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REGISTRATION NO. -
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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1,400,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 1,400,000 ORDINARY SHARES
ZINDART INDUSTRIAL COMPANY LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
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HONG KONG 3944 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
FLAT C & D, 25/F BLOCK 1, TAI PING INDUSTRIAL CENTRE
57 TING KOK ROAD, TAI PO, N.T., HONG KONG
GENERAL: 011-852-2665-6992
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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CT CORPORATION SYSTEM
1733 BROADWAY, NEW YORK, NEW YORK 10019
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES OF ALL COMMUNICATIONS SHOULD BE SENT TO:
LIOR O. NUCHI, ESQ. AUGUST J. MORETTI, ESQ.
DANIEL D. MEYERS, ESQ. SIMON C. LUK, ESQ.
ELAN Q.G. NGUYEN, ESQ. TIMOTHY G. HOXIE, ESQ.
MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP DAWN L. JUDD, ESQ.
ONE EMBARCADERO PLACE HELLER EHRMAN WHITE & MCAULIFFE
2100 GENG ROAD, SUITE 200 525 UNIVERSITY AVENUE
PALO ALTO, CA 94303-9173 PALO ALTO, CA 94301
(415) 846-4000 (415) 324-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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Ordinary Shares represented by
American Depositary Shares(3)... 1,610,000 $12.00 $19,320,000 $6,662.07
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(1) Includes (a) 1,400,000 Ordinary Shares represented by 1,400,000 ADSs that
are to be sold in the Offering, and (b) 210,000 Ordinary Shares represented
by 210,000 ADSs that the Underwriters may purchase to cover over-allotments,
if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(3) A separate Registration Statement on Form F-6 has been filed with respect to
the American Depositary Shares evidenced by American Depositary Receipts
issuable upon deposit of the Ordinary Shares registered hereby. Each
American Depositary Share will represent one Ordinary Share.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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ZINDART INDUSTRIAL COMPANY LIMITED
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) and Item 501(b) of Regulation S-K
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
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1. Forepart of Registration Statement and
Outside
Front Cover Page of Prospectus........... Facing Page; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of
Prospectus............................... Inside Front Cover Page; Additional
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Selected Financial
Data; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds, Dividends and Dividend
Policy
5. Determination of Offering Price.......... Underwriting
6. Dilution................................. Dilution
7. Plan of Distribution..................... Outside Front Cover Page; Underwriting
8. Description of Securities to be
Registered............................... Prospectus Summary; Description of
Shares; Description of American
Depositary Receipts
9. Interests of Named Experts and Counsel... Legal Matters
10(a). Information with Respect to the
Registrant............................... Prospectus Summary; Use of Proceeds;
Dividends and Dividend Policy; Dilution;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Description of Shares; Description of
American Depositary Receipts; Shares
Eligible for Future Sale; Taxation;
Certain Foreign Issuer Considerations;
Financial Statements
10(b). Financial Statements..................... Index to Financial Statements
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1997
1,400,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 1,400,000 ORDINARY SHARES
ZINDART
LIMITED
All of the 1,400,000 American Depositary Shares ("ADSs") offered hereby are
being sold by Zindart Limited ("Zindart" or the "Company"). Each ADS offered
hereby represents one Ordinary Share, par value $0.065 per share (a "Share") of
the Company. The ADSs are evidenced by American Depositary Receipts ("ADRs"),
and are initially being offered hereby for sale by Van Kasper & Company ("Van
Kasper" or the "Representative") and the several underwriters named herein
(together with the Representative, the "Underwriters") (the "Offering"). Prior
to this Offering, there has been no public market for the ADSs or the Shares. It
is currently estimated that the initial public offering price per ADS will be
between $10.00 and $12.00. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Company has
applied for inclusion of the ADSs on the Nasdaq National Market upon
commencement of this Offering under the symbol ZNDT.
THE ADSS OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," COMMENCING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per ADS............................ $ $ $
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Total (3).......................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities and to pay the Underwriters an amount not to exceed $280,000 as
reimbursement of their expenses. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $1,300,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 210,000 additional ADSs representing 210,000 additional Shares on the
same terms as set forth above, solely for the purpose of covering
over-allotments, if any (the "Over-allotment Option"). If the Over-allotment
Option is exercised in full, the Price to Public and Underwriting Discount
will be $ and $ , respectively. See "Underwriting."
The ADSs offered by the several Underwriters named herein are subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. The Depositary will charge a fee of $1.50 or less per
certificate for an ADS or ADSs transferred pursuant to the Deposit Agreement.
See "Description of American Depositary Receipts." It is expected that delivery
of the ADSs will be made against payment therefore at the office of Van Kasper &
Company, San Francisco, California on or about , 1997.
VAN KASPER & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1997
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REPORTS TO SECURITIES HOLDERS
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 and in accordance
therewith will file reports, proxy statements and other information with the
U.S. Securities and Exchange Commission (the "Securities and Exchange
Commission"). The Company intends to provide its securities holders with annual
reports in English containing audited financial statements and such other
periodic reports as the Company deems appropriate or as may be required by law.
The Company intends to publish its consolidated financial statements in U.S.
Dollars prepared in conformity with generally accepted accounting principles in
the United States ("U.S. GAAP"). The Company currently intends to make certain
summary financial information publicly available with respect to the results of
operations of the Company for each quarter of each fiscal year. The Company has
agreed to provide the Depositary referred to under "Description of American
Depositary Receipts" with annual reports of the Company, including a review of
operations and annual audited consolidated financial statements prepared in
conformity with U.S. GAAP. Upon receipt thereof, the Depositary will promptly
mail such reports to all holders of ADSs. The Depositary will also mail to all
holders of ADSs a notice containing the information (or a summary of the
information) contained in any notice of a shareholders' meeting received by the
Depositary and make available to all holders of ADSs such notices and all other
reports and other communications received by the Depositary from the Company.
CURRENCY CONVERSIONS
Unless otherwise specified, all references in this Prospectus to "U.S.
Dollars," "Dollars," "US$" or "$" alone are to United States dollars; all
references to "HK Dollars" or "HK$" are to Hong Kong dollars; and all references
to "Renminbi" or "Rmb" are to Renminbi, which is the legal tender currency of
the People's Republic of China (the "PRC"). This Prospectus contains
translations of certain HK Dollar amounts into U.S. Dollar amounts at specified
rates. These translations should not be construed as representations that the HK
Dollar amounts actually represent such U.S. Dollar amounts or could be or could
have been converted into U.S. Dollars at the rates indicated. Unless otherwise
stated, the translations of HK Dollars into U.S. Dollars have been made at the
rate of US$1.00 = HK$7.73.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is organized under the laws of Hong Kong and all or a
substantial portion of its assets are or may be located outside the United
States. In addition, certain of the directors and officers of the Company and
certain of the experts named herein are nationals or residents of Hong Kong or
the PRC, and all or a substantial portion of the assets of such persons are or
may be located outside the United States. The Company has appointed CT
Corporation System, 1733 Broadway, New York, New York 10019 as its agent to
receive service of process with respect to any action brought against it in the
United States District Court for the District of New York under the laws of the
United States or any state, or any action brought against it in the Supreme
Court of the State of New York in the County of New York under the laws of the
State of New York. However, it may be difficult for investors to enforce outside
the United States judgments against the Company or any of its officers and
directors or the experts named herein obtained in the United States in any such
actions, including actions predicated upon the civil liability provisions of the
United States federal securities laws. As a result, it may be difficult for
investors to effect service of process within the United States upon such
persons or to enforce against them judgments obtained in United States federal
or state courts, including judgments predicated upon the civil liability
provisions of United States federal securities laws. The Company has been
advised by its PRC counsel, Guangzhou Law Office, and its Hong Kong counsel,
Robert W.H. Wang & Co., that there is uncertainty as to whether the courts of
the PRC or Hong Kong would enforce (i) judgments of United States federal or
state courts obtained against the Company or such persons predicated upon the
civil liability provisions of United States federal or state laws or (ii) in
original actions brought in the PRC or Hong Kong, claims against the Company or
such persons predicated upon United States federal or state laws.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT ARE INTENDED TO STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
ADSs AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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THIS PROSPECTUS DOES NOT COMPRISE AN OFFER TO SELL SHARES OR ADSs, DIRECTLY
OR INDIRECTLY, TO ANY MEMBER OF THE PUBLIC IN HONG KONG, OR ANY SECTION OF THE
PUBLIC IN HONG KONG. THIS PROSPECTUS HAS NOT BEEN APPROVED BY OR REGISTERED WITH
ANY REGULATORY AUTHORITY IN HONG KONG. NO SHARES OF THE COMPANY ARE TRADED ON
ANY STOCK EXCHANGE AND THERE IS NO INTENTION TO LIST SHARES OR ADSs ON ANY STOCK
EXCHANGE OTHER THAN THE LISTING OF ADSs AS CONTEMPLATED IN THIS PROSPECTUS.
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Zindart(TM) is a trademark of the Company. This Prospectus also includes
trade names and trademarks of companies other than Zindart, whose mention herein
is with due recognition of and without intent to misappropriate their marks.
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PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this Prospectus. The following summary is qualified in
its entirety by the more detailed information and the financial statements and
notes appearing elsewhere in this Prospectus. Except as otherwise noted herein,
all information contained in this Prospectus assumes that the Over-allotment
Option will not be exercised. See "Underwriting." Unless otherwise indicated,
all Share and per Share information in this Prospectus gives effect to the 20
for 1 stock split of the Company's Shares effected in December 1996.
THE COMPANY
Zindart Limited ("Zindart" or the "Company") manufactures high-quality,
detailed die-cast and injection-molding products, including: (i) die-cast
collectibles, (ii) collectible holiday ornaments, and (iii) action figures and
miniature figurine playsets used primarily as toys. Zindart's headquarters are
located in Hong Kong and its manufacturing operations are located in the
neighboring Guangdong Province in the People's Republic of China (the "PRC"). In
fiscal year 1996, Zindart sold its products to approximately 20 customers, many
of which are the premier U.S. designers and marketers of die-cast collectibles,
collectible holiday ornaments and toys.
Hallmark Cards, Inc. ("Hallmark") and The Ertl Company, Inc. ("Ertl") are
Zindart's two largest customers, each accounting for approximately one-third of
the Company's sales in the last two fiscal years. Hallmark, a customer of the
Company since 1982, is a leading U.S. designer and marketer of greeting cards
and collectible holiday ornaments under the Keepsake Ornaments line, which are
sold through authorized retail outlets. Ertl, a customer of the Company since
1978, is a leading U.S. designer and marketer of high-quality, die-cast scale
model replicas of automobiles, trucks, planes, farm implements, construction
equipment and other similar items targeted at adult collectors, equipment
dealers and children. Ertl's die-cast replicas are sold through hobby shops,
collectors' clubs, car and equipment dealers, toy and gift stores and other
similar channels. Zindart's other customers include Mattel Inc., Sieper Werke
Gmbh ("SWG"), MBI Inc. (The Danbury Mint), Revell-Monogram, Inc., a subsidiary
of Hallmark ("Revell-Monogram"), Hasbro, Inc. and Tyco Toys, Inc. See
"Business -- Markets, Products and Customers."
Zindart seeks to develop a partnering relationship with each of its
customers and to improve and expand such relationships for the parties' mutual
benefit. In order to enhance these partnering relationships, in 1994 Zindart
introduced its Turnkey Manufacturing Service, which enables Zindart to satisfy a
customer's requirements at every stage in the production process -- from product
engineering to model making, to computer-aided mold design and production, to
manufacturing and packaging of the finished product. This coordinated,
"one-stop" production strategy enables Zindart and its customers to shorten lead
times from design to production, lower the costs of production, better control
the quality and consistency of the manufactured products and better meet
shipping and delivery schedules. See "Business -- Manufacturing."
In February 1996, the Company completed Phase I of the construction of a
large, modern facility located on a 20-acre site in HengLi, Dongguan (the
"Dongguan Facility"), approximately 60 miles north of Hong Kong. Currently, the
Company has approximately 1,300 employees in the Dongguan Facility. By early
1998, the Company intends to complete Phase II of the construction of the
Dongguan Facility, using approximately $7 million of the net proceeds of this
offering, and to close its other two manufacturing facilities. As a result, all
of the Company's production is expected to be consolidated at the Dongguan
Facility. Upon completion of Phase II of the construction of the Dongguan
Facility, the net manufacturing area of the Dongguan Facility will be 887,000
square feet, 470,773 square feet more than Phase I's manufacturing space and
double the size of the manufacturing space in the Company's original two
manufacturing facilities. The Dongguan Facility will be able to accommodate
8,000 employees. See "Business -- Properties." Management intends to establish a
sales, marketing and investor relations office in the U.S. in 1997.
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Zindart's net sales for the fiscal year ended March 31, 1996 were $46.9
million, an increase of 27% from the prior fiscal year. Net sales for the six
months ended September 30, 1996, were $32.4 million, an increase of 39% from the
prior year's comparable period, and consisted of die-cast collectibles (39.9% of
net sales), collectible holiday ornaments (29.3%), action figures and miniature
figurine playsets (18.6%) and molds (12.2%). As a percentage of sales for the 12
months ended September 30, 1996, sales in each quarter during such period were
21.9%, 20.1%, 28.6%, and 29.4%, respectively. The lower sales figure for the
quarter ended March 31, 1996 reflects the annual customary two-week factory
closing for the Chinese New Year holiday. As of September 30, 1996, Zindart had
orders on hand of approximately $19.6 million, compared to $17.3 million at
September 30, 1995. The Company's net income for the six months ended September
30, 1996 was $2.8 million, versus $2.6 million for the prior year's comparable
period. See "Summary Consolidated Financial Data."
Zindart's largest shareholders are private equity funds under the
management of two U.S.-based venture capital firms -- ChinaVest Group
("ChinaVest") and Advent International Corporation ("Advent") -- which funds
acquired their interests in Zindart in 1993. Prior to the Offering, the funds
under the management of ChinaVest indirectly owned 51.5% of the outstanding
Shares of the Company, and funds under the management of Advent indirectly owned
14.9% of the outstanding Shares of the Company. See "Risk Factors -- Risks
Relating to the Company -- Control by Principal Shareholders" and "Principal
Shareholders."
Zindart's principal executive offices are located at Flat C&D, 25/F Block
1, Tai Ping Industrial Centre, 57 Ting Kok Road, Tai Po, N.T., Hong Kong, its
telephone number is 011-852-2665-6992, its fax number is 011-852-2664-7066, and
its email address is zndt@aol.com.
THE OFFERING
SECURITIES OFFERED......... 1,400,000 ADSs, each representing one Share.
SHARES TO BE OUTSTANDING
AFTER THE OFFERING......... 6,400,000 Shares.
USE OF PROCEEDS............ Approximately $7,000,000 will be used to finance
Phase II of the construction of the Dongguan
Facility, $1,600,000 to purchase equipment,
$2,400,000 to repay certain indebtedness, and
$300,000 to establish a sales, marketing and
investor relations office in the U.S. in 1997. The
balance will be used for working capital and
general corporate purposes. See "Use of Proceeds."
OVER-ALLOTMENT OPTION...... The Company has granted the Underwriters an option
to purchase up to an additional 210,000 ADSs solely
for the purpose of covering over-allotments, if
any. See "Underwriting."
PROPOSED NASDAQ NATIONAL
MARKET SYMBOL............ ZNDT.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present summary consolidated financial information
derived from the consolidated financial statements of the Company and certain
other data, all of which have been prepared in conformity with U.S. GAAP. See
also "Business," "Selected Consolidated Financial and Other Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
appearing elsewhere herein.
SIX MONTHS ENDED
YEARS ENDED MARCH 31 SEPTEMBER 30,
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1992 1993 1994 1995 1996 1995 1996
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INCOME STATEMENT DATA:
Net sales.................................. $29,116 $35,603 $35,583 $36,879 $46,930 $23,251 $32,398
Gross profit............................... 7,037 8,294 10,546 11,235 12,814 6,469 7,979
Operating income........................... 2,178 3,214 4,195 4,429 6,316 3,238 3,817
Interest income (expense) net.............. (7) (1) (21) 91 (194) 35 (460)
Other income (expense), net................ 52 122 80 492 (416) 7 122
Income before income taxes................. 2,223 3,335 4,254 5,012 5,706 3,280 3,479
Income before minority interests........... 2,004 3,033 3,818 4,529 5,218 2,977 3,195
Minority interests(1)...................... 0 0 83 337 622 405 425
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Net income................................. $ 2,004 $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 2,572 $ 2,770
======= ======= ======= ======= ======= ======= =======
Earnings per share(2)...................... $ 0.40 $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 0.51 $ 0.55
======= ======= ======= ======= ======= ======= =======
Weighted average number of shares.......... 5,000 5,000 5,000 5,000 5,000 5,000 5,000
======= ======= ======= ======= ======= ======= =======
AS OF AS OF
MARCH 31, 1996 SEPTEMBER 30, 1996
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ACTUAL ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,294 $ 4,253 $ 6,637
Working capital............................................. 3,401 5,764 9,570
Property, plant and equipment, net.......................... 10,800 11,216 19,816
Total assets................................................ 31,710 36,220 46,826
Short-term debt(4).......................................... 8,899 7,530 6,108
Long-term debt and capital lease obligations................ 2,128 2,085 1,091
Shareholders' equity........................................ 11,608 14,378 27,400
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(1) Certain third parties own minority equity interests in the Company's
subsidiaries. See "Business -- Subsidiaries.
(2) Earnings per share is computed by dividing net income for each year by
5,000,000, the weighted average number of ordinary shares outstanding during
the years or periods on the basis that the 20 for 1 stock split had been
consummated prior to the years or periods presented.
(3) As adjusted to reflect the sale of 1,400,000 ADSs at an assumed public
offering price of $11.00 per ADS and the application of the net proceeds
therefrom. See "Use of Proceeds."
(4) Includes current portions of long-term debt and capital lease obligations.
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ORGANIZATION OF THE COMPANY
The following chart shows the organization of the Company, its principal
shareholders and subsidiaries prior to giving effect to the Offering.
[LOGO]
OPERATING STRUCTURE
The following chart shows the operating structure of the Company's three
manufacturing facilities.
[LOGO]
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RISK FACTORS
An investment in the ADSs offered hereby involves a high degree of risk.
Prior to making an investment decision, prospective purchasers of the ADSs
offered hereby should consider carefully, together with the other information
contained in this Prospectus, the matters set forth below.
LIMITED PRECEDENT
Prospective investors should be aware of and take into consideration the
limited precedent with which to evaluate the potential risks and rewards related
to the development, financing, ownership and operation of a light manufacturing
company in the PRC.
RISKS RELATING TO THE COMPANY
Dependence on Two Major Customers. Sales to two major
customers -- Hallmark and Ertl -- account for a majority of the Company's total
net sales. Sales to these two customers as a percentage of the Company's total
net sales during the fiscal years ended March 31, 1994, 1995 and 1996 were
approximately 66.3%, 63.3% and 52.9%, respectively. The Company's dependence on
these two customers is expected to continue in the foreseeable future. Although
management believes that any one of its customers could be replaced eventually,
the loss of either one of its major customers would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's sales transactions with all of its customers are based on purchase
orders received by the Company from time to time. While these purchase orders
may be cancelled by the customer, to date, such cancellations have not been
significant in the aggregate. Except for these purchase orders, the Company has
no written purchase agreements with its customers relating to the sale of
products.
Introduction of New Products by Customers; Market Acceptance; Economic
Factors. The Company's long-term operating results depend substantially upon
its customers' ability to continue to conceive of, design and market new
products and upon continuing market acceptance of its customers' existing and
future products. In the ordinary course of their businesses, the Company's
customers continuously develop new products and create additions to their
existing product lines. Significant delays by the Company's customers in the
introduction of, or their failure to introduce or market, new products or
additions to their collective product lines would impair the Company's results
of operations. The die-cast collectible, collectible holiday ornament and toy
markets are affected by changing consumer tastes and interests, which are
difficult to predict and over which the Company's customers have little, if any,
control. Accordingly, there can be no assurance that the existing or future
products of the Company's customers will maintain or receive substantial market
acceptance. In addition, since most of the products manufactured by the Company
are sold in the United States, the Company's profitability will also depend on
the strength of the U.S. economy, which can affect U.S. consumers' spending
habits on such items as die-cast collectibles, collectible holiday ornaments and
toys. Any downturn in the U.S. economy could have a material adverse effect on
the Company's business, financial condition and results of operations.
Competition. The Company expects significantly increased competition, both
from existing and new competitors. Some of these competitors may have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The ability of the Company to compete successfully
depends, in part, upon the Company's ability to maintain and increase demand for
its manufacturing services and increase production capacity to meet such
increased demand. There can be no assurance that the Company will be able to
compete successfully in the future or that the Company will not be subject to
increased price competition. See "Business -- Competition." In addition, the
Company's major customers operate in highly competitive markets. There can be no
assurance that these customers will be able to continue to enjoy market
acceptance of their products in the face of such competition. Any failure by the
Company's major customers to remain competitive could have a material adverse
effect on the Company's business, financial condition and results of operations.
Lack of Barriers to Entry. The Company does not believe that there are any
significant barriers to entry into the manufacture of die-cast collectibles,
collectible holiday ornaments and toys, although the Company
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believes that it currently holds certain competitive advantages. The Company
does not characterize its business as proprietary and does not own any patents
or copyrights or possess any material trade secrets. There can be no assurance
that additional participants will not enter the market or that the Company could
effectively compete with such entrants. Any failure by the Company to compete
effectively with such new entrants would have a material adverse effect on the
Company's business, results of operations and financial condition.
Ability to Manage Growth and Expansion. The Company has experienced
significant growth over the past few years and is expanding its manufacturing
operations. The management of the Company's growth will require continued
improvement and refinement of the Company's operating, management and financial
control systems, as well as a significant increase in the Company's
manufacturing, quality control, marketing, logistics and service capabilities,
any of which could place a significant strain on the Company's resources. If the
Company's management is unable to manage growth effectively, the quality of the
Company's products, its ability to retain key customers and its business,
financial condition and results of operations could be adversely affected. As
part of its expansion, the Company will have to hire additional management
personnel and other employees. The expenses associated with hiring, training and
integrating such employees may be incurred prior to the generation of any
associated revenues, with a corresponding adverse effect on the Company's
business, financial condition and results of operations. In addition, the
failure to integrate new personnel on a timely basis could have an adverse
effect on the Company's business, financial condition and results of operations.
Reliance on New Production Facility. Historically, the Company conducted
its manufacturing operations in two facilities in Guangzhou. In February 1996,
the Company completed Phase I of the construction of the Dongguan Facility. By
early 1998, the Company intends to complete Phase II of the construction of the
Dongguan Facility, to consolidate all manufacturing operations at the Dongguan
Facility and to close the other two facilities. In addition, the Company intends
to transfer some administrative functions from the Hong Kong headquarters to the
Dongguan Facility. See "Business -- Properties."
Although the Company believes that it will be able to complete Phase II of
the construction of the Dongguan Facility on schedule, no assurance can be given
that such construction will be completed or completed on schedule. Any material
delay in completing, or the inability to complete, Phase II of the construction
of the Dongguan Facility would have a material adverse effect on the Company's
business, financial condition and results of operations. Consolidating the
Company's operations into the Dongguan Facility will require the Company's
management to coordinate a wide array of key decisions and physical logistics,
including the relocation of a majority of the Company's factory employees and
equipment. Failure to timely and properly execute these tasks could have a
material adverse impact on the Company's business, financial condition and
results of operations.
If a natural disaster, such as a typhoon, fire or flood, were to destroy or
significantly damage the Dongguan Facility or if such facility were to otherwise
become unavailable or inoperable, the Company would need to obtain alternative
facilities from which to conduct its operations, which would result in
significantly increased operating costs and significant delays in the
fulfillment of customer orders. No assurance can be given that alternative
facilities could be obtained at an affordable price or at all. Such increased
costs or delays, or inability to obtain alternative facilities, would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company maintains business interruption insurance.
A significant portion of the benefits to be obtained from consolidating
operations in the Dongguan Facility depends on the Company being able to
terminate in a cost-effective and timely manner its obligations relating to the
Company's other two manufacturing facilities. The Company does not have the
right to terminate at will these agreements and thus must depend on the
cooperation of other parties to attain this objective. There can be no assurance
that the Company will be able to terminate these agreements on a timely basis or
without incurring substantial costs. Any additional costs associated with
terminating such agreements or otherwise consolidating operations at the
Dongguan Facility could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that the
Company is unable to capitalize its
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relocation costs, the Company will have to expense such costs, which may have an
adverse effect on the Company's reported net income.
Dependence on PRC Parties. The Company's oldest factory, located in the
Tian He district of Guangzhou, is owned by a local economic development
authority (the "Subcontractor") and operated under a subcontract operating
agreement. The factory located in the Henan district of Guangzhou and the
Dongguan Facility are each owned by Sino-foreign contractual joint ventures in
which the Company has a majority interest. The other parties to these
contractual joint ventures are entities (the "PRC Co-Venturers") that are
controlled by PRC governmental bodies. The efficient and cost-effective
operation of these facilities depends upon the cooperation and support of the
Subcontractor and the PRC Co-Venturers (collectively, the "PRC Parties"). Should
a dispute develop between the Company and any of the PRC Parties, there can be
no assurance that the Company would be able to enforce its understanding of its
agreements with the PRC Parties. Any lack of cooperation by the PRC Parties
could subject the Company to additional risks and costs, including the
interruption or cessation of its present operations in the PRC, all of which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Raw Materials. The Company uses zinc alloy and various
plastic resins in its manufacturing operations. The Company's financial
performance is dependent to a substantial extent on the cost of such raw
materials. The capacity, supply and demand for zinc alloy and for both plastic
resins and the petrochemical intermediates from which plastic resins are
produced are subject to cyclical and other market factors and may fluctuate
significantly. As a result, the cost of raw materials to the Company is subject
to substantial increases and decreases over which the Company has no control
except by seeking to time its purchases in order to take advantage of favorable
market conditions. In the past, the Company has experienced significant
increases in the price of certain raw materials, which increases the Company was
not able to pass on fully to its customers. To the extent that future increases
in the cost of raw materials cannot be passed on to customers, such increases
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has no formal written agreements with its suppliers. The
Company purchases zinc alloy and over 12 different types of plastics from
approximately 10 major suppliers and is not dependent upon any single supplier
for key materials. The Company has not experienced any difficulty in obtaining
needed materials and thus believes that the lack of written agreements with any
of its suppliers does not present a risk to its business, but no assurance can
be given that the Company will be able to obtain sufficient quantities of such
raw materials to meet its needs. Any lack of sufficient raw materials for its
needs could have a material adverse effect on the Company's business, financial
condition and results of operations.
Reliance on Key Personnel. The success of the Company is substantially
dependent upon its executive management, as well as upon its ability to attract
and retain additional qualified design, manufacturing and marketing personnel.
The loss of the services of any of the Company's current executive management
for any reason could have a material adverse effect on the business, financial
condition and results of operations of the Company. The Company is not the
beneficiary of any "key person" life insurance policy on any such person. See
"Management." Successful expansion of the Company's business will require
additional management resources and may require the hiring of additional senior
management personnel.
Potential Product Liability. The Company is engaged in a business that
could result in possible claims for injury or damage resulting from its
products. The Company is not currently a defendant in any product liability
lawsuit. The Company does not maintain product liability insurance. A successful
claim brought against the Company by a customer of the Company or a consumer
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Government Regulations. U.S. customers of the Company are subject to the
provisions of, among other laws, the Federal Hazardous Substances Act and the
Federal Consumer Product Safety Act. These laws empower the Consumer Product
Safety Commission (the "CPSC") to protect consumers from hazardous toys and
other articles. The CPSC has the authority to exclude from the market articles
that are found to be unsafe or hazardous, and can require a recall of such
products under certain circumstances. Similar laws exist in some states and
cities in the United States, as well as in Canada and Europe. The Company relies
on its
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customers to design products that comply with such safety standards and to test
the products to ensure compliance with applicable regulatory safety standards.
The Company has established a strong quality assurance program to meet the
Company's objective of conforming to its customers' design specifications and
delivering high-quality, safe products to its customers. While the Company
believes that its customers design and test the products the Company
manufactures for compliance with regulatory standards, and the Company itself
maintains appropriate quality assurance, there can be no assurance that the
Company's products will not be found to violate applicable laws, rules and
regulations, which could have a material adverse effect on the business,
financial condition and results of operations of the Company. In addition, there
can be no assurance that more restrictive laws, rules and regulations will not
be adopted in the future, or that the Company's products will not be marketed in
the future in countries with more restrictive laws, rules and regulations,
either of which could make compliance more difficult or expensive, and which
could have a material adverse effect on the business, financial condition and
results of operations of the Company.
Reduced Revenue in the Fourth Fiscal Quarter, Possible Fluctuation in
Quarterly Results. The Company ceases production for a two-week period during
January or February of each year due to the Chinese New Year holiday, which
cessation in the past has caused revenue during the fourth fiscal quarter of
each year to be somewhat lower than revenue during the other three quarters. The
Company may also experience fluctuations in quarterly sales and related net
income compared with the prior year due to the timing of receipt of orders from
customers for die-cast collectibles, toys and molds and subsequent shipment of
such products. As a result, it is possible that the Company may experience
quarterly variations in operating results. Accordingly, the trading price of the
Company's ADSs may be subject to fluctuations in response to quarterly
variations in the Company's operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Control by Principal Shareholders. Following this Offering, Zindart Pte
Limited, a Singapore
corporation ("Zindart Singapore") will own approximately 78.1% of the
outstanding Shares (approximately 75.6% if the Over-allotment Option is
exercised in full). As majority shareholder, Zindart Singapore will have the
ability to control the election of the Company's directors and most corporate
actions of the Company. Zindart Singapore is controlled by ZIC Holdings Limited,
a Cayman Islands corporation ("ZICHL"), which owns approximately 76.0% of the
shares of Zindart Pte Limited. ZICHL, in turn, is currently controlled by
limited life private equity funds managed by ChinaVest (the "ChinaVest private
equity funds"), which own in the aggregate approximately 67.8% of the ordinary
shares of ZICHL and which therefore will be indirectly in control of the
Company. See "Principal Shareholders." Subject to agreements with the
Representative not to sell or dispose any shares of the Company for 180 days
following the closing of the Offering, these funds have the right, acting in
their own interest, to sell or dispose of such shares as they see fit, subject
to applicable law. Further, since these funds must dissolve by 2003, these funds
will need to liquidate their investments, whether by way of sale, distribution
or otherwise, prior to that date. Accordingly, although the Company has been
advised that ChinaVest has no present intention to cause these funds to sell or
dispose of their investments in the Company at any particular time, no assurance
can be given that any current shareholder of the Company, including the
ChinaVest private equity funds, will maintain any interest in the Company beyond
the lock-up period.
Taxation. During the past five years, under applicable Hong Kong and PRC
tax laws, only 50% of the Company's profits have been subject to tax in Hong
Kong and the Company has been exempt from taxation in the PRC pursuant to a tax
holiday, which tax holiday will change from a complete exemption to a partial
exemption, then to no exemption over time based on profitability of the
Company's joint ventures. See "Taxation -- Hong Kong Taxation" and "-- PRC
Taxation." As a result, during the past five years, the Company has enjoyed a
relatively low effective tax rate of between 7.0% and 9.0%. No assurance can be
given that the Company's effective tax rate will not increase in the future. In
the event that certain special United States federal income tax rules are
applicable to the Company, there is a risk that holders of ADSs who are U.S.
taxpayers may be required to recognize income prior to the receipt of dividends
or distributions from the Company. See "Taxation -- United States Federal Income
Taxation -- Special United States Federal Income Tax Considerations."
Tariffs and Quotas. Most of the Company's products are shipped to
customers in the United States. The United States may, from time to time, impose
new quotas, duties, tariffs, or other charges or restrictions, or adjust
presently prevailing quota, duty or tariff levels, which could have an adverse
effect on the Company's
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business, financial condition and results of operations and its ability to
continue to export products to the United States at current or increased levels.
The Company cannot predict what regulatory changes may occur, if any, or the
type or amount of any financial impact on the Company that such changes may have
in the future. In addition, various forms of protectionist trade legislation
have been proposed in the United States. Adverse changes in tariff structures or
other trade policies could have a material adverse effect on the Company's
business, financial condition and results of operations.
Environmental Matters. The Company's operations involve the use of certain
toxic substances, including plastic resins and oil-based paints. The Company is,
and is likely to continue to be, subject to PRC national, provincial and local
environmental protection laws and regulations. Such laws and regulations
currently impose a uniform fee on industrial wastewater discharges and a
graduated schedule of pollution fees for the discharge into the environment of
waste substances in excess of applicable standards, require the payment of fines
for violations of laws, regulations or decrees, and provide for possible closure
by the central, provincial or local government of any facility which fails to
comply with orders requiring it to cease or cure certain activities deemed by
such authorities to be causing environmental damage. The Company believes that
it has complied, and intends to continue to comply, with all applicable
environmental protection laws and regulations. There can be no assurance that
the Company will at all future times remain in compliance with such laws and
regulations and avoid incurring the consequences of non-compliance, or that PRC
authorities will not impose additional regulatory requirements that would
necessitate additional expenditures for environmental compliance. Any such
occurrence could have a material adverse effect on the Company's business,
financial condition and results of operations.
Employees. Substantially all of the Company's factory employees are women
aged 18-24 who come from various rural regions in the PRC for the purpose of
working for wages higher than are available in such rural regions. These
employees typically work for the Company for two to five years and then return
to their communities. Accordingly, approximately 20% of the factory employees do
not return to the Company each year after the Chinese New Year holiday, and the
Company must hire replacements. If these employees were able to earn similar
wages in their communities or higher wages in other industries, the Company
could experience labor shortages or could be required to increase salaries to
meet its labor needs, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's employees are not unionized, and the Company has not experienced any
labor strife. Union organizing and worker unrest are not common in the PRC. No
assurance can be given, however, that labor conflicts will not develop. Any
labor conflicts could have a material adverse effect on the Company's business,
financial condition and results of operations.
Lack of Dividends. The Company does not contemplate the payment of
dividends in the foreseeable future. In addition, the Company's lines of credit
prohibit the payment of dividends in excess of 25% of net income. See "Dividends
and Dividend Policy."
Dilution. Purchasers of ADSs offered hereby will incur immediate and
substantial dilution in the net tangible book value per Share of the ADSs from
the initial public offering price. See "Dilution."
No Assurance of Public Market; Possible Volatility of Market Price of
ADSs. Prior to this Offering, there has been no public trading market for the
ADSs or the Shares. There can be no assurance that an active trading market for
the ADSs will develop after this Offering or that, if developed, it will be
sustained. Further, there will be no public market for the Shares. In the past
several years, many foreign issuers with market capitalizations similar to that
of the Company after this Offering have been unable to sustain an active trading
market for their securities. The initial public offering price for the ADSs
being sold by the Company in this Offering has been determined by negotiations
between the Company and the Representative and does not necessarily reflect the
Company's book value or other established criteria of value. The market price
for the ADSs following this offering may be highly volatile, as has been the
case with the securities of other companies in emerging businesses. The market
price of the ADSs may fluctuate substantially in response to various factors
affecting the collectible, holiday ornament and toy markets generally.
Shares Eligible for Future Sale. No prediction can be made as to the
effect, if any, that future sales of ADSs, or the availability of ADSs for
future sale, will have on the market price of the ADSs prevailing from time to
time. Sales of a substantial number of ADSs in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of the ADSs or the ability of the Company to raise capital through
a sale of its equity securities. See "Shares Eligible For Future Sale." The
Company and
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its shareholder have agreed not to sell or otherwise dispose of any ADSs for a
period of 180 days after the closing of this Offering without the prior written
consent of the Representative. See "Underwriting."
COUNTRY RISKS
General. The Company conducts all of its product engineering,
model-making, mold-making and manufacturing operations in the PRC. In addition,
some of the Company's administrative, finance and accounting, marketing, and MIS
activities are located in Hong Kong. As a result, the Company's business,
financial condition and results of operations may be influenced by the general
political, social and economic situation in Hong Kong and the PRC. Accordingly,
the Company may be subject to political and economic risks, including political
instability, currency controls and exchange rate fluctuations, and changes in
import/export regulations, tariffs, duties and quotas.
Exchange Rate Risk
The Company's sales are denominated in U.S. Dollars. The largest portion of
the Company's expenses are denominated in Hong Kong Dollars, followed by
Renminbi 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, the Hong
Kong Dollar and Renminbi. 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.
Since 1983, the Hong Kong government has maintained a policy of linking the
U.S. Dollar and the Hong Kong Dollar at an exchange rate of approximately
HK$7.80 to U.S. $1.00. There can be no assurance that this link will be
continued, although the Company is not aware of any intention of the Hong Kong
government or the PRC to abandon the link. There has been significant volatility
in the exchange rates of Renminbi to U.S. Dollars in recent years. Over the last
five years, the Renminbi has experienced significant devaluation against most
major currencies. The January 1, 1994 establishment of the current exchange rate
system produced a significant devaluation of the Renminbi from $1.00 to Rmb 5.7
to approximately $1.00 to Rmb 8.7. The rates at which exchanges of Renminbi into
U.S. Dollars may take place in the future may vary.
Inflation Risk
The annual inflation rate in Hong Kong was approximately 9.4%, 8.5%, 8.1%
and 8.8% in 1992, 1993, 1994 and 1995, respectively. The annual inflation rate
in the PRC was approximately 14.7%, 21.7% and 14.8% in 1993, 1994 and 1995,
respectively. The Company does not consider that inflation in Hong Kong or the
PRC has had a material impact on its results of operations in recent years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." No assurance can be given that inflation in Hong Kong or the PRC
will not have a material adverse effect on the business, financial condition and
results of operations of the Company in the future.
RISKS RELATING TO HONG KONG
The Company's business, financial condition and results of operations may
be influenced by the political situation in Hong Kong and by the general state
of the Hong Kong economy. On July 1, 1997, sovereignty over Hong Kong will be
transferred from the United Kingdom to the PRC, and Hong Kong will become a
Special Administrative Region ("SAR") of the PRC. As provided in the
Sino-British Joint Declaration on the Question of Hong Kong and the Basic Law of
the Hong Kong SAR of the PRC (the "Basic Law"), the Hong Kong SAR will have a
high degree of autonomy except in foreign affairs and defense. Under the Basic
Law, the Hong Kong SAR is to have its own legislature, legal and judicial system
and economic autonomy for 50 years. Based on the current political conditions
and the Company's understanding of the Basic Law, the Company does not believe
that the transfer of sovereignty over Hong Kong will have a material adverse
effect on the Company's business, financial condition or results of operations.
There can be no assurance, however, that changes in political, legal or other
conditions will not result in such an adverse impact.
RISKS RELATING TO THE PRC
Investment in the Company may be adversely affected by the political,
social and economic environment in the PRC. The PRC is controlled by the
Communist Party of China. Under its current leadership, the PRC has been
pursuing economic reform policies, including the encouragement of private
economic activity and greater economic decentralization. There can be no
assurance, however, that the PRC government will
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continue to pursue such policies, that such policies will be successful if
pursued, or that such policies will not be significantly altered from time to
time. Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, the inadequate development or maintenance
of infrastructure or the unavailability of adequate power and water supplies,
transportation, raw materials and parts, or a deterioration of the general
political, economic or social environment in the PRC, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, economic reforms and growth in the PRC have
been more successful in certain provinces than others, and the continuation or
increase of such disparities could affect the political or social stability of
the PRC.
MFN Status. The PRC currently enjoys Most-Favored-Nation ("MFN") status
granted by the United States, pursuant to which the United States imposes the
lowest applicable tariffs on PRC exports to the United States. The United States
annually reconsiders the renewal of MFN trading status for the PRC. No assurance
can be given that the PRC's MFN status will be renewed in future years. The
PRC's loss of MFN status would adversely affect the Company's business by
raising prices for its products in the United States, which could possibly
result in a reduction in demand for the Company's products by its U.S.
customers. Furthermore, trade friction between the PRC and the United States may
have an influence on after-market prices of the ADSs offered hereby.
Loss of PRC Facilities; Nationalization; Expropriation. If for any reason
the Company were required to move its manufacturing operations outside of the
PRC, the Company's profitability, competitiveness and market position could be
materially jeopardized, and there could be no assurance that the Company could
continue its manufacturing operations. In addition, the Company's business and
prospects are dependent upon agreements with various entities controlled by PRC
governmental instrumentalities. Not only would the Company's operations and
prospects be materially and adversely affected by the failure of such entities
to honor these contracts, but it might be difficult to enforce these contracts
in the PRC. There can be no assurance that assets and business operations in the
PRC will not be nationalized, which could result in the total loss of the
Company's investments in that country. Following the formation of the PRC in
1949, the PRC government renounced various debt obligations incurred by
predecessor governments, which obligations remain in default, and expropriated
assets without compensation. Accordingly, an investment in the Company involves
a risk of total loss.
Government Control Over Economy. The PRC only recently has permitted
greater provincial and local economic autonomy and private economic activities.
The PRC central government has exercised and continues to exercise substantial
control over virtually every sector of the PRC economy. Accordingly, PRC
government actions in the future, including any decision not to continue to
support current economic reform programs and to return to a more centrally
planned economy, or regional or local variations in the implementation of
economic reform policies, could have a significant effect on economic conditions
in the PRC or particular regions thereof. Any such developments could affect
current operations of and property ownership by foreign investors.
PRC Law; Evolving Regulations and Policies. The PRC's legal system is a
civil law system based on written statutes in which decided legal cases have
little value as precedents, unlike the common law system in the United States.
The PRC does not have a well-developed, consolidated body of law governing
foreign investment enterprises. As a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion and
variation. In addition, the legal system of the PRC relating to foreign
investments is both new and continually evolving, and currently there can be no
certainty as to the application of its laws and regulations in particular
instances. Definitive regulations and policies with respect to such matters as
the permissible percentage of foreign investment and permissible rates of equity
returns have not yet been published, statements regarding these evolving
policies have been conflicting, and any such policies, as administered, are
likely to be subject to broad interpretation and discretion and to be modified,
perhaps on a case-by-case basis. As the legal system in the PRC develops with
respect to these new types of enterprises,
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foreign investors may be adversely affected by new laws, changes to existing
laws (or interpretations thereof) and the preemption of provincial or local laws
by national laws. In circumstances where adequate laws exist, it may not be
possible to obtain timely and equitable enforcement thereof. The Company's
activities in the PRC are by law subject, in some circumstances, to
administrative review and approval by various national and local agencies of the
PRC government. Although the Company believes that the present level of support
from local, provincial and national governmental entities enjoyed by the Company
benefits the Company's operations in connection with administrative review and
the receipt of approvals, there is no assurance that such approvals, when
necessary or advisable in the future, will be forthcoming. The inability to
obtain such approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the ADSs offered hereby
are estimated to be approximately $13,000,000 at an assumed initial public
offering price of $11.00 per ADS, after deducting offering expenses and
underwriting discounts, which are estimated to be approximately $2,400,000. The
net proceeds will be applied as follows: (i) approximately $7,000,000 to finance
Phase II of the construction of the Dongguan Facility; (ii) approximately
$2,400,000 to reduce the outstanding amount of long-term bank loans and an
equipment lease (including current portions thereof); (iii) approximately
$1,600,000 for plant and equipment purchases; and (iv) approximately $300,000 to
establish a combined sales and marketing and investor relations office in the
U.S. in 1997. The balance of the proceeds will be used for general working
capital.
The Company intends to apply the amount specified in clause (ii) above as
follows:
APPROXIMATE INTEREST RATE OF MATURITY DATE OF
AMOUNT LOAN/LEASE LOAN/LEASE
----------- ---------------- ----------------
$ 388,000 10.0% January 1997
388,000 10.0% February 1997
218,000 9.5% December 1998
145,000 9.5% December 1998
243,000 9.5% March 1999
1,034,000 9.5% May 1999
-----
Total.... $ 2,416,000
Pending application of the net proceeds of this Offering to the uses
described above, the Company intends to invest the net proceeds of the Offering
in bank time deposits or other short-term investment-grade, interest-bearing
instruments.
DIVIDENDS AND DIVIDEND POLICY
The Company intends to retain earnings for expansion of its operations in
accordance with its business strategy and does not contemplate the payment of
dividends in the foreseeable future. In addition, the Company's present lines of
credit prohibit the payment of dividends in excess of 25% of net income. The
Company currently intends that dividends, if paid, would be paid to holders of
ADSs in U.S. Dollars. See "Description of Shares -- Dividends" and "Description
of American Depositary Receipts -- Dividends, Other Distributions and Rights."
In the fiscal years 1992 through 1995, the Company declared and paid
dividends per Share in the amount of $0.44, $0.29, $0.39, and $0.21,
respectively. The aggregate amount of dividends paid in these fiscal years was
$2,222,000, $1,473,000, $1,959,000, and $1,073,000, respectively. In 1996, the
Company distributed a dividend in kind of approximately $0.60 per Share
consisting of $2,994,000 of a loan receivable and amounts due from a debtor of
the Company. The Company did not declare a cash dividend in FY 1996.
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DILUTION
As of September 30, 1996, the net tangible book value per Share of the
Company was approximately $14,306,000, or $2.86 per Share. Net tangible book
value per Share is determined by dividing the tangible net worth of the Company
(total assets less liabilities) by the number of Shares outstanding. Without
taking into account any change in such net tangible value after September 30,
1996, other than to give effect to the sale of 1,400,000 ADSs offered hereby
(assuming an offering price of $11.00 per Share), and after deducting estimated
offering expenses and underwriting discounts, the pro forma net tangible book
value per Share as of September 30, 1996, on a consolidated basis, would have
been approximately $27,328,000, or $4.27 per Share, representing an immediate
dilution of $6.73 per Share to persons purchasing ADSs in this Offering. The
following table illustrates this per ADS dilution:
Initial public offering price per Share........................... $ 11.00
Net tangible book value per Share as of September 30, 1996........ $ 2.86
Increase per Share attributable to this offering.................. 1.41
-------
Pro forma net tangible book value per Share after offering........ 4.27
--------
Dilution to purchasers of ADSs in the offering.................... $ 6.73
========
The computations in the table set forth above assume that the
Over-allotment Option is not exercised. If the Over-allotment Option is
exercised in full, the pro forma net tangible book value at September 30, 1996
would have been $29,476,000 or $4.46 per Share, resulting in dilution to
purchasers of ADSs of $6.54 per Share.
The following table summarizes, on a pro forma basis at September 30, 1996,
the number of Shares or ADSs purchased, the total consideration paid to the
Company, and the average price per Share or ADS paid by the existing
shareholders and by new investors purchasing ADSs in this Offering at an initial
public offering price of $11.00 per Share.
SHARES OR ADSS AVERAGE
PURCHASED TOTAL CONSIDERATION PRICE
--------------------- --------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ----- ------
Existing Shareholders.......... 5,000,000 78.1% $14,378,000 48.3% $ 2.88
New investors (1).............. 1,400,000 21.9% 15,400,000 51.7% 11.00
---------
Total................ 6,400,000 100.0% $29,778,000 100.0%
=========
- ---------------
(1) Assuming no exercise of the Over-allotment Option. If such Over-allotment
Option were exercised in full, the Number of Shares or ADSs Purchased would
be 1,610,000, the Percent of Shares or ADSs Purchased would be 24.4% and the
aggregate Amount of Total Consideration would be $32,088,000.
17
20
CAPITALIZATION
The following table sets forth the pro forma consolidated capitalization of
the Company at September 30, 1996, as adjusted to give effect to the sale by the
Company of the ADSs offered hereby and the application of the estimated net
proceeds to be received by the Company therefrom, at an initial offering price
of $11.00 per ADS and after deducting the underwriting discounts and estimated
offering expenses payable by the Company. The capitalization information set
forth in the table below is unaudited and should be read in conjunction with the
more detailed Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus.
AT SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
Short-term debt:
Short-term bank borrowings........................................... $ 5,555 $ 5,555
Current portion of long-term loans................................... 811 165
Current portion of capital lease obligations......................... 1,164 388
------ ------
Total short-term debt........................................ 7,530 6,108
------ ------
Long-term debt:
Long-term bank loans................................................. 1,336 342
Capital lease obligations, long-term................................. 749 749
------ ------
Total long-term debt......................................... 2,085 1,091
Minority interest...................................................... 1,026 1,026
Shareholders' equity:
Ordinary shares; 5,000,000 shares issued and outstanding;
6,400,000 shares issued and outstanding, as adjusted.............. 323 414
Additional paid-in capital........................................... -- 12,931
Retained earnings.................................................... 14,055 14,055
------ ------
Total shareholders' equity................................... 14,378 27,400
------ ------
Total capitalization................................................... $17,489 $29,517
====== ======
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21
SELECTED FINANCIAL DATA
The selected consolidated income statement data for the fiscal years ended
March 31, 1994, 1995 and 1996 and the selected consolidated balance sheet data
as of March 31, 1995 and 1996 set forth below have been prepared in accordance
with U.S. GAAP and are derived from the consolidated financial statements and
notes thereto included elsewhere in this Prospectus which have been audited by
Arthur Andersen & Co., independent public accountants, whose report thereon is
also included elsewhere in this Prospectus. The selected consolidated income
statement data for the fiscal years ended March 31, 1992 and 1993 and the
selected consolidated balance sheet data as of March 31, 1992, 1993 and 1994 not
included elsewhere in this Prospectus have been prepared in accordance with U.S.
GAAP and are derived from Zindart's audited financial statements. The selected
consolidated income statement data for the six months ended September 30, 1995
and 1996 and the selected balance sheet data as of September 30, 1996, are
unaudited, but in the opinion of management, such unaudited consolidated
financial statements include all adjustments necessary for a fair presentation
of such data. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and the notes
thereto and other financial information, which appears elsewhere in this
Prospectus.
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales..................................... $29,116 $35,603 $35,583 $36,879 $46,930 $23,251 $32,398
Cost of goods sold............................ 22,079 27,309 25,037 25,644 34,116 16,782 24,419
------ ------ ------ ------ ------ ------ ------
Gross profit.................................. 7,037 8,294 10,546 11,235 12,814 6,469 7,979
Selling, general and administrative
expenses.................................... 4,859 5,080 6,351 6,806 6,498 3,231 4,162
Operating income.............................. 2,178 3,214 4,195 4,429 6,316 3,238 3,817
Interest expense.............................. 211 165 150 137 402 107 517
Interest income............................... 204 164 129 228 208 142 57
Other income (expense), net................... 52 122 80 492 (416) 7 122
------ ------ ------ ------ ------ ------ ------
Income before income taxes.................... 2,223 3,335 4,254 5,012 5,706 3,280 3,479
Provision for income taxes.................... 219 302 436 483 488 303 284
------ ------ ------ ------ ------ ------ ------
Income before minority interests.............. 2,004 3,033 3,818 4,529 5,218 2,977 3,195
Minority interests(1)......................... 0 0 83 337 622 405 425
------ ------ ------ ------ ------ ------ ------
Net income.................................... $ 2,004 $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 2,572 $ 2,770
====== ====== ====== ====== ====== ====== ======
Earnings per share(2)......................... $ 0.40 $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 0.51 $ 0.55
====== ====== ====== ====== ====== ====== ======
Dividends per share(3)........................ $ 0.44 $ 0.29 $ 0.39 $ 0.21 $ 0.60 $ 0.60 $ --
====== ====== ====== ====== ====== ====== ======
Weighted average number of shares............. 5,000 5,000 5,000 5,000 5,000 5,000 5,000
====== ====== ====== ====== ====== ====== ======
AS OF
SEPTEMBER 30, 1996
AS OF MARCH 31, ---------------------
----------------------------------------------- AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(4)
------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 2,692 $ 3,912 $ 4,068 $ 4,123 $ 3,294 $ 4,253 $ 6,637
Working capital............................... 2,621 3,775 3,210 5,399 3,401 5,764 9,570
Property, plant and equipment, net............ 1,528 1,882 2,545 3,902 10,800 11,216 19,816
Total assets.................................. 10,445 13,905 16,846 23,070 31,710 36,220 46,826
Short-term debt(5)............................ 1,528 1,052 1,020 1,780 8,899 7,530 6,108
Long-term debt and capital lease
obligations................................. 566 745 420 859 2,128 2,085 1,091
Shareholders' equity.......................... 3,552 5,112 6,887 10,011 11,608 14,378 27,400
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS)
OTHER DATA:
Capital expenditures.......................... $ 548 $ 1,086 $ 1,491 $ 3,197 $ 7,341 $ 3,748 $ 1,237
- ---------------
(1) Certain third parties own minority equity interests in the Company's
manufacturing and mold-making operations in the PRC. See
"Business -- Subsidiaries."
(2) Earnings per share is computed by dividing net income for each year by
5,000,000, the weighted average number of shares of common stock outstanding
during the years/periods, on the basis that a 20 for 1 stock split had been
consummated prior to the years/periods presented.
(3) Dividends per Share are computed by dividing the total amount of dividends
for such year by 5,000,000, the weighted average number of shares of common
stock outstanding during the years or periods, on the basis that the 20 for
1 stock split had been consummated prior to years or periods presented. For
the six months ended September 30, 1995, and accordingly during the year
ended March 31, 1996, the Company distributed a dividend in kind of
approximately $2,994,000 of a loan receivable and amounts due from a related
company.
(4) As adjusted to reflect the sale of 1,400,000 ADSs at an assumed public
offering price of $11.00 per ADS and the application of the net proceeds
therefrom. See "Use of Proceeds."
(5) Includes current portions of long-term debt and capital lease obligations.
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE
HEREIN.
The fiscal 1996 period is referred to herein as FY 1996, the fiscal 1995
period is referred to herein as FY 1995 and the fiscal 1994 period is referred
to herein as FY 1994.
OVERVIEW
The Company manufactures a wide range of high-quality, detailed die-cast
and injection-molding products including (i) die-cast collectibles, (ii)
collectible holiday ornaments and (iii) action figures and miniature figurine
playsets used primarily as toys. In fiscal 1996, the Company manufactured
products for approximately 20 customers, most of which are leading U.S.
marketers. Two of these customers accounted for a majority of the Company's
production, as they have for the past five fiscal years.
The Company's dependence on a relatively small number of customers may
increase the volatility of the Company's net sales in response to changes in the
level of demand by such customers for the Company's products. Such demand can
vary both as a result of fluctuations in the business of these customers as well
as changes in the proportion of such customers' needs for the manufactured
products supplied by the Company. As a result, the Company's net sales can vary
from period to period. The Company intends to seek to reduce its exposure to
such fluctuations in financial performance by expanding its customer base and
product lines. However, the Company is committed to strengthening its
relationships with key customers since the Company believes such relationships
are vital to its long-term success, even if they can expose the Company to
short-term variations in financial performance.
Notwithstanding fluctuations in net sales, the Company has, through
emphasis on improving efficiency, managed to control costs such that the Company
has experienced steady growth in both operating income as a percentage of net
sales and net income. For example, for fiscal years 1992 through 1996, operating
income as a percentage of net sales increased from 7.5% to 13.5%; for the same
period, net income grew from $2.0 million to $4.6 million, a compounded annual
growth rate of 23.1%. While on an absolute basis operating and net income may
increase in FY 1997 as compared with FY 1996, the Company expects that, as a
percentage of net sales, each is likely to be below FY 1996 percentages of net
sales due primarily to expenses related to operating the Dongguan Facility at
less than full capacity and training new employees.
RESULTS OF OPERATIONS
The table below sets forth certain statement of operations data as a
percentage of net sales for the fiscal years ended March 31, 1994, 1995 and 1996
and the six months ended September 30, 1995 and 1996.
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................................... 29.6% 30.5% 27.3% 27.8% 24.6%
Selling, general, and administrative expenses...... 17.9% 18.5% 13.8% 13.9% 12.8%
Operating income................................... 11.8% 12.0% 13.5% 13.9% 11.8%
Income before income taxes......................... 12.0% 13.6% 12.2% 14.1% 10.7%
Provision for income taxes......................... 1.2% 1.3% 1.0% 1.3% 0.9%
Minority interests................................. 0.2% 0.9% 1.3% 1.7% 1.3%
Net income......................................... 10.5% 11.4% 9.8% 11.1% 8.5%
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1995
Net Sales. Net sales for the six months ended September 30, 1996 totaled
$32,398,000, an increase of $9,147,000, or 39.3%, from $23,251,000 in the six
months ended September 30, 1995. This increase resulted from an increase in
sales volume in all finished product categories. Sales of the Company's die-cast
collectibles
20
23
increased from $9,128,000 to $12,954,000, or 41.9%, due to increased sales to
Ertl. Sales of collectible holiday ornaments increased from $6,763,000 to
$9,483,000, or 40.2%. Sales of action figures and miniature figurine playsets
increased from $2,589,000 to $6,038,000, or 133.2%, primarily due to sales to
two new customers. Mold sales decreased by 17.8% from $4,771,000 to $3,923,000,
because during the period ended September 30, 1996 the Company's mold-making
subsidiaries focused on manufacturing molds for the Company's products rather
than for sale to third parties.
Gross Profit. Gross profit during the six months ended September 30, 1996
totaled $7,979,000, an increase of $1,510,000, or 23.3%, from $6,469,000 in the
six months ended September 30, 1995. The increase in gross profit was
principally due to the increase in sales volume in all finished product
categories. Gross profit as a percentage of net sales ("Gross Margin") decreased
from 27.8% to 24.6% because of costs associated with operating the Dongguan
Facility at less than full capacity and training new employees.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the six months ended September 30, 1996
totaled $4,162,000, compared to $3,231,000 for the six months ended September
30, 1995, an increase of $931,000, or 28.8%, as a result of increased sales and
a corresponding increase in selling expenses. As a percentage of net sales, SG&A
declined from 13.9% to 12.8%.
Operating Income. Income from operations totaled $3,817,000 for the six
months ended September 30, 1996, compared to $3,238,000 for the six months ended
September 30, 1995, an increase of $579,000, or 17.9%, due to the factors
described above. Income from operations as a percentage of net sales decreased
from 13.9% to 11.8%.
Interest Expense. Interest expense totaled $517,000 for the six months
ended September 30, 1996 compared to $107,000 for the six months ended September
30, 1995, an increase of $410,000. The increase in interest expenses resulted
from the Company's assumption of additional indebtedness to finance Phase I of
the construction of the Dongguan Facility. Approximately $2,400,000 of the
proceeds from this Offering will be used to repay indebtedness.
Provision for Income Taxes. The effective tax rate remained relatively
constant at approximately 8.2% of pre-tax income in FY 1996, and 9.2% in FY
1995, respectively.
Net Income. Net income during the six months ended September 30, 1996 was
$2,770,000, an increase of $198,000, or 7.7% from $2,572,000 for the six months
ended September 30, 1995, due to the factors stated above.
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 1996 AND 1995
Net Sales. Net sales in FY 1996 totaled $46,930,000, an increase of
$10,051,000, or 27.3%, from $36,879,000 in FY 1995. This growth resulted from an
increase in sales volume in all finished product categories. Sales of die-cast
collectibles increased by 13.9%, from $17,500,000 to $19,934,000. Sales of
collectible holiday ornaments increased by 10.0%, from $11,496,000 to
$12,650,000. Sales of action figures and miniature figurine playsets increased
by 63.9%, from $3,492,000 to $5,722,000. Mold sales increased by 96.4%, from
$4,391,000 to $8,624,000, as a result of the Company's acquisition of a 51%
majority interest of Luen Tat Mould Manufacturing Limited ("Luen Tat Mould") and
the subsequent consolidation of Luen Tat Mould's financial results with those of
the Company, as well as an increase in Luen Tat Mould's sales.
Gross Profit. Gross profit totaled $12,814,000 in FY 1996, an increase of
$1,579,000, or 14.1%, from $11,235,000 in FY 1995. Gross Margin was 27.3% in FY
1996 compared to 30.5% in FY 1995. The Gross Margin decreased because the sale
of action figures and miniature figurine playsets and molds as a percentage of
total net sales increased. These products generally have a lower Gross Margin
than the Company's other products. Sales of die-cast collectibles decreased from
47.5% of net sales to 42.5% of net sales, and sales of collectible holiday
ornaments decreased from 31.2% of net sales to 27.0% of net sales. Sales of
action figures and miniature figurine playsets increased from 9.5% of net sales
to 12.2% of net sales, and sales of molds decreased from 19.6% of net sales to
18.4% of net sales.
Selling, General and Administrative Expenses. SG&A expenses totaled
$6,498,000 in FY 1996 compared to $6,806,000 in FY 1995, a decrease of $308,000,
or 4.5%, as a result of the transfer of certain
21
24
engineering and administrative functions from Hong Kong to the PRC. SG&A
expenses were 13.8% of net sales in FY 1996 as compared to 18.5% of net sales in
FY 1995, a decrease of 4.7%.
Operating Income. Income from operations totaled $6,316,000 in FY 1996
compared to $4,429,000 in FY 1995, an increase of $1,887,000, or 42.6%. The
operating margin increased from 12.0% of net sales in 1995 to 13.5% of net sales
in 1996.
Interest Expense. Interest expense increased from $137,000 in FY 1995 to
$402,000 in FY 1996 because the Company increased borrowings to undertake the
construction of Phase I of the Dongguan Facility.
Provision for Income Taxes. The effective income tax rate was 8.6% in FY
1996 and 9.6% in FY 1995. The effective rate decreased because profit
contributions from subsidiaries of the Company are not taxable and the
proportion of profits contributed from such subsidiaries was higher in FY 1996
than in FY 1995.
Net Income. Net income totaled $4,596,000 in FY 1996, an increase of
$404,000, or 9.6% from $4,192,000 for FY 1995.
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 1995 TO FISCAL 1994
Net Sales. Net sales in FY 1995 totaled $36,879,000, an increase of
$1,296,000, or 3.6%, from $35,583,000 in FY 1994. During FY 1995, the Company
did not emphasize increasing sales revenues, but instead focused on the
introduction of its Turnkey Manufacturing Service, implementing cost control
measures and increasing production efficiency. Also during FY 1995 sales of
die-cast collectible products decreased by $939,000, or approximately 5.1% from
$18,439,000 to $17,500,000 in FY 1995 due to a reduction in sales to a major
customer. Sales of collectible holiday ornaments increased by $1,510,000, or
approximately 15.1% from $9,986,000 to $11,496,000 in FY 1995. Sales of action
figures and miniature figurine playsets increased by $466,000 or approximately
15.4%, from $3,026,000 to $3,492,000 in FY 1995. Mold sales increased 6.3% from
$4,132,000 in 1994 to $4,391,000 in FY 1995.
Gross Profit. Gross profit totaled $11,235,000 in FY 1995, an increase of
$689,000, or 6.5%, from $10,546,000 in FY 1994. The Gross Margin increased from
29.6% in FY 1994 to 30.5% in FY 1995, principally as a result of a higher
percentage of sales of collectible holiday ornaments relative to other products
and an improvement in cost controls and efficiency.
Selling, General and Administrative Expenses. SG&A expenses totaled
$6,806,000 in FY 1995 as compared to $6,351,000 in FY 1994, an increase of
$455,000, or 7.2%, due to the hiring of additional employees for the Turnkey
Manufacturing Service. SG&A as a percentage of net sales increased from 17.9% in
FY 1994 to 18.5% in FY 1995.
Operating Income. Income from operations increased by $234,000, or 5.6%,
from $4,195,000 in FY 1994 to $4,429,000 in FY 1995, due to the factors
described above. Operating margins increased from 11.8% of net sales in FY 1994
to 12.0% of net sales in FY 1995.
Provision for Income Taxes. The effective income tax rate as a percentage
of pre-tax income remained relatively constant at approximately 10.0%.
Net Income. Net income totaled $4,192,000 in FY 1995, an increase of
$457,000, or 12.2%, from $3,735,000 in FY 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash generated
from operations and borrowings from banks and other third parties. Cash and cash
equivalents were $3,294,000 at March 31, 1996, and $4,253,000 at September 30,
1996, while total indebtedness at March 31, 1996 was $11,027,000 and total
indebtedness at September 30, 1996 was $9,615,000.
22
25
The Company obtained a term loan in the amount of $2,600,000 from The Hong
Kong and Shanghai Banking Corporation Limited in FY 1995 in connection with
Phase I of the construction of the Dongguan Facility. This loan is partially
secured by a mortgage on the Company's Hong Kong property and certain other
assets. The term loan is repayable in 48 monthly installments, commencing on
August 1, 1994. As of September 30, 1996, the outstanding principal amount of
this loan was $1,640,000. The Company intends to use a portion of the proceeds
from this Offering to repay a portion of the remaining balance of this loan.
In FY 1995 and FY 1996, the Company obtained equipment lease financings in
the aggregate amount of $3,700,000 from three different equipment lessors. One
lease requires repayment in January and February of 1997 (the "First Lease") and
the second and third leases (the "Second and Third Leases") require repayment in
48 monthly installments. The First Lease carries an interest rate of 10.0% and
the Second and Third Leases carry interest rates of 9.3% and 7.2%, respectively.
As of September 30, 1996, the aggregate outstanding amount under these leases
was $1,900,000. The Company intends to use approximately $776,000 of the
proceeds from this Offering to repay the First Lease.
The Company has revolving lines of credit with three banks -- Standard
Chartered Bank, The Hong Kong and Shanghai Banking Corporation Limited and Bank
of China. As of March 31, 1996, these lines of credit allow for aggregate
borrowings of up to $10,800,000. As at September 30, 1996, the Company had
$4,400,000 of outstanding loans and letters of credit under these revolving
lines of credit. The Company draws down from the lines of credit primarily to
finance purchases of raw materials. The lines of credit contain covenants
requiring the maintenance of net minimum worth, and limitations on payment of
dividends and bonuses to management without the consent of the lender.
Consistent with practice in the giftware and collectibles industry, the
Company offers accounts receivable terms to its customers. This practice
typically has created working capital requirements that the Company generally
has financed with net cash balances, internally generated cash flow and
borrowing. The Company's accounts receivable balance at March 31, 1996, was
$8,315,000. The Company has never experienced any significant problems with
collection of accounts receivable from its customers.
Capital expenditures, for fiscal years 1994, 1995, 1996, and the six month
period ended September 30, 1996, were $1,491,000, $3,197,000, $7,341,000, and
$1,237,000, respectively. The Company believes that cash flow generated from its
operations, the proceeds from this Offering and its existing credit facilities
will be sufficient to satisfy its working capital and capital expenditure
requirements for at least the next 18 months.
FOREIGN EXCHANGE
All of the Company's sales are generated either in Hong Kong Dollars or
U.S. Dollars. Approximately 50% of the Company's expenses are incurred in
Renminbi, and the remainder are incurred primarily in Hong Kong Dollars. The
exchange rate of the Hong Kong Dollar is currently pegged to the U.S. Dollar,
but during the past several years the market exchange rate has fluctuated within
a narrow range. The PRC government sets the exchange rate between the Renminbi
and all other currencies. As a result, the exchange rate between the Renminbi
and the U.S. Dollar and the Hong Kong Dollar has fluctuated in the past and may
fluctuate in the future. If the value of the Renminbi or the Hong Kong Dollar
decreases relative to the U.S. Dollar, such fluctuation may have a positive
effect on the Company's results of operations. If the value of the Renminbi or
the Hong Kong Dollar increases relative to the U.S. Dollar, such fluctuation may
have a negative effect on the Company's results of operations. See "Risk
Factors -- Country Risks -- Exchange Rate Risk." The Company does not currently
hedge its foreign exchange positions.
EFFECT OF INFLATION
During the past three years, the rate of inflation in Hong Kong has been
between approximately 8% to 10% per year and the rate of inflation in the PRC
has been approximately 14% to 22% per year. However, the Company has in such
years been able to minimize the impact of inflation on profitability by
increasing the prices of its products and reducing operating costs. No assurance
can be given that the Company will be able to minimize the impact of inflation
on profitability in the future.
23
26
BUSINESS
Zindart manufactures high-quality, detailed die-cast and injection-molding
products, including: (i) die-cast collectibles, (ii) collectible holiday
ornaments, and (iii) action figures and miniature figurine playsets used
primarily as toys. Zindart's corporate headquarters are located in Hong Kong and
its manufacturing operations are located in the neighboring Guangdong Province
in the PRC.
DEVELOPMENT OF THE COMPANY
Since its inception, Zindart's goal has been to become the leading
manufacturer of high-quality die-cast and injection-molding products for the
premier U.S. designers and marketers of die-cast collectibles, collectible
holiday ornaments and toys. Zindart was founded in Hong Kong in 1978 by George
K.D. Sun, who believed that, in order to succeed, Asian light manufacturers had
to build industry partnerships with their customers by providing them with
consistently high-quality, mass-produced products at affordable prices. It was
Mr. Sun's plan to meet the needs of Zindart's customers and forge the desired
industry partnerships by seeking to manage the entire product engineering and
manufacturing process rather than acting simply as a volume contract
manufacturer. Zindart's long-term relationships with its two largest customers
exemplify the type of industry partnerships envisioned by Mr. Sun. See
"Business -- Markets, Products and Customers."
In the early 1980s, Zindart decided to capitalize on opportunities in the
PRC by moving its manufacturing operations to Guangdong Province. In so doing,
Zindart realized substantial savings in labor and operating costs and gained
access to a large pool of technically trained craftsmen and other skilled but
relatively inexpensive laborers. Zindart also developed and trained a local PRC
management team, resulting both in cost savings and increased synergy between
labor and management. In 1982, Zindart opened the Zhong Xin factory in the Tian
He district of Guangzhou. In 1987, due to expanding sales and the need for
additional production capacity, Zindart opened a second production facility in
the PRC -- the Xin Xing factory in the Henan district of Guangzhou.
In 1987, in order to secure PRC governmental support for the Company's
operations in the PRC, Mr. Sun, Ertl and certain management staff collectively
sold a controlling interest in the Company to certain PRC entities. In 1993, in
order to enable the Company to gain access to U.S. management expertise and
capital markets, Mr. Sun asked the PRC entities to sell their shares in the
Company to funds under the management of ChinaVest, Advent and certain other
shareholders, which they did, and concurrently Mr. Sun sold a majority of his
shares to these parties. See "Principal Shareholders."
By late 1994, in response to growth in sales, Zindart decided to build the
Dongguan Facility in order to expand and consolidate its manufacturing
operations. Phase I of the construction of the Dongguan Facility was completed
in 1996. Upon completion of Phase II of the construction of the Dongguan
Facility, Zindart will increase its current manufacturing space in the Dongguan
Facility by 470,773 square feet and will have doubled the amount of its
manufacturing space from the manufacturing space in its first two facilities.
See "Business -- Properties." During the past two decades, Mr. Sun recruited and
trained the Company's current executive team, and in the past few years
gradually transferred to them responsibility for managing all of the Company's
day-to-day operations. Mr. Sun continues to be responsible for providing
leadership to, and engaging in strategic planning for, the Company. See
"Management."
MARKETS, PRODUCTS AND CUSTOMERS
Die-cast Collectibles
Zindart manufactures a wide range of metal die-cast collectible scale model
replicas of automobiles, trucks, planes, farm implements and construction
equipment, such as Mercedes Benz, BMW, Corvette and Mustang, farm equipment,
such as John Deere and Caterpillar, and classic cars, such as the 1932 Cadillac,
the 1964 Aston Martin and the 1956 Ford Thunderbird. These replicas, which come
in various scales from 1/12th to 1/64th of the size of the original product, are
medium- and high-feature products that must meet exacting standards. Many of the
die-cast replicas manufactured by Zindart have complex designs which require
high-quality workmanship and decorative details, with pad printing of as many as
one hundred imprints. The most
24
27
complex of these models incorporate up to 200 moveable parts. The die-cast scale
model replicas manufactured by Zindart are sold through hobby shops, collectors'
clubs, car and equipment dealers, toy and gift stores and other channels. These
products typically retail in the U.S. between $150.00 and $180.00 for the high-
feature products, between $25.00 and $60.00 for the medium-feature products and
between $5.00 and $10.00 for the low-feature products. Many of these products
have nostalgic appeal to adult consumers. In addition, some of these products,
especially the automobile replicas, have attracted a following of collectors and
have been traded on a secondary market. It is the Company's belief, based on 15
years of sales experience, that many die-cast collectibles have enduring
consumer appeal. For example, the Company manufactures on an annual basis
several products for which molds were made between five and ten years ago. These
include the '70 Ford Mustang, '68 Pontiac GTO, '67 Corvette convertible, Ford
Roadster, Allis Chalmers Model "C" Tractor, and John Deere Skidsteer Loader.
Zindart's primary customer for die-cast collectibles is Ertl, a leading
U.S. designer and marketer of die-cast collectible replicas with 1995 sales of
over $200 million. Ertl was Zindart's first customer in 1978 and has been a
customer ever since. In 1982, Ertl's affiliated company, Ertl (Hong Kong)
Limited, acquired a significant equity interest in Zindart. Currently, Ertl's
Chief Executive Officer is a director of the Company. See "Management" and
"Certain Transactions." In fiscal years 1995 and 1996, sales to Ertl accounted
for 32.1% and 25.9% of the Company's net sales. Other customers of Zindart for
die-cast collectibles include other well known designers and marketers of such
products, such as Revell-Monogram, which has been a customer of Zindart since
1987, and SWG of Germany, which has been a customer of Zindart since 1989.
Revell-Monogram is a leading worldwide designer and marketer of plastic model
kits and die-cast replicas of airplanes, automobiles and ships marketed under
the "Revell" and "Monogram" brand names. SWG is one of the largest designers and
marketers of die-cast replicas in Germany, which are sold under the brand name
"Siku." The Company is currently manufacturing molds for die-cast collectibles
for Mattel, Inc.
Collectible Holiday Ornaments
Hallmark, long known as a leading producer of greeting cards, has
successfully diversified into collectible holiday ornaments and giftware
products. Hallmark relies on Zindart to manufacture many of its Keepsake
Ornaments, which consist of a variety of Christmas ornaments, holiday-themed
pieces and other giftware, both in die-cast zinc alloy and plastic. Hallmark's
Keepsake Ornament products also include free-standing decorations such as
die-cast replicas of pedal cars, which were first manufactured by Zindart in
1992. Production of Keepsake Ornament products requires highly developed hand
spray painting skills and attention to quality by each member of the workforce
in order to meet Hallmark's exacting aesthetic and quality requirements.
The Keepsake Ornaments manufactured by Zindart are collectibles sold
through authorized retail outlets. These products typically retail in the U.S.
between $7.00 and $25.00. Many purchasers of Keepsake Ornaments consider these
products to be valuable, collectible items. In addition to traditional holiday
themes, many Keepsake Ornaments depict characters from storybooks and films such
as the Wizard of Oz, Star Trek, Pocahontas, the Flintstones, and Peanuts, and
various American icons such as Lou Gehrig and Babe Ruth. Sales to Hallmark
accounted for 31.2% and 27.0% of the Company's net sales in FY 1995 and FY 1996,
respectively.
Action Figures and Miniature Figurine Playsets
Zindart also manufactures action figures and miniature figurine playsets
for various designers and marketers such as Hasbro, Inc., Tyco Toys, Inc. and
Lewis Galoob Toys, Inc. These products include miniature replicas of popular
television and movie characters such as Thomas the Tank Engine & Friends and
various Disney and Sesame Street characters. These products typically retail in
the U.S. between $5.00 and $15.00. The Company believes that a developing trend
among toymakers is to focus on profitability rather than volume. As a result,
many toymakers are moving into the sale of higher-priced toys, the production of
which requires high-quality and detailed manufacturing skills of the type
offered by Zindart.
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MANUFACTURING NEEDS OF ZINDART'S CUSTOMERS
Zindart believes that a significant sourcing problem facing its customers
is locating suppliers who can manufacture: (i) high-quality products, (ii) in
desired volumes (i.e., both in large quantities and limited runs) and (iii) in a
timely and cost-effective manner. In addition, a significant problem facing the
Company's customers is eliminating the cost, time and complexity of locating and
managing the number of companies usually required to perform the different steps
of the product development and production cycle of a single product. Different
companies are often hired to engage in product engineering, model and mold
making, and manufacturing and packaging of the finished product. The need to
coordinate several different companies in the manufacturing process can cause
production delays, inefficiencies in management of multiple contractors, and
quality and reliability problems.
ZINDART'S SOLUTION
- High-quality Production
Zindart has developed the ability to produce high-quality products by
employing a skilled workforce of technically trained craftsmen using modern
equipment under the guidance of experienced management. The Company ensures
quality through rigorous quality control procedures at each step of the
production process. The Company has an employee training program geared
specifically toward inspection and quality control.
- Manufacturing Capacity
Zindart currently employs over 6,800 persons in its manufacturing
facilities. Upon completion of Phase II of the construction of the Dongguan
Facility, the Company will have an aggregate of 887,000 square feet of
manufacturing space for up to 8,000 workers. The Company believes that this
space, together with the anticipated increase in efficiency for which the
Dongguan Facility was designed, will allow the Company to significantly increase
its production capacity. The added flexibility gained through increased
production capacity should enable the Company to further shorten production
cycles, which in turn will enable the Company to offer, among other things, a
just-in-time manufacturing service.
- Commitment to Improvement in Efficiency
The Company continually strives to increase efficiency and reduce costs for
the benefit of the Company and its customers. To date, the Company has been able
to achieve efficiencies by locating its production facilities in the PRC,
vertically integrating its production processes, and by working in close
cooperation with its customers. The Company expects to achieve greater
efficiencies as a result of the consolidation of its operations in the Dongguan
Facility. In addition, the Company intends to retain production experts to
assist it in achieving further production efficiencies.
- Turnkey Manufacturing Service
Zindart's Turnkey Manufacturing Service fulfills a customer's requirements
at every stage in the production process, from computer-aided product
engineering and model and mold making, to manufacturing, assembling and
packaging of the finished product. This coordinated, "one-stop" production
process provides Zindart's customers with (i) shortened lead times from design
to production; (ii) a single rather than multiple participants in the
manufacturing process; and (iii) increased efficiency resulting in lower
per-unit costs. See "-- Manufacturing."
ZINDART'S STRATEGY
Zindart's goal is to become the leading manufacturer of high-quality
die-cast and injection-molding products for the premier designers and marketers
of die-cast collectibles, collectible holiday ornaments and toys. Zindart's
business strategy to achieve this goal is to focus on the following:
- Develop Additional Major Customers
Currently, Zindart has two major customers, but manufactures products for
an additional 15 premier marketers. Some of these marketers have become
customers in the last few years. The Company expects that it will be able to
develop several of these new customers into major customers as these customers
become
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familiar with the benefits of the Company's Turnkey Manufacturing Service. Upon
completion of Phase II of the construction of the Dongguan Facility, Zindart
will be able to offer new major customers a dedicated production team and
dedicated production space, which can provide such customers with attractive
advantages. For example, the Company will be able to customize its production
facility to meet the specific needs of such customers, and the customer will
then be able to exercise greater control over the production process. thereby
enhancing quality control and cost efficiency, increasing confidentiality, and
expediting scheduling and delivery timetables.
- Diversify Product Offerings
Zindart has established itself as a leading manufacturer of die-cast
collectibles and collectible holiday ornaments and toys. Zindart intends to
further diversify the Company's product offerings to include the manufacture of
other consumer products which utilize Zindart's current competitive advantages
and know-how. In this regard, the Company intends to establish a sales,
marketing and investor relations office in the U.S. in 1997 to pursue such
efforts.
- Invest in Plant, Equipment and Employees
The completion of Phase II of the Dongguan Facility will provide the
Company with additional production space. In addition, Zindart intends to
purchase new equipment for this facility and hire additional employees. This
expansion will increase Zindart's capacity and, the Company believes, the
quality of its operations and overall efficiency, which should in turn enable
Zindart to meet additional demand for its manufacturing services.
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MANUFACTURING
A significant problem facing the Company's customers is eliminating the
cost, time and complexity of locating and managing the number of companies
usually required to perform the different steps of the product development and
production cycle of a single product. Different companies are often hired to
engage in product engineering, model and mold making, and manufacturing and
packaging of the finished product. The need to coordinate several different
companies in the manufacturing process can cause production delays,
inefficiencies in management of multiple contractors, quality and reliability
problems.
To address this problem, the Company in 1994 broadened its manufacturing
capability to provide a fully integrated service known as Turnkey Manufacturing
Service. With this service, Zindart is able to provide product engineering,
model making and mold making, which Zindart integrates with the production of
the finished product. With this vertical integration, Zindart can meet all of a
customer's design engineering and manufacturing needs (other than the design and
printing of product packaging), thus avoiding the need for a Hong Kong
intermediary. Zindart's commitment to providing a comprehensive product
development service is evidenced by a team currently consisting of approximately
130 engineers and technicians, 350 model makers and tool makers and a total
workforce of approximately 6,800. By coordinating product development and
process design with production and packaging, Zindart is able to shorten the
lead time from conceptual design to product delivery and to lower product cost
while maintaining high quality and reliability.
The Turnkey Manufacturing Service comprises the following processes:
LOGO
- Based on a customer's preliminary specifications, Zindart assists in
product engineering through the use of computer-aided design systems
and other means with an eye toward promoting cost effectiveness
throughout the production cycle.
- Zindart builds prototype scale models of the product which are then
reviewed to ensure economical production and adherence to safety and
quality requirements.
- Using the model, Zindart produces tooling casts and then molds that
are key to the quality, timing and cost of the finished product.
- Zindart employs die-casting and injection-molding processes to shape
zinc alloys or plastic into product parts.
- The product parts are then painted through electrostatic painting,
detailed hand spray painting and/or pad printing.
- Zindart's large work force assembles multiple parts to produce the
final product.
- The product then undergoes buffing, finishing and quality control
inspection.
- Zindart assembles preprinted boxes, inserts the product and places
the boxes in cartons for delivery as specified by the customer.
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COMPETITION
The Company faces competition from several companies for the manufacture of
die-cast collectibles and several other companies for the manufacture of
collectible holiday ornaments. The Company faces competition from numerous
companies for the manufacture of toys. The Company believes that the basis for
competition in the manufacture of all of these products is price, quality and
the ability to produce in required volumes and to timely meet delivery
schedules. The Company believes that, to date, it has been able to successfully
compete with respect to each of these criteria. However, no assurance can be
given that the Company will be able to continue to compete successfully or that
it will not face increased competition from new entrants or increased price
competition. The Company expects increased competition from manufacturers of
low-priced toys that may seek to enter the higher margin business of
manufacturing high-quality toys, die-cast collectibles and collectible holiday
ornaments. Some of these potential competitors may have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
See "Risk Factors -- Risks Relating to the Company -- Competition" and "-- Lack
of Barriers to Entry."
PROPERTIES
Zindart owns a facility of approximately 14,700 square feet at Tai Po in
Hong Kong's New Territories, which it acquired in 1982 and which currently
serves as the Company's headquarters, housing its customer service, quality
control, material control and purchasing, finance and accounting, marketing,
project management and engineering, personnel and other administration
functions, which are staffed by approximately 80 persons. Prior to the transfer
of production to the PRC, Zindart's manufacturing plant was located at its Tai
Po facility.
In 1982, Zindart established its Zhong Xin factory in the Tian He district
of Guangzhou, which is approximately 112 miles northwest of Hong Kong, on the
Pearl River. The factory, which is not owned by Zindart, operates under a
subcontract processing agreement with the local economic development authority,
which provides Zindart with the factory building and facilities as well as the
workforce. Zindart pays subcontracting fees for the use of these facilities and
labor, and provides machinery, equipment and raw materials. All of the
production machinery and equipment used in the plant is the property of Zindart.
Under the subcontract processing agreement, Zindart has the right to operate and
manage the production facility, including the authority to employ and dismiss
plant workers and to make decisions on day-to-day operational matters. The Zhong
Xin plant has been expanded over the years and currently provides a factory
space of approximately 250,000 square feet and employs a workforce of
approximately 2,500. The subcontract processing agreement expires in December
1999. The parties are currently negotiating the terms on which this agreement
will be terminated when Zindart moves all production to the Dongguan Facility.
See "Risk Factors -- Reliance on New Production Facility."
Zindart established its Xin Xing factory in the Henan district of Guangzhou
in 1987. The Xin Xing factory now occupies a factory space of approximately
170,000 square feet, with a workforce of approximately 1,500. In December 1993,
Zindart entered into a contractual joint venture agreement with the PRC party
that owned the Xin Xing factory to operate the factory through a majority-owned
subsidiary of Zindart. Pursuant to the contractual joint venture agreement with
the PRC party, the PRC party receives an annual fee from Zindart equal to the
rent of this facility, but does not share in the profits or losses of the
venture. This agreement will have to be terminated prior to the Company's
transfer of its operations from this facility to the Dongguan Facility. See
"Risk Factors -- Reliance on New Production Facility."
In October 1994, Zindart decided to build its own production facility on
approximately 20 acres of land in the city of Dongguan, which is located
approximately 60 miles north of Hong Kong, near the Pearl River Delta. Virtually
all land in the PRC is state-owned, but can be leased from the government on a
long-term basis. Operation of the Dongguan Facility is structured as a
contractual joint venture with a PRC governmental entity, Dongguan Xinda, which
will receive an annual fee from Zindart but which does not share in the profits
or losses of the venture. This contractual joint venture acquired a 50-year
lease on the 20 acres of land, and has a term of fifteen years. At the end of
this term, Zindart will continue to own the principle assets of the joint
venture, including the fifty year land lease. Phase I of the construction of the
Dongguan Facility,
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with a gross floor area of approximately 560,000 square feet, including living
accommodations for up to 3,500 workers, was completed in February 1996. The
Company commenced Phase II of the construction in late 1996, and intends to
complete such construction in early 1998. When Phase II of the construction of
the Dongguan Facility is completed, it will have approximately 887,000 square
feet of manufacturing space and approximately 385,000 square feet of space used
for non-production purposes. The Dongguan Facility has been designed to meet or
exceed applicable environmental, worker and fire safety requirements. Following
completion of Phase II of the construction, Zindart intends to transfer all
production activities from the two Guangzhou factories to the Dongguan Facility.
RAW MATERIALS
Zindart acquires the raw materials for its die-cast production primarily
from Australia, Belgium and Canada. Plastics used for manufacturing collectible
holiday ornaments and figurines are obtained from Hong Kong. Zindart's standard
practice is to maintain a supply of raw materials sufficient for approximately
three months' production. See "Risk Factors -- Risks Relating to the
Company -- Dependence on Raw Materials."
SUBSIDIARIES
The Company has a controlling interest in two mold-making subsidiaries. In
August 1994, the Company acquired a 55% interest in Onchart Industrial Limited,
a British Virgin Islands corporation. In December 1994, the Company acquired a
51% interest in Luen Tat Mould. Prior to these acquisitions, the Company had
regularly contracted with these companies to provide mold-making services to the
Company. Presently, Luen Tat Mould conducts its mold-making operations in one of
the Company's factories, and provides the Company with the largest in-house mold
and model-making capacity in southern China. Both subsidiaries will move their
operations to the Dongguan Facility upon completion of Phase II of the
construction.
Luen Tat Mould owns an 18% interest in Luen Tat Model, which provides
model-making services to Luen Tat Mould.
BACKLOG AND SEASONALITY
Zindart's customers generally place orders two to three months in advance
of delivery target dates. These purchase orders may be cancelled by the customer
upon reimbursement of actual costs incurred and payment of a portion of lost
profits determined on a case-by-case basis. As is customary in the PRC, Zindart
closes its facilities for two weeks during the months of January or February in
celebration of the Chinese New Year holidays. As a result, the Company's fourth
fiscal quarter production and revenues have in the past been lower than in other
quarters and are expected to be lower than other quarters in the future. Except
as attributable to the observance of the New Year, the Company has not
experienced seasonality in its operations, although it could show quarterly
fluctuations based on the timing of orders placed by its customers.
As of September 30, 1996, Zindart had orders on hand of approximately $19.6
million, compared to $17.3 million at September 30, 1995. Less than 1% of
Zindart's total annual customer orders have been canceled in any of the last
three years.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
Zindart has no registered trademarks or other registered proprietary
rights. The Company's key employees have entered into to confidentiality
agreements with the Company.
ENVIRONMENTAL MATTERS
The plants and equipment owned and operated by Zindart and the construction
activity associated with the expansion program are subject to comprehensive laws
and regulations for environmental protection. If Zindart were found to be in
violation of any such regulation, it would be given a period of time to remedy
the problem. If it failed to do so, the government could impose sanctions
including, but not limited to, a shut-down of operations until such time as
Zindart complied with such regulations. Each of Zindart's manufacturing
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facilities have been subject to periodic environmental review by the local
authorities and have never incurred a fine or penalty for any breach or
violation of any applicable environmental laws. Zindart believes that its
manufacturing and other operations are in compliance in all material respects
with existing applicable environmental laws. See "Risk Factors -- Risks Relating
to the Company -- Environmental Matters."
EMPLOYEES
Zindart currently employs over 6,800 persons, of whom approximately 5,400
are production workers, 600 are administrative staff and 800 are engineering and
technical personnel. See "Risk Factors -- Risks Relating to the
Company -- Employees." As is customary for employers in the PRC, each of
Zindart's production facilities includes housing facilities for workers. Zindart
is committed to providing good working and living conditions for its employees
in the PRC. To that end, the Company has adopted a code of conduct regulating
human rights policies, including child labor, worker safety, wages and hours.
Zindart intends to retain outside consultants to review and assist in improving
the working and living conditions of its employees.
Zindart provides training to its managers and executives in its Hong Kong
headquarters through courses conducted by industry professionals engaged by
Zindart as well by senior management. The courses cover management skills, total
quality management, ISO 9000 requirements and the technical aspects of
operations. In addition, Zindart sponsors a number of technical staff to attend
night classes and in-house seminars for workers are held semi-annually by the
quality control staff or the factory managers on quality requirements.
LEGAL PROCEEDINGS AND INSURANCE
Zindart is not a party to any material pending legal or arbitration
proceeding with respect to itself or any of its material properties.
Zindart currently maintains insurance coverage with HSCB Insurance Ltd.,
the China Pacific Insurance Co., Ltd. and China Insurance Co., Ltd. on its
property, plant and equipment in an amount in excess of the current net book
value of such assets. It carries business interruption and third-party liability
insurance to cover claims arising out of bodily injury or property or
environmental damage caused by accidents on its property, or otherwise relating
to its operations or defects in the products it manufactures.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and key employees of the Company:
NAME POSITION AGE
- --------------------------------- ---------------------------------------------------- ---
George K. D. Sun................. Founder, Chief Executive Officer and Director 56
Feather S. Y. Fok................ Chief Operating Officer, Chief Financial Officer and 35
Director
Tony D. H. Lai................... Vice President of Production and Director 55
Andrew C. H. Mok................. Vice President of Marketing 45
Koulman N. Zheng................. Vice President of Engineering 41
Vickie W. K. So.................. Assistant Vice President and Financial Controller 36
Choi S. Leung.................... Assistant Vice President of Marketing and Purchasing 52
Pei J. Yu........................ Assistant Vice President of Production 50
Alexander M. K. Ngan............. Director 45
Henry H.L. Hu.................... Director 52
George B. Volanakis.............. Director 48
Domina W.K. Leung................ Director 36
George K. D. Sun, 56, founded Zindart in 1978 and served as a Director and
Chief Executive Officer from 1978 to 1994. In 1994, Mr. Sun took a sabbatical
from the Company to pursue philanthropic activities, including the creation of
the Zindart (De Zhen) Foundation, the beneficiaries of which include Zindart's
employees and their families, and other charities and churches. Mr. Sun returned
to Zindart in 1996 as a Director and Chief Executive Officer.
Feather S. Y. Fok, 35, has served as a Director since August 1993 and has
served as Chief Operating Officer and Chief Financial Officer since 1993. Ms.
Fok joined the Company in January 1989. Before joining the Company, Ms. Fok
worked in the auditing and consulting department of a "Big 6" accounting firm in
Hong Kong. Ms. Fok is a Certified Public Accountant in Hong Kong and an
associate member of the Hong Kong Society of Accountants. Ms. Fok is also a
member of the Chartered Association of Certified Accountants, United Kingdom.
Ms. Fok received a B.S. degree in Business Administration from the Chinese
University of Hong Kong.
Tony D. H. Lai, 55, has served as a Director and Vice President of
Production since October 1994 and is responsible for production in the PRC. Mr.
Lai graduated from the Shanghai Education University and was a secondary school
teacher for 27 years in the PRC before he emigrated to Hong Kong. He joined the
Company in 1989.
Andrew C. H. Mok, 45, has served as Vice President of Marketing since
January 1995, and in that capacity is responsible for the management of customer
relations, marketing, product engineering and costing. Mr. Mok has over 20 years
of working experience in the toy industry. Mr. Mok received a B.S. degree in
Mechanical Engineering from the University of Hong Kong.
Koulman N. Zheng, 41, has served as Vice President of Engineering since
1993, and is responsible for Luen Tat Mould's operations. Prior to joining the
Company, Mr. Zheng worked for many years as an engineer and operations manager
in various companies in the U.S. Mr. Zheng holds a 10% interest in Luen Tat
Mould. Mr. Zheng holds a B.S. and an M.S. degree in Mechanical Engineering from
San Francisco State University and Northeastern University, respectively. Mr.
Zheng also received a B.S. degree in Mechanical Engineering from the South
Chinese Institute of Technology in the PRC.
Vickie W. K. So, 36, has served as the Assistant Vice President and
Financial Controller since September 1996. Prior to joining the Company, Ms. So
worked as Administration Manager, Group Accountant and Financial Controller of
Pacific Dunlop (Asia) Ltd. for more than ten years. Ms. So is a qualified
accountant in
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Hong Kong. Ms. So received a B.S. degree in Business Administration from the
Chinese University of Hong Kong in 1984 and an M.B.A. from the Australian
Graduate School of Management, University of New South Wales.
Choi S. Leung, 52, has served as the Assistant Vice President of Marketing
and Purchasing since 1992 and is responsible for customer relations of the
Hallmark account, and purchasing. Prior thereto, Mr. Leung worked for 12 years
for the Hong Kong-based purchasing arm of Hallmark as a buyer and manager for
its PRC operations.
Pei J. Yu, 50, has served as the Assistant Vice President of Production
since October 1993, and is responsible for production in all of the Company's
manufacturing facilities. Prior to joining the Company in 1983, Mr. Yu worked as
an engineer in various companies in the PRC for 15 years. Mr. Yu received a B.S.
degree from the East China Chemical Engineering University.
Alexander M. K. Ngan, 45, has served as a Director since October 1995. Mr.
Ngan is a partner of ChinaVest, which he joined in 1993. Mr. Ngan is a director
of several ChinaVest portfolio companies. Prior thereto, Mr. Ngan worked for
over 20 years in banking and financial consulting in Canada and Hong Kong. Mr.
Ngan received a Bachelors of Mathematics degree from the University of Waterloo,
Ontario. Mr. Ngan is a representative of ChinaVest.
Henry H. L. Hu, 52, has served as a Director since August 1993. Mr. Hu has
over 25 years of experience in the light manufacturing industry in Hong Kong and
the PRC. Prior to becoming an entrepreneur, Mr. Hu held senior executive
positions in several multi-national toy companies.
George B. Volanakis, 48, has served as a Director since November 1992. Mr.
Volanakis joined Ertl in 1988 and has served as President and Chief Executive
Officer of Ertl since 1993. Prior to joining Ertl, Mr. Volanakis was Senior Vice
President of Marketing for Mattel Inc. Mr. Volanakis has served as President of
Matchbox Toys U.S.A., Ltd. and as President and Chief Operating Officer of
Playskool Inc., a subsidiary division of Milton Bradley Company, Inc. Mr.
Volanakis is the Chairman of the Toy Manufacturing Association in the United
States. Mr. Volanakis received a B.A. degree from Union College. Mr. Volanakis
is a representative of Ertl.
Domina W. K. Leung, 36, has been a Director since October 1994. Ms. Leung
joined the Company in 1980 and is responsible for finance, personnel and
administration. Ms. Leung has earned a London Chamber of Commerce certificate in
accounting. Ms. Leung resigned from her executive officer position in the
Company in July, 1996, but remains as a Director on the Board.
BOARD OF DIRECTORS
The Directors of the Company who are not executive officers do not receive
compensation for serving on the Board of Directors or any committee thereof. All
non-management directors are reimbursed for their expenses for each Board of
Directors meeting attended.
Pursuant to the listing requirements of the Nasdaq National Market, the
Company is required to have at least two independent directors on its Board of
Directors and to establish an audit committee, at least a majority of whose
members are independent of management. Prior to the Offering, Mr. Ngan and two
other directors will be appointed to be on the Audit Committee of the Board of
Directors.
EXECUTIVE COMPENSATION
The aggregate amount of compensation paid by the Company to all directors,
executive officers and significant employees as a group in FY 1996 was $939,145,
of which $182,859 was paid as discretionary bonuses. In addition, $122,345 was
contributed to the Company's provident fund (i.e., the Company's defined
contribution benefit plan administered by Jardine Matheson) in FY 1996 on behalf
of such persons.
The Company's executive officers and other key employees participate in the
Company's bonus plan, which generally provides for the payment of bonuses in an
aggregate amount not to exceed ten percent of the Company's pre-tax income. The
Chief Executive Officer recommends the size of the bonus pool to the
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Company's Board of Directors for its approval and the allocation of the bonus
amounts to the Compensation Committee for its approval. An employee's bonus
amount is determined on the basis of the employee's position, performance during
the year, length of service and other factors. The Compensation Committee is
comprised of Messrs. Sun and Ngan.
OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY
No officer or director of the Company currently has any option or warrant
to purchase any securities of the Company. The Company intends to adopt an
employee stock option plan following the closing of the Offering. The plan will
provide for the issuance of options up to 10% of the outstanding Shares
following the Offering.
LIMITATION OF LIABILITY
The organizational documents of the Company contain provisions limiting the
personal liability of directors to the Company or its shareholders and
indemnifying directors, officers, employees and agents of the Company for acts
performed in such capacity, to the fullest extent permitted by law. The
Underwriting Agreement provides for indemnification by the Underwriters of the
Company, its directors and officers, and by the Company of the Underwriters, for
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), and affords certain rights of
contributions with respect thereto.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
At present there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company for which indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that may result in a claim of indemnification by any
director or officer.
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PRINCIPAL SHAREHOLDERS
The following table sets forth beneficial ownership of Shares as of
December 11, 1996 and immediately following the completion of this offering, by
(i) each person known by the Company to own beneficially more than 10% of the
outstanding Shares and (ii) the officers and directors of the Company as a
group.
Zindart Pte Limited ("Zindart Singapore") owns 100% of the Shares prior to
the offering, and after the Closing Date will own 78.1% of the Shares, thereby
retaining control of the Company. ZICHL is the largest shareholder of Zindart
Singapore by virtue of its ownership of 76.0% of the shares of Zindart
Singapore. Funds under the management of ChinaVest own 67.81% of the shares of
ZICHL.
The Company is not aware of any present arrangement that may at a
subsequent date result in a change of control of the Company.
PERCENTAGE OF SHARES
OUTSTANDING (2)
---------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------ ------------------- -------- --------
Zindart Singapore(3)........................................ 5,000,000 100.0% 78.1%
ZICHL (4)................................................. 5,000,000 100.0% 78.1%
ChinaVest IV Funds (5)................................. 5,000,000 100.0% 78.1%
All executive officers and directors as a group ((2)
persons) (6).............................................. 5,000,000 100.0% 78.1%
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(1) Beneficial ownership is determined pursuant to Rule 13d-3 of the Exchange
Act.
(2) Based on 5,000,000 Shares outstanding before the offering and 6,400,000
Shares outstanding after the offering.
(3) Zindart Singapore is an investment holding company incorporated in
Singapore. The shareholders of Zindart Singapore are ZIC Holdings Limited
(76.0%), Longvest Management Limited (14.0%) and Ertl (Hong Kong) Limited
(10%). The address of Zindart Singapore is 138 Cecil St., #18-00 Cecil
Court, Singapore 069538.
(4) ZICHL is an investment holding company incorporated in the Cayman Islands.
The address of ZICHL is P.O. Box 309, Ugland House, South Church St.,
George Town, Grand Cayman, Cayman Islands, British West Indies. The shares
of ZICHL are owned by four shareholders, whose indirect pecuniary interest
in the Company is outlined below:
PERCENTAGE OF SHARES
OUTSTANDING
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SHARES BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
-------------------------------------------------- ------------------- -------- --------
ChinaVest IV Funds................................ 2,577,000 51.5% 40.3%
Advent Funds...................................... 744,000 14.9% 11.6%
Long Gain Limited................................. 239,500 4.8% 3.7%
Cititrend International Holdings Ltd.............. 239,500 4.8% 3.7%
ChinaVest IV Funds are described in note (5).
Advent Funds consist of the following three limited partnerships: Advent
International Investors II, L.P., a Massachusetts limited partnership;
Advent Asia/Pacific Fund L.P., a Bermuda limited partnership; and
Asia/Pacific Special Situations Fund, L.P., a Delaware limited partnership,
which together hold 19.6% of ZICHL. The address of Advent Funds is c/o
Advent International Corporation, 5th Floor, 101 Federal St., Boston,
Massachusetts 02110.
Long Gain Limited, incorporated in the British Virgin Islands, is the
personal investment holding company of Mr. Henry H.L. Hu. The address of
Long Gain Limited is Creque Building, P.O. Box 116, Roadtown, Tortola,
British Virgin Islands.
Cititrend International Holdings Ltd., incorporated in Bermuda, is the
personal investment holding company of Mr. Carl Tong. The address of
Cititrend International Holdings Ltd. is 12B Thomson Commercial Building,
4-10 Thomson Road, Wanchai, Hong Kong.
(5) The ChinaVest IV Funds consist of the following three limited partnerships:
ChinaVest IV, L.P., a Delaware partnership; ChinaVest IV-A, L.P., a
Delaware limited partnership, and ChinaVest IV-B,
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L.P., a Bermuda limited partnership The address of ChinaVest IV Funds is
c/o ChinaVest Ltd., 19/F, Dina House, Duddell Street, Central, Hong Kong.
(6) Alexander M.K. Ngan is a partner of ChinaVest. On that basis, Mr. Ngan may
be deemed to own beneficially the Shares held by ChinaVest. Mr. Ngan
disclaims beneficial ownership of such Shares, except to the extent of his
pecuniary interest therein. Henry H.L. Hu is a Director of the Company and
of ZICHL. On that basis, Mr. Hu may be deemed to own beneficially the
shares held by ZICHL. Mr. Hu disclaims beneficial ownership of such Shares,
except to the extent of his pecuniary interest therein.
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CERTAIN TRANSACTIONS
Ertl has been one of the Company's two largest customers in the past three
fiscal years. Ertl beneficially owns 10% of the Company's Shares and has a
representative on the Company's Board of Directors (the "Board"). All sales
transactions to Ertl are negotiated on an arm's length basis.
In 1992, Zindart granted Mr. George Sun an option to buy from Zindart a
leasehold apartment in Hong Kong, at Zindart's original cost. In 1995, Mr. Sun
exercised his option to buy this leasehold apartment pursuant to the terms of
the option.
In 1994, the Company sold its interest in four associated companies,
Zindart Investment (China) Company Limited, G&D Children Products Company
Limited, Zindart Investment Company Limited and Yuehai Recreation World Limited
to Zindart Entertainment & Leisure Limited ("ZEL"), a company controlled by
ZICHL. The interests were sold by the Company at its cost, approximately
$350,000, and the Company recorded the sale as a loan by the Company to ZICHL
with an interest rate of 2.0% above the Hong Kong prime lending rate.
Subsequently, the Company made other advances to ZEL with similar interest rates
such that as of September 30, 1995, the balance owing to the Company by ZEL was
approximately $2,994,000. On September 30, 1995, the Company declared and
distributed a dividend in kind of the debt owing from ZEL at its face value.
The Company advanced ZICHL $95,000 in fiscal 1994 on an interest-free basis
for working capital purposes. These advances were repaid in fiscal 1995.
In February 1996, the Company borrowed $259,000 from Hua Yang Printing Co.,
Ltd., a company whose principal shareholders are funds under the management of
ChinaVest and Advent. This loan was unsecured and had an interest rate of 2.0%
above the Hong Kong prime lending rate. This loan was repaid by the Company in
March 1996.
In FY 1995, the Company loaned $517,000 to Sinomex, Inc., a company in
which ZICHL owned a 28.6% equity interest at the time the loan was made. The
loan carried an interest rate of 2.0% above the Hong Kong prime lending rate,
and was used for working capital purposes. The principal amount of the loan,
along with all accrued interest, was repaid in full in FY 1996.
The Company intends that all transactions with affiliates will be approved
by a committee of disinterested directors.
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DESCRIPTION OF SHARES
As of December 16, 1996, the authorized shares of the Company consisted of
5,000,000 Ordinary Shares with a par value of approximately $0.065, all of which
were outstanding. The Company intends to increase the number of authorized
Ordinary Shares to 10,000,000 prior to the closing of the Offering. The
following statements are summaries of certain provisions of the Company's
Memorandum of Association and Articles of Association and the Companies
Ordinance (Chapter 32) of the laws of Hong Kong (the "Companies Ordinance").
These summaries do not purport to be complete and are qualified in their
entirety by reference to the full Memorandum and Articles of Association which
have been filed as exhibits to the Company's Registration Statement, of which
this Prospectus is a part.
GENERAL
All of the Ordinary Shares of the Company offered hereby, when issued, will
be fully paid and non-assessable. Certificates representing the Shares are
issued in registered form. Shareholders of the Company who are non-residents of
Hong Kong for exchange control purposes may freely hold and vote their Shares.
The Shares are not entitled to any sinking fund or redemption rights.
Application has been made to list the ADSs on the Nasdaq National Market.
The Shares will not be listed.
VOTING RIGHTS
Under the Companies Ordinance, any action to be taken by the shareholders
in general meeting requires the affirmative vote of either an ordinary or a
special resolution passed at such meeting. An ordinary resolution is one passed
by the majority of such members as are entitled to, and do, vote in person or by
proxy at a general meeting of the Company. A special resolution is one passed by
not less than three-quarters of such members as are entitled to, and do, vote in
person or by proxy at a general meeting of the Company. Generally, resolutions
of the members of the Company are passed by ordinary resolution. However, the
Companies Ordinance stipulates that certain matters may only be passed as
special resolutions.
Subject to any special voting rights granted to any additional class of
shares, on a show of hands every member who is present in person at a general
meeting of the Company shall have one vote, and on a poll every member who is
present in person or by proxy shall have one vote, for every share in the
capital of the Company of which it is the holder.
Any action to be taken by the shareholders requires the affirmative vote of
a majority of the Shares at a meeting of shareholders. There are no cumulative
voting rights. Accordingly, the holders of a majority of the shares voting for
the election of directors can elect all the directors if they choose to do so.
MODIFICATION OF RIGHTS
Subject to the Companies Ordinance, any of the rights from time to time
attaching to any class of Ordinary Shares may (whether or not the Company is
being wound up) be altered or abrogated with the consent in writing of the
holders of not less than three-quarters of the issued Ordinary Shares of that
class or with the sanction of a special resolution passed at a separate general
meeting of the holders of Ordinary Shares.
ISSUE OF SHARES
Under the Companies Ordinance, the directors of the Company may, without
prior approval of the shareholders, offer to issue new shares in the Company to
existing shareholders pro rata. The directors may not issue new shares of the
Company in any other manner without the prior approval of the shareholders in a
general meeting. Any such approval given in a general meeting shall continue in
force until the conclusion of the following annual general meeting or the
expiration of the period within which the next annual general meting is required
by law to be held. If such approval is given, the unissued Ordinary Shares of
the Company
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shall be at the disposal of the board of directors, which may offer, allot,
grant options over or otherwise dispose of them to such persons, at such times
and for such consideration and upon such terms and conditions as the directors
may determine.
The shareholders may remove any director before the expiration of his
period office only upon the vote of not less than three-quarters of the issued
Ordinary Shares.
DIVIDENDS
Subject to the Companies Ordinance and as set out in the Articles of
Association, the shareholders in a general meeting may from time to time declare
dividends to be paid to the members according to their rights and interests in
the profits available for distribution, but no dividend shall be declared in
excess of the amount recommended by the Board.
In addition to dividends declared in a general meeting upon the
recommendation of the board of directors, the board of directors may from time
to time declare and pay to the members such interim dividends as appear to the
board of directors to be justified by the financial position of the Company; the
board of directors may also pay any fixed dividend which is payable on any
Ordinary Shares of the Company on any other dates, whenever the Company's
financial position, in the opinion of the board of directors, justifies such
payment.
The Company's loan facility with The Hong Kong and Shanghai Banking
Corporation Limited restricts the Company to an annual dividend not in excess of
25% of net profits. See "Dividends and Dividend Policy".
MISCELLANEOUS
The shareholders have no redemption rights, conversion rights or preemptive
rights on the transfer of securities of the Company.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of certain provisions of the Deposit Agreement
(the "Deposit Agreement"), to be entered into by the Company, The Bank of New
York, as depositary (the "Depositary"), and the owners (the "Owners") and
holders from time to time of American Depositary Receipts ("ADRs") issued
thereunder.
This summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the Deposit Agreement which has been
filed as an exhibit to the Company's Registration Statement of which this
Prospectus is a part, including the form of ADRs. Terms used herein and not
otherwise defined will have the meanings set forth in the Deposit Agreement.
Copies of the Deposit Agreement, the Memorandum of Association and the Articles
of Association of the Company will be available for inspection at the Corporate
Trust Office of the Depositary, currently located at 101 Barclay Street, New
York, New York 10286, and at the principal office of the agent of the Depositary
(the "Custodian"), currently located at the Hong Kong office of The Hong Kong
and Shanghai Banking Corporation Limited. The Depositary's principal executive
office is located at 48 Wall Street, New York, New York 10286.
AMERICAN DEPOSITARY RECEIPTS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the Deposit
Agreement. Each ADS will represent one Share or evidence of the right to receive
one Share. Only persons in whose names ADRs are registered on the books of the
Depositary will be treated by the Depositary and the Company as Owners.
DEPOSIT, TRANSFER AND WITHDRAWAL
The Depositary has agreed, subject to the terms and conditions of the
Deposit Agreement, that upon delivery to the Custodian of Shares (or evidence of
rights to receive Shares) and pursuant to appropriate instruments of transfer in
a form satisfactory to the Custodian, the Depositary will, upon payment of the
fees, charges and taxes provided in the Deposit Agreement, execute and deliver
at its Corporate Trust Office to, or upon the written order of, the person or
persons named in the notice of the Custodian delivered to the Depositary or
requested by the person depositing such Shares with the Depositary, an ADR or
ADRs, registered in the name or names of such person or persons, and evidencing
the authorized number of ADSs requested by such person or persons.
Upon surrender at the Corporate Trust Office of the Depositary of an ADR
for the purpose of withdrawal of the Shares represented by the ADSs evidenced by
such ADR, and upon payment of the fees of the Depositary for the surrender of
ADRs, governmental charges and taxes provided in the Deposit Agreement, and
subject to the terms and conditions of the Deposit Agreement, the Owner of such
ADR will be entitled to delivery, to it or upon its order, of the number of
Shares at the time represented by the ADS or ADSs evidenced by such ADR. The
forwarding of share certificates, other securities, property, cash and other
documents of title for such delivery will be at the risk and expense of the
Owner.
Subject to the terms and conditions of the Deposit Agreement and any
limitations established by the Depositary, the Depositary may execute and
deliver ADRs prior to the receipt of Shares (a "Pre-Release") and deliver Shares
upon the receipt and cancellation of ADRs which have been Pre-Released, whether
or not such cancellation is prior to the termination of such Pre-Release or the
Depositary knows that such ADR has been Pre-Released. The Depositary may receive
ADRs in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release must
be (a) preceded or accompanied by a written representation from the person to
whom the ADRs or Shares are to be delivered that such person, or its customer,
owns the Shares or ADRs to be remitted, as the case may be, (b) at all times
fully collateralized with cash or such other collateral as the Depositary deems
appropriate, (c) terminable by the Depositary on not more than five business
days' notice and (d) subject to such further indemnities and credit regulations
as the Depositary deems appropriate. The number of ADSs which are outstanding at
any time as a result of Pre-Releases will not normally exceed thirty
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percent of the Shares deposited under the Deposit Agreement; provided, however,
that the Depositary reserves the right to change or disregard such limit from
time to time as it deems appropriate.
The Depositary may retain for its own account any compensation received by
it in connection with the foregoing.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
The Depositary will convert or cause to be converted into U.S. Dollars, to
the extent that in its judgment it can do so on a reasonable basis and can
transfer the resulting U.S. Dollars to the United States, all cash dividends and
other cash distributions denominated in a currency other than Dollars, including
Hong Kong Dollars ("Foreign Currency"), that it receives in respect of the
deposited Shares, and to distribute the resulting U.S. Dollar amount (net of the
expenses incurred by the Depositary in converting such Foreign Currency) to the
Owners entitled thereto, in proportion to the number of ADSs representing such
Shares evidenced by ADRs held by them, respectively. Such distribution may be
made upon an averaged or other practicable basis without regard to any
distinctions among Owners on account of exchange restrictions or the date of
delivery of any ADR or ADRs or otherwise. The amount distributed to the Owners
of ADRs will be reduced by any amount on account of taxes to be withheld by the
Company or the Depositary. See "-- Liability of Owner for Taxes."
If the Depositary determines that in its judgment any Foreign Currency
received by the Depositary cannot be converted on a reasonable basis into U.S.
Dollars, or if any approval or license of any government or agency thereof which
is required for such conversion is denied or in the opinion of the Depositary is
not obtainable, or if any such approval or license is not obtained within a
reasonable period as determined by the Depositary, the Depositary may distribute
the Foreign Currency received by the Depositary to, or in its discretion may
hold such Foreign Currency uninvested and without liability for interest thereon
for the respective accounts of, the Owners entitled to receive the same. If any
such conversion of Foreign Currency, in whole or in part, cannot be effected for
distribution to some of the Owners entitled thereto, the Depositary may in its
discretion make such conversion and distribution in U.S. Dollars to the extent
permissible to the Owners entitled thereto, and may distribute the balance of
the Foreign Currency received by the Depositary to, or hold such balance
uninvested and without liability for interest thereon for, the respective
accounts of, the Owners entitled thereto.
If any distribution upon any Shares consists of a dividend in, or free
distribution of, Shares, the Depositary may, and will if the Company so
requests, distribute to the Owners of outstanding ADRs entitled thereto, in
proportion to the number of ADSs evidenced by the ADRs held by them,
respectively, additional ADRs evidencing an aggregate number of ADSs that
represents the number of Shares received as such dividend or free distribution,
subject to the terms and conditions of the Deposit Agreement with respect to the
deposit of Shares and the issuance of ADSs evidenced by ADRs, including the
withholding of any tax or other governmental charge and the payment of fees of
the Depositary as provided in the Deposit Agreement. The Depositary may withhold
any such distribution of ADRs if it has not received satisfactory assurances
from the Company that such distribution does not require registration under the
Securities Act or is exempt from registration under the provisions of such Act.
In lieu of delivering ADRs for fractional ADSs in the event of any such dividend
or free distribution, the Depositary will sell the number of Shares represented
by the aggregate of such fractions and distribute the net proceeds in accordance
with the Deposit Agreement. If additional ADRs are not so distributed, each ADS
will thenceforth also represent the additional Shares distributed upon the
Shares represented thereby.
If the Company offers or causes to be offered to the holders of any Shares
any rights to subscribe for additional Shares or any rights of any other nature,
the Depositary will have discretion as to the procedure to be followed in making
such rights available to any Owners of ADRs or in disposing of such rights for
the benefit of any Owners and making the net proceeds available in Dollars to
such Owners or, if by the terms of such rights offering or for any other reason,
the Depositary may not either make such rights available to any Owners or
dispose of such rights and make the net proceeds available to such Owners, then
the Depositary shall allow the rights to lapse. If at the time of the offering
of any rights the Depositary determines in its discretion that it is lawful and
feasible to make such rights available to all Owners or to all or certain Owners
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but not to other Owners, the Depositary may distribute to any Owner to whom it
determines the distribution to be lawful and feasible, in proportion to the
number of ADSs held by such Owner, warrants or other instruments therefore in
such form as it deems appropriate. If the Depositary determines in its
discretion that it is not lawful and feasible to make such rights available to
all or certain Owners, it may sell the rights, warrants or other instruments in
proportion to the number of ADSs held by the Owners to whom it has determined it
may not lawfully or feasibly make such rights available, and allocate the net
proceeds of such sales for the account of such Owners otherwise entitled to such
rights, warrants or other instruments, upon an averaged or other practical basis
without regard to any distinctions among such Owners because of exchange
restrictions or the date of delivery of any ADR or ADRs, or otherwise.
In circumstances in which rights would not otherwise be distributed, if an
Owner of ADRs requests the distribution of warrants or other instruments in
order to exercise the rights allocable to the ADSs of such Owner, the Depositary
will make such-rights available to such owner upon written notice from the
Company to the Depositary that (a) the Company has elected in its sole
discretion to permit such rights to be exercised and (b) such owner has executed
such documents as the Company has determined in its sole discretion are
reasonably required under applicable law. Upon instruction pursuant to such
warrants or other instruments to the Depositary from such Owner to exercise such
rights, upon payment by such Owner to the Depositary for the account of such
Owner of an amount equal to the purchase price of the Shares to be received in
exercise of the rights, and upon payment of the fees of the Depositary as set
forth in such warrants or other instruments, the Depositary will, on behalf of
such owner, exercise the rights and purchase the Shares, and the Company shall
cause the Shares so purchased to be delivered to the Depositary on behalf of
such Owner. As agent for such Owner, the Depositary will cause the Shares so
purchased to be deposited, and will execute and deliver ADRs to such Owner,
pursuant to the Deposit Agreement.
The Depositary will not offer rights to Owners unless both the rights and
the securities to which such rights relate are either exempt from registration
under the Securities Act with respect to a distribution to all Owners or are
registered under the provisions of such Act; provided, that nothing in the
Deposit Agreement will create, or be construed to create, any obligation on the
part of the Company to file a registration statement with respect to such rights
or underlying securities or to endeavor to have such a registration statement
declared effective. If an Owner of ADRs requests the distribution of warrants or
other instruments, notwithstanding that there has been no such registration
under the Securities Act, the Depositary will not effect such distribution
unless it has received an opinion from recognized counsel in the United States
for the Company upon which the Depositary may rely that such distribution to
such Owner is exempt from such registration. The Depositary will not be
responsible for any failure to determine that it may be lawful or feasible to
make such rights available to owners in general or any owner in particular.
Whenever the Depositary receives any distribution other than cash, Shares
or rights in respect of the Shares, the Depositary will cause the securities or
property received by it to be distributed to the Owners entitled thereto, after
deduction or upon payment of any fees and expenses of the Depositary or any
taxes or other governmental charges, in proportion to their holdings,
respectively, in any manner that the Depositary may deem equitable and
practicable for accomplishing such distribution; provided, however, that if in
the opinion of the Depositary such distribution cannot be made proportionately
among the Owners entitled thereto, or if for any other reason (including, but
not limited to, any requirement that the Company or the Depositary withhold an
amount on account of taxes or other governmental charges or that such securities
must be registered under the Securities Act in order to be distributed to Owners
or the Depositary deems such distribution not to be feasible), the Depositary
may adopt such method as it may deem equitable and practicable for the purpose
of effecting such distribution, including, but not limited to, the public or
private sale of the securities or property thus received, or any part thereof,
and the net proceeds of any such sale (net of the fees of the Depositary) will
be distributed by the Depositary to the Owners entitled thereto as in the case
of a distribution received in cash.
If the Depositary determines that any distribution of property (including
Shares and rights to subscribe therefor) is subject to any taxes or other
governmental charges which the Depositary is obligated to withhold, the
Depositary may, by public or private sale, dispose of all or a portion of such
property in such amount and in such manner as the Depositary deems necessary and
practicable to pay such taxes or charges and the
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Depositary will distribute the net proceeds of any such sale after deduction of
such taxes or charges to the owners entitled thereto in proportion to the number
of ADSs held by them, respectively.
Upon any change in nominal or par value, split-up, consolidation or any
other reclassification of Shares, or upon any recapitalization, reorganization,
merger or consolidation or sale of assets affecting the Company or to which it
is a party, any securities which shall be received by the Depositary or
Custodian in exchange for, in conversion of, or in respect of Shares will be
treated as new Shares under the Deposit Agreement, and the ADSs will thenceforth
represent, in addition to the existing Shares, the right to receive the new
Shares so received in exchange or conversion, unless additional ADRs are
delivered pursuant to the following sentence. In any such case the Depositary
may, and will, if the Company so requests, execute and deliver additional ADRs
as in the case of a dividend in Shares, or call for the surrender of outstanding
ADRs to be exchanged for new ADRs specifically representing such new Shares.
RECORD DATES
Whenever any cash dividend or other cash distribution shall become payable
or any distribution other than cash shall be made, or whenever rights shall be
issued with respect to the Shares, or whenever for any reason the Depositary
causes a change in the number of Shares that are represented by each ADS, or
whenever the Depositary shall receive notice of any meeting of holders of
Shares, the Depositary will fix a record date, (a) for the determination of the
Owners who will be (i) entitled to receive such dividend, distribution or
rights, or the net proceeds of the sale thereof, or (ii) entitled to give
instructions for the exercise of voting rights at any such meeting, or (b) on or
after which each ADS will represent the changed number of Shares, all subject to
the provisions of the Deposit Agreement.
VOTING OF SHARES
Upon receipt of notice of any meeting of holders of Shares, if requested in
writing by the Company, the Depositary will, as soon as practicable thereafter,
mail to all Owners a notice, the form of which notice will be in the sole
discretion of the Depositary, containing (a) such information included in such
notice of meeting received by the Depositary from the Company, and (b) a
statement that the Owners as of the close of business on a specified record date
will be entitled, subject to any applicable provision of Hong Kong law and of
the Memorandum of Association and Articles of Association of the Company, to
instruct the Depositary as to the exercise of the voting rights, if any,
pertaining to the amount of Shares or other Deposited Securities represented by
their respective ADSs. Upon the written request of an Owner on such record date,
received on or before the date established by the Depositary for such purpose,
the Depositary will endeavor, insofar as practicable, to vote or cause to be
voted the amount of Shares or other Deposited Securities represented by the ADSs
evidenced by such ADRs in accordance with the instructions set forth in such
request. The Depositary will not vote or attempt to exercise the right to vote
that attaches to the Shares or other Deposited Securities, other than in
accordance with such instructions.
There can be no assurance that the Owners generally or any Owner in
particular will receive the notice described in the preceding paragraph
sufficiently prior to the date established by the Depositary for the receipt of
instructions to ensure that the Depositary will vote the Shares in accordance
with the provisions set forth in the preceding paragraph.
REPORTS AND OTHER COMMUNICATIONS
The Depositary will make available for inspection by Owners at its
Corporate Trust Office any reports and communications, including any proxy
soliciting material, received from the Company, which are both (a) received by
the Depositary as the holder of the Shares and (b) made generally available to
the holders of such Shares by the Company. The Depositary will also, upon
written request, send to the Owners copies of such reports when furnished by the
Company pursuant to the Deposit Agreement. Any such reports and communications,
including any proxy soliciting material, furnished to the Depositary by the
Company will be furnished in English when so required pursuant to any
regulations of the Securities and Exchange Commission.
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AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of ADRs and any provisions of the Deposit Agreement may at any
time and from time to time be amended by agreement between the Company and the
Depositary in any respect which they may deem necessary or desirable without the
consent of the Owners; provided, however, that any amendment that imposes or
increases any fees or charges (other than taxes and other governmental charges,
registration fees, cable, telex or facsimile transmission costs, delivery costs
or other such expenses), or which otherwise prejudices any substantial existing
right of Owners, will not take effect as to outstanding ADRs until the
expiration of 30 days after notice of any amendment has been given to the
Owners. Every Owner, at the time any amendment so becomes effective will be
deemed, by continuing to hold such ADR, to consent and agree to such amendment
and to be bound by the Deposit Agreement as amended thereby. In no event will
any amendment impair the right of the Owner to surrender its ADR and receive
therefor the Shares represented thereby, except to comply with mandatory
provisions of applicable law.
The Depositary will at any time at the direction of the Company terminate
the Deposit Agreement by mailing notice of such termination to the Owners of the
ADRs then outstanding at least 90 days prior to the date fixed in such notice
for such termination. The Depositary may likewise terminate the Deposit
Agreement by mailing notice of such termination to the Company and the Owners of
all ADRs then outstanding if, any time after 90 days have expired after the
Depositary will have delivered to the Company a written notice of its election
to resign and a successor depositary will not have been appointed and accepted
its appointment, in accordance with the terms of the Deposit Agreement. If any
ADRs remain outstanding after the date of termination of the Deposit Agreement,
the Depositary thereafter will discontinue the registration of transfers of
ADRs, will suspend the distribution of dividends to the Owners thereof and will
not give any further notices or perform any further acts under the Deposit
Agreement, except the collection of dividends and other distributions pertaining
to the Shares, the sale of rights and the delivery of underlying Shares,
together with any dividends or other distributions received with respect thereto
and the net proceeds of the sale of any rights or other property, in exchange
for surrendered ADRs (after deducting, in each case, the fees of the Depositary
for the surrender of an ADR and other expenses set forth in the Deposit
Agreement and any applicable taxes or governmental charges). At any time after
the expiration of one year from the date of termination, the Depositary may sell
the Shares then held thereunder and hold uninvested the net proceeds of such
sale, together with any other cash, unsegregated and without liability for
interest, for the pro rata benefit of the Owners that have not theretofore
surrendered their ADRs, such Owners thereupon becoming general creditors of the
Depositary with respect to such net proceeds. After making such sale, the
Depositary will be discharged from all obligations under the Deposit Agreement,
except to account for net proceeds and other cash (after deducting, in each
case, the fee of the Depositary and other expenses set forth in the Deposit
Agreement for the surrender of an ADR and any applicable taxes or other
governmental charges).
CHARGES OF DEPOSITARY
The Depositary will charge any party depositing or withdrawing Shares or
any party surrendering ADRs or to whom ADRs are issued (including, without
limitation, issuance pursuant to a stock dividend or stock split declared by the
Company or an exchange of stock regarding the ADRs or Shares or a distribution
of ADRs pursuant to the Deposit Agreement) whichever applicable: (a) taxes and
other governmental charges; (b) such registration fees as may from time to time
be in effect for the registration of transfers of Shares generally on the share
register of the Company or Foreign Registrar and applicable to transfers of
Shares to the name of the Depositary or its nominee or the Custodian or its
nominee on the making of deposits or withdrawals; (c) such cable, telex and
facsimile transmission expenses as are expressly provided in the Deposit
Agreement to be at the expense of persons depositing Shares or Owners; (d) such
expenses as are incurred by the Depositary in the conversion of Foreign Currency
pursuant to the Deposit Agreement; (e) a fee of $5.00 or less per 100 ADSs (or
portion thereof) for the execution, delivery and surrender of ADRs pursuant to
the Deposit Agreement; (f) a fee of $.02 or less per ADS (or portion thereof)
for any cash distribution made pursuant to the Deposit Agreement; (g) a fee of
$1.50 or less per certificate for an ADR or ADRs for transfers made pursuant to
the Deposit Agreement; and (h) a fee for the distribution of securities pursuant
to the Deposit Agreement, such fee being in an amount equal to the fee for the
execution and delivery of ADSs
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referred to above which would have been charged as a result of the deposit of
such securities (for purposes of this clause (h) treating all such securities as
if they were Shares), but which securities are instead distributed by the
Depositary to Owners and the net proceeds distributed.
The Depositary, pursuant to the Deposit Agreement, may own and deal in any
class of securities of the Company and its affiliates and in ADRs.
LIABILITY OF OWNER FOR TAXES
If any tax or other governmental charge shall become payable by the
Custodian or the Depositary with respect to any ADR or any Shares represented by
the ADRs, such tax or other governmental charge will be payable by the Owner of
such ADR to the Depositary. The Depositary may refuse to effect any transfer of
such ADR or any withdrawal of Shares underlying such ADR until such payment is
made, and may withhold any dividends or other distributions, or may sell for the
account of the Owner thereof any part or all of the Shares underlying such ADR
and may apply such dividends, distributions or the proceeds of any such sale to
pay any such tax or other governmental charge and the owner of such ADR will
remain liable for any deficiency.
GENERAL
Neither the Depositary nor the Company will be liable to any Owner or
holder of any ADR, if by reason of any provision of any present or future law or
regulation of the United States, or any other country, or of any governmental or
regulatory authority or stock exchange, or by reason of any provision, present
or future, of the Memorandum of Association or Articles of Association of the
Company, or by reason of any act of God or war or other circumstances beyond its
control, the Depositary or the Company shall be prevented, delayed or forbidden
from, or be subject to any civil or criminal penalty on account of, doing or
performing any act or thing which by the terms of the Deposit Agreement it is
provided will be done or performed; nor will the Depositary or the Company incur
any liability to any Owner or holder of any ADR by reason of any nonperformance
or delay, caused as aforesaid, in the performance of any act or thing which by
the terms of the Deposit Agreement it is provided will or may be done or
performed, or by reason of any exercise of, or failure to exercise, any
discretion provided for under the Deposit Agreement. Where, by the terms of a
distribution pursuant to the Deposit Agreement, or an offering or distribution
pursuant to the Deposit Agreement, or for any other reason, such distribution or
offering may not be made available to Owners, and the Depositary may not dispose
of such distribution or offering on behalf of such Owners and make the net
proceeds available to such Owners, then the Depositary will not make such
distribution or offering, and will allow the rights, if applicable, to lapse.
The Company and the Depositary assume no obligation nor will they be
subject to any liability under the Deposit Agreement to Owners or holders of
ADRs except that they agree to perform their respective obligations specifically
set forth under the Deposit Agreement without negligence or bad faith.
The ADRs are transferable on the books of the Depositary, provided that the
Depositary may close the transfer books at any time or from time to time when
deemed expedient by it in connection with the performance of its duties. As a
condition precedent to the execution and delivery, registration or transfer,
split-up, combination or surrender of any Shares, the Depositary, the Custodian
or the Registrar may require payment from the person presenting the ADR or the
depositor of the Shares of a sum sufficient to reimburse it for any tax or other
governmental charge and any stock transfer or registration fee with respect
thereto (including any such tax or charge and fee with respect to Shares being
deposited or withdrawn) and payment of any applicable fees payable by the Owners
and holders of ADRs. The Depositary may refuse to deliver ADRs, to register the
transfer of any ADR or to make any distribution on, or related to, Shares until
it has received such proof of citizenship or residence, exchange control
approval or other information as it may deem necessary or proper. The delivery,
transfer, registration of transfer of outstanding ADRs and surrender of ADRs
generally may be suspended or refused during any period when the transfer books
of the Depositary, the Company or the Foreign Registrar are closed or if any
such action is deemed necessary or advisable by the Depositary or the Company,
at any time or from time to time. Notwithstanding any other provision of this
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Deposit Agreement or the ADRs, the surrender of outstanding ADRs and withdrawal
of the deposited Shares may not be suspended subject only to (i) temporary
delays caused by closing the transfer books of the Depositary or the Company or
the deposit of Shares in connection with voting at a shareholders' meeting, or
the payment of dividends, (ii) the payment of fees, taxes and similar charges,
and (iii) compliance with any U.S. or foreign laws or governmental regulations
relating to the ADRs or to the withdrawal of the deposited Shares. Without
limitation of the foregoing, the Depositary shall not knowingly accept for
deposit under the Deposit Agreement any Shares required to be registered under
the provisions of the Securities Act of 1933, unless a registration statement is
in effect as to such Shares.
The Depositary will keep books, at its Corporate Trust Office, for the
registration and transfer of ADRs, which at all reasonable times will be open
for inspection by the Owners, provided that such inspection will not be for the
purpose of communicating with Owners in the interest of a business object other
than the business of the Company or a matter related to the Deposit Agreement or
the ADRs.
The Depositary may appoint one or more co-transfer agents for the purpose
of effecting transfers, combinations and split-ups of ADRs at designated
transfer offices on behalf of the Depositary. In carrying out its functions, a
co-transfer agent may require evidence of authority and compliance with
applicable laws and other requirements by Owners or persons entitled to ADRs and
will be entitled to protection and indemnity to the same extent as the
Depositary.
GOVERNING LAW
The Deposit Agreement will be governed by the laws of the State of New
York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 6,400,000 Shares
issued and outstanding, assuming no exercise of the Over-allotment Option. Of
such Shares, the 1,400,000 Shares represented by ADSs offered hereby will be
freely tradable without restriction or further registration under the Securities
Act, except for any Shares subsequently purchased by "affiliates" of the
Company, which may include the Company's existing shareholders, officers or
directors. All other Shares (including Shares purchased by certain officers and
employees of the Underwriter and its affiliates) will become eligible for sale
in the public market, although, with respect to sales of such Shares by
affiliates of the Company into the U.S. public market, such shares will be
subject to the volume and other limitations under Rule 144 promulgated by the
Securities and Exchange Commission under the Securities Act ("Rule 144").
Subject to certain exceptions, the Company and each affiliate prior to this
Offering have agreed not to offer, sell, contract to sell, grant options to
purchase, or otherwise dispose of any Shares or ADSs of the Company or any
securities convertible into or exercisable or exchangeable for such Shares or
ADSs or in any other manner transfer all or a portion of the economic benefits
associated with the ownership of any such Shares or ADSs, except to the
Underwriter pursuant to the Underwriting Agreement, for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representative.
Following expiration of such lockup period, the Company will be able to
sell Shares held by it as treasury shares, if any, and to issue additional
Shares. Any Shares held by affiliates of the Company may be sold in the U.S.
public markets only pursuant to an effective registration statement or an
exemption from the registration requirements of the Securities Act, including
Rule 144, or outside the United States in accordance with Regulation S
promulgated by the Securities and Exchange Commission under the Securities Act.
In general, Rule 144, as in effect on the date of this Prospectus, permits
a person who has beneficially owned for at least two years (subject to
applicable rules on tacking) restricted shares acquired from the Company or an
affiliate of the Company to sell within any three-month period a number of
shares not exceeding the greater of: (i) one percent of the then-outstanding
shares of the class (approximately 64,000 Shares immediately following
completion of this offering, assuming no exercise of this Over-allotment Option)
and (ii) the average weekly trading volume of such shares on the Nasdaq National
Market during the four calendar weeks preceding the date on which a notice of
sale is filed with the Securities and Exchange
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Commission. Sales under Rule 144 are subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information on the Company. A person who is not deemed an affiliate of the
Company at any time during the 90 days preceding a sale and who beneficially
owns shares that were not acquired from the Company or an affiliate of the
Company within the past three years is entitled to sell such shares under Rule
144(k) without regard to volume limitations, manner of sale provisions, notice
requirements or the availability of current public information on the Company.
There can be no assurance that a significant public market for the ADSs or
the Shares will be sustained after the Offering. No precise predictions can be
made about the effect, if any, that market sales of ADSs or Shares or the
availability of ADSs or Shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of a substantial number of ADSs or Shares
in the public market, or the prospect of such sales, may have an adverse impact
on the market price thereof.
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TAXATION
The following discussion under "United States Federal Income Taxation"
generally summarizes the principal United States federal income tax consequences
of an investment in the ADSs. The discussion under "Hong Kong Taxation"
generally summarizes the material Hong Kong tax consequences of an investment in
the ADSs. The discussion under "PRC Taxation" generally summarizes the material
PRC taxes applicable to Company's investment in the PRC. The discussion under
"Hong Kong Taxation" generally summarizes the material Hong Kong taxes
applicable to the Company's operations in Hong Kong. The discussion does not
deal with all possible tax consequences relating to an investment in the ADSs
and does not purport to deal with the tax consequences applicable to all
categories of investors, some of which (such as dealers in securities, insurance
companies and tax-exempt entities) may be subject to special rules. In
particular, the discussion does not address the tax consequences under state or
local law or the laws of countries other than the United States, Hong Kong and
the PRC. Accordingly, prospective investors should consult their own tax
advisors regarding the particular tax consequences to them of an investment in
the ADSs. The following discussion is based upon laws and relevant
interpretations thereof in effect as of the date of this Prospectus, all of
which are subject to change.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion, solely to the extent relating to the U.S., is
based on the advice of McCutchen, Doyle, Brown & Enersen LLP, Palo Alto,
California, and addresses the United States federal income taxation of the
Company and of a beneficial owner of ADSs that is a United States citizen or
resident or a United States domestic corporation who owns the ADSs as a capital
asset (a "United States Investor"). For purposes of the following discussion, a
United States Investor who acquires ADSs shall be deemed to own the Shares
represented thereby. The summary does not address the United States federal
income tax treatment of certain types of investors (such as non-United States
Investors, life insurance companies, tax-exempt investors, banks, broker-dealers
and investors who or that hold Shares as part of hedging or conversion
transactions), all of whom may be subject to tax rules that differ significantly
from those summarized below. Prospective investors, including investors other
than United States Investors, are advised to consult their own tax advisor with
respect to their particular circumstances and with respect to the effects of
state, local or foreign tax laws to which they may be subject.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, court decisions and current administrative
rulings and pronouncements of the United States Internal Revenue Service ("IRS")
in effect as of the date of this Prospectus, all of which are subject to change,
possibly with retroactive effect. There can be no assurance that future changes
in applicable law or administrative and judicial interpretations thereof will
not adversely affect the tax consequences discussed herein. Prospective
purchasers are advised to consult their own tax advisors regarding the tax
consequences of acquiring, holding or disposing of the Shares in light of their
particular circumstances.
Taxation of the Company. The Company will be subject to United States
federal income tax only to the extent it has income which has its source in the
United States or is effectively connected with a United States trade or
business. Income derived by the Company from it's business in the PRC should not
constitute United States source income. It is possible that the Company may
invest the net proceeds of this offering, future earnings from the business, or
proceeds derived from the sale of Shares in United States securities or cash
equivalents. Income derived from United States securities or cash equivalents
will generally constitute United States source income and may therefore be
subject to United States federal income tax unless a statutory exemption
applies.
Taxation of Shareholders. The following discussion does not purport to
address the tax consequences to non-United States Investors or to a person who
owns, directly or indirectly (or is deemed to own after the application of
certain complex attribution rules), the Company's Shares giving the holder the
right to exercise 10 percent or more of the total voting power of the Company's
outstanding Shares (a "10-Percent Shareholder" of the Company), other than as
discussed below under "-- Special United States Federal Income Tax
Considerations -- Controlled Foreign Corporations." Non-United States Investors
and any
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person contemplating becoming a 10-Percent Shareholder are advised to consult
their own tax advisors regarding the tax consequences to them of an investment
in the Shares.
Basis in Shares. A United States Investor will have a basis in the Shares
equal to his or her purchase price for United States federal tax purposes. The
purchase price (and basis) will be allocated among the Shares received on the
basis of their relative fair market values at the time of this offering.
Dividends. A United States Investor receiving a distribution on the Shares
will be required to include such distribution in gross income as a taxable
dividend to the extent such distribution is paid from current or accumulated
earnings and profits of the Company as determined for United States federal
income tax purposes. Distributions in excess of the current and accumulated
earnings and profits of the Company will first be treated, for United States
federal income tax purposes, as a nontaxable return on capital to the extent of
the United States Investor's basis in the Shares and then as gain from the sale
or exchange of a capital asset. Dividends paid by the Company will not be
eligible for the corporate dividends received deduction.
In general, a United States Investor (other than a 10-Percent Shareholder
of the Company) will be entitled to claim a foreign tax credit only for taxes
(such as withholding taxes), if any, imposed on dividends paid to such United
States Investor and not for taxes, if any, imposed on the Company or on any
entity in which the Company has made an investment. Dividends received with
respect to Shares will generally be characterized as "passive income" for
purposes of applying the foreign tax credit limitation. To the extent that the
Company's income is derived from United States sources, dividends which it pays
to United States Investors may be considered United States source income for
purposes of applying the foreign tax credit limitation.
Dispositions of Shares. Subject to the discussion below of the
consequences of the Company being treated as a Passive Foreign Investment
Company or a Foreign Investment Company, gain or loss realized by a United
States Investor (other than a 10-Percent Shareholder of the Company) on the sale
or other disposition of Shares will be subject to United States federal income
tax capital gain or loss in an amount equal to the difference between such
United States Investor's basis in the Shares and the amount realized on the
disposition. Such capital gain or loss will be long-term capital gain or loss if
the United States Investor has held the Shares for more than one year at the
time of the sale or exchange.
SPECIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Passive Foreign Investment Company
The Company has not been a passive foreign investment company ("PFIC") for
United States federal income tax purposes and believes that it will not be
treated as a PFIC, but this conclusion is a factual determination made annually
and thus subject to change. The Company will be a PFIC with respect to a United
States Investor if, for any taxable year in which such United States Investor
held the Company's Shares, either (i) at least 75 percent of the gross income of
the Company for the taxable year is passive income, or (ii) at least 50 percent
of the value (or adjusted basis) of the Company's assets is attributable to
assets that produce or are held for the production of passive income (in each
case taking into account the Company's pro rata share of the gross income and
the value (or adjusted basis) of the assets of any company in which the Company
owns, directly or indirectly, 25 percent or more of the stock by value (the
"look-through" rule). For this purpose, passive income generally includes
dividends, interest, royalties, rents (other than rents and royalties derived in
the active conduct of a trade or business and not derived from a related
person), annuities, and gains from assets that produce passive income. The
Company anticipates that, under the "look-through" rules described above, most
of the income that it derives from manufacturing in the PRC will not constitute
passive income and that most of its investment in such manufacturing will not
constitute assets held for the production of passive income. The Company
anticipates, therefore, that it will not be a PFIC.
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If the Company were to be treated as a PFIC, then, unless a United States
Investor who owns Shares in the Company elects to have the Company treated as a
"qualified electing fund" (a "QEF") as described below, the following rules
apply:
1. Distributions made by the Company during a taxable year to a United
States Investor who owns Shares in the Company that are an "excess
distribution" (defined generally as the excess of the amount received with
respect to the Shares in any taxable year over 125 percent of the average
received in the shorter of either the three previous years or such United
States Investor's holding period before the taxable year) must be allocated
ratably to each day of such shareholder's holding period. The amount
allocated to the current taxable year must be included as ordinary income
in gross income for that year. The amount allocated to each prior taxable
year is taxed as ordinary income at the highest rate in effect for such
shareholder in that prior year and the tax is subject to an interest charge
at the rate applicable to deficiencies in income taxes.
2. The entire amount of any gain realized upon the sale or other
disposition of the Shares will be treated as an excess distribution made in
the year of sale or other disposition and as a consequence will be treated
as ordinary income and, to the extent allocated to years prior to the year
of sale or disposition, will be subject to the interest charge described
above.
A shareholder that makes a QEF election will be currently taxable on his or
her pro rata share of the Company's ordinary earnings and net capital gain (at
ordinary income and capital gains rates, respectively) for each taxable year of
the Company, regardless of whether or not distributions were received. A
shareholder that makes a QEF election for the first taxable year in which the
Company is a PFIC and in which the shareholder owns shares in the Company and
maintains this election for all subsequent years in which the shareholder owns
shares in the Company (causing the Company to be a so-called "pedigreed QEF"
with respect to such shareholder) will be subject to the foregoing treatment
only in such years in which the Company actually satisfies the income and asset
tests for PFIC status described above. The shareholder's basis in his or her
Shares will be increased to reflect taxed but undistributed income.
Distributions of income that had previously been taxed will result in a
corresponding reduction of basis in the Shares and will not be taxed again as a
distribution to the shareholder.
Special rules apply with respect to the calculation of the amount of the
foreign tax credit with respect to excess distributions by a PFIC or inclusions
under a QEF.
A United States Investor who owns Shares in the Company during any year
that the Company is a PFIC must file Internal Revenue Service Form 8621 with the
Internal Revenue Service (as well as attaching a copy to his or her income tax
return).
Controlled Foreign Corporations
Sections 951 through 964 and Section 1248 of the Code relate to controlled
foreign corporations ("CFC"). The CFC provisions may impute some portion of such
a corporation's undistributed income to certain shareholders on a current basis
and convert into dividend income some portion of gains on dispositions of stock
which would otherwise qualify for capital gains treatment. In general, the CFC
provisions will apply to the Company only if 10-Percent Shareholders who are
United States Investors own in the aggregate (or are deemed to own after
application of complex attribution rules), more than 50 percent (measured by
voting power or value) of the Shares of the Company. The Company does not
believe that it will be a CFC after this Offering. It is possible that the
Company could become a CFC in the future. Even if the Company were classified as
a CFC in a future year, however, the CFC rules referred to above would apply
only with respect to 10-Percent Shareholders.
Personal Holding Company/Foreign Personal Holding Company/Foreign
Investment Company
A corporation will be classified as a personal holding company (a "PHC") if
at any time during the last half of a tax year (i) five or fewer individuals
(without regard to their citizenship or residence) directly or indirectly or by
attribution own more than 50 percent in value of the corporation's stock and
(ii) at least
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60 percent of its ordinary gross income, as specially adjusted, consists of
personal holding company income (defined generally to include dividends,
interest, royalties, rents and certain other types of passive income). A PHC is
subject to a United States federal income tax of 39.6 percent on its
undistributed personal holding company income (generally limited, in the case of
a foreign corporation, to United States source income).
A corporation will be classified as a foreign personal holding company (an
"FPHC") and not a PHC if at any time during a tax year (i) five or fewer
individual United States citizens or residents directly or indirectly or by
attribution own more than 50 percent of the total combined voting power or value
of the corporation's stock and (ii) at least 60 percent of its gross income
consists of foreign personal holding company income (defined generally to
include dividends, interest, royalties, rents and certain other types of passive
income). Each United States shareholder in an FPHC is required to include in
gross income, as a dividend, an allocable share of the FPHC's undistributed
foreign personal holding company income (generally the taxable income of the
FPHC, as specially adjusted).
A corporation will be classified as a foreign investment company (a "FIC")
if for any taxable year it (i) is registered under the Investment Company Act of
1940, as amended, as a management company or share investment trust or is
engaged primarily in the business of investing or trading in securities or
commodities (or any interest therein) and (ii) 50 percent or more of the value
or the total combined voting power of all the corporation's stock is owned
directly or indirectly (including stock owned through the application of
attribution rules) by United States persons. In general, unless an FIC elects to
distribute 90 percent or more of its taxable income (determined under United
States tax principles as specially adjusted) to its shareholders, gain on the
sale or exchange of FIC stock is treated as ordinary income (rather than capital
gain) to the extent of such shareholder's ratable share of the corporation's
earnings and profits for the period during which such stock was held.
The Company believes that it is not and will not be a PHC, FPHC or FIC
after this offering. However, no assurance can be given as to the Company's
future status.
U.S. Information Reporting and Backup Withholding. Dividends paid in the
United States are generally subject to the information reporting requirements of
the Code. Dividends paid in the United States may be subject to backup
withholding at the rate of 31 percent unless the holder provides a taxpayer
identification number on a properly completed Form W-9 or otherwise establishes
an exemption.
The amount of any backup withholding will not constitute additional tax and
will be allowed as a credit against the United States Investor's federal income
tax liability.
Filing of Information Returns. Under a number of circumstances, a United
States Investor acquiring Shares of the Company may be required to file an
information return. In particular, any United States Investor who becomes the
owner, directly or indirectly, of 10 percent or more of the Shares of the
Company will be required to file such a return. Other filing requirements may
apply, and United States Investors should consult their own tax advisors
concerning these requirements.
HONG KONG TAXATION
In the opinion of Robert W.H. Wang & Co., Hong Kong counsel to the Company,
the following correctly summarizes the taxes applicable to the Company and its
shareholders under Hong Kong law:
Profits tax
The Company is subject to profits tax on all profits (excluding capital
profits) arising in or derived from Hong Kong. The source of income is therefore
the relevant factor, and this is generally regarded as a question of fact. There
are certain situations in which the Hong Kong tax authorities are prepared to
accept apportionment of chargeable profits, for example when a Hong Kong-based
company has manufacturing facilities in the PRC. The proportion of income
originating from the PRC and Hong Kong respectively in such situations is a
question of fact. However, where apportionment is appropriate, the Hong Kong tax
authorities usually adopt a 50:50 allocation unless compelling circumstances
dictate otherwise. Profits tax is levied at the rate of 16.5% for corporations
and 15.0% for unincorporated entities. Generally speaking, business losses may
be carried forward indefinitely to be offset against future profits of the
Company.
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Capital Gains/Taxation of Dividends
Hong Kong does not have any form of capital gains tax. Neither does it have
any form of dividend taxation or withholding taxes, and hence profits
accumulated in a Hong Kong company can be distributed as dividends without tax
deduction in Hong Kong. However, Hong Kong profits tax will be charged on
trading gains from the sale of property that are derived from or arise in Hong
Kong, by persons carrying on a trade in Hong Kong where such gains are from such
trade. Liability for Hong Kong profits tax would therefore arise in respect of
trading gains from the sale of ADSs or Shares realized by persons carrying on a
business of trading or dealing in securities in Hong Kong.
Estate Duty
Estate duties are imposed upon the value of properties situated in Hong
Kong that pass to a person's estate upon his or her death. ADSs or Shares that
are registered outside Hong Kong are not regarded as properties situated in Hong
Kong for estate duty purposes.
Stamp Duty
Hong Kong stamp duty is generally payable by the purchaser on every
purchase, and by the seller on every sale, of shares of Hong Kong-incorporated
companies. The duty is charged to both the purchaser and the seller at the rate
of HK$1.50 per HK$1,000 or part thereof of the consideration for, or (if
greater) the value of, the shares transferred. In addition, a fixed duty of HK$5
is currently payable on an instrument of transfer of such shares.
Under the current practices of the Hong Kong Inland Revenue Department, if
ADSs are not specifically identified to correspond with particular underlying
Shares, the issuance of ADSs upon the deposit of Shares issued directly to the
Depositary or for the account of the Depositary should not be subject to stamp
duty, nor should any Hong Kong stamp duty be payable upon the transfer of ADSs
outside Hong Kong.
PRC TAXATION
In the opinion of the Guangzhou Law Office, PRC counsel to the Company, the
following correctly summarizes the taxes applicable to the Company's investment
in the PRC under PRC law:
Income Tax. The Company's investment is subject to the Income Tax Law of
the PRC for Enterprises with Foreign Investment and Foreign Enterprises ("the
Foreign Investment Enterprise Tax Law"). Pursuant to the Foreign Investment
Enterprise Tax Law, Sino-foreign equity and contractual joint venture
enterprises generally are subject to an income tax at an effective rate of 33%,
which is comprised of a state tax of 30% and a local tax of 3%. The Foreign
Investment Enterprise Tax Law generally exempts Sino-foreign equity and
contractual joint venture enterprises engaged in manufacturing with an operating
term of more than ten years from state and local income taxes for two years
starting from the first profitable year of operations, followed by a 50%
reduction for the next three years. The first profitable year for the Company's
operations at the Xin Xing facility was the year ended March 31, 1995, and the
first profitable year for Dongguan Facility has not yet occurred as the joint
venture has just started operations.
Value-Added Tax ("VAT"). Effective January 1, 1994, all goods produced or
processed in the PRC, other than real property and goods produced or processed
for export, are subject to a new VAT at each stage or sale in the process of
manufacture, processing and distribution through the sale to the ultimate
consumer of the goods. The new basic VAT rate for the Company is 17% of the sale
price of the item. The seller of the goods adds 17% to the sale price of the
item, separately invoiced (except in the case of retail sales), and collects the
applicable amount of VAT through the sale of the item. The amount of the
seller's VAT liability to the Tax Bureau is calculated as the amount of sales
multiplied by the applicable VAT rate. The amount of the seller's VAT liability
may be reduced by deducting the invoiced amount of VAT included in the
materials, parts and other items purchased by the seller and used in producing
the goods.
The Value-Added Tax Provisional Regulations do not permit the seller to
deduct from its VAT liability the amount of VAT included in the purchase price
of fixed assets purchased by the Seller. Thus, although the
52
55
book value of fixed assets, including plant and equipment, purchased by the
Company will be the depreciated cost (ordinarily the purchase price plus VAT)
paid at the time of such purchase, the Company is not permitted to deduct from
its VAT liability in respect of products sold.
Taxation of Dividends from the PRC. Dividends distributed to the Company
can be remitted from the PRC without any PRC taxation. Although the Income Tax
Law on Foreign Investment Enterprises and Foreign Enterprises provides that
certain remittances of foreign exchange earnings from the PRC are subject to PRC
withholding tax, dividends received by foreign investors from a foreign
investment enterprise are exempt from withholding tax. The Company's PRC
subsidiaries are qualified as foreign investment enterprises, so withholding tax
is not applicable to dividends received by the Company from these subsidiaries.
Taxation of Disposition of Interest in PRC Subsidiaries. In the event the
Company transfers its interest in its PRC subsidiaries, the amount received in
excess of its original capital contribution would be subject to PRC withholding
tax at the rate of 20%.
In the event that the Company's PRC subsidiaries are liquidated, the
portion of the balance of their assets or remaining property, after deducting
undistributed profits, various funds and liquidation expenses, that exceeds the
Company's paid-in capital would be treated as income from liquidation, which
would be subject to income tax at the same rate that would apply to the
Company's income as described under "Income Tax."
53
56
CERTAIN FOREIGN ISSUER CONSIDERATIONS
The Company is a limited liability company incorporated under the Companies
Ordinance of Hong Kong. The Company is therefore governed by and subject to the
provisions of Hong Kong law.
Under Hong Kong law, there are currently no restrictions on the degree of
foreign ownership of a company incorporated in Hong Kong. Likewise, there are
currently no restrictions on the rights of non-Hong Kong owners to exercise
voting rights in respect of Shares held by them in Hong Kong-incorporated
companies.
There are currently no foreign exchange control restrictions imposed by
Hong Kong law which affect the Company. There are currently no foreign exchange
control restrictions on the ability of the Company to transfer funds into and
out of Hong Kong or to pay dividends to United States residents who are holders
of the Shares or ADSs.
In accordance with Hong Kong law, share certificates are only issued in the
name of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any special capacity, the Company is
not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. The Company will take no notice of
any trust applicable to any of its securities whether or not it had notice of
such trust.
The rights and liabilities of the shareholders of the Company are governed
by the Companies Ordinance and the Memorandum of Association and Articles of
Association. Under Hong Kong law, shareholders are liable to pay the full
purchase price of shares or ADSs registered in their name, but are not otherwise
subject to liabilities vis-a-vis the Company in their capacity as shareholders.
See "Taxation -- Hong Kong Taxation."
54
57
UNDERWRITING
The Underwriters named below, acting through their representative, Van
Kasper & Company (the "Representative"), have severally agreed, subject to the
terms and conditions set forth in an Underwriting Agreement with the Company, to
purchase from the Company the number of ADSs set forth opposite their respective
names below:
NUMBER
NAME OF ADSS
-------------------------------------------------------------------------- ---------
Van Kasper & Company......................................................
---------
Total.....................................................................
=========
The ADSs are being offered by the Underwriters named herein, subject to
receipt and acceptance by them, to their right to reject any order in whole or
in part, and to certain other conditions. The Underwriters are committed to
purchase all of the above ADSs being offered if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the ADSs to the public at the offering price set forth on the cover page
of this Prospectus and to certain selected dealers at that price less a
concession not in excess of $ per ADS, and such dealers may re-allow to
certain dealers a discount not in excess of $ per ADS. After the
initial Offering, the public offering price, concessions and re-allowance to
dealers may be changed by the Representative as a result of market conditions or
other factors.
Prior to this Offering, there has been no public market for the ADSs or
Shares. Consequently, the initial public offering price will be determined
through negotiation between the Company and the Representative. Among the
factors to be considered in making such determination are the prevailing market
conditions, the Company's financial and operating history and condition, its
prospects and the market prices of securities for companies in businesses
similar to that of the Company.
The Company has granted an option to the Underwriters, exercisable by the
Representative within 30 days after the date of this Prospectus, to purchase up
to 210,000 additional ADSs at the initial offering price, less underwriting
discounts and commissions. The Representative may exercise the Over-allotment
Option solely for the purpose of covering over-allotments, if any, incurred in
the sale of the ADSs offered hereby. To the extent that the Over-allotment
Option is exercised, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of the additional ADSs as the number
of ADSs to be purchased and offered by that Underwriter in the above table bears
to the total number of ADSs offered hereunder.
The Company has agreed to pay the Underwriters all out-of-pocket costs and
expenses of the Underwriters and their legal counsel, together in an amount not
to exceed $280,000.
The Company has agreed to indemnify the Underwriters for certain
liabilities, including liabilities under the Securities Act.
Certain beneficial owners of the Shares have agreed not to sell, offer to
sell, contract to sell or otherwise dispose of any Shares or securities
exercisable for Shares, directly or indirectly, for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representative and the Company. The Representative and the Company may, in their
sole discretion and at any time without notice, release all or any portion of
the securities subject to these lock-up agreements. In addition, the Company has
agreed that for a period of 180 days after the date of this Prospectus, it will
not issue, offer, sell, grant options to purchase or otherwise dispose of any
equity securities or securities convertible into or exchangeable for equity
securities, without the prior written consent of the Representative, except for
(i) ADSs offered hereby, (ii) Shares issued pursuant to the exercise of
outstanding options, and (iii) options granted to its associates, officers,
directors
55
58
and consultants so long as none of such options become exercisable during said
180 day period. Sales of such shares in the future could adversely affect the
market price of the ADSs. See "Shares Eligible for Future Sale."
LEGAL MATTERS
United States counsel for the Company is McCutchen, Doyle, Brown & Enersen,
LLP, Palo Alto, California. The validity of the issuance of the shares offered
hereby and certain legal matters as to Hong Kong law are being passed upon for
the Company by Robert W.H. Wang & Co., Hong Kong, and certain legal matters as
to PRC law will be passed upon by the Guangzhou Law Office, Guangzhou, the PRC.
Certain legal matters as to United States Law will be passed upon for the
Underwriters by Heller Ehrman White & McAuliffe, Palo Alto, California. The
matters included herein under the heading "Hong Kong Taxation" and "PRC
Taxation" under the caption "Taxation" have been passed upon by Robert W.H. Wang
& Co. as to Hong Kong Taxation and Guangzhou Law Office as to PRC Taxation,
respectively, and are stated herein on their respective authority.
EXPERTS
The financial statements of the Company as of March 31, 1995 and 1996 and
for years ended March 31, 1994, 1995 and 1996 included in this Prospectus have
been audited by Arthur Andersen & Co., independent public accountants, as stated
in their report appearing herein and are so included herein in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form F-1 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act with respect to
the ADSs being offered in this Offering. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain items of which
are omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. The omitted information may be inspected and copied at the
public reference facilities maintained by the Securities and Exchange Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Securities and Exchange Commission's regional offices located at Seven World
Trade Center, New York, New York 10048 and CitiCorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained from
the public reference section of the Securities and Exchange Commission at
prescribed rates. Statements contained in this Prospectus as to the contents of
any contract or other document filed as an exhibit to the Registration Statement
are not necessarily complete and in each instance reference is made to the copy
of the document filed as an exhibit to the Registration Statement, each
statement made in this Prospectus relating to such documents being qualified in
all respects by such reference. For further information with respect to the
Company and the securities being offered hereby, reference is hereby made to
such Registration Statement, including the exhibits thereto and the financial
statements, notes, and schedules filed as a part thereof.
The Company intends to furnish its security holders with annual reports
containing audited financial statements and a report thereon by its independent
public accountants, and quarterly reports containing unaudited financial
information. Such financial statements and financial information will be
prepared in accordance with U.S. GAAP and such quarterly and annual reports will
include a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section for all relevant periods.
56
59
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ZINDART INDUSTRIAL COMPANY LIMITED:
Report of Independent Public Accountants............................................ F-2
Consolidated audited Balance Sheets as of March 31, 1995 and 1996 and unaudited as
of September 30, 1996............................................................ F-3
Consolidated audited Statements of Operations for each of the three years ended
March 31, 1994, 1995 and 1996 and unaudited for the six-month periods ended
September 30, 1995 and 1996...................................................... F-4
Consolidated audited Statements of Cash Flows for each of the three years ended
March 31, 1994, 1995 and 1996 and unaudited for the six-month periods ended
September 30, 1995 and 1996...................................................... F-5
Consolidated audited Statements of Changes in Shareholders' Equity for each of the
three years ended March 31, 1994, 1995 and 1996 and unaudited for the six-month
period ended September 30, 1996.................................................. F-7
Notes to financial statements....................................................... F-8
F-1
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Zindart Industrial Company
Limited:
We have audited the accompanying consolidated balance sheets of Zindart
Industrial Company Limited, a company incorporated in Hong Kong, ("the Company")
and Subsidiaries ("the Group") as of March 31, 1995 and 1996, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the years ended March 31, 1994, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zindart
Industrial Company Limited and Subsidiaries as of March 31, 1995 and 1996, and
the results of their operations and their cash flows for the years ended March
31, 1994, 1995 and 1996, in conformity with generally accepted accounting
principles in the United States of America.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
December 16, 1996.
F-2
61
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1995 AND 1996 (AUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
MARCH 31, SEPTEMBER 30,
--------------- 1996
1996 -------------
------ $'000
1995 $'000 (UNAUDITED)
------
$'000
ASSETS
Current assets:
Cash and bank deposits......................................... 4,123 3,294 4,253
Accounts receivable, net....................................... 4,300 8,315 10,599
Due from immediate holding company............................. -- 3 --
Due from ultimate holding company.............................. 95 -- --
Due from related companies..................................... 1,752 -- 3
Deposits and prepayments....................................... 1,575 1,528 1,376
Inventories, net............................................... 5,347 7,514 8,144
------ ------ ------
Total current assets........................................ 17,192 20,654 24,375
Property, plant, equipment and capital leases, net............... 3,902 10,800 11,216
Loan receivable from a related company........................... 1,889 -- --
Long-term investment............................................. -- 179 179
Deferred stock issuance costs.................................... -- -- 378
Goodwill, net.................................................... 87 77 72
------ ------ ------
Total assets................................................ 23,070 31,710 36,220
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings..................................... 1,269 7,055 5,555
Long-term bank loans, current portion.......................... 261 811 811
Capital lease obligations, current portion..................... 250 1,033 1,164
Accounts payable............................................... 2,305 4,107 4,194
Receipts in advance............................................ 1,321 958 1,616
Accrued liabilities............................................ 4,596 2,806 4,579
Due to related companies....................................... 52 -- 41
Due to a director.............................................. 66 -- --
Taxation payable............................................... 600 483 651
Dividend payable............................................... 1,073 -- --
------ ------ ------
Total current liabilities................................... 11,793 17,253 18,611
Long-term bank loans............................................. 733 1,754 1,336
Capital lease obligations........................................ 126 374 749
Deferred taxation................................................ 120 120 120
------ ------ ------
Total liabilities........................................... 12,772 19,501 20,816
------ ------ ------
Minority interests............................................... 287 601 1,026
------ ------ ------
Shareholders' equity:
Common stock, par value $0.0646 (equivalent of HK$0.5); 323
authorized, outstanding and fully paid -- 5,000,000
shares...................................................... 323 323
Retained earnings.............................................. 9,683 11,285 14,055
Cumulative translation adjustments............................. 5 -- --
------ ------ ------
Total shareholders' equity.................................. 10,011 11,608 14,378
------ ------ ------
Total liabilities, minority interests and shareholders' 23,070
equity.................................................... 31,710 36,220
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-3
62
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
SIX MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED MARCH 31, ---------------------------
------------------------------------- 1995 1996
1994 1995 1996 ---------- ----------
--------- --------- --------- $'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
Net sales......................... 35,583 36,879 46,930 23,251 32,398
Cost of goods sold................ (25,037) (25,644) (34,116) (16,782) (24,419)
------- ------- ------- ------- -------
Gross profit.................... 10,546 11,235 12,814 6,469 7,979
Selling, general and
administrative expenses......... (6,351) (6,806) (6,498) (3,231) (4,162)
Interest expenses................. (150) (137) (402) (107) (517)
Interest income................... 129 228 208 142 57
Other income (expenses), net...... 80 492 (416) 7 122
------- ------- ------- ------- -------
Income before income taxes...... 4,254 5,012 5,706 3,280 3,479
Provision for income taxes........ (436) (483) (488) (303) (284)
------- ------- ------- ------- -------
Income before minority
interests.................... 3,818 4,529 5,218 2,977 3,195
Minority interests................ (83) (337) (622) (405) (425)
------- ------- ------- ------- -------
Net income...................... 3,735 4,192 4,596 2,572 2,770
======= ======= ======= ======= =======
Earnings per common share......... $ 0.75 $ 0.84 $ 0.92 $ 0.51 $ 0.55
======= ======= ======= ======= =======
Weighted average number of shares
outstanding..................... 5,000 5,000 5,000 5,000 5,000
======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-4
63
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
SIX MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED MARCH 31, --------------------------
----------------------------------- 1995 1996
1994 1995 1996 ---------- ----------
-------- -------- -------- $'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. 3,735 4,192 4,596 2,572 2,770
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation of property, plant and
equipment......................... 762 946 1,021 521 821
Amortization of goodwill............. -- 10 10 5 5
Net gain on disposals of property,
plant and equipment............... (37) (121) (6) (8) --
Minority interests................... 83 337 622 405 425
Provision for deferred taxation...... 70 -- -- -- --
(Increase) Decrease in operating
assets -- Accounts receivable, net... 46 (1,395) (4,015) (4,717) (2,284)
Deposits and prepayments............. 24 266 47 537 152
Inventories, net..................... (104) (1,589) (2,167) (816) (630)
Increase (Decrease) in operating
liabilities -- Accounts payable...... (503) 82 1,802 2,249 87
Receipts in advance.................. (156) 738 (363) (93) 658
Accrued liabilities.................. 1,212 1,112 (1,790) (372) 1,773
Taxation payable..................... 339 (93) (117) 187 168
------ ------ ------ ------ ------
Net cash provided by (used in)
operating activities............ 5,471 4,485 (360) 470 3,945
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash inflow from acquisition of a
subsidiary........................ -- 168 -- -- --
Acquisition of long-term
investment........................ -- -- (179) -- --
Acquisition of property, plant and
equipment......................... (1,491) (3,197) (7,341) (3,748) (1,237)
Proceeds from disposals of property,
plant and equipment............... 103 1,040 13 15 --
------ ------ ------ ------ ------
Net cash used in investing
activities...................... (1,388) (1,989) (7,507) (3,733) (1,237)
------ ------ ------ ------ ------
F-5
64
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED) -- (CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
SIX MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED MARCH 31, --------------------------
----------------------------------- 1995 1996
1994 1995 1996 ---------- ----------
-------- -------- -------- $'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in bank
overdraft......................... 105 340 1,910 (13) (937)
Increase (Decrease) in short-term
bank loans........................ (119) 25 3,876 425 (563)
New long-term bank loans............. -- 1,035 2,565 2,287 --
Repayment of long-term bank loans.... (120) (283) (994) (994) (418)
New capital lease obligations ....... 209 107 776 321 727
Repayment of capital element of
capital lease obligations......... (470) (300) (330) (167) (221)
Stock issuance costs paid............ -- -- -- -- (378)
Due from immediate holding company... -- -- (3) -- 3
Due from ultimate holding company.... -- (95) 95 (137) --
Due from related companies........... (466) (1,286) 647 602 (3)
Due to related companies............. (1,545) 52 (52) (52) 41
Due from a director.................. (77) 77 -- -- --
Due to a director.................... -- (63) (66) 4 --
Dividends paid....................... (1,473) (1,959) (1,073) (167) --
Finance from minority interests...... 29 (33) -- -- --
Dividends paid by subsidiaries to
their minority shareholders....... -- (63) (308) -- --
------ ------ ------ ------ ------
Net cash (used in) provided by
financing activities............ (3,927) (2,446) 7,043 2,109 (1,749)
------ ------ ------ ------ ------
Effect of cumulative translation
adjustments.......................... -- 5 (5) -- --
------ ------ ------ ------ ------
Net increase (decrease) in cash and
bank deposits........................ 156 55 (829) (1,154) 959
Cash and bank deposits, as of beginning
of years/periods..................... 3,912 4,068 4,123 4,123 3,294
------ ------ ------ ------ ------
Cash and bank deposits, as of end of
years/periods........................ 4,068 4,123 3,294 2,969 4,253
====== ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-6
65
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED)
AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK RETAINED CUMULATIVE
-------------------- EARNINGS TRANSLATION
AMOUNT -------- ADJUSTMENTS
------ $'000 -----------
NUMBER OF $'000 $'000
SHARES
---------
'000
Balance as of April 1, 1993....................... 5,000 323 4,788 --
Net income........................................ -- -- 3,735 --
Dividend -- $0.39 per share....................... -- -- (1,959) --
-- --
---- ----- ------- -
Balance as of March 31, 1994...................... 5,000 323 6,564 --
Net income........................................ -- -- 4,192 --
Dividend -- $0.21 per share....................... -- -- (1,073) --
Translation adjustments........................... -- -- -- 5
-- --
---- ----- ------- -
Balance as of March 31, 1995...................... 5,000 323 9,683 5
Net income........................................ -- -- 4,596 --
Dividend -- $0.60 per share....................... -- -- (2,994) --
Translation adjustments........................... -- -- -- (5)
-- --
---- ----- ------- -
Balance as of March 31, 1996...................... 5,000 323 11,285 --
Net income (Unaudited)............................ -- -- 2,770 --
-- --
---- ----- ------- -
Balance as of September 30, 1996 (Unaudited)...... 5,000 323 14,055 --
==== ===== ======== ====
The accompanying notes are an integral part of these financial statements.
F-7
66
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Zindart Industrial Company Limited (the "Company") was incorporated in Hong
Kong in July 1977. Prior to August 1993, the Company was owned by certain
individual shareholders. In August 1993, as a result of a group reorganization,
the Company became wholly owned by Zindart Holdings Limited ("ZHL"; a company
incorporated in the Cayman Islands). In December 1995, ZHL transferred its 100%
interest in the Company to Zindart Pte Limited (formerly known as Devenish Pte
Limited; a company incorporated in Singapore) in return for 14,689,998 ordinary
shares of S$1 each in Zindart Pte Limited. ZHL is majority owned by ZIC Holdings
Limited ("ZIC"; a company incorporated in Cayman Islands).
Prior to the Offering, 1996, the Company consummated a 20 for 1 stock split
(the "Share Split") and as a result 5,000,000 shares of common stock, par value
HK$0.50 each, were outstanding. The Company intends to increase its authorized
share capital from HK$2,500,000 to HK$5,000,000 by authorizing an aggregate of
10,000,000 ordinary shares of HK$0.50 each, rank pari passu to the then existing
shares prior to the closing of the Offering. The Share Split has been reflected
retrospectively in the accompanying balance sheets and in all per share
computations.
The Company and its subsidiaries are principally engaged in the
manufacturing of high-quality, detailed die-cast and injection-molding products,
including collectibles, collectible holiday ornaments and toy action figures and
figurine playsets in the People's Republic of China (the "PRC") for sales to
customers in North America and Europe.
2. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as the "Group") as of March 31, 1996 were as follows:
PERCENTAGE OF EQUITY
NAME PLACE OF INCORPORATION INTEREST HELD
- ------------------------------------------------ --------------------------- --------------------
Dongguan Xinda Giftware Company Limited......... The PRC Note(a)
Guangzhou Zindart (Xin Xing)(Giftware) Company
Limited....................................... The PRC Note(b)
Luen Tat Mould Manufacturing Limited............ The British Virgin Islands 51% Note(c)
Onchart Industrial Limited...................... The British Virgin Islands 55%
Onchart Industrial Limited...................... Hong Kong 55%
Wealthy Holdings Limited........................ The British Virgin Islands 100%
- ---------------
(a) Dongguan Xinda Giftware Company Limited is a contractual joint venture
established in the PRC to be operated for 15 years up to November 2009.
Under the joint venture contract and the supplemental agreement thereto, the
Group is entitled to 100% of the joint venture's income after paying a pre-
determined annual fee to its joint venture partner.
(b) Guangzhou Zindart (Xin Xing)(Giftware) Company Limited is a contractual
joint venture established in the PRC to be operated for 15 years up to
December 2008. Under the joint venture contract and the supplemental
agreement thereto, the Group is entitled to 100% of the joint venture's
income after paying a pre-determined rental for the factory premises to its
joint venture partner.
(c) According to a shareholders' agreement dated October 10, 1994, the Group is
only entitled to share 41% of the profit of Luen Tat Mould Manufacturing
Limited.
There is no restriction on the distribution of retained earnings by the
subsidiaries.
F-8
67
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Consolidation
The consolidated financial statements include the accounts of the Company,
its subsidiaries and its contractual joint ventures which are considered as de
facto subsidiaries. All material intra-group balances and transactions have been
eliminated on consolidation.
b. Goodwill
Goodwill, being the excess of cost over the fair value of the net assets of
a subsidiary acquired during the year ended March 31, 1995, is amortized on a
straight-line basis over ten years. The amortization recorded for the years
ended March 31, 1995 and 1996 was $10,000 and $10,000, respectively, and for the
six months ended September 30, 1995 and 1996 was $5,000 and $5,000,
respectively. Accumulated amortization as of March 31, 1995 and 1996 and
September 30, 1996 was $10,000, $20,000 and $25,000, respectively.
c. Contractual Joint Ventures
A contractual joint venture is an entity established between the Group and
one or more other parties, with the rights and obligations of the joint venture
partners governed by a contract. If the Group owns more than 50% of the joint
venture and is able to govern and control its financial and operating policies
and its board of directors, such joint venture is considered as a de facto
subsidiary and is accounted for as a subsidiary.
d. Inventories
Inventories are stated at the lower of cost, on a first-in first-out basis,
or market value. Costs of work-in-process and finished goods are composed of
direct materials, direct labor and an attributable portion of production
overheads.
e. Property, Plant, Equipment and Capital Leases
Property, plant, equipment and capital leases are recorded at cost. Gains
or losses on disposals are reflected in current operations. Depreciation for
financial reporting purpose is provided using the straight-line method over the
estimated useful lives of the assets as follows: properties -- 10 to 20 years,
machinery, tools, furniture and office equipment -- 4 to 5 years. All ordinary
repair and maintenance costs are expensed as incurred.
Interest costs incurred during the years/periods of construction of fixed
assets are capitalized and amortized over the estimated useful lives of the
related assets. Interest costs capitalized during the years ended March 31,
1994, 1995 and 1996 were Nil, approximately $23,000 and approximately $206,000,
respectively, and for the six months ended September 30, 1995 and 1996 were
approximately $90,000 and Nil, respectively.
f. Long-term investments
Investments held for the long-term are stated at market value. Income from
long-term investments is accounted for to the extent of dividends received and
receivable.
g. Sales
Sales represent the invoiced value of merchandise/molds supplied to
customers. Sales are recognized upon delivery of goods and passage of title to
customers.
F-9
68
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
h. Income Taxes
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
i. Operating Leases
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
j. Foreign Currency Translation
The Company considers United States dollars as its functional currency as
most of the Group's business activities are based in United States dollars and
Hong Kong dollars ("HK$") (Note: Hong Kong dollars are pegged with United States
dollars at the exchange rate of US$1 to HK$7.8).
The translation of the financial statements of group companies into United
States dollars is performed for balance sheet accounts using the closing
exchange rate in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate during each reporting period. The gains
or losses resulting from translation are included in shareholders' equity
separately as cumulative translation adjustments. Aggregate gains (losses) from
foreign currency transactions included in the results of operations for the
years ended March 31, 1994, 1995 and 1996 were approximately $(102,000),
approximately $182,000 and approximately $(160,000), respectively, and for the
six months ended September 30, 1995 and 1996 were approximately $8,000 and
approximately $1,000, respectively.
k. Earnings Per Common Share
Earnings per common share is computed by dividing net income for each
year/period by 5,000,000, the weighted average number of shares of common stock
outstanding during the years/periods, on the basis that the Share Split (see
Note 1) had been consummated prior to the years/periods presented.
l. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
F-10
69
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
MARCH 31, SEPTEMBER 30,
----------------------- 1996
1996 -------------
--------- $'000
1995 $'000 (UNAUDITED)
---------
$'000
Trade receivables................................. 4,339 8,354 10,638
Less: Allowance for doubtful accounts............. (39) (39) (39)
----- ----- ------
Accounts receivable, net.......................... 4,300 8,315 10,599
===== ===== ======
5. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
SEPTEMBER 30,
1996
MARCH 31, -------------
----------------------- $'000
1995 1996 (UNAUDITED)
--------- ---------
$'000 $'000
Deposits for acquisition of molds................. 1,268 1,083 1,058
Prepayments....................................... 287 352 289
Rental and utility deposits....................... 12 12 11
Other receivables................................. 8 81 18
----- ----- -----
1,575 1,528 1,376
===== ===== =====
6. INVENTORIES
Inventories comprised:
SEPTEMBER 30,
1996
MARCH 31, -------------
--------------- $'000
1995 1996 (UNAUDITED)
----- -----
$'000 $'000
Raw materials.......................................... 3,840 5,204 4,479
Work-in-process........................................ 903 1,170 2,098
Finished goods......................................... 663 1,199 1,626
----- ----- -----
5,406 7,573 8,203
Less: Allowance for obsolescence....................... (59) (59) (59)
----- ----- -----
Inventories, net....................................... 5,347 7,514 8,144
===== ===== =====
F-11
70
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY, PLANT, EQUIPMENT AND CAPITAL LEASES
Property, plant, equipment and capital leases comprised:
MARCH 31, SEPTEMBER 30,
----------------- 1996
1996 -------------
------ $'000
1995 $'000 (UNAUDITED)
------
$'000
Property, plant and equipment:
Properties.............................................. 2,303 7,940 8,116
Machinery and tools..................................... 3,631 4,212 3,455
Furniture and office equipment.......................... 1,094 1,367 1,592
Capital leases:
Machinery and tools..................................... 711 1,993 3,027
Furniture and office equipment.......................... 566 636 587
----- ------ ------
Cost.................................................... 8,305 16,148 16,777
Less: Accumulated depreciation
Property, plant and equipment........................... (3,558) (3,740) (3,656)
Capital leases.......................................... (845) (1,608) (1,905)
----- ------ ------
Property, plant, equipment and capital leases, net...... 3,902 10,800 11,216
===== ====== ======
As of March 31, 1995 and 1996 and September 30, 1996, properties with a net
book value of approximately $1,409,000, approximately $7,225,000, and
approximately $7,276,000, respectively, were mortgaged to secure certain of the
Group's banking facilities.
8. LONG-TERM INVESTMENT
On March 1, 1996, the Group acquired from several individuals, including a
minority shareholder of a subsidiary, an 18% interest in Luen Tat Model Design
Company Limited (a company incorporated in the British Virgin Islands) for a
cash consideration of $179,000. The cost of $179,000 approximates the market
value of this investment as of March 31, 1996 and September 30, 1996.
9. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
MARCH 31,
-----------------------
1996
--------- SEPTEMBER 30,
1996
1995 $'000 -------------
--------- $'000
$'000 (UNAUDITED)
Bank overdrafts................................... 456 2,366 1,429
Short-term bank loans............................. 813 4,689 4,126
----- ----- -----
1,269 7,055 5,555
===== ===== =====
Short-term bank borrowings are denominated in Hong Kong dollars, and bear
interest at the floating commercial bank lending rates in Hong Kong, which range
from 8.72% to 10.50% per annum as of March 31, 1996 and from 8.94% to 10.50% per
annum as of September 30, 1996. They are secured by certain properties, bank
deposits and inventories of the Group. They are drawn for working capital
purposes and are renewable with the consent of the relevant banks.
F-12
71
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHORT-TERM BANK BORROWINGS -- (CONTINUED)
Supplemental information with respect to short-term bank borrowings for the
year ended March 31, 1996 and for the six months ended September 30, 1996 are as
follows:
AVERAGE WEIGHTED AVERAGE
AMOUNT INTEREST RATE AT WEIGHTED AVERAGE
OUTSTANDING THE END OF AVERAGE INTEREST RATE
DURING THE YEAR/PERIOD DURING THE YEAR/PERIOD
YEAR/PERIOD ---------------- ----------------------
MAXIMUM -----------
AMOUNT
OUTSTANDING $'000
DURING THE
YEAR/PERIOD
-----------
$'000
MARCH 31, 1996
Bank overdrafts.................. 2,366 1,232 9.66% 9.90%
===== ===== ==== ====
Short-term bank loans............ 5,551 3,632 8.92% 8.41%
===== ===== ==== ====
SEPTEMBER 30, 1996 (UNAUDITED)
Bank overdrafts.................. 3,646 2,241 9.25% 9.50%
===== ===== ==== ====
Short-term bank loans............ 6,590 4,774 8.98% 8.94%
===== ===== ==== ====
10. ACCRUED LIABILITIES
Accrued liabilities comprised:
MARCH 31,
-----------------------
1996
--------- SEPTEMBER 30,
1996
1995 $'000 -------------
--------- $'000
$'000 (UNAUDITED)
Accruals for operating expenses
-- Workers, wages and bonus..................... 560 467 679
-- Management bonus............................. 1,146 535 908
-- Rental expenses.............................. 457 408 417
-- Subcontracting charges....................... 622 271 198
-- Repair and maintenance....................... 714 -- --
Payable for land cost in the PRC.................. 531 98 --
Accruals for raw materials purchases.............. 75 339 1,018
Others............................................ 491 688 1,359
----- ----- -----
4,596 2,806 4,579
===== ===== =====
F-13
72
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM BANK LOANS
Long-term bank loans are collateralized by certain properties and bank
deposits of the Group. They bear interest rates ranging from 7% to 10% per annum
as of March 31, 1996 and from 7% to 10% per annum as of September 30, 1996 and
are repayable as follows:
MARCH 31, SEPTEMBER 30,
--------------- 1996
1996 -------------
----- $'000
1995 $'000 (UNAUDITED)
-----
$'000
Payable during the following period:
Within one year...................................... 261 811 811
Over one year but not exceeding two years............ 259 1,594 810
Over two years but not exceeding three years......... 259 160 470
Over three years but not exceeding four years........ 215 -- 56
---- ----- -----
Total bank loans....................................... 994 2,565 2,147
Less: Current maturities............................... (261) (811) (811)
---- ----- -----
Long-term bank loans................................... 733 1,754 1,336
==== ===== =====
12. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital leases as of March 31, 1995 and
1996 and September 30, 1996, together with the present value of the minimum
lease payments are:
MARCH 31, SEPTEMBER 30,
---------------- 1996
1996 -------------
------ $'000
1995 $'000 (UNAUDITED)
-----
$'000
Payable during the following period:
Within one year..................................... 306 1,151 1,270
Over one year but not exceeding two years........... 87 438 801
Over two years but not exceeding three years........ 88 -- 106
---- ----- ------
Total minimum lease payments.......................... 481 1,589 2,177
Less: Amount representing interest.................... (105) (182) (264)
---- ----- ------
Present value of minimum lease payments............... 376 1,407 1,913
Less: Current portion................................. (250) (1,033) (1,164)
---- ----- ------
Non-current portion................................... 126 374 749
==== ===== ======
13. NET SALES
Net sales comprised:
YEAR ENDED MARCH 31, SIX MONTHS ENDED
------------------------ SEPTEMBER 30,
1994 1995 1996 -------------------------
------ ------ ------ 1995 1996
$'000 $'000 $'000 ----------- -----------
$'000 $'000
(UNAUDITED) (UNAUDITED)
Sales of merchandise.................... 31,451 32,488 38,306 18,480 28,475
Sales of molds.......................... 4,132 4,391 8,624 4,771 3,923
------ ------ ------ ------ ------
35,583 36,879 46,930 23,251 32,398
====== ====== ====== ====== ======
F-14
73
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. NET SALES -- (CONTINUED)
Substantially all of the sales of merchandise and molds are shipped to the
United States of America.
14. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
are domiciled and operate. The Company is subject to Hong Kong profits tax at a
rate of 16.5%. The British Virgin Islands subsidiaries are incorporated under
the International Business Companies Act of the British Virgin Islands and,
accordingly, is exempted from payment of the British Virgin Islands income
taxes. The joint venture enterprises established in the PRC are subject to PRC
income taxes at a rate of 27% (24% state unified income tax and 3% local income
tax, in the open coastal areas of the PRC). However, they are exempted from
state unified income tax and local income tax for two years starting from the
first year of profitable operations and then are subject to a 50% reduction in
state unified income tax for the next three years. The first profitable year for
Guangzhou Zindart (Xin Xing) (Giftware) Company Limited was the year ended March
31, 1995; and the first profitable year for Dongguan Xinda Giftware Company
Limited could not be determined as the joint venture has just started
operations.
Significant components of provision for income taxes are:
YEAR ENDED MARCH 31, SIX MONTHS ENDED
--------------------------------- SEPTEMBER 30,
1994 1995 1996 -------------------------
--------- --------- --------- 1995 1996
$'000 $'000 $'000 ----------- -----------
$'000 $'000
(UNAUDITED) (UNAUDITED)
Current tax
-- Hong Kong profits tax........... 366 483 488 303 284
Deferred tax....................... 70 -- -- -- --
--- --- --- --- ---
436 483 488 303 284
=== === === === ===
The reconciliation of the Hong Kong statutory tax rate to the effective
income tax rate based on income before income taxes stated in the consolidated
statements of operations is as follows:
YEAR ENDED MARCH 31,
---------------------------------
1994 1995 1996
--------- --------- --------- SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
Hong Kong statutory tax rate....... 17.5% 16.5% 16.5% 16.5% 16.5%
Effect of tax exemption for
Guangzhou Zindart (Xin Xing)
(Giftware) Company Limited....... -- (1.4%) (1.1%) (0.9%) --
Non-taxable income arising from
activities which qualified as
offshore......................... (7.3%) (5.5%) (6.8%) (6.4%) (8.3%)
----- ---- - ---- - ---- - ---- -
Effective income tax rate.......... 10.2% 9.6% 8.6% 9.2% 8.2%
===== ===== ===== ===== =====
F-15
74
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES -- (CONTINUED)
Components of deferred tax balances as of March 31, 1995 and 1996 and
September 30, 1996 are as follows:
MARCH 31, SEPTEMBER 30,
--------------------- 1996
1995 1996 -------------
--------- --------- $'000
$'000 $'000 (UNAUDITED)
Accumulated difference between taxation allowance and
depreciation expenses............................... 120 120 120
=== === ===
15. DIVIDENDS
Dividends comprised:
YEAR ENDED MARCH 31, SIX MONTHS ENDED
--------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
--------- --------- --------- ----------------
$'000 $'000 $'000 $'000
(UNAUDITED)
Cash dividend............................. 1,959 1,073 -- --
Dividend in kind.......................... -- -- 2,994 --
----- ----- ----- -----
1,959 1,073 2,994 --
===== ===== ===== =====
Dividends for the year ended March 31, 1996 of approximately $2,994,000 was
settled in kind by distributing to the shareholder the loan receivable from a
related company of approximately $1,889,000 and the amount due from that related
company of approximately $1,105,000.
16. COMMITMENTS
a. Capital commitments
As of March 31, 1995 and 1996 and September 30, 1996, the Group had capital
commitments amounting to approximately $3,368,000, $975,000 and Nil,
respectively, in respect of construction of factories in the PRC.
F-16
75
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS -- (CONTINUED)
b. Operating Lease Commitments
The Group has various operating lease agreements for factory premises and
office equipment which extend through December 1997. Rental expenses for the
years ended March 31, 1994, 1995 and 1996 were approximately $615,000,
approximately $936,000 and approximately $624,000, respectively, and for the six
months ended September 30, 1995 and 1996 were approximately $300,000 and
approximately $326,000, respectively. Most leases contain renewal options.
Future minimum rental payments as of March 31, 1996 and September 30, 1996,
under agreements classified as operating leases with non-cancelable terms in
excess of one year, are as follows:
MARCH 31, SEPTEMBER 30,
1996 1996
--------- -------------
$'000 $'000
(UNAUDITED)
Payable during the following period:
Within one year............................................ 500 185
Over one year but not exceeding two years.................. 63 21
Over two years but not exceeding three years............... 3 --
--- ---
566 206
=== ===
Under the supplementary joint venture agreement for the establishment of
Dongguan Xinda Giftware Company Limited, the Group has committed to pay a
pre-determined annual fee to the third-party joint venture partner for the
period from January 1996 to November 2009. The total commitments for this pre-
determined fee as of March 31, 1996 and September 30, 1996 are analyzed as
follows:
MARCH 31, SEPTEMBER 30,
1996 1996
--------- -------------
$'000 $'000
(UNAUDITED)
Payable during the following period:
Within one year............................................ 39 39
Over one year but not exceeding two years.................. 39 39
Over two years but not exceeding three years............... 39 39
Over three years but not exceeding four years.............. 39 39
Over four years but not exceeding five years............... 39 39
Thereafter................................................. 348 328
--- ---
543 523
=== ===
17. RETIREMENT PLAN
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
The Group's employees in Hong Kong, after completing a probation period,
may join the Group's defined contribution provident fund managed by an
independent trustee. Both the Group and its Hong Kong employees make monthly
contributions to the scheme of 5% of the employees' basic salaries. The Hong
Kong employees are entitled to receive their entire contribution together with
accrued interest thereon at any time upon leaving the Group, and 100% of the
employer's contribution and the accrued interest thereon upon retirement or
leaving the Group after completing ten years of service or at a reduced scale of
between 30% to 90% after completing three to nine years of service. Any
forfeited contributions made by the Group and the accrued interest thereon are
used to reduce future employer's contributions. The aggregate amount of
F-17
76
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. RETIREMENT PLAN -- (CONTINUED)
employer's contributions made by the Group during the years ended March 31,
1994, 1995 and 1996 were approximately $62,000, approximately $97,000, and
approximately $71,000, respectively, and during the six months ended September
30, 1995 and 1996 were approximately $28,000 and approximately $28,000,
respectively.
The Group has no other post-retirement or post-employment benefit plans.
18. BANKING FACILITIES
As of March 31, 1996 and September 30, 1996, the Group had banking
facilities of approximately $10,754,000 and $12,153,000, respectively, for
overdrafts, loans and trade financing. Unused facilities as of the same dates
amounted to approximately $1,129,000 and approximately $4,446,000, respectively.
These facilities were secured by:
a. Mortgages over the Group's properties with a net book value of
approximately $7,225,000 and $7,276,000 as of March 31, 1996 and September
30, 1996, respectively;
b. Pledges of the Group's bank deposits of approximately $1,770,000 and
$1,770,000 as of March 31, 1996 and September 30, 1996, respectively; and
The Group's inventories held under trust receipt and import bank loans.
In addition, the Group has agreed to observe certain restrictive bank
covenants on maintenance of net worth, and payment of dividends and management
bonuses. The Group has complied with all such covenants. The Group has also
agreed not to create any debenture without a bank's prior consent.
19. RELATED PARTY TRANSACTIONS
The Group entered into the following transactions with related parties:
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- ------------------------
1995 1996 1995 1996
--------- --------- ----------- -----------
1994 $'000 $'000 $'000 $'000
--------- (UNAUDITED) (UNAUDITED)
$'000
Sales to ERTL (Note a) and ERTL's
related company.................... 13,576 11,824 12,081 5,564 9,850
Management fee paid to ZIC........... -- 23 -- -- --
Management fee paid to related
companies.......................... -- 171 -- -- --
Rental income from a related
company............................ -- -- 8 -- --
========= ========= ========= =========== ===========
F-18
77
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Group had the following outstanding balances with related parties:
MARCH 31, SEPTEMBER 30,
--------------------- 1996
1996 -------------
--------- $'000
1995 $'000 (UNAUDITED)
---------
$'000
Accounts receivable from ERTL (Note a) and its
related company................................. 1,140 1,536 3,241
Loan receivable from a related company (Note b)... 1,889 -- --
Due from immediate holding company (Note f)....... -- 3 --
Due from ultimate holding company (Note f)........ 95 -- --
Due from related companies (Notes b, and c and
f).............................................. 1,752 -- 3
Due to related companies.......................... 52 -- 41
Due to a director (Note e)........................ 66 -- --
========= ========= =============
Notes
a. ERTL (Hong Kong) Ltd. ("ERTL") is a minority shareholder of Zindart Pte
Limited, the Company's sole shareholder.
b. Loan receivable from a related company of approximately $1,889,000 and the
amount due from that related company of approximately $1,105,000 were
distributed to Zindart Pte Limited, the Company's then sole shareholder, as
dividends in kind during the year ended March 31, 1996.
c. Included in amounts due from related companies of approximately $1,317,000
were unsecured and bore interest at two percentage points above the Hong Kong
prime lending rate. Interest income earned from these related companies for
the years ended March 31, 1994, 1995 and 1996 were Nil, approximately $85,000
and approximately $68,000, respectively and for the six months ended
September 30, 1995 and 1996 were approximately $67,000 and Nil, respectively.
d. During the year ended March 31, 1996, a related company had advanced
approximately $259,000 to the Company. Such advance was unsecured and bore
interest at two percentage points above the Hong Kong prime lending rate.
During the year ended March 31, 1996, the Group paid to this related company
interest of approximately $3,000.
e. Amounts due to a director were unsecured and bore interest at two percentage
points above the Hong Kong prime lending rate. Interest expenses paid to the
director for the years ended March 31, 1994, 1995 and 1996 were Nil,
approximately $1,000 and approximately $7,000, respectively and for the six
months ended September 30, 1995 and 1996 were approximately $4,000 and Nil,
respectively.
f. The other outstanding balances with the ultimate and immediate holding
company and related companies were unsecured, non-interest bearing and
without pre-determined repayment terms.
20. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. Cash paid for interest and income taxes comprised:
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------- ---------------------------
1995 1996 1995 1996
---- ---- ----------- -----------
1994 $'000 $'000 $'000 $'000
---- (UNAUDITED) (UNAUDITED)
$'000
Interest............................. 150 160 608 197 517
========= ========= ========= =========== ===========
Income taxes......................... 165 742 605 116 116
========= ========= ========= =========== ===========
F-19
78
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- (CONTINUED)
b. Supplemental disclosure of investing activities:
(i) During the year ended March 31, 1995, the Group acquired from an
unrelated third party certain assets and liabilities with a net book value
of approximately $82,000 at a consideration of approximately $179,000.
Thereafter, it contributed such assets and liabilities to Luen Tat Mould
Manufacturing Limited ("LTMML") in exchange for a 51% interest in LTMML.
According to a shareholders' agreement dated October 10, 1994, the Group is
only entitled to share 41% of the profit of LTMML. Details of net assets
acquired were as follows:
$'000
----
Cash and bank deposits...................................................... 347
Accounts receivable, net.................................................... 372
Deposits and prepayments.................................................... 328
Inventories, net............................................................ 2
Property, plant and equipment............................................... 26
Accounts payable............................................................ (604)
Accrued liabilities......................................................... (157)
Due to a director........................................................... (129)
Taxation payable............................................................ (24)
----
Net assets as of the date of acquisition.................................... 161
Acquired percentage......................................................... 51%
----
Share of net assets as of the date of acquisition........................... 82
Consideration satisfied in cash............................................. (179)
----
Goodwill.................................................................... 97
====
Net cash inflow:
Cash acquired............................................................. 347
Cash paid................................................................. (179)
----
Net cash inflow........................................................... 168
====
(ii) During the six months ended September 30, 1995 and accordingly during
the year ended March 31, 1996, the Group paid a dividend in kind of
approximately $2,994,000 by distributing a loan receivable from a related
company of approximately $1,889,000 and an amount due from that related company
of approximately $1,105,000.
(iii) During the year ended March 31, 1996, the Group entered into capital
lease arrangements in respect of originally owned assets and obtained cash
finance of $776,000, and (ii) newly acquired assets with a capital value of
approximately $585,000.
21. OPERATING RISK
a. Country risk
The Group's operations are conducted in Hong Kong and the PRC. As a result,
the Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong and
the PRC, and by the general state of the Hong Kong and the PRC economies.
On July 1, 1997, sovereignty over Hong Kong will be transferred from the
United Kingdom to the PRC, and Hong Kong will become a Special Administrative
Region of the PRC (a "SAR"). As provided in the
F-20
79
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. OPERATING RISK -- (CONTINUED)
Sino-British Joint Declaration relating to Hong Kong and the Basic Law of the
Hong Kong SAR of the PRC, the Hong Kong SAR will have full economic autonomy and
its own legislative, legal and judicial systems for fifty years. The Group's
management does not believe that the transfer of sovereignty over Hong Kong will
have an adverse impact on the Group's financial and operating environment. There
can be no assurance, however, that changes in political or other conditions will
not result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Group's results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.
b. Dependence on strategic relationship
The Group conducts its manufacturing operations through its contractual
joint ventures established between the Group and two PRC parties. The
deterioration of any of these strategic relationships may have an adverse effect
on the operations of the Group.
c. Concentration of credit risk
A substantial portion of the Group's sales are made to a small number of
customers on an open account basis and generally no collateral is required.
Details of individual customers accounting for more than 5% of the Group's sales
are as follows:
YEAR ENDED MARCH 31, SIX MONTHS
---------------------- ENDED
1994 1995 1996 SEPTEMBER 30,
---- ---- ---- 1996
-------------
(UNAUDITED)
Hallmark Cards (HK) Limited (a subsidiary of
Hallmark Cards Inc.)........................... 28.1% 31.2% 27.0% 29.3%
ERTL and its related company (Note a)............ 38.2% 32.1% 25.9% 30.4%
Hasbro Far East Limited.......................... 8.0% 8.1% 9.3% 3.4%
A buying office of Sieper Werke GmbH............. 7.0% 7.4% 6.2% 7.6%
Drumwell Limited................................. 0.1% 0.7% 4.5% 7.2%
Revell/Monogram, Inc............................. 5.8% 4.5% 3.0% 1.4%
==== ==== ==== ======
- ---------------
Note a. ERTL is a minority shareholder of Zindart Pte Limited, the Company's
sole shareholder.
Concentration of accounts receivable as of March 31, 1995 and 1996 and
September 30, 1996 is as follows:
MARCH 31,
-----------------------
1995 1996
--------- --------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
Five largest accounts receivable.................. 85% 52% 67%
== == ==
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.
F-21
80
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. OPERATING RISK -- (CONTINUED)
d. Concentration of Suppliers
The Group purchases raw materials from a number of suppliers. Details
of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
YEAR ENDED MARCH 31,
-------------------------------------
1994 1995 1996
--------- --------- --------- SIX MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
Sogen (Far East) Limited............... 0.4% 2.5% 9.8% 5.0%
Starlite Printers Limited.............. 3.3% 4.8% 8.3% 7.3%
Wing Fu Carton & Printing Company
Limited.............................. 5.0% 5.5% 6.3% 4.9%
Lee Kee Metal Company Limited.......... 2.0% 9.0% 4.8% 2.6%
Y.T. Cheng (Ching Tai) Limited......... 4.0% 7.2% 4.7% 1.9%
Cominco Ltd............................ 16.4% 1.2% 0.9% 5.2%
==== === === ===
22. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of
operations:
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------- -------------------------
1995 1996 1995 1996
--------- --------- ----------- -----------
1994 $'000 $'000 $'000 $'000
--------- (UNAUDITED) (UNAUDITED)
$'000
Depreciation of property, plant and
equipment
owned assets............................. 458 658 759 409 609
assets held under capital leases......... 304 288 262 112 213
Interest expenses for
bank overdrafts and loans................ 70 91 519 160 451
capital lease obligations................ 80 68 79 33 66
amount due to a director................. -- 1 7 4 --
amount due to a related company.......... -- -- 3 -- --
Less: amount capitalized as property, plant
and equipment............................ -- (23) (206) (90) --
---- --- ---- ---- ---
150 137 402 107 517
Operating lease rentals for
rented premises.......................... 590 913 613 299 308
machinery and equipment.................. 25 23 11 1 18
Repairs and maintenance expenses........... 636 289 286 160 268
Interest income from
bank deposits............................ 129 143 140 75 57
amount due from related companies........ -- 85 68 67 --
Net foreign exchange (loss) gain........... (102) 182 (160) 8 1
==== === ==== ==== ===
F-22
81
APPENDIX
DESCRIPTION OF GRAPHICS
PAGE 7:
ORGANIZATION OF THE COMPANY
This chart shows the organization of the Company, its principal shareholders
and subsidiaries prior to giving effect to the Offering.
OPERATING STRUCTURE
This chart shows the operating structure of the Company's three manufacturing
facilities.
PAGE 28:
This flow chart shows the steps in the manufacturing process that make up the
Turnkey Manufacturing Service.
82
- ------------------------------------------------------
- ------------------------------------------------------
No person has been authorized to give any information or to make any
representation in connection with the Offering being made hereby not contained
in this Prospectus, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company, the
Underwriters or any other person. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy any securities offered hereby in
any jurisdiction in which it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
PAGE
----
Reports to Securities Holders.......... 2
Currency Conversions................... 2
Enforceability of Civil Liabilities.... 2
Prospectus Summary..................... 5
Risk Factors........................... 9
Use of Proceeds........................ 17
Dividends and Dividend Policy.......... 17
Dilution............................... 17
Capitalization......................... 19
Selected Financial Data................ 20
Management's Discussion and Analysis of
Financial Condition and Results
of Operations........................ 21
Business............................... 25
Management............................. 33
Principal Shareholders................. 35
Certain Transactions................... 37
Description of Shares.................. 37
Description of American Depositary
Receipts............................. 39
Shares Eligible for Future Sale........ 47
Taxation............................... 48
Certain Foreign Issuer
Considerations....................... 53
Underwriting........................... 54
Legal Matters.......................... 55
Experts................................ 55
Additional Information................. 55
Report of Independent Public
Accountants.......................... F-2
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OR ADSS, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,400,000
AMERICAN DEPOSITARY SHARES
REPRESENTING 1,400,000 ORDINARY SHARES
Z I N DA R T
LIMITED
------------------------------
PROSPECTUS
------------------------------
VAN KASPER & COMPANY
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
of the securities being registered, other than the underwriting discount and
commission. All of the amounts are estimates except for the SEC registration fee
and NASD filing fee.
SEC registration fee.................................................. $ 5,793.10
NASD filing fee....................................................... 2,180.00
Blue Sky fees and expenses............................................ 5,000.00
Printing and engraving expenses....................................... 85,000.00
Legal fees and expenses............................................... 700,000.00
Accounting fees and expenses.......................................... 250,000.00
Miscellaneous expenses................................................ 252,026.90
---------
Total............................................................ $ 1,300,000.00
=========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 8 of the Underwriting Agreement, a copy of
which will be filed as Exhibit 1.1 hereto, which provides for indemnification of
the directors and officers of the Company who sign the Registration Statement by
the Underwriters against certain liabilities, including those arising under the
Securities Act, in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
To be provided by amendment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
1.1 -- Form of Underwriting Agreement.
*3.1 -- Memorandum of Association of the Company.
3.2 -- Articles of Association of the Company.
4.1 -- Deposit Agreement
*5.1 -- Opinion of Robert W.H. Wang & Co.
*10.1 -- Contractual Joint Venture Agreement with Dongguan Xinda Giftware
Company Limited (English summary of document in Chinese).
*10.2 -- Contractual Joint Venture Agreement with Guangzhou (Xin Xing)
Giftware Company Limited (English summary of document in Chinese).
*10.3 -- Subcontract Processing Agreement with Guangzhou Tian He Dongpu
Economic Development Company (English summary of document in
Chinese).
*10.4 -- Commitment Letter from The Hong Kong and Shanghai Banking
Corporation Limited.
*10.5 -- Commitment Letter from Standard Chartered Bank.
*10.6 -- Commitment Letter from Bank of China.
*10.7 -- Land Use Rights Agreement (English summary of document in
Chinese).
II-1
84
*15.1 -- Letter of Arthur Andersen & Co., re Unaudited Interim Financial
Information.
22.1 -- Subsidiaries of the Registrant.
*24.1 -- Consent of Arthur Andersen & Co.
*24.2 -- Consent of Robert W.H. Wang & Co.
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedule II -- Amounts Receivable from Related Parties
Schedule IV -- Indebtedness of Related Parties -- Not Current
Schedule IX -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement at the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To provide the Underwriter at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
II-2
85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Hong Kong, on December 16, 1996.
(Registrant)
ZINDART INDUSTRIAL COMPANY LIMITED
By
George K.D. Sun
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ---------------------------------------- --------------------------------- ------------------
/s/ GEORGE K.D. SUN Chief Executive Officer and December 16, 1996
- ---------------------------------------- Director (Principal Executive
George K.D. Sun Officer)
/s/ FEATHER S.Y. FOK Chief Operating Officer and Chief December 16, 1996
- ---------------------------------------- Financial Officer (Principal
Feather S.Y. Fok Financial Officer)
/s/ VICKIE W.K. SO Financial Controller (Principal December 16, 1996
- ---------------------------------------- Accounting Officer)
Vickie W.K. So
/s/ ALEXANDER M.K. NGAN Director December 16, 1996
- ----------------------------------------
Alexander M.K. Ngan
/s/ HENRY H.L. HU Director December 16, 1996
- ----------------------------------------
Henry H.L. Hu
/s/ GEORGE VOLANAKIS Director December 16, 1996
- ----------------------------------------
George Volanakis
/s/ TONY D.H. LAI Director December 16, 1996
- ----------------------------------------
Tony D.H. Lai
/s/ DOMINA W.K. LEUNG Director December 16, 1996
- ----------------------------------------
Domina W.K. Leung
/s/ ROBERT A. THELEEN Authorized U.S. Representative December 16, 1996
- ----------------------------------------
Robert A. Theleen
II-3
86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the shareholders and Board of Directors of Zindart Industrial Company
Limited:
We have audited, in accordance with generally accepted auditing standards
in the United States of America, the consolidated balance sheets of Zindart
Industrial Company Limited (incorporated in Hong Kong; "the Company") and
Subsidiaries as of March 31, 1994, 1995 and 1996 and the related consolidated
statements of operations, cash flows and changes in shareholders' equity for the
years ended March 31, 1994, 1995 and 1996, included in this registration
statement and have issued our report thereon dated December 16, 1996. Our audit
was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in the index to the schedules
are the responsibility of the Company's management and are presented for the
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
December 16, 1996.
S-1
87
SCHEDULE II
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
DEDUCTIONS BALANCE AT END
ADDITIONS ----------------------- ---------------------
--------- AMOUNTS AMOUNTS CURRENT NOT CURRENT
NAME OF DEBTOR COLLECTED WRITTEN OFF ------- -----------
- -------------------------------------- BALANCE AT $'000 --------- ----------- $'000 $'000
BEGINNING $'000 $'000
----------
$'000
Year ended March 31, 1994
Zindart Entertainment &
Leisure Limited.................. $ -- $ 152 $ -- $ -- $ 152 --
Zindart Investment Company
Limited.......................... -- 194 -- -- 194 --
Premium Gallery Limited............. -- 120 -- -- 120 --
------ ------ ------- ------ ------ ------
$ -- $ 466 $ -- $ -- $ 466 $ --
====== ====== ======= ====== ====== ======
Year ended March 31, 1995
Zindart Entertainment &
Leisure Limited.................. $ 152 $ 880 $ -- $ -- $ 1,032 $ --
Zindart Investment Company
Limited.......................... 194 -- (194) -- -- --
Premium Gallery Limited............. 120 -- (120) -- -- --
Sinomex Hong Kong Limited........... -- 526 -- -- 526 --
Verveine Limited.................... -- 4 -- -- 4 --
Gold Venture Limited................ -- 4 -- -- 4 --
Wealthy Holdings Limited............ -- 7 -- -- 7 --
Luen Tat Model Design Company
Limited.......................... -- 179 -- -- 179 --
------ ------ ------- ------ ------ ------
$ 466 $ 1,600 $ (314) $ -- $ 1,752 $ --
====== ====== ======= ====== ====== ======
Year ended March 31, 1996
Zindart Entertainment &
Leisure Limited.................. $1,032 $ 73 $ (1,105)* $ -- -- --
Sinomex Hong Kong Limited........... 526 41 (567) -- -- --
Verveine Limited.................... 4 2 (6) -- -- --
Gold Venture Limited................ 4 2 (6) -- -- --
Wealthy Holdings Limited............ 7 -- (7) -- -- --
Luen Tat Model Design Company
Limited.......................... 179 -- (179) -- -- --
------ ------ ------- ------ ------ ------
$1,752 $ 118 $ (1,867) $ -- $ -- $ --
====== ====== ======= ====== ====== ======
- ---------------
* This amount was distributed to Zindart Pte Limited, the Company's then sole
shareholder, as dividends in kind.
S-2
88
SCHEDULE IV
ZINDART INDUSTRIAL COMPANY LIMITED
AND SUBSIDIARIES
INDEBTEDNESS OF RELATED PARTIES -- NOT CURRENT
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
INDEBTEDNESS OF
------------------------ BALANCE
ADDITIONS DEDUCTIONS AT END
NAME --------- ---------- -------
- ------------------------------------------------ BALANCE $'000 $'000 $'000
AT BEGINNING
------------
$'000
Year ended March 31, 1994
Zindart Entertainment & Leisure Limited....... $ -- $ 1,889 $ -- $ 1,889
====== ====== ======= ======
Year ended March 31, 1995
Zindart Entertainment & Leisure Limited....... $1,889 $ -- $ -- $ 1,889
====== ====== ======= ======
Year ended March 31, 1996
Zindart Entertainment & Leisure Limited....... $1,889 $ -- $ (1,889)* $ --
====== ====== ======= ======
- ---------------
* This amount was distributed to Zindart Pte Limited, the Company's then sole
shareholder, as dividends in kind.
S-3
89
SCHEDULE IX
ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS EXPRESSES IN UNITED STATES DOLLARS)
ADDITIONS:
CHARGED TO DEDUCTIONS BALANCE AT
COST AND ---------- END
DESCRIPTION EXPENSES ----------
- ------------------------------------------------ BALANCE AT ---------- $'000 $'000
BEGINNING $'000
----------
$'000
Year ended March 31, 1994
Provision for doubtful accounts............... $ -- $ 26 $ -- $ 26
Provision for inventories obsolescence........ 59 -- -- 59
--- --- --- ---
$ 59 $ 26 $ -- $ 85
=== === === ===
Year ended March 31, 1995
Provision for doubtful accounts............... $ 26 $ 13 $ -- $ 39
Provision for inventories obsolescence........ 59 -- -- 59
--- --- --- ---
$ 85 $ 13 $ -- $ 98
=== === === ===
Year ended March 31, 1996
Provision for doubtful accounts............... $ 39 $ -- $ -- $ 39
Provision for inventories obsolescence........ 59 -- -- 59
--- --- --- ---
$ 98 $ -- $ -- $ 98
=== === === ===
S-4
90
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------- ------------------------------------------------------------------------------
1.1 -- Form of Underwriting Agreement................................................
*3.1 -- Memorandum of Association of the Company......................................
3.2 -- Articles of Association of the Company........................................
4.1 -- Deposit Agreement.............................................................
*5.1 -- Opinion of Robert W.H. Wang & Co..............................................
*10.1 -- Contractual Joint Venture Agreement with Dongguan Xinda Giftware Company
Limited (English summary of document in Chinese)..............................
*10.2 -- Contractual Joint Venture Agreement with Guangzhou (Xin Xing) Giftware Company
Limited (English summary of document in Chinese)..............................
*10.3 -- Subcontract Processing Agreement with Guangzhou Tian He Dongpu Economic
Development Company (English summary of document in Chinese)..................
*10.4 -- Commitment Letter from The Hong Kong and Shanghai Banking Corporation
Limited.......................................................................
*10.5 -- Commitment Letter from Standard Chartered Bank................................
*10.6 -- Commitment Letter from Bank of China..........................................
*10.7 -- Land Use Rights Agreement (English summary of document in Chinese)............
*15.1 -- Letter of Arthur Andersen & Co., re Unaudited Interim Financial
Information...................................................................
22.1 -- Subsidiaries of the Registrant................................................
*24.1 -- Consent of Arthur Andersen & Co...............................................
*24.2 -- Consent of Robert W.H. Wang & Co..............................................
- ---------------
* To be filed by amendment.