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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended December 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 000-22161
Zindart Limited
(Exact name of registrant as specified in its charter)
Hong Kong
(State or other jurisdiction of incorporation or organization)
Not Applicable
(I.R.S. Employer Identification No.)
Flat C&D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road, Tai Po
New Territories, Hong Kong
(Address of principal executive offices)
011-852-2665-6992
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock outstanding as of December 31, 1999
was 8,834,125 (including the assumed issuance of 666,667 shares of common stock
reserved for future issuance pursuant to the acquisition of Hua Yang Holdings
Co., Ltd.).
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART I. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE PAGE 16
REPORTS TO SHAREHOLDERS
Zindart Limited (the "Company") is publishing this report on Form 10-Q in order
to provide additional information to the Company's shareholders. However, the
Company, as a foreign private issuer, is not required to publish these reports
on these forms and may discontinue doing so at any time without prior notice.
Moreover, as a foreign private issuer, the company is and will remain exempt
from Section 14(a), 14(b), 14(c), and 14(f) of the Securities Exchange Act of
1934 (the "Exchange Act"), and the Company's officers, directors and principal
shareholders are and will remain exempt from the reporting and "short-swing"
profit recovery provisions contained in Section 16 of the Exchange Act until
such time as the company ceases to be a foreign private issuer.
Unless otherwise indicated, amounts denoted by "$" are U.S. dollars and amounts
denoted by "GBP" are pounds sterling of the United Kingdom.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands)
As of Dec. As of Mar 31,
31, 1999 1999
--------- ---------
(Unaudited) (Audited)
Assets
Current assets:
Cash and bank deposits $ 5,628 $ 17,061
Accounts receivable, net 33,365 18,871
Bills receivable -- 256
Deposits and prepayments 4,198 1,379
Loan receivable 2,200 --
Inventories, net 16,493 11,078
--------- ---------
Total current assets 61,884 48,645
Property, machinery, equipment, net 36,449 30,311
Goodwill, net 49,631 11,955
Deferred expenditures 729 --
--------- ---------
Total assets $ 148,693 $ 90,911
========= =========
Liabilities, minority interests and shareholders' equity
Current liabilities:
Short-term bank borrowings $ 6,993 $ --
Deferred consideration 1,726 --
Convertible notes payable 1,431 --
Long-term bank loan, current portion 12,000 --
Accounts payable 10,108 5,421
Receipts in advance 1,317 1,802
Accrued liabilities 14,030 12,557
Taxation payable 4,081 1,436
--------- ---------
Total current liabilities 51,686 21,216
Long-term bank loan, non-current portion 15,000 --
Convertible notes payable, non-current portion 3,341 --
Deferred taxation 971 971
--------- ---------
Total liabilities 70,998 22,187
--------- ---------
Minority interests 1,222 946
--------- ---------
Shareholders' equity:
Common stock 527 527
Common stock reserved and to be issued 43 43
Additional paid-in capital 38,634 38,497
Reorganization adjustment (8,180) (8,180)
Retained earnings 45,446 37,024
Cumulative translation adjustments 3 (133)
--------- ---------
Total shareholders' equity 76,473 67,778
--------- ---------
Total liabilities, minority interests and shareholders' equity $ 148,693 $ 90,911
========= =========
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Consolidated Statements of Operations
Unaudited
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $ 37,835 $ 25,776 $ 108,153 $ 90,585
Cost of sales (24,796) (18,144) (73,399) (62,991)
--------- --------- --------- ---------
Gross profit 13,039 7,632 34,754 27,594
Selling, general and administrative expenses (8,985) (4,917) (22,515) (15,325)
--------- --------- --------- ---------
Operating income 4,054 2,715 12,239 12,269
Other (expenses) income , net (834) 114 (844) (35)
Amortization of goodwill (494) (168) (1,048) (529)
--------- --------- --------- ---------
Income before income taxes 2,726 2,661 10,347 11,705
Provision for income taxes (674) (217) (1,650) (1,042)
--------- --------- --------- ---------
Income before minority interests 2,052 2,444 8,697 10,663
Minority interests (57) (119) (276) (711)
--------- --------- --------- ---------
Net income $ 1,995 $ 2,325 $ 8,421 $ 9,952
========= ========= ========= =========
Basic earnings per share $ 0.23 $ 0.26 $ 0.95 $ 1.13
Weighted average number of shares outstanding - Basic 8,825 8,814 8,818 8,800
Diluted earnings per share $ 0.22 $ 0.26 $ 0.95 $ 1.13
Weighted average number of shares outstanding - Diluted 8,932 8,814 8,906 8,829
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Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
----------------------
Dec 31, Dec 31,
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 8,421 $ 9,952
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 1,048 529
Amortization of deferred expenditures 346 275
Depreciation of property, machinery and equipment 4,460 3,171
Net loss (gain) on disposals of property, machinery and
equipment 33 (23)
Minority interests 276 711
(Increase) decrease in operating assets:
Accounts receivable, net (6,643) 2,973
Bills receivable 256 --
Deposits and prepayments (1,234) 208
Inventories, net (1,159) 3,096
Increase (decrease) in operating liabilities:
Accounts payable 916 (1,277)
Receipts in advance (485) (1,030)
Accrued liabilities 808 1,926
Taxation payable 1,086 693
Deferred taxation -- 61
-------- --------
Net cash provided by operating activities 8,129 21,265
-------- --------
Cash flows from investment activities:
Net cash outflow for acquisition of a subsidiary (45,403) (575)
Acquisition of property, machinery and equipment (5,996) (3,755)
Fixed assets disposal proceeds -- 28
Additions of deferred expenditures (875) (18)
New loan receivables (2,200) --
-------- --------
Net cash used in investing activities (54,474) (4,320)
-------- --------
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Nine Months Ended
Dec 31, Dec 31,
1999 1998
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 137 4,931
Increase in short-term bank borrowings 3,017 --
New bank loan 27,000 --
New convertible notes issued 4,772 --
Repayment of revolving credit facility -- (28,000)
-------- --------
Net cash provided by (used in) financing activities 34,926 (23,069)
-------- --------
Effect of cumulative translation adjustments (14) (115)
-------- --------
Net decrease in cash and bank deposits (11,433) (6,239)
Cash and bank deposits, as of the beginning of the period 17,061 22,373
-------- --------
Cash and bank deposits, as of the end of the period $ 5,628 $ 16,134
======== ========
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Notes to Consolidated Financial Statements
(Unaudited)
December 31, 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements have been condensed or omitted.
In the opinion of management, the accompanying financial statements include
all adjustments considered necessary to present fairly the financial
position, results of operations, and cash flows of the Company. The results
of operations for the three months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for fiscal year
2000. These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Form 10-K for the fiscal year ended March 31, 1999, which have been
previously filed with the Securities and Exchange Commission.
2. Inventories
Inventories comprised:
December 31, 1999 March 31, 1999
----------------- --------------
$'000 $'000
Raw materials 9,123 6,641
Work-in-process 2,854 3,287
Finished goods 5,200 2,212
------- -------
17,177 12,140
Less: Allowance for slow-moving and
obsolete inventories (684) (1,062)
------- -------
16,493 11,078
======= =======
3. Comprehensive Income
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" which
establishes guidance for the reporting and display of comprehensive income
and its components. The purpose of reporting comprehensive income is to
report a measure of all changes in equity that resulted from
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recognized transactions and other economic events of the period other than
transactions with stockholders. Adoption of SFAS No. 130 had no economic
impact on the Company's consolidated financial position, net income,
stockholders' equity or cash flows, although the presentation of certain
items has changed. The components of accumulated other comprehensive income
included in the accompanying consolidated balance sheets consist of
cumulative translation adjustments as of the end of each period.
Comprehensive income and its components, net of tax, comprised:
Three Months Ended
December 31,
1999 1998
------ ------
$'000 $'000
Net income 1,995 2,325
Other comprehensive income, net of tax :
Translation adjustments (163) --
------ ------
Comprehensive income 1,832 2,325
====== ======
4. Computation of earnings per share:
The numerator in calculating both basic and diluted earnings per share for
each period is reported net income. The denominator is based on the
following weighted-average number of common shares:
Three Months Ended December 31,
---------------------------
1999 1998
----- -----
(`000) (`000)
Basic 8,825 8,814
Diluted 8,932 8,814
The difference between basic and diluted weighted average common shares
results from the assumption that dilutive stock options outstanding were
exercised.
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5. Segment Disclosure:
The Company organises its operations into three business segments: (i)
die-cast and injection-moulded plastic, (ii) books and specialty packaging
and (iii) production and marketing of collectibles through the Company's
United Kingdom subsidiary, Corgi Classics. The following table presents
certain operating segment information:
Die-Cast Paper Corgi Total
Division Division Classics Segments
------ ------ ------ ------
Three Months Ended
Dec 31, 1999
Net revenue 20,934 7,418 9,483 37,835
Operating income 1,546 415 2,093 4,054
Three Months Ended
Dec 31, 1998
Net revenue 20,572 5,204 -- 25,776
Operating income 2,606 109 -- 2,715
Total identifiable assets*
Dec 31, 1999 47,971 27,500 23,591 99,062
Dec 31, 1998 51,522 30,523 -- 82,045
*Identifiable assets represent total assets less goodwill, net.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 regarding events and trends which may affect the Company's future operating
results and financial position. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
anticipated. These risks and uncertainties include, but are not limited to, the
Company's dependence on major customers and on parties located in mainland
China, changes in market demand for the Company's products, economic factors
that include the international financial situation in Asia and other economic
conditions, the Company's reliance on key personnel and those other factors
discussed in the section titled "Risk Factors" and elsewhere in the Company's
Form 10-K for the fiscal year ended March 31, 1999, as well as those discussed
elsewhere in this Form 10-Q. The forward-looking statements are based on
information available to the Company on the date of this report, and the Company
undertakes no obligation to revise these forward-looking statements to reflect
subsequent events or circumstances.
The Company is a turnkey manufacturer of high-quality die-cast, injection-molded
and paper products, including die-cast collectibles, collectible holiday
ornaments and toys, hand-made books and specialty packaging products. The
Company is a Hong Kong corporation headquartered in Hong Kong, and its
manufacturing operations are located in the neighboring Guangdong province of
mainland China. The Company serves a growing number of customers that are
brand-name marketers of die-cast and injection-molded giftware and collectibles,
as well as packagers and publishers of books in the United States and Europe.
On July 28, 1999, the Company acquired all of the outstanding shares of stock of
Corgi Classics Limited, a corporation registered in England and Wales. Corgi is
a producer of collectible items and figurines. In consideration for the stock,
the Company paid GBP29,000,000, including the assumption of existing debt, the
redemption of GBP6,557,817 of preferred stock from certain former stockholders
of Corgi and the issuance of GBP3,000,000 in loan notes (the "Loan Notes") to
certain stockholders of Corgi. The Loan Notes carry with them a right
exercisable by the Noteholders (as defined in the Loan Notes) to require the
Company to purchase the outstanding amount of the Loan Notes in exchange for the
issuance to the Noteholders of common stock of the Company on terms set forth in
the Loan Notes. This right is exercisable over a two-year period commencing on
July 28, 1999 subject to certain conditions.
The acquisition of Corgi was financed by a $30,000,000 term loan extended on
July 28, 1999 to a subsidiary of the Company by ABN AMRO Bank N.V., London
Branch (the "Term Loan"). A standby letter of credit facility between ABN AMRO
Bank N.V., Hong Kong Branch, and certain other financial institutions and the
Company also in the amount of $30,000,000, was entered into on the same date in
support of the Term Loan.
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On November 16, 1999, Corgi purchased certain assets from Lledo PLC, a leading
brand in the United Kingdom collectibles industry including the right to the
brand name of Lledo and certain tooling, for GBP1.95 million in cash.
Results of Operations
The table below sets forth certain statement of operations data as a percentage
of net sales for the three months ended December 31, 1999 and 1998.
Three Months Ended Three Months Ended
December 31, 1999 December 31, 1998
------------------ ------------------
Net sales 100.0% 100.0%
Gross profit 34.5% 29.6%
Selling, general and administrative 23.8% 19.1%
expenses
Operating income 10.7% 10.5%
Other (expenses) income, net (2.2%) 0.4%
Amortization of goodwill 1.3% 0.7%
Income before income taxes 7.2% 10.3%
Provision for income taxes 1.8% 0.8%
Minority interests 0.2% 0.5%
Net income 5.3% 9.0%
Net sales. Net sales for the three months ended December 31, 1999 were
$37.8 million, an increase of $12.0 million, or 46.8%, from the same period in
1998. The increase was primarily driven by three sources: the contribution of
Corgi Classics, Inc., growth in the high-quality book category and an increase
in sales of die-cast products as a result of new OEM customers.
Gross profit. Gross profit was $13.0 million for the three months ended
December 31, 1999, an increase of $5.4 million, or 70.8%, from the same period
in 1998. Gross margin was 34.5% for the three months ended December 31, 1999 as
compared to 29.6% for the same period in 1998. The increase in gross profit is
primarily due to the addition of the Corgi business, whose gross profit was
53.1% in the three months ended December 31, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $9.0 million for the three months ended December
31, 1999, an increase of $4.1 million, or 82.7%, from the same period in 1998.
The increase is primarily due to the addition of the selling, general and
administrative expenses of Corgi Classics and expenses of Zindart's expanded
marketing program.
Other (expenses) income, net. Other expenses were $0.8 million for the
three months ended December 31, 1999, an increase of $0.9 million from the same
period in 1998. The increase in other expenses was primarily due to interest
expenses for the Term Loan and the Loan Notes and amortization of debt issuance
expenses incurred in connection with the Corgi acquisition.
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Net income. Net income was $2.0 million for the three months ended
December 31, 1999, a decrease of $0.3 million, or 14.2%, from the same period in
1998. The lower net income reflects primarily the higher selling, general and
administrative expenses and higher effective income tax rate of Corgi and
expenses associated with Corgi acquisition. The Company increased expenditures
in its marketing program and recorded $1.2 million in interest and debt issuance
expenses and amortization of goodwill associated with the Corgi acquisition.
Liquidity and Capital Resources
Cash and bank deposits were $5.6 million at December 31, 1999. Cash
generated from operating activities was $8.1 million for the nine months ended
December 31, 1999. Cash used by investing activities was $54.5 million,
primarily in connection with the Corgi acquisition.
Zindart has revolving lines of credit with certain banks, including ABN
AMRO Bank, Standard Chartered Bank, KBC Bank NV and The Hongkong and Shanghai
Banking Corporation Limited. As of December 31, 1999, the Company had available
banking facilities with these banks of up to $56 million. On July 28, 1999, the
Company drew down its $30 million term loan from ABN AMRO Bank at interest rate
of 3-month LIBOR plus a margin. The term loan has a tenure of 30 months. The
company expects to repay the term loan and related interest from internally
generated funds.
In May 1999, the Company entered into a credit agreement with one of its
customers, Intervisual Books Inc. ("IBI") to facilitate its acquisition of a
distributing company. The Company believes this acquisition will be beneficial
to both IBI and the Company. Under the terms of this credit agreement, the
Company agreed to provide a $2.3 million revolving credit facility to IBI, which
bears interest at a rate of 5% above LIBOR per annum and will mature in May 2000
and is secured by certain assets of IBI. The credit agreement may be extended
for an additional year in exchange for warrants to purchase IBI stock. As of
December 31, 1999, the loan due from IBI was $2.2 million.
Consistent with the industry practice, the Company offers accounts
receivable terms to its customers. This practice has created working capital
requirements that the Company generally has financed with net cash balances and
internally generated cash flow. The Company's accounts receivable balance at
December 31, 1999 was $33.4 million.
The Company's sales are denominated in either U.S. dollars or Hong Kong
dollars. The majority of the Company's expenses are denominated in Hong Kong
dollars, followed by renminbi (the currency of mainland China) 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, Hong Kong Dollar and the renminbi. The
Company does not currently hedge its foreign exchange positions. Any material
increase in the value of the Hong Kong dollar or renminbi relative to the U.S.
dollar would increase the Company's expenses and therefore would have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Year 2000 Compliance
The Company's operations may suffer if the computer systems on which it depends
are not Year 2000 compliant. The Company has undertaken a systematic approach to
address the Year 2000 issue. A detailed Y2K rollover plan and rollover team were
established to set up procedures to address any issues resulting from the
changeover from December 31,1999 to January 1,2000. The rollover resulted in no
material adverse effect on the Company's computer systems and operations. Also
no data or reports were lost in the Company's computer systems during the
transition period and all date-based calculations were appeared to be calculated
correctly by the Company's computer systems following the rollover. The Company
suffered no interruption in supplies from third parties as a result of the
rollover. Production machinery and equipment were also tested and their function
has not been affected by the year changeover. Date-based computer systems may
also fail to recognize February 29, 2000, possibly resulting in faulty date
calculations and related errors or disruptions. The Company conducted a review
of its date-based computer systems in respect of February 29, 2000, as part of
its systematic Y2K review; however, there can be no assurance that the computer
systems and operations of the Company will not be disrupted by the failure of
computer systems to recognize February 29, 2000.
Seasonality
Our operating results in the past have fluctuated and those results may
fluctuate in the future. We cease production for a two-week period during
January or February of each year due to the observance of the lunar new year
holiday in Hong Kong and mainland China, which has caused revenues during the
fourth fiscal quarter of each year to be lower than revenues during the other
three quarters. We may also experience fluctuations in quarterly sales and
related net income compared with other quarters due to the timing of receipt of
orders from customers and the shipment of products. Sales of books are weighted
toward the Christmas season; as a result, book sales in the first half of our
fiscal year are generally higher than in the second half.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary risk exposures arise from changes in interest rates and
foreign currency exchanges rates. The Company had $27 million in variable rate
debt outstanding at December 31, 1999. The Company does not currently hedge its
interest rate exposure. Based on its current level of variable rate debt, the
Company believes that its results from operations and cash flows would not be
adversely affected if the applicable interest rate were increased one percent.
The Company is exposed to risk from changing foreign currency exchange rates.
The Company's sales are denominated either in U.S. dollars or Hong Kong dollars.
The majority of the Company's expenses are denominated in Hong Kong dollars,
followed by renminbi (the currency of mainland China) 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, Hong Kong Dollar and the renminbi. The
Company does not currently hedge its foreign exchange positions. Any material
increase in the value of the Hong Kong dollar or renminbi relative to the U.S.
dollar would increase the Company's expenses and therefore would have a material
adverse effect on the Company's business, financial condition and results of
operations.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this report:
Exhibit
Number Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZINDART LIMITED
/s/ Feather Fok
----------------------------------
Dated: February 14, 2000 By: Feather Fok
Chief Financial Officer
(Principal Financial Officer)
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Exhibit Index
Exhibit
Number Description
27.1 Financial Data Schedule
17.