SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to _______________
Commission file number: 000-22161
ZINDART LIMITED
(Exact Name of Registrant as Specified in its Charter)
Hong Kong S.A.R., China
(State or Other Jurisdiction of Incorporation or Organization)
Not Applicable
(I.R.S. Employer Identification No.)
Flat C&D, 25/F, Block 1, Tai Ping Industrial Centre
57 Ting Kok Road, Tai Po
New Territories, Hong Kong S.A.R., China
(Address of Principal Executive Offices)
Not Applicable
(Zip Code)
Registrant's telephone number, including area code: 011-852-2256-6000
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 [ ]
The number of ordinary shares ("Shares") outstanding as of October 30, 2001 was
8,834,125.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE PAGE 17
REPORTS TO SHAREHOLDERS
Zindart Limited (the "Company") is publishing this report on Form 10-Q in order
to provide additional information to the Company's shareholders. However, the
Company, as a foreign private issuer, is not required to publish reports on this
form and may discontinue doing so at any time without prior notice. Moreover, as
a foreign private issuer, the Company is and will remain exempt from Section
14(a), 14(b), 14(c), and 14(f) of the Securities Exchange Act of 1934 (the
"Exchange Act"), and the Company's officers, directors and principal
shareholders are and will remain exempt from the reporting and "short-swing"
profit recovery provisions contained in Section 16 of the Exchange Act until
such time as the Company ceases to be a foreign private issuer.
Unless otherwise indicated, amounts denoted by "$" are U.S. dollars and amounts
denoted by "GBP" are pounds sterling of the United Kingdom.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands)
As of As of
September March
30, 2001 31, 2001
---------- ---------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and bank deposits $ 3,326 $ 8,738
Short-term investment 130 130
Accounts receivable, net 36,160 28,177
Inventories 16,343 13,783
Deposits and prepayments 6,831 5,888
Debt issuance cost 545 711
Loan receivable, current portion 2,050 500
-------- ---------
Total current assets 65,385 57,927
Property, machinery and equipment, net 32,818 33,267
Loan receivable, non-current portion -- 1,800
Goodwill, net 46,223 47,210
-------- ---------
Total assets $144,426 $ 140,204
======== =========
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 19,938 $ 10,872
Long-term bank loans, current portion 4,617 2,851
Capital lease obligations, current portion 1,888 1,901
Convertible note, current portion 1,583 1,276
Accounts payable 14,758 14,705
Receipts in advance 526 1,539
Accrued liabilities 13,557 11,165
Taxation payable 105 1,456
-------- ---------
Total current liabilities 56,972 45,765
Long-term bank loans, non-current portion 9,264 11,822
Capital lease obligations, non-current portion 490 1,413
Convertible note, non-current portion -- 1,702
Deferred taxation 962 981
-------- ---------
Total liabilities 67,688 61,683
-------- ---------
Minority interests 1,409 1,253
-------- ---------
Shareholders' equity:
Common stock 571 571
Additional paid-in capital 38,634 38,634
Retained earnings 37,707 40,064
Accumulated other comprehensive loss (1,583) (2,001)
-------- ---------
Total shareholders' equity 75,329 77,268
-------- ---------
Total liabilities, minority interests and shareholders' equity $144,426 $ 140,204
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 37,692 $ 33,271 $ 65,957 $ 68,606
Cost of goods sold (26,868) (22,962) (47,805) (47,455)
-------- -------- -------- --------
Gross profit 10,824 10,309 18,152 21,151
Selling, general and administrative expenses (9,441) (8,487) (18,549) (17,590)
-------- -------- -------- --------
Operating income (loss) 1,383 1,822 (397) 3,561
Other expense, net (702) (899) (1,376) (1,535)
Amortization of goodwill (493) (494) (987) (987)
-------- -------- -------- --------
Income (loss) before income taxes 188 429 (2,760) 1,039
Income tax benefit (expense) 60 (102) 559 76
-------- -------- -------- --------
Income (loss) before minority interests 248 327 (2,201) 1,115
Minority interests (43) (2) (156) (181)
-------- -------- -------- --------
Net income (loss) $ 205 $ 325 $ (2,357) $ 934
======== ======== ======== ========
Basic earnings (loss) per share $ 0.02 $ 0.04 $ (0.27) $ 0.11
Weighted average no. of shares outstanding - Basic 8,834 8,834 8,834 8,834
Diluted earnings (loss) per share $ 0.02 $ 0.04 $ (0.27) $ 0.11
Weighted average no. of shares outstanding - Diluted 8,991 8,834 9,017 8,834
The accompanying notes are an integral part of these consolidated financial
statements.
3
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
September 30,
-----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net (loss) income $ (2,357) $ 934
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Minority interests 156 181
Amortization of goodwill 987 987
Amortization of debt issuance cost 234 174
Depreciation of property, machinery and equipment 3,647 3,898
Net loss on disposal of property, machinery and
equipment 22 --
Deferred taxation (19) (48)
(Increase) decrease in operating assets:
Accounts receivable, net (7,983) (2,968)
Bills receivable -- 1
Inventories (2,560) (1,319)
Deposits and prepayments (943) (1,349)
Increase (decrease) in operating liabilities:
Accounts payable 53 (1,252)
Receipts in advance (1,013) 283
Accrued liabilities 2,392 (196)
Taxation payable (1,351) (445)
-------- --------
Net cash used in operating activities (8,735) (1,119)
-------- --------
Cash flows from investing activities:
Acquisitions of property, machinery and equipment (3,220) (1,311)
Decrease in loan receivable 250 --
-------- --------
Net cash used in investing activities (2,970) (1,311)
-------- --------
Cash flows from financing activities:
New short-term bank borrowings 30,653 22,488
Repayment of short-term bank borrowings (25,958) (17,810)
Repayment of long-term bank loans (792) (6,000)
Repayment of capital element of capital lease
obligations (936) (829)
Repayment of convertible note (1,395) (1,673)
Payment of debt issuance cost (68) --
-------- --------
Net cash provided by (used in) financing activities 1,504 (3,824)
-------- --------
Effect of translation adjustments on cash 418 (1,230)
-------- --------
Net decrease in cash and cash equivalents (9,783) (7,484)
Cash and cash equivalents, as of beginning of the period 8,738 12,488
-------- --------
Cash and cash equivalents, as of end of the period $ (1,045) $ 5,004
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Zindart
Limited (the "Company") and its subsidiaries have been prepared in
accordance with generally accepted accounting principles in the United
States for interim financial reporting and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures required by generally accepted accounting principles for
complete financial statements have been condensed or omitted.
In the opinion of management, the accompanying financial statements
include all recurring adjustments considered necessary to present fairly
the financial position, results of operations, and cash flows of the
Company for the periods presented. Also, we have made certain
reclassification to our historical financial statements to conform to the
current period's presentation. The results of operations for the three and
six months ended September 30, 2001 are not necessarily indicative of the
results that may be expected for fiscal year ending March 31, 2002. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended March 31, 2001 filed with
the Securities and Exchange Commission on June 28, 2001.
2. Inventories
Inventories consist of:
As of As of
September March
30, 2001 31, 2001
--------- -------
$ '000 $ '000
Raw materials 6,534 4,529
Work-in-process 1,175 1,860
Finished goods 8,634 7,394
------- -------
16,343 13,783
======= =======
5
3. Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes guidance for the
reporting and display of comprehensive income (loss) and its components.
The purpose of reporting comprehensive income (loss) is to report a
measure of all changes in equity that resulted from recognized
transactions and other economic events of the period other than
transactions with stockholders. The components of accumulated other
comprehensive loss included in the accompanying consolidated balance
sheets consist of cumulative translation adjustments and unrealized loss
on short-term investment as of the end of each period.
Comprehensive income (loss) and its components, net of tax, consist of:
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -----------------
2001 2000 2001 2000
------ ------ ------ ------
$ '000 $ '000 $ '000 $ '000
Net income (loss) 205 325 (2,357) 934
Other comprehensive income (loss),
net of tax:
Translation adjustments 484 (279) 418 (1,230)
------ ------ ------ ------
Comprehensive income (loss) 689 46 (1,939) (296)
====== ====== ====== ======
6
4. Earnings (Loss) Per Share
The numerator in calculating both basic and diluted earnings (loss) per
share for each period is the reported net income (loss). The denominator
is based on the following weighted average number of common shares:
Three Months Ended Six Months Ended
September 30, September 30,
----------------- -----------------
2001 2000 2001 2000
----- ----- ----- -----
'000 '000 '000 '000
Basic 8,834 8,834 8,834 8,834
Diluted 8,991 8,834 9,017 8,834
The difference between basic and diluted weighted average number of common
shares results from the assumption that dilutive stock options outstanding
were exercised. The diluted loss per share for the six months ended
September 30, 2001 is anti-dilutive as a result of the net loss.
Therefore, the basic and diluted loss per share for the six months ended
September 30, 2001 are the same.
5. Segment Information
The Company organizes its operations into three business segments: (i)
manufacturing of die-cast and injection-molded plastic products under OEM
arrangements (the "Die-Cast Division"), (ii) manufacturing of paper
products under OEM arrangements (the "Paper Division") and (iii) marketing
and distribution of die-cast products under the proprietary brand names
owned by its subsidiary, Corgi Classics Limited (the "Corgi Division").
The following table presents certain operating segment information:
Die-Cast Paper Corgi Total
Division Division Division Segments
-------- -------- -------- --------
$ '000 $ '000 $ '000 $ '000
Three Months Ended September 30, 2001
Net revenue 15,543 11,774 10,375 37,692
Operating income (loss) 294 1,401 (312) 1,383
Three Months Ended September 30, 2000
Net revenue 11,573 11,418 10,280 33,271
Operating income (loss) (49) 960 911 1,822
Six Months Ended September 30, 2001
Net revenue 28,606 18,613 18,738 65,957
Operating income (loss) (989) 1,595 (1,003) (397)
Six Months Ended September 30, 2000
Net revenue 30,039 20,592 17,975 68,606
Operating income 1,256 1,943 362 3,561
Total identifiable assets*
September 30, 2001 41,382 23,427 33,394 98,203
September 30, 2000 40,893 25,068 26,843 92,804
*Identifiable assets represent total assets less goodwill.
7
6. Dividends
The Company did not declare any dividends for the three and six months
ended September 30, 2001 or for the three and six months ended September
30, 2000.
7. Supplemental Disclosure of Cash Flow Information
Cash paid for interest and income taxes is as follows:
Six Months Ended
September 30,
-----------------
2001 2000
----- -----
$ '000 $ '000
Interest 1,347 1,938
Income taxes 792 369
8. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FSAB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 provides
new standards for the identification, recognition and measurement of
derivative financial instruments, including embedded derivatives.
Historically, the Company has not entered into derivative contracts to
hedge existing risks nor has it entered into speculative contracts. The
adoption of SFAS No. 133 on April 1, 2001 did not have an impact on the
Company's results of operations or financial position.
In June 2001, the FSAB issued SFAS No. 141, "Business combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal
years beginning after December 15, 2001. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
completed after June 30, 2001. The adoption of SFAS No. 141 is not
expected to have a material impact on the accompanying financial
statements. SFAS No. 142 requires, among other provisions, companies to
assess the possible impairment of goodwill existing at the date of
adoption and perform subsequent impairment tests on an annual basis.
Additionally, existing goodwill and intangible assets must be reassessed
and classified consistently in accordance with the Statement's criteria.
Under this new standard, the Company will no longer amortize goodwill of
$2 million per year; however, intangible assets will continue to be
amortized over their estimated useful lives, which, if supportable, may be
a period that exceeds the current maximum period of 40 years. Intangible
assets with indeterminable useful lives will not be amortized but assessed
for impairment in accordance with SFAS No. 121. The Company is required to
adopt SFAS No. 142 on April 1, 2002. The Company has not yet completed an
assessment of other impact, if any, these new standards may have on the
accompanying financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Statement requires, among other provisions,
retirement obligations to be recognized when they are incurred and
displayed as liabilities, with a corresponding amount capitalized as part
of the related long-lived asset. The capitalized element is required to be
expensed using a systematic and rational method over its useful life. SFAS
No. 143 will be adopted by the Company on April 1, 2003 and is not
expected to have a material impact on the accompanying financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which must be applied by the
Company by April 1, 2002. The Statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of " and APB Opinion No. 30, " Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events."
For long-lived assets to be held and used, the Statement retains the
requirements of SFAS No. 121 whereby an impairment loss is recognized if
the carrying value of the asset is not recoverable from its undiscounted
cash flows and an impairment loss is measured as the difference between
fair values and carrying values of the
8
asset. The new Statement requires long-lived assets to be disposed of
other than by sale be considered held and used until it is disposed of.
The Statement also broadens the scope of APB 30 provisions for the
presentation of discontinued operations separately from continuing
operations to include a component of an entity that either has been
disposed of or is classified as held for sale. In addition, discontinued
operations are no longer measured on a net realizable value basis, and
expected future operating losses must be reflected in the periods
incurred, rather than at the measurement date as previously required by
APB 30. The adoption of the Statement is not expected to have a material
impact on the accompanying financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended, regarding events and trends which may affect
the Company's future operating results and financial position. These statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those anticipated. These risks and uncertainties include, but
are not limited to, changes in market demand for our products, changes in
general economic conditions, dependence on certain customers, the results of our
planned growth initiatives, competition, changes in governmental regulations, a
decline in capital markets, changes in the political, social and economic
situations of Hong Kong and the People's Republic of China ("PRC"), and other
risks described in the Company's annual report on Form 10-K for the fiscal year
ended March 31, 2001. In some cases, forward looking statements can be
identified by terminology such as "may," "will," "should," "could," "predicts,"
"potential," "continue," "expects," "anticipates," "future," "intends," "plans,"
"believes," "estimates," and similar expressions. The forward-looking statements
are based on information available to the Company on the date of this report,
and the Company undertakes no obligation to revise these forward-looking
statements to reflect subsequent events or circumstances.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto and the information
contained in this quarterly report on Form 10-Q.
OVERVIEW
The Company is a turnkey manufacturer of high-quality die-cast, injection-molded
and paper products that require a significant degree of engineering and
hand-assembly expertise to produce. The Company markets and distributes some of
its die-cast products under the Corgi brand name. The Company manufactures
die-cast collectibles, collectible holiday ornaments, toys, hand-made books,
specialty packaging and other paper products. The Company is headquartered in
Hong Kong and its manufacturing operations are located in the neighboring
Guangdong Province of the PRC. The Corgi products are marketed from the
Company's subsidiaries in the United Kingdom and the United States.
The Company's customers for die-cast and injection-molded products include
Hallmark Cards, Inc., Mattel Toys ("Mattel"), Sieper Werke GmbH, Alcone
Marketing Group Inc., Promotional Partners Group Ltd., Freeplay Group, and Spin
Master Far East Ltd. For books, paper and packaging products, the Company's
customers include Mattel, Intervisual Books, Inc. ("IBI"), Jetta Co. Ltd.,
Penguin Putnam Inc. and Macmillan Children's Books.
The Company organizes its operations into three business segments: (1)
manufacturing of die-cast and injection-molded plastic products under OEM
arrangements (the "Die-Cast Division"), (2) manufacturing of paper products
under OEM arrangements (the "Paper Division") and (3) marketing and distribution
of die-cast products under the proprietary brand names owned by its subsidiary,
Corgi Classics Limited (the "Corgi Division").
10
RESULTS OF OPERATIONS
The table below sets forth certain statements of operations data as a percentage
of net sales for the three and six months ended September 30, 2001 and 2000.
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 28.7% 31.0% 27.5% 30.8%
Selling, general and administrative expenses 25.0% 25.5% 28.1% 25.6%
Operating income (loss) 3.7% 5.5% (0.6%) 5.2%
Interest expense, net 1.6% 2.5% 1.8% 2.4%
Other income (expense), net (0.3%) (0.2%) (0.3%) 0.2%
Amortization of goodwill 1.3% 1.5% 1.5% 1.4%
Income (loss) before income taxes 0.5% 1.3% (4.2%) 1.5%
Income tax benefit (expense) 0.2% (0.3%) 0.8% 0.1%
Minority interests 0.1% 0.0% 0.2% 0.3%
Net income (loss) 0.5% 1.0% (3.6%) 1.4%
Net Sales. The Company's net sales were $37.7 million for the three months ended
September 30, 2001, an increase of $4.4 million, or 13.2%, from $33.3 million
from the same period in 2000. The increase was primarily due to an increase in
the sales of the Die-Cast Division resulting from deferred shipments of products
from the three months ended June 30, 2001.
Net sales for the six months ended September 30, 2001 were $66.0 million, a
decrease of $2.6 million, or 3.8%, from $68.6 million from the same period in
2000. The decrease was primarily due to an overall toy industry downturn.
However, the reduction was partially offset by an increase in sales in the Corgi
Division.
Gross Profit. The Company's gross profit was $10.8 million for the three months
ended September 30, 2001, an increase of $0.5 million, or 4.9%, from $10.3
million from the same period in 2000. Gross margin was 28.7% of sales for the
three months ended September 30, 2001 and 31.0% for the three months ended
September 30, 2000. The decreases in gross margin and gross profit were due to
increased manufacturing costs in the Corgi Division and the Die-Cast Division.
Gross profit for the six months ended September 30, 2001 was $18.2 million, a
decrease of $3.0 million, or 14.2%, from $21.2 million from the same period in
2000. Gross margin was 27.5% of sales for the six months ended September 30,
2001 and 30.8% for the same period in 2000. The decreases in gross margin and
gross profit were due to lower gross margins in all divisions.
Selling, General and Administrative Expenses. The Company's selling, general and
administrative expenses were $9.4 million for the three months ended September
30, 2001, an increase of $954,000, or 11.2%, from $8.5 million from the same
period in 2000. The increase was due to higher advertising expenditures in the
Corgi Division.
Selling, general and administrative expenses for the six months ended September
30, 2001 was $18.5 million, an increase of $959,000, or 5.5%, from $17.6 million
from the same period in 2000. The increase was due to higher advertising
expenditures in the Corgi Division.
Interest Expense, Net. The Company's interest expense, net, was $600,000 for the
three months ended September 30, 2001 and $1.2 million for the six months ended
September 30, 2001. The Company's interest expense, net, was $827,000 for the
three months ended September 30, 2000 and $1.7 million for the six months ended
September 30, 2000. The decreases in the Company's interest expense, net, for
both periods were due to the reduction of the principal of the term loan used to
finance the acquisition of Corgi Classics Limited (described in the "Liquidity
and Capital Resources" section below) as well as continuous interest rate
reductions in the United States.
Other Income (Expense), Net. The Company's other income (expense), net, was
$(102,000) for the three months ended September 30, 2001, as compared to
$(72,000) for the same period in 2000.
11
The Company's other income (expense), net, was $(188,000) for the six months
ended September 30, 2001, as compared to $118,000 for the same period in 2000.
Amortization of Goodwill. The Company's amortization of goodwill was $493,000
for the three months ended September 30, 2001 and $987,000 for the six months
ended September 30, 2001.
Income Tax Benefit (Expense). The Company's income tax benefit (expense) was
$60,000 for the three months ended September 30, 2001, as compared to $(102,000)
for the same period in 2000. The increase in income tax benefit is due to the
lower net income earned by the Company for the three months ended September 30,
2001 as compared to the same period in 2000.
The Company's income tax benefit was $559,000 for the six months ended September
30, 2001, as compared to $76,000 for the same period in 2000. The increase in
income tax benefit is due to the lower net income earned by the Company for the
six months ended September 30, 2001 as compared to the same period in 2000.
Minority Interests. The Company's minority interests were $43,000 for the three
months ended September 30, 2001 and $2,000 for the same period in 2000. The
decrease was due to lower net income earned by the Company's subsidiaries.
The Company's minority interests were $156,000 for the six months ended
September 30, 2001 and $181,000 for the same period in 2000. The decrease was
due to lower net income earned by the Company's subsidiaries.
Net Income (Loss). The Company's net income was $205,000 for the three months
ended September 30, 2001, a decrease of $120,000 from $325,000 in net income for
the same period in 2000. The decrease was mainly due to lower gross margins in
the Die-Cast and Corgi Divisions and higher advertising expenditures in the
Corgi Division.
The Company's net loss was $2.4 million for the six months ended September 30,
2001, a decrease of $3.3 million from $934,000 in net income for the same period
in 2000. The decrease was primarily due to lower sales and lower gross margins
in the Die-Cast and Paper Divisions as well as higher selling, general and
administrative expenses incurred by the Corgi Division in connection with its
expansion into U.S. markets.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $(1.0) million as of September 30, 2001. Cash
used in operating activities was $8.7 million for the six months ended September
30, 2001. Cash used in investing activities for the six months ended September
30, 2001 was $3.0 million. Such cash was used primarily in connection with the
acquisition of machinery and equipment. Cash generated from financing activities
was $1.5 million for the six months ended September 30, 2001, primarily from new
short-term bank borrowings.
The Company has lines of credit with certain banks including: ABN AMRO Bank, KBC
Bank, Standard Chartered Bank, The Hong Kong and Shanghai Banking Corporation
Limited, and The Royal Bank of Scotland plc. As of September 30, 2001, the
Company had outstanding banking facilities of $50.9 million and unused
facilities of $12.2 million.
On July 28, 1999, the Company acquired all of the outstanding shares of Corgi
Classics Limited ("Corgi UK"), a producer of collectible items (the "Corgi
Acquisition"). The Corgi Acquisition was financed by a $30.0 million term loan
extended on July 28, 1999 to Corgi Classics Holdings Limited by ABN AMRO Bank
N.V. (London Branch) (the "Corgi Term Loan"). A standby letter of credit
facility between ABN AMRO Bank, N.V. (Hong Kong Branch) and certain other
financial institutions and the Company also in the amount of $30.0 million, was
entered into on the same date in support of the Corgi Term Loan.
From July 1999 through March 2001, the Company repaid $21.0 million (70%) of its
original $30.0 million Corgi Term Loan. In order to release working capital to
expand its sales and marketing efforts, the Company completed a $9.0 million
refinancing (the "Refinancing Loan") with four international banks: ABN AMRO
Bank, N.V. (Hong Kong Branch), KBC Bank, N.V. (Hong Kong Branch), Standard
Chartered Bank and Rabo Bank (Hong Kong Branch) in March 2001. The Refinancing
Loan extends the loan terms and calls for scaling down the quarterly repayment
commitments. As of September 30, 2001, the outstanding amount under the
Refinancing Loan was $8 million.
12
In connection with the Corgi Acquisition, the Company issued a total of $4.7
million (equivalent of GBP3.0 million) in convertible loan notes to certain
stockholders of Corgi UK (the "Loan Note"). The Loan Note matures at various
dates within a three year period to July 2002. The Loan Note carries with it a
right, exercisable by the Note holders (as defined in the Loan Note), to require
the Company to purchase the outstanding amount of the Loan Note in exchange for
the issuance to the Note holders of shares of the Company at a price equal to 80
percent of the average market price of the Company's common stock over a ten-day
period prior to exercise of the right, so long as the average market price is
above $12. This right is exercisable over a three-year period commencing on July
28, 1999 subject to certain conditions. The outstanding amount of the Loan Note
as of September 30, 2001 was $1.6 million (equivalent of GBP1.1 million).
In January 2001, Corgi UK entered into two agreements (collectively, the "RBS
Loan Agreements") with The Royal Bank of Scotland plc ("RBS") to support the
Corgi Division's expansion into U.S. markets and general working capital
requirements. Under the terms of the RBS Loan Agreements, RBS agreed to provide
to Corgi UK a term loan of $5.9 million (equivalent of GBP4.0 million) as well
as a revolving working capital facility of $4.4 million (equivalent of GBP3.0
million). As of September 30, 2001, the outstanding amount for the RBS loans was
$5.9 million and the outstanding amount for the revolving working capital
facility was $2.7 million.
Consistent with practice in industry, the Company offers accounts receivable
terms to its customers. This practice creates working capital requirements that
the Company generally finances with net cash balances through short-term bank
borrowings. The Company's accounts receivable balance at September 30, 2001 was
$36.2 million.
In May 1999, the Company entered into a loan and security agreement with IBI
(the "IBI Agreement"). Under the terms of IBI Agreement, the Company agreed to
provide a $2.3 million revolving credit facility to IBI (the "IBI Credit
Facility"), scheduled to mature in May 2000 and secured by certain assets of
IBI. Pursuant to the IBI Agreement, IBI extended the IBI Credit Facility for an
additional year and issued warrants to the Company to purchase 150,000 shares of
common stock of IBI at a price of $1.73 per share. The warrants are
non-transferable and are exercisable during a two-year period ending May 12,
2002.
IBI experienced net loss and negative cash flow for the six months ended June
30, 2001. As of September 30, 2001, $2.1 million remained outstanding under the
IBI Credit Facility. In April 2001, the Company entered into an amendment to the
IBI Agreement, which extended the maturity date of the IBI Facility to June 30,
2002. Pursuant to this amendment, IBI repaid the Company $250,000 in April 2001.
The amendment also requires IBI to pay the Company $250,000 in March 2002.
Management of the Company is monitoring the situation and expects to take
necessary action as appropriate at the time to recover the loan. No assurances
can be given as to the ability of the Company to recover the amount due to the
Company on the IBI Credit Facility, and the inability to do so could have a
material adverse effect on Company's financial condition. Management of the
Company will determine whether the value of the loan could be impaired, and if
appropriate, record necessary provision.
The Company's principal source of cash to fund its liquidity needs is net cash
from operating activities and cash available under lines of credit. The Company
believes that these sources will be adequate to meet the Company's anticipated
future requirements for working capital and capital expenditures. However, there
can be no assurances that these resources will be adequate to meet the Company's
needs in the future. In the event that the Company requires additional capital,
it may be required to issue additional equity securities, which could result in
dilution to existing stockholders, or to borrow funds, which could adversely
affect operating results. Such capital may not be available on appropriate
terms, if at all.
13
SEASONALITY
The Company's operating results in the past have fluctuated and those results
may fluctuate in the future. The Company ceases production for a two-week period
during January or February of each year due to the Chinese New Year holiday,
which has caused revenues during the fourth fiscal quarter of each year to be
lower than revenues during the other three quarters. The Company may also
experience fluctuations in quarterly sales and related net income compared with
other quarters due to the timing of orders from customers and the shipment of
products. Sales of books are weighted toward the Christmas season; as a result,
book sales in the first half of the fiscal year are generally higher than the
second half. The Company may experience annual and quarterly variations in
operating results and, accordingly, the trading price of the American Depository
Shares may be subject to fluctuations in response to such variations.
EXCHANGE RATE RISK
The Company's sales are denominated either in U.S. dollars, GBP, Hong Kong
dollars or Euros. The largest portion of the Company's expenses are denominated
in Hong Kong dollars, followed by Renminbi (the PRC's currency), GBP and U.S.
dollars. The Company is subject to a variety of risks associated with changes
among the relative values of the U.S. dollar, GBP, the Hong Kong dollar and
Renminbi. The Company does not currently hedge its foreign exchange positions.
Any material increase in the value of the Hong Kong dollar or Renminbi or GBP
relative to the U.S. dollar would increase the Company's expenses and therefore
would have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS FACTORS
The Company and its business are subject to a number of risks and uncertainties.
These risks and uncertainties include but are not limited to the following: (i)
the Company's long-term operating results depend upon its customers' ability to
conceive of, design and market new products and upon continuing market
acceptance of its customers' existing and future products; (ii) the Company
faces significant competition in each of its product segments; (iii) the Company
is subject to the financial conditions of certain major customers and may not be
able to collect accounts receivable; (iv) the Company's efficient and
cost-effective operation of certain of its facilities depends upon the
cooperation and support of PRC governmental bodies; (v) the Company's success is
substantially dependent upon retention of existing executive management and the
recruitment of executive managers in the future; (vi) most of the Company's
products are shipped to customers in the United States, which may, from time to
time, impose new quotas, duties, tariffs, or other charges or restrictions, or
adjust presently prevailing quota, duty or tariff levels; and (vii) the
Company's business, financial condition and results of operation may be
influenced by the general, political, social and economic situations in Hong
Kong, the PRC and elsewhere. These risks, among others, are more fully described
in the "Risk Factors" section of the Company's annual report on Form 10-K for
the fiscal year ended March 31, 2001 as filed with the Securities and Exchange
Commission on June 28, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary risk exposures arise from changes in interest rates and
foreign currency exchanges rates. The Company had $36.2 million in variable rate
debt outstanding on September 30, 2001. The Company does not currently hedge its
interest rate exposure. Based on its current level of variable rate debt, the
Company believes that its results from operations and cash flows would not be
adversely affected if the applicable interest rate were increased one percent.
The Company is exposed to risk from changing foreign currency exchange rates.
The Company's sales are denominated either in U.S. dollars, GBP, Hong Kong
dollars or Euros. The majority of the Company's expenses are denominated in Hong
Kong dollars, followed by Renminbi, GBP and U.S. dollars. The Company is subject
to a variety of risks associated with changes among the relative value of the
U.S. dollar, the GBP, the Hong Kong dollar and the Renminbi. The Company does
not currently hedge its foreign exchange positions. Any material increase in the
value of the Hong Kong dollar or Renminbi relative to the U.S. dollar would
increase the Company's expenses and therefore would have a material adverse
effect on the Company's business, financial condition and results of operations.
If exchange rates on such currencies were to fluctuate 10%, the Company believes
that its results from operations and cash flows would not be adversely affected.
14
PART II. OTHER INFORMATION
Items 1, 2 and 3 of Part II are not applicable and have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual general meeting of the Company's shareholders was held on September
6, 2001, to consider and vote upon the following matters, each of which were
approved by the indicated vote.
1. Proposal to adopt the audited financial statements and the reports of the
directors and auditors of the Company for the fiscal year ended March 31,
2001.
Votes for Votes against Abstentions
--------------- --------------- ---------------
5,424,378 11,125 4,217
2. Proposal to elect the following nominees for director until the next annual
general meeting of shareholders and until their successors are elected.
Votes cast for each director
-------------------------------------------------------
Votes for Votes against Abstentions
------------- ---------------- ---------------
Mr. Peter A.J. Gardiner 5,415,803 23,917 -
Mr. Robert A. Theleen 5,390,213 49,507 -
Mr. Alexander M.K. Ngan 5,405,903 33,817 -
Ms. Feather S.Y. Fok 5,409,303 30,417 -
Mr. George Chen 5,408,303 31,417 -
Mr. James E. Gilleran 5,415,603 24,117 -
Mr. Christopher Guest 5,409,303 30,417 -
Mr. Leo Paul Koulos 5,415,703 24,017 -
Mr. Gordon L.M. Seow 5,415,603 24,117 -
Mr. Victor Yang 5,415,503 24,217 -
All director nominees were elected to serve until the next annual general
meeting of shareholders.
3. Proposal to approve an amendment to the Company's 1997 Equity Incentive
Plan, as amended (1) to increase the aggregate number of Ordinary Shares
and/or American Depositary Shares ("ADS") authorized for issuance under
such plan from 1,320,000 to 2,200,000, an increase of 880,000 Ordinary
Shares and/or ADSs and (2) to increase the maximum share awards that may be
granted to an individual in any calendar year from 75,000 Ordinary Shares
and/or ADSs to 100% of the Ordinary Shares and/or ADSs available for
issuance under such plan.
Votes for Votes against Abstentions
--------------- --------------- ---------------
3,898,832 1,531,652 9,236
4. Proposal to authorize the Board of Directors to issue all or part of the
authorized but unissued Ordinary Shares of the Company, in such manner and
to such persons as the Board of Directors shall deem fit in its absolute
discretion, such authorization to lapse at the Company's next annual
general meeting.
Votes for Votes against Abstentions
--------------- --------------- ---------------
3,961,232 1,464,893 13,595
15
5. Proposal to re-appoint Arthur Andersen & Co as independent auditors of the
Company for the fiscal year ending March 31, 2002.
Votes for Votes against Abstentions
--------------- --------------- ---------------
5,430,703 4,300 4,717
ITEM 5. OTHER INFORMATION
On July 25, 2001, Phibe Wong resigned from her position as Chief Financial
Officer of the Company. The Company has named Len Kalkun, the Finance Director
of Corgi UK, as interim Chief Financial Officer.
On November 12, 2001, Alexander M.K. Ngan, President and Chief Executive
Officer of the Company, resigned from his executive position and from the Board
of Directors of the Company. Peter A.J. Gardiner, Chairman of the Board of
Directors, will be taking over responsibility for the Company and its
subsidiaries in the interim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this report.
None.
(b) Reports on Form 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZINDART LIMITED
/s/ PETER A.J. GARDINER
Dated: November 14, 2001 -------------------------------------
By: Peter A.J. Gardiner
Executive Chairman
(Principal Executive Officer)
/s/ LEN KALKUN
-------------------------------------
Dated: November 14, 2001 By: Len Kalkun
Interim Chief Financial Officer
(Principal Financial Officer)
17