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Tuesday, December 9, 1997

DSI Toys Inc.
(Nasdaq: DSIT)
Phone: 713-365-9900
Price (12/8/97): $1 15/16


After a June IPO at $8 and a steady rise to $10 by October, DSI Toys seemed destined to be a pleasant stocking stuffer. But the Grinch has stolen Christmas from unfortunate DSI shareholders.

With sales growing and new playthings off to successful debuts, the going was pretty good. A television advertising campaign that only highlighted two toys last year was to be expanded to four. Yet when the company announced that revenues would fall below analyst projections and earnings would turn in a staggering loss for the year, DSI, with just a few months of public life, had nowhere to go except down the chimney.


Houston-based DSI makes toys and audio playthings. The majority of sales comes from the juvenile audio products division, which includes walkie-talkies and kid-friendly musical instruments.

DSI also makes dolls and had a strong showing in the two previous years with Rosie. Baby Pick Me Up was introduced this year and helped defray some of the popularity fade with Rosie.


Income Statement
12-month sales: $71.7 million
12-month income: ($3.1 million)
12-month EPS: ($0.63)
Profit Margin: N/A
Market Cap: $11.6 million

Balance Sheet
Cash: $1.1 million
Current Assets: $28.0 million
Current Liabilities: $21.5 million
Long-term Debt: $4.5 million

Price-to-earnings: N/A
Price-to-sales: 0.16


Absent a daughter of my own, I called my niece, a satisfied Rosie owner over the last two years who now wanted a Baby Pick Me Up for Christmas. My sister then explained why Santa would be short at least one Baby Pick Me Up this season. The doll cries until it is picked up, when it begins giggling. Unfortunately, the laughter mechanism is unintentionally triggered if the doll is shaken.

With the recent au pair trial in Boston still fresh in everyone's mind, one can see how rattling a doll to laughter has strong negative implications. As bad as DSI's luck has been, it doesn't seem that the weakened big dolls division will soon find any relief after this publicized blunder.

While DSI claims it is doing much better with audio-based toys, specifically walkie-talkies, the dismal outlook has squelched any positive that the product line may have produced. When the company announced a steep loss for the third quarter last week and said that the fiscal year would show a loss of $0.90 to $1.00 a share, those still around were noticeably rattled.


Hoppin' Poppin' Spaceballs? Lately, management has probably been called worse. However, the toy is new in the DSI arsenal and has sold briskly. The first week of December found the toy on sale at K-Mart, Target, and Toys R Us. I did what any resident tire-kicker would do -- I bought the game.

A pair of C batteries later, the test drive began. My son, a year shy of the "Ages 5 and Up" label, was more than anxious to lend a hand. Simple enough, different colored balls are bouncing around in an enclosed plastic dome and the player must catch four matching "spaceballs" before the other players. The game was fast, loud, and seemingly engaging for the young, if not for the young at heart.

I'd run out and sample the Kawaski Air Guitar if it wasn't for the fact that, despite my son's zeal, sales and profits at DSI are in a funk no matter how ambitious my field research would become.

The real game now is to value the company. Because the offering has blown up, one might think that there might be some fundamental vulture parameters worth considering. but that is not necessarily the case. After the dismal third quarter, book value has now fallen under a buck a share. After the fourth quarter's deficit, that bottom will sink even lower.

Any hopes for a Hoppin' Poppin' share price will probably be on hold until the company gets past the current quarter and announces the now expected loss. Stocks that fall this quickly after their debut are also usually prone to class action lawsuits. While DSI went public almost half a year before the tumble, jaded shareholders, Hoppin' Poppin' mad investors, may vent their anger at the company -- even though the demise did not seem foreseeable earlier this year.

So, while the value in a turnaround can mean huge stock appreciation, there are quite a few hurdles that must be cleared here -- no easy task, even with one of DSI's Kawasaki Ninja Supergyro Motorcycles.

-Rick Aristotle Munarriz

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