common stock, $5 million of which was paid directly
to the Company for the purchase of 2,458,491 shares of common stock.
NOTE 2 - Summary of Significant Accounting Policies:
Basis of presentation
The accompanying consolidated financial statements include the accounts of
wholly-owned subsidiaries DSI(HK) Limited, Meritus Limited, and RSP Limited.
All significant intercompany transactions have been eliminated in consolidation.
Fiscal year
The Company's fiscal year is the year ending December 31 of the calendar
year mentioned. Prior to December 31, 1999, the terms "fiscal year" and "fiscal"
refer to January 31 of the following calendar year mentioned (e.g., a reference
to fiscal 1998 is a reference to the fiscal year ended January 31, 1999).
Cash equivalents
The Company considers investments with original maturity dates of three
months or less from the date of purchase to be cash equivalents. Restricted
cash, held as a compensating balance under a revolving loan supported by letters
of credit is not considered a cash equivalent.
Revenue recognition
Revenues are recognized upon shipment of product by the Company, or in the
case of FOB Asia sales, by the manufacturer, and, at that point, legal
responsibility and title pass to the buyer. The Company provides an allowance
for doubtful accounts and accrues for returns and discounts using a percentage
of gross sales based on historical experience. Provision is made currently for
estimated returns of defective and slow-moving merchandise, price protection and
customer allowances and is included as a reduction of accounts receivable and
revenues.
F-7
Inventories
Inventories consist of finished goods and supplies and are stated at the
lower of cost or market, with cost determined on a first-in, first-out basis.
Property and equipment
Property and equipment are recorded at cost. Maintenance and repairs
are charged to operations, and replacements or betterments are capitalized.
Property or equipment sold, retired, or otherwise disposed of is removed from
the accounts, and any gains or losses thereon are included in operations.
Depreciation is recorded over the estimated useful lives of the related
assets using the straight-line method for molds and leasehold improvements
and an accelerated method, which approximates the straight line method, for
all other assets .
Debt issuance costs and debt discount
Debt issuance costs and debt discount are amortized over the term of the
related debt on a straight-line basis.
Advertising
The cost of producing media advertising is capitalized as incurred and
expensed in the period in which the advertisement is first shown. During interim
periods, media communications costs are accrued in relation to sales when the
advertising is clearly implicit in the related sales arrangement. In any event,
all media communication costs are expensed in the fiscal year incurred. All
other advertising costs are expensed in the period incurred. Television
advertising expense totaled $3,621,000, $275,000 and $141,000 during fiscal
2000, 1999 and 1998, respectively. Prepaid television advertising production
costs of $101,000 and $108,000 respectively are included in prepaid expenses at
December 31, 2000 and 1999. The Company entered into advertising barter
transactions in which the Company recorded $529,000 and $311,000 in advertising
expenses in fiscal 2000 and 1999, respectively. In addition, prepaid expenses at
December 31, 2000 include $200,000 in bartered, prepaid 2001 print advertising.
Management believes these amounts approximate fair value.
Income taxes
The Company accounts for deferred income taxes using the liability method
which provides for the recognition of deferred tax assets and liabilities based
upon temporary differences between the tax basis of assets and liabilities and
their carrying value for financial reporting purposes. Deferred tax expense or
benefit is the result of changes in deferred tax assets and liabilities during
the period. In estimating future tax consequences, all expected future events
are considered other than enactments of changes in the tax law or rates.
U.S. deferred income taxes are provided on the undistributed earnings of
the wholly-owned subsidiaries.
Foreign currency translations
The Company's foreign subsidiary uses the local currency as the functional
currency. Accordingly, assets and liabilities of the Company's foreign
subsidiary are translated using the exchange rate in effect at the balance sheet
date, while income and expenses are translated using average rates. Translation
adjustments are reported as a separate component of shareholders' equity.
Fair value of financial instruments
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt. Due
to their short maturity, the fair value of cash and cash equivalents, accounts
receivable and accounts payable approximates carrying value. The
F-8
fair value of the Company's debt approximates the carrying amount of the debt as
it is at variable market rates.
Concentration of credit risk and export sales
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company sells its products principally to retail discount stores and toy stores.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their geographic dispersion. The Company performs ongoing credit evaluations of
its customers to minimize credit risk, and for the majority of its FOB Asia
sales, the Company obtains letters of credit from its customers supporting the
accounts receivable. (See Note 12).
Use of estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America 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 period. Because of the inherent uncertainties in their
process, actual results could differ from such estimates. Management believes
that the estimates are reasonable.
Impairment of assets
The Company reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. The Company has not identified any
such impairment losses.
Earnings per share
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted average number of common shares as well as
all dilutive potential common shares outstanding.
Stock options and warrants are the only potentially dilutive shares the
Company has outstanding at December 31, 2000. The 866,500 shares of common stock
options and warrants outstanding were not included in the diluted earnings per
share calculation during fiscal 2000, because the options and warrants would be
anti-dilutive. During fiscal 1999, the Company's warrants, for which the
exercise price was less than the average market price of the common shares, were
included in the computation of diluted earnings per share, increasing the
weighted average number of shares outstanding by 114,439 shares. The Company's
remaining 996,500 shares of common stock options and warrants were not included
in the calculation because the exercise price of the options and warrants were
greater than the average market price of the common shares. During fiscal 1998,
the Company had 1,241,888, of common stock options and warrants outstanding
which were not included in the diluted earnings per share calculation because
the options and warrants would have been anti-dilutive.
Stock-based compensation plans
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its plans and the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in disclosures regarding the plan.
F-9
Comprehensive income
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes
rules for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. The Company's comprehensive
income is comprised of net income and foreign currency translation adjustments.
The adoption of SFAS 130 had no impact on the Company's net income or total
shareholders' equity. Prior to the adoption of SFAS 130, foreign currency
translation adjustments were reported separately in the statement of
shareholders' equity.
Segment information
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not affect the Company's results
of operations or financial position but did affect the disclosures of segment
information (see Note 12).
NOTE 3 - Accounts Receivable:
Accounts receivable consist of the following:
December 31, 2000 December 31, 1999
----------------- -----------------
Trade receivables $ 9,642,883 $ 5,405,587
Provisions for:
Discounts and markdowns (1,670,229) (728,910)
Return of defective goods (1,029,771) (1,082,408)
Doubtful accounts (420,000) (186,210)
----------- -----------
Accounts receivable, net $ 6,522,883 $ 3,408,059
=========== ===========
NOTE 4 - Property and Equipment:
Property and equipment consist of the following:
Estimated useful lives December 31, 2000 December 31, 1999
---------------------- ----------------- -----------------
Molds 3 years $ 5,175,410 $ 3,795,738
Equipment, furniture and fixtures 5-7 years 2,030,612 1,899,383
Leasehold improvements 10 years or lease term 1,188,693 1,008,481
Automobiles 3-5 years 83,981 84,246
-------------- --------------
8,478,696 6,787,848
Less: accumulated depreciation (6,063,612) (4,787,633)
-------------- --------------
$ 2,415,084 $ 2,000,215
============== ==============
F-10
NOTE 5 - Accounts Payable and Accrued Liabilities:
Accounts payable and accrued liabilities consist of the following:
December 31, 2000 December 31, 1999
----------------- -----------------
Trade payables $ 5,053,214 $ 1,299,732
Accrued royalties 1,023,633 1,164,079
Accrued compensation and commissions 714,411 521,836
Other 1,110,032 783,639
----------- -----------
$ 7,901,290 $ 3,769,286
=========== ===========
NOTE 6 - Notes Payable:
Indebtedness consists of the following:
December 31, 2000 December 31, 1999
----------------- -----------------
Primary Debt
Bank revolving line of credit for $10 million with a commercial bank,
collateralized by all of the Company's U.S. accounts receivable,
intangibles, equipment, fixtures, and inventory and 65% of the common
stock of DSI(HK) Limited, principal due on February 2, 2003; interest
at prime plus .75% (10.25% at December 31, 2000) $ 6,419,925 $ 2,373,454
Revolving bank loan drawn against an $8 million line of credit,
collateralized by customers' letters of credit and $150,000 cash,
interest at prime (9.5% at December 31, 2000) 1,631,415 1,297,921
Other 102,839 35,648
----------- -----------
8,154,179 3,707,023
Less: current portion 1,689,911 1,313,787
----------- -----------
$ 6,464,268 $ 2,393,236
=========== ===========
The bank revolving credit facility (the "Revolver") includes a $10 million
revolving line of credit commitment, subject to availability under a borrowing
base calculated by reference to the level of eligible accounts receivable and
inventory, as defined in the agreement. The Revolver matures on February 2,
2003. Interest on borrowings outstanding under the Revolver is payable monthly
in arrears at an annual rate equal to prime plus .75%. In addition, an unused
line fee at an annual rate equal to .25% applied to the amount by which $10
million exceeds the average daily principal balance during the month and a
collateral management fee of $2,000 is payable monthly.
The Revolver contains certain restrictive covenants and conditions among
which are prohibition on payment of dividends, limitations on further
indebtedness, restrictions on dispositions and acquisition of assets,
limitations on advances to third parties and compliance with minimum net worth
amounts and designation as the "Senior Indebtedness" as relates to the related
party debt described below.
At December 31, 2000 the Company was in violation of certain of its
Revolver restrictions and covenants. Such restrictions and covenants have been
waived by the bank (see Note 16.)
F-11
Related Party Debt December 31, 2000 December 31, 1999
----------------- -----------------
Promissory Note of $1,690,000 to Walter S. and Susan Reiling, collateralized by a
$868,000 Letter of Credit, subordinated to other debt, payable in quarterly
installments of $108,500 through January 7, 2005; including interest at 10.0375%. $ 1,415,515
Promissory Note of 5,000,000 to MVII, Inc., subordinated to the Revolver, payable
in monthly installments of $100,000 through July 2004 plus interest at prime plus
2% (11.5% at December 31, 2000). 4,300,000
------------
5,715,515
Less: current portion 1,424,478
------------ ------------
$ 4,291,037
============ ============
The $868,000 Letter of Credit collateralizing the $1,690,000 promissory note, is
provided for the benefit of the Company by MVII. Payment to MVII on the
$5,000,000 promissory note is subject to the terms of a subordination agreement
between MVII and the Revolver bank, which places restrictions on payment to
MVII, based on the borrowing capacity available to the Company under the
Revolver.
NOTE 7 - Income Taxes:
The components of income (loss) before provision for (benefit from) income
taxes by fiscal year were as follows:
2000 1999 1998
----------- ----------- -----------
Domestic $(4,167,128) $ (408,523) $(3,209,516)
Foreign 2,840,694 2,558,119 1,872,674
----------- ----------- -----------
$ 1,326,434 $ 2,149,596 $(1,336,842)
=========== =========== ===========
The provision for income taxes (benefit) by fiscal year is as follows:
2000 1999 1998
----------- ----------- -----------
Current:
Federal $ (106,641) $ (615,358)
State
Foreign $ 324,473 253,829 271,358
----------- ----------- -----------
324,473 147,188 (344,000)
----------- ----------- -----------
Deferred:
Federal (949,000) 702,000 17,000
State
Foreign 147,079 19,417 (6,000)
----------- ----------- -----------
(801,921) 721,417 11,000
----------- ----------- -----------
$ (477,448) $ 868,605 $ (333,000)
=========== =========== ===========
F-12
The difference between income taxes (benefit) at the statutory Federal and
the effective income tax rates by fiscal year is as follows:
2000 1999 1998
--------- --------- ---------
Taxes (benefit) computed at statutory rate $(450,987) $ 734,000 $(364,000)
Expired foreign tax credits 44,000
U.S. Permanent items 190,256
Split Dollar Life Insurance (592,577)
Reserve against foreign tax credits 371,654 87,000
Other, net 4,206 3,605 31,000
--------- --------- ---------
$(477,448) $ 868,605 $(333,000)
========= ========= =========
Deferred tax assets (liabilities) are comprised of the following:
December 31, 1999 December 31, 2000
----------------- -----------------
Net operating loss carry forward $ 1,179,000
Allowance for doubtful accounts 136,000 $ 69,000
Inventory valuation adjustments 38,000 32,000
Depreciation 135,000 105,000
Accruals for inventory returns and markdowns 169,000 185,000
Foreign and alternative minimum tax credits 1,636,000 1,403,000
Life insurance premiums paid for shareholders 593,000
Other 64,000 226,000
------------ -----------
Gross deferred tax assets 3,357,000 2,613,000
Less valuation allowance (372,000) (680,000)
------------ -----------
Net deferred tax assets 2,985,000 1,933,000
------------ -----------
Unremitted earnings of foreign subsidiary (820,000) (717,000)
Depreciation (188,849) (133,340)
------------ -----------
Gross deferred tax liabilities (1,008,849) (850,340)
------------ -----------
Net deferred tax assets (liabilities) $ 1,976,151 $ 1,082,660
============ ===========
The Internal Revenue Service regulations restrict the utilization of U.S.
net operating loss carryforwards and other tax attributes such as foreign tax
credits for any company in which an "ownership change" as defined in Section 382
of the Internal Revenue Code has occurred. In June of 1999, the Company had a
Section 382 change in ownership. As a result, the Company's U.S. net operating
losses and tax credits are subject to limitation of approximately $1,230,000 per
year. For the current fiscal year, this limitation did not impact the Company's
utilization of U.S. net operating losses and foreign tax credits.
At December 31, 2000, the Company has $1,554,000 in foreign tax credit
carryforwards which expire between December 31, 2000 through December 31,
2005. The Company also has $82,000 in alternative minimum tax credit
carryforwards which do not expire. With the exception of $372,000 of foreign
tax credits expiring during the tax year December 31, 2001, the Company
believes that the foreign and alternative minimum tax credit carryforwards
will be available to reduce future federal income tax liabilities, and has
recorded the related tax benefit as a non-current deferred tax asset. The
Company has federal net operating loss carryforwards (NOL) of $1,179,000
which expire in 2020. The Company's state net operating loss carryforward is
not significant. The benefit from utilization of net operating loss
carryforwards could be subject to limitations if significant ownership
changes occur in the Company. The Company's ability to realize the
F-13
entire benefit of its deferred tax asset requires that the Company achieve
certain future earnings levels prior to the expiration of its foreign tax credit
and NOL carryforwards. The Company could be required to record a valuation
allowance for a portion or all of its deferred tax asset if market conditions
deteriorate and future earnings are below, or projected to be below, its current
estimates.
NOTE 8 - Employee Benefit Plan:
The Company maintains a 401(k) Plan (the Plan) for the benefit of its U.S.
employees. The Company may, at its discretion, provide funds to match employee
contributions to the Plan. The Company contributed $54,000, $27,000 and $35,000
in fiscal 2000, 1999 and 1998, respectively, as employer matching contributions
to employee contributions.
NOTE 9 - The Stock Option Plan and Warrants:
The Company has reserved 388,888 common shares for issuance upon exercise
of warrants issued to a bank. Such warrants are currently exercisable at a
purchase price of $2 per share and expire December 11, 2005.
In connection with the Offering, the Company issued warrants to purchase
250,000 shares of common stock. Such warrants are exercisable at $10.80 per
share and expire May 28, 2002.
In May 1997, the Board adopted the DSI Toys, Inc. 1997 Stock Option Plan
(the 1997 Plan) whereby certain employees may be granted stock options,
appreciation rights or awards related to the Company's common stock.
Additionally, the Company may grant nonstatutory stock options to nonemployee
board members. The Board authorized 600,000 shares to be available for grant
pursuant to the 1997 Plan. Options expire no later than ten years from the date
of grant.
Additional awards may be granted under the 1997 Plan in the form of cash,
stock or stock appreciation rights. The stock appreciation right awards may
consist of the right to receive payment in cash or common stock. Any award may
be subject to certain conditions, including continuous service with the Company
or achievement of business objectives.
In May 1999, the 1997 Plan was amended to authorize 900,000 shares to be
available for grant.
A summary of the option activity under the 1997 Plan, as amended, follows:
Number of Weighted Average
Outstanding Options Option Price
------------------- ------------
Options outstanding at January 31, 1998 533,000 8.00
Granted 82,000 1.41
Surrendered (12,000) 8.00
-------------------
Options outstanding at January 31, 1999 603,000 7.10
Granted 685,500 3.13
Exercised (74,666) 1.39
Surrendered (467,334) 7.73
-------------------
Options outstanding at December 31, 1999 746,500 3.63
Granted 142,500 3.19
Surrendered (22,500) 5.40
-------------------
Options outstanding December 31, 2000 866,500 3.51
===================
The weighted average fair value at date of grant for options granted
during fiscal 2000, 1999 and 1998 was $3.19, $3.13 and $1.41 respectively.
Vesting periods for options granted range from immediate to seven years from the
date of grant in increments between 5% and 90% per year.
F-14
Options outstanding at December 31, 2000 are as follows:
Weighted Weighted Weighted
Number of Average Average Number of Average
Outstanding Exercise Remaining Exercisable Exercise
Option Price Options Price Contractual Life Options Price
- ------------------- ----------- -------- ---------------- ----------- --------
$3.125 - 3.49 800,000 3.14 9 132,500 3.13
8.00 66,500 8.00 7 16,775 8.00
------- -------
866,500 149,275
======= =======
The Company applies APB 25 and related interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized by
the Company for this plan. The following unaudited pro forma data is calculated
as if compensation cost for the 1997 Plan was determined based upon the fair
value at the grant date for awards under the plan consistent with the
methodology prescribed under SFAS 123 for fiscal years 2000, 1999 and 1998:
2000 1999 1998
------------- ------------- -------------
Pro forma net earnings (loss) $ 1,089,412 $ 1,000,150 $ (1,589,283)
Pro forma basic earnings (loss) per common share $(0.12) $0.13 $(0.26)
Pro forma diluted earnings (loss) per common share $(0.12) $0.13 $(0.26)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes options-repricing model with the following weighted
average assumptions used for grants in fiscal 2000, 1999 and 1998: expected
volatility of 80% in fiscal 2000, 104% in fiscal 1999 and 80% in fiscal 1998,
risk-free interest rate of 4.64% to 6.37%, no dividend yield and an expected
life of seven years.
NOTE 10 - Related Party Transactions:
The Company leases its office and warehouse in Houston from an entity
owned by the previous sole shareholder of the Company. Rent expense on these
leases was $325,000, $199,000 and $217,000 respectively for fiscal 2000, 1999,
and 1998. Management believes that the rental rates approximate fair market
value.
In connection with a recapitalization in 1995, the Company paid a director
the sum of $240,000 in three equal payments on January 1, 1998, 1997 and 1996.
On June 11, 1999, the Company entered into a consulting agreement with a
director (and former CEO), for a term of three years. Compensation for the three
year term is $450,000 payable in equal monthly installments of $12,500.
On January 7, 2000, the Company borrowed $5,000,000 from MVII, LLC (a
California limited liability company controlled by the Chairman, and including
certain other directors) evidenced by a Promissory Note. The Note, which bears
interest at a rate of prime plus 2% per annum, requires monthly interest
payments from the date of the Note and principal payments beginning June 1,
2000, subject to subordination terms of the Revolver (Note 6).
F-15
Also on January 7, 2000, as discussed in Note 15, the Company merged
with Meritus Industries, Inc. Pursuant to the merger terms, one of Meritus'
primary shareholders was subsequently elected to the Board. In addition to
the stock received in the transaction, the shareholder received $1.1 million
in cash and a note receivable for $1.7 million. The note, bearing interest at
10.0375% per annum, requires quarterly principal and interest payments
beginning April 1, 2000.
Additional related party transactions are described in Notes 1, 11 and 16.
NOTE 11 - Commitments and Contingencies:
In the normal course of business, the Company is involved in product and
intellectual property issues which sometimes result in litigation. It is the
opinion of management that the ultimate resolution of such matters will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows, taken as a whole.
The Company leases its facilities under various operating leases which
expire from 2001 to 2010. Rent expense, including amounts paid to a related
party, for fiscal 2000, 1999, and 1998 amounted to $1,008,183, $573,000 and
$625,000, respectively. Aggregate minimum rental commitments under
non-cancelable leases are as follows for the specified fiscal years:
2001 $1,015,370
2002 814,061
2003 270,759
2004 167,316
2005 167,316
Thereafter thru 2010 725,036
----------
$3,159,858
==========
Royalty expense under licensing agreements aggregated $2,989,000,
$1,829,000 and $1,298,000, in fiscal 2000, 1999 and 1998, respectively. At
December 31, 2000, minimum guaranteed royalties payable under these agreements
of $97,000 in fiscal 2001 and $125,000 through 2003, are included in accrued
royalties payable and prepaid expenses and other assets.
The Company has employment agreements with executives that aggregate
$685,000 and expire in the next 12-24 months.
In fiscal 2000, the Company terminated its obligations for current and
future insurance premium payments on certain life insurance policies. In
prior years, the Company paid premiums for the policies owned by the Tommy
and JoBeth Moss Joint Life Insurance Trust, (the "Trust"), and was entitled
to repayment of the advanced premiums, plus related cumulative interest, upon
the death of JoBeth Moss. The Company agreed to forgo the cumulative amounts
due the Company in exchange for the Trust extinguishing the future
obligations for insurance premium payments. The premiums for 1999 and 1998
were $243,000 and $265,000 respectively and were recorded in general and
administrative expense.
NOTE 12 - Segment Information:
The Company designs, develops, markets and distributes a variety of toys
and children's consumer electronics. These product lines are grouped into three
major categories which represent the Company's operating segments, as follows:
Juvenile Audio Products, including walkie-talkies, pre-school audio
products, pre-teen audio products and musical toys; Girls' Toys, including
dolls, play sets and accessories; and Boys' Toys, including radio control
vehicles, action figures and western and military action toys.
F-16
These operating segments all have similar economic characteristics: the
marketing of children's products. Based on these similarities, the Company's
products can be aggregated into one reportable segment for purposes of this
disclosure.
The Company sells its products through (i) the Hong Kong operation, where
products are shipped directly from contract manufacturers to the Company's
customers, and (ii) the United States operation, where products are shipped from
the Company's warehouse in Houston to its customers.
Financial information for fiscal 2000, 1999, and 1998 for the U.S. and
Hong Kong operations is as follows:
United States Hong Kong Consolidated
------------- ------------ ------------
Fiscal 2000:
Net sales $ 27,147,848 $ 43,290,683 $ 70,438,531
Operating income (loss) (682,572) 633,386 (49,186)
Depreciation expense 733,186 818,446 1,551,632
Capital expenditures 237,752 1,012,192 1,249,944
Total assets at fiscal year end $ 26,528,128 $ 3,471,012 $ 29,999,140
Fiscal 1999:
Net sales $ 16,419,628 $ 31,140,396 $ 47,560,024
Operating income (loss) (1,527,874) 4,139,162 2,665,288
Depreciation expense 265,790 463,161 728,951
Capital expenditures 256,354 831,092 1,087,446
Total assets at fiscal year end $ 11,134,140 $ 3,893,226 $ 15,027,366
Fiscal 1998:
Net sales $ 14,817,505 $ 37,905,012 $ 52,722,517
Operating income (4,376,009) 3,807,193 (568,816)
Depreciation expense 275,147 295,632 570,779
Capital expenditures 255,940 705,364 961,304
Total assets at fiscal year end $ 7,894,703 $ 3,516,076 $ 11,410,779
Sales to major customers that exceeded 10% of the Company's total net
sales consist of the following for the specified fiscal years:
2000 1999 1998
---- ---- ----
Wal-Mart 18% 21% 19%
Toys "R" Us 12% 7% 11%
Approximately 19% of the Company's sales were exports to foreign countries
during fiscal 2000, and 23% and 21% during fiscal 1999 and 1998, respectively.
F-17
NOTE 13 - Supplemental Cash Flow Information:
Additional cash flow information by fiscal year is as follows:
2000 1999 1998
--------------------------------------------
Cash paid (received) for:
Interest $ 1,104,296 $ 334,932 $ 614,150
Income taxes (8,636) (1,149,829)
Noncash activities included in the following:
Accounts receivable write-offs (recoveries) $ (11,769) $ 2,777 $ 63,946
Acquisition of Meritus:
Property, plant and equipment acquired $ (748,730)
Accounts receivable and other assets
acquired (838,563)
Liabilities assumed 7,475,172
Note payable issued to the Sellers 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 $ (884,033)
=============
F-18
NOTE 14 - Quarterly Financial Information (unaudited):
Fiscal Quarter Ended
----------------------------------------------------------
3/31/00 6/30/00 9/30/00 12/31/00
------------ ------------ ------------ ------------
Net sales $ 6,914,462 $ 13,582,505 $ 29,915,591 $ 20,025,973
Operating income (loss) (1,735,467) 362,744 2,598,974 (1,275,437)
Income (loss) before income taxes (1,995,260) 3,287 2,312,891 (1,647,352)
Net income (loss) (1,276,913) 2,049 1,480,251 (1,054,373)
Basic earnings (loss) per share $ (0.14) $ 0.00 $ 0.16 $ (0.12)
Diluted earnings (loss) per share $ (0.14) $ 0.00 $ 0.16 $ (0.12)
Fiscal Quarter Ended
----------------------------------------------------------
4/30/99 7/31/99 10/31/99 12/31/99
------------ ------------ ------------ ------------
Net sales $ 3,927,695 $ 14,646,943 $ 22,466,132 $ 6,519,254
Operating income (loss) (631,394) 472,609 2,867,621 (43,548)
Income (loss) before income taxes (741,246) 373,555 2,672,381 (155,094)
Net income (loss) (498,285) 215,188 1,686,437 (122,349)
Basic earnings (loss) per share $ (0.08) $ 0.03 $ 0.20 $ (0.01)
Diluted earnings (loss) per share $ (0.08) $ 0.03 $ 0.19 $ (0.01)
Fiscal Quarter Ended
----------------------------------------------------------
4/30/98 7/31/98 10/31/98 1/31/99
------------ ------------ ------------ ------------
Net sales $ 5,926,126 $ 17,524,808 $ 24,563,262 $ 4,708,321
Operating income (loss) (863,056) 560,582 2,399,965 (2,666,307)
Income (loss) before income taxes
and extraordinary item (1,074,380) 375,941 2,150,012 (2,788,415)
Net income (loss) (711,490) 205,401 1,363,435 (1,861,188)
Basic earnings (loss) per share $ (0.12) $ 0.03 $ 0.23 $ (0.31)
Diluted earnings (loss) per share $ (0.12) $ 0.03 $ 0.23 $ (0.31)
NOTE 16 - Subsequent Event:
On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock, in exchange for a
cash purchase price $2.7 million. The Investment Warrant is exercisable for
no additional consideration, in whole on in part, for a ten-year period
beginning June 3, 2002. The Investment Warrant is subject to certain
anti-dilution adjustments, including adjustments in the event the Company
issues securities for a purchase price that is equivalent to less than $1.50
per share of the Company Common Stock. In connection with the issuance of the
Investment Warrant, the Company and MVII entered into a Registration Rights
Agreement, pursuant to which MVII was granted piggyback registration rights
with respect to the shares of the Company
F-19
Common Stock underlying the Warrant, under certain circumstances. Shares of
Common Stock acquired by MVII upon exercise of the Warrant are subject to the
terms of a Shareholders' and Voting Agreement dated as of April 5, 1999, among
MVII and certain of the Company's other shareholders. Proceeds from the sale of
the Investment Warrant were used by the Company for current working capital.
Also, on March 30, 2001, the Company and Sunrock amended the Revolver
resulting in an increase in the maximum loan amount from $10 million to $17.5
million, subject to the availability of sufficient, eligible inventory and
accounts receivable. The terms include interest at prime rate plus three
quarters of one percent (.75%) and maturity on March 31, 2004. As part of the
amendment, the Company and Sunrock revised the future covenants and
restrictions required by the Revolver, and waived the Company's
non-compliance at December 31, 2000. Management believes the Company will be
able to maintain compliance with such covenants in the future.
NOTE 17 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 were initially 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. At the end of the holdback
period (June 7, 2000), the post-closing conditions were not satisfied and none
of the held back (66,792) shares was paid to the Reilings. The market value of
the shares issued was $1,081,415 and was satisfied by the issuance of 347,365
shares of new stock and 185,843 shares in treasury stock. 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. The results of operations of the Meritus entities are
included in the consolidated results of operations for fiscal 2000.
Commensurate with the merger, the Company borrowed $5,000,000 from MVII,
LLC, a California limited liability company controlled by E. Thomas Martin
("MVII"), evidenced by a promissory note dated January 7, 2000. The proceeds
from the note were used for the payment of the Meritus debt discussed above.
F-20
Pro Forma Results of Operations
Presented below is a pro forma statement of operations for fiscal years
ended December 1999 and 1998. The proforma reflects the combined operations of
the Company and Meritus as if the merger of the Company and Meritus occurred on
January 1, 1998.
Fiscal 1999
-------------------------------------------------------------
DSI Meritus Combined
(unaudited) (unaudited)
------------ ------------ ------------
Net sales $ 47,560,024 $ 15,813,170 $ 63,373,194
Net income $ 1,280,991 $ (2,000,870) $ (719,879)
Basic earnings per share
Earnings per share $ 0.17 $ (0.09)
Weighted average shares outstanding 7,688,964 8,222,172
Diluted earnings per share
Earnings per share $ 0.16 $ (0.09)
Weighted average shares outstanding 7,803,403 8,336,611
Fiscal 1998
-------------------------------------------------------------
DSI Meritus Combined
(unaudited) (unaudited)
------------ ------------ ------------
Net sales $ 52,722,517 $ 21,497,445 $ 74,219,962
Net income (loss) $ (1,003,842) $ (991,675) $ (1,995,517)
Basic earnings per share
Earnings per shares $ (0.17) $ (0.33)
Weighted average shares outstanding 6,000,000 6,533,208
Diluted earnings per share
Earnings per share $ (0.17) $ (0.33)
Weighted average shares outstanding 6,000,000 6,533,208
F-21
DSI Toys, Inc. and Subsidiary
Valuation and Qualifying Accounts and Reserves (Schedule II)
(In thousands)
Balance Charged Balance Charged Charged
at to costs at to costs Balance at to costs
January and January and Becember and
Description 31, 1998 expenses Deductions 31, 1999 expenses Dedcutions 1, 1999 expenses
- ----------- -------- -------- ---------- -------- -------- ---------- ------- --------
Reserves deducted from assets:
Trade receivables 204 (17) (64) 123 66 (3) 186 222
Discounts and
markdowns 1,957 1,559 (2,132) 1,384 1,041 (1,696) 729 1,339
Return of defective
goods 830 2,416 (2,838) 408 2,400 (1,726) 1,082 1,837
Inventory 100 100 379
----- ----- ------ ----- ----- ------ ----- -----
2,991 3,958 (5,034) 1,915 3,607 (3,425) 2,097 3,777
===== ===== ====== ===== ===== ====== ===== =====
Balance
at
December
Description Deductions 31, 2000
- ----------- ---------- --------
Reserves deducted from assets:
Trade receivables 12 420
Discounts and
markdowns (398) 1,670
Return of defective
goods (1,889) 1,030
Inventory (129) 350
------ -----
(2,404) 3,470
====== =====
S-1
Exhibit Index
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)
4.1 Form of Common Stock Certificate. (1)
4.2 Form of Warrant Agreement among the Company and Representatives to
purchase 250,000 shares of common stock. (1)
4.3 Common Stock Purchase Warrant No. A-1 dated December 11, 1995, issued to
Hibernia Corporation to purchase 388,888 shares of common stock. (1)
4.4 Registration Rights Agreement by and between the Company and Hibernia
Corporation. (1)
4.5 Registration Rights Agreement by and between the Registrant and Tommy
Moss. (1)
4.6 Form of Investment Warrant by and between the Company and MVII, LLC, dated
March 19, 2001.*
4.7 Registration Rights Agreement by and between the Company and MVII,
LLC, dated March 19, 2001.*
10.1 1997 Stock Option Plan. (1)
10.2 Agreement for Sale of Stock between Rosie Acquisition, L.L.C. and DSI
Acquisition, Inc. and Diversified Specialists, Inc. and Tommy Moss, dated
December 11, 1995. (1)
10.3 Employment Agreement dated December 11, 1995 by and between the Company
and M. D. Davis. (1)
10.4 Employment Agreement dated December 11, 1995 by and between the Company
and Richard R. Neitz. (1)
10.5 Employment Agreement dated December 11, 1995 by and between the Company
and Yau Wing Kong. (1)
10.6 Employment Agreement dated December 11, 1995 by and between the Company
and Dale Y. Chen. (1)
10.7 Employment Agreement dated December 11, 1995 by and between the Company
and Thomas V. Yarnell. (1)
10.8 Employment Agreement dated March 16, 1997 by and between the Company and
J. Russell Denson. (1)
E-1
10.9 Letter Loan Agreement between the Company and Bank One, Texas, N.A. dated
December 11, 1995, evidencing a revolving line of credit and a term note
(the "Bank One Letter Loan Agreement"). (1)
10.10 First Amendment to Bank One Letter Loan Agreement, dated January 31, 1996.
(1)
10.11 Second Amendment to Bank One Letter Loan Agreement, dated August 1, 1996.
(1)
10.12 Third Amendment to Bank One Letter Loan Agreement, dated November 14,
1996. (1)
10.13 Fourth Amendment to Bank One Letter Loan Agreement, dated January 31,
1997. (1)
10.14 Fifth Amendment to Bank One Letter Loan Agreement, dated January 31, 1997.
(1)
10.15 Line of Credit Facility with State Street Bank and Trust Company, Hong
Kong Branch, dated April 1, 1997, evidencing a $5,000,000 line of credit.
(1)
10.16 Underwriting Agreement dated May 28, 1997 among the Company, the Tommy
Moss Living Trust, Hibernia Corporation and Tucker Anthony Incorporated
and Sutro & Co. Incorporated (filed as Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended April 30, 1997), incorporated herein
by reference.
10.17 Warrant Agreement dated May 28, 1997 by and among the Company, Tucker
Anthony Incorporated and Sutro & Co. Incorporated (filed as Exhibit 10.2
to the Company's Form 10-Q for the quarterly period ended April 30, 1997),
incorporated herein by reference.
10.18 Renewal and Modification of Line of Credit Facility with State Street Bank
and Trust Company, Hong Kong Branch, dated June 6, 1997, evidencing an
$8,000,000 line of credit (filed as Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended July 31, 1997), incorporated herein by
reference.
10.19 Debenture by DSI(HK) Limited to State Street Bank and Trust Company, Hong
Kong Branch, dated July 29, 1997 (filed as Exhibit 10.2 to the Company's
Form 10-Q for the quarterly period ended July 31, 1997), incorporated
herein by reference.
10.20 Amended and Restated Bank One Letter Loan Agreement, dated October 22,
1997 (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended October 31, 1997), incorporated herein by reference.
10.21 First Amendment to Amended and Restated Bank One Letter Loan Agreement,
dated January 31, 1998 (filed as Exhibit 10.21 to the Company's Form 10-K
for the annual period ended January 31, 1998), incorporated herein by
reference.
10.22 Second Amendment to Amended and Restated Bank One Letter Loan Agreement,
dated September 30, 1998 (filed as Exhibit 10.22 to the Company's Form
10-Q for the quarterly period ended October 31, 1998), incorporated herein
by reference.
10.23 Employment Agreement dated August 20, 1998 by and between the Company and
Howard G. Peretz. (2)
10.24 Loan and Security Agreement by and between the Company and Sunrock Capital
Corp. dated February 2, 1999. (2)
10.25 Stock Pledge Agreement by and between the Company and Sunrock Capital
Corp. dated February 2, 1999. (2)
E-2
10.26 Assignment of Deposit Account by and between the Company and Sunrock
Capital Corp. dated February 2, 1999. (2)
10.27 Trademark Security Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999. (2)
10.28 Patent Collateral Assignment by and between the Company and Sunrock
Capital Corp. dated February 2, 1999. (2)
10.29 Stock Purchase and Sale Agreement dated April 15, 1999 by and between the
Company and MVII, LLC (filed as Exhibit 2 to the Company's Schedule 14D-9
filed by the Company on April 22, 1999), incorporated herein by reference.
10.30 Stock Purchase and Sale Agreement, dated April 15, 1999, between the
Company and MVII, LLC (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, LLC, 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, LLC, 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, LLC and Conrad. (3)
10.34 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and Davis. (3)
10.35 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and Matlock. (3)
10.36 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and Rust
Capital. (3)
10.37 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and Smith. (3)
10.38 Consulting Agreement dated June 1, 1999, between the Company and Davis.
(3)
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.
(3)
10.40 Amendment No. 1 dated June 30, 1999, to Loan and Security Agreement, by
and between Sunrock Capital Corp. and the Company. (4)
10.41 Employment Agreement dated June 17, 1999 by and between the Company and
Michael J. Lyden. (4)
10.42 Employment Agreement dated June 1, 1999, by and between the Company and
Joseph S. Whitaker. (4)
10.43 Amendment to 1997 Stock Option Plan dated May 24, 1999. (4)
10.44 Restated Employment Agreement dated December 31, 1999, by and between
DSI(HK) Limited and Yau Wing Kong.
E-3
10.45 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.
10.46 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.
10.47 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.
10.48 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.
10.49 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.
10.50 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.
10.51 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.
10.52 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.
10.53 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.
10.54 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.
10.55 Amendment No. 2 to DSI Toys, Inc. 1997 Stock Option Plan (filed as
Exhibit 10.11 to the Company's Form 10-Q for the quarterly period ended
June 30, 2000), incorporated herein by reference.
10.56 Amendment No. 3 dated July 14, 2000, to Loan and Security Agreement, by
and between Sunrock Capital Corp. and the Company (filed as Exhibit 10.12
to the Company's Form 10-Q for the period ended June 30, 2000),
incorporated herein by reference.
10.57 Amendment No. 4 dated March 30, 2001, to Loan and Security Agreement,
by and between Sunrock Capital Corp. and the Company.*
21 Subsidiaries.*
99.1 DSI Toys, Inc. Audit Committee of the Board of Directors, Charter,
adopted by the Board of Directors on May 23, 2000 (filed as Exhibit 99.1
to the Company's Form 10-Q for the period ended June 30, 2000),
incorporated herein by reference.
E-4
99.2 Amendment No. 1 to the Audit Committee of the Board of Directors,
Charter, adopted by the Board of Directors on March 13, 2001.*
(1) Filed as a part of the Registrant's Registration Statement on Form S-1
(No. 333-23961) and incorporated herein by reference.
(2) Filed as the indicated numbered exhibit to the Company's Form 10-K for
the annual period ended January 31, 1999, and incorporated herein by
reference.
(3) Filed as the indicated numbered exhibit to the Company's Form 10-Q for
the quarterly period ended April 30, 1999, and incorporated herein by
reference.
(4) Filed as the indicated numbered exhibit to the Company's Form 10-Q for
the quarterly period ended July 31, 1999, and incorporated herein by
reference.
* Filed herewith
E-5