1
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 June 30, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 000-22161
Zindart Limited
(Exact name of registrant as specified in its charter)
Hong Kong S.A.R., China
(State or other jurisdiction of incorporation or organization)
Not Applicable
(I.R.S. Employer Identification No.)
Flat C&D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road, Tai Po
New Territories, Hong Kong S.A.R., China
(Address of principal executive offices)
011-852-2256-6666
(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 ordinary shares outstanding as of June 30, 2000 was
8,834,125 (including the assumed issuance of 666,667 ordinary shares reserved
for future issuance pursuant to the acquisition of Hua Yang Holdings Co., Ltd.).
1.
2
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE PAGE 13
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.
2.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands)
As of June As of March
30, 2000 31, 2000
(Unaudited) (Audited)
Assets
Current assets:
Cash and bank deposits $ 5,578 $ 12,488
Accounts receivable, net 33,998 27,015
Bills receivable 179 140
Deposits and prepayments 5,311 4,201
Debt issuance cost 551 642
Inventories, net 15,015 14,824
Loan receivable 2,300 --
--------- ---------
Total current assets 62,932 59,310
Property, machinery and equipment, net 34,800 35,804
Loan receivable -- 2,300
Goodwill, net 48,685 49,184
--------- ---------
Total assets $ 146,417 $ 146,598
========= =========
Liabilities, minority interests and shareholders' equity
Current liabilities:
Short-term bank borrowings $ 10,693 $ 5,933
Convertible note, current portion 1,362 1,429
Long-term bank loan, current portion 12,000 12,000
Capital lease obligations, current portion 1,683 1,684
Accounts payable 13,163 14,526
Receipts in advance 1,225 1,358
Accrued liabilities 11,035 10,062
Taxation payable 1,621 2,237
--------- ---------
Total current liabilities 52,782 49,229
Long-term bank loan, non-current portion 9,000 12,000
Capital lease obligations, non-current portion 2,755 3,160
Convertible note, non-current portion 3,180 3,332
Deferred taxation 961 967
--------- ---------
Total liabilities 68,678 68,688
--------- ---------
Minority interests 1,276 1,105
--------- ---------
Shareholders' equity:
Common stock 528 528
Common stock reserved and to be issued 43 43
Additional paid-in capital 38,634 38,634
Retained earnings 38,491 37,882
Cumulative translation adjustments (1,233) (282)
--------- ---------
Total shareholders' equity 76,463 76,805
--------- ---------
Total liabilities, minority interests and
shareholders' equity $ 146,417 $ 146,598
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3.
4
Consolidated Statements of Operations
Unaudited
(in thousands, except per share amounts)
Three Months Ended
June 30,
2000 1999
-------- --------
Net sales $ 35,335 $ 28,573
Cost of sales (24,493) (20,443)
-------- --------
Gross profit 10,842 8,130
Selling, general and administrative expenses (8,983) (5,050)
-------- --------
Operating income 1,859 3,080
Other (expenses) income, net (756) 311
Amortization of goodwill (494) (170)
-------- --------
Income before income taxes 609 3,221
Income tax benefit (provision) 178 (287)
-------- --------
Income before minority interests 787 2,934
Minority interests (178) (148)
======== ========
Net income $ 609 $ 2,786
======== ========
Basic earnings per share $ 0.07 $ 0.32
Weighted average number of shares outstanding - Basic 8,834 8,814
Diluted earnings per share $ 0.07 $ 0.32
Weighted average number of shares outstanding - Diluted 8,834 8,845
The accompanying notes are an integral part of these consolidated financial
statements.
4.
5
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
-------------------------------
June 30, June 30,
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 609 $ 2,786
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 494 170
Amortization of debt issuance cost 87 --
Depreciation of property, machinery and equipment 1,917 1,171
Minority interests 178 148
Deferred taxation (6) --
(Increase) decrease in operating assets
Accounts receivable, net (6,983) (8,148)
Bills receivable (39) (19)
Deposits and prepayments (1,110) (209)
Inventories, net (191) (1,428)
Increase (decrease) in operating liabilities
Accounts payable (1,363) 4,312
Receipts in advance (133) (204)
Accrued liabilities 973 3,374
Taxation payable (616) 280
-------- --------
Net cash (used in) provided by operating activities (6,183) 2,233
-------- --------
Cash flows from investing activities:
Acquisition of property, machinery and equipment (913) (836)
Increase in loan receivable -- (2,000)
-------- --------
Net cash used in investing activities (913) (2,836)
-------- --------
Cash flows from financing activities:
New short-term bank borrowings 14,293 --
Repayment of short-term bank borrowings (9,533) --
Repayment of long-term bank loan (3,000) --
Repayment of capital element of capital lease obligations (406) --
-------- --------
Net cash provided by financing activities 1,354 --
-------- --------
Effect of cumulative translation adjustments (1,168) 3
-------- --------
Net decrease in cash and bank deposits (6,910) (600)
Cash and bank deposits, as of the beginning of the period 12,488 17,061
-------- --------
Cash and bank deposits, as of the end of the period $ 5,578 $ 16,461
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5.
6
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Zindart
Limited ("the Company") 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 June 30,
2000 are not necessarily indicative of the results that may be expected
for fiscal year 2001. 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,
2000, which have been previously filed with the Securities and Exchange
Commission.
2. Inventories
Inventories comprised:
June 30, 2000 March 31, 2000
------------- --------------
$ '000 $ '000
Raw materials 8,594 6,444
Work-in-process 1,573 3,343
Finished goods 5,778 5,961
------- -------
15,945 15,748
Less: Allowance for slow-moving and
obsolete inventories (930) (924)
------- -------
15,015 14,824
======= =======
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 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
6.
7
the end of each period.
Comprehensive income and its components, net of tax, comprised:
Three Months Ended
June 30,
2000 1999
----- -----
$'000 $'000
Net income 609 2,786
Other comprehensive income, net of tax:
Translation adjustments (951) 3
----- -----
Comprehensive (loss) income (342) 2,789
===== =====
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 June 30,
------------------------
2000 1999
----- -----
(`000) (`000)
Basic 8,834 8,814
Diluted 8,834 8,845
The difference between basic and diluted weighted average common shares
results from the assumption that dilutive stock options outstanding were
exercised.
7.
8
5. Segment Information:
The Company organizes its operations into three business segments: (i)
manufacturing of die-cast and injection-molded plastic products under
OEM arrangements, (ii) manufacturing of paper products under OEM
arrangements and (iii) marketing and distribution of die-cast products
under the proprietary brand name owned by its subsidiary, Corgi Classics
Limited. The following table presents certain operating segment
information:
Die-Cast Paper Corgi Total
Division Division Classics Segments
-------- -------- -------- --------
$'000 $'000 $'000 $'000
Three Months Ended
June 30, 2000
Net revenue 18,466 9,174 7,695 35,335
Operating income (loss) 1,602 983 (726) 1,859
Three Months Ended
June 30, 1999
Net revenue 19,552 9,021 -- 28,573
Operating income 2,391 689 -- 3,080
Total identifiable assets*
June 30, 2000 50,438 22,750 24,544 97,732
June 30, 1999 56,499 33,325 -- 89,824
*Identifiable assets represent total assets less goodwill.
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,
changes in market demand for our products, changes in general economic
conditions, dependence on certain customers, the results of our planned growth
initiatives and other risks described in the Company's Form 10-K for the fiscal
year ended March 31, 2000. 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 replica scale model collectibles, quality
hand-made books and specialty packaging products. The Company is a Hong Kong
corporation headquartered in Hong Kong, and its manufacturing
8.
9
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 Corgi
Classics Limited ("Corgi"), a corporation registered in England and Wales. Corgi
is a producer of collectible items and figurines. In consideration for shares of
Corgi, the Company paid GBP29.0 million to the stockholders, including the
repayment of Corgi's existing debt, the redemption of GBP6.6 million of
preferred stock from certain former stockholders of Corgi and the issuance of
GBP3.0 million in convertible note ("the Convertible Note") to certain
stockholders of Corgi. The Convertible Note carries with it a right exercisable
by the Noteholders (as defined in the Convertible Note) to require the Company
to purchase the outstanding amount of the Convertible Note in exchange for the
issuance to the Noteholders of common stock of the Company on terms set forth in
the Convertible Note. This right is exercisable over a three-year period
commencing on July 28, 1999 subject to certain conditions.
The acquisition was financed by a thirty-month installment bank loan of $30.0
million and convertible note of approximately $4.8 million (equivalent of GBP3.0
million).
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 June 30, 2000 and 1999.
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
Net sales 100.0% 100.0%
Gross profit 30.7% 28.5%
Selling, general and administrative 25.4% 17.7%
expenses
Operating income 5.3% 10.8%
Other (expenses) income, net (2.1%) 1.1%
Amortization of goodwill 1.4% 0.6%
Income before income taxes 1.7% 11.3%
Income tax benefit (provision) 0.5% (1.0%)
Minority interests 0.5% 0.5%
Net income 1.7% 9.8%
Net sales. Net sales for the three months ended June 30, 2000 were $35.3
million, an increase of $6.7 million, or 23.4%, from the same period in 1999.
The increase was primarily driven by the contribution of Corgi, which was
acquired in July 1999.
9.
10
Gross profit. Gross profit was $10.8 million for the three months ended
June 30, 2000, an increase of $2.7 million from the same period in 1999. The
increase in gross profit was driven by Corgi's higher profit margin and a slight
increase in the book division's margin as a result of cost savings. The gross
profit margin was partially offset by the lower margins in the die-cast division
as a result of changes in product mix.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $9.0 million for the three months ended June 30,
2000, an increase of $3.9 million, or 76.5%, from the same period in 1999. The
increase is primarily due to the addition of the selling, general and
administrative expenses of Corgi, including marketing and other expenses
incurred in connection with the launch of Corgi's U.S. division.
Other (expenses) income, net. Other expenses were $0.8 million for the
three months ended June 30, 2000, an increase of $1.1 million from the same
period in 1999. The increase in other expenses was primarily due to higher
interest expenses and amortization of debt issuance cost associated with the
Corgi acquisition.
Net income. Net income was $0.6 million for the three months ended June
30, 2000, a decrease of $2.2 million from the same period in 1999. The lower net
income reflects lower margins in the die-cast division, the Corgi U.S.
division's operating loss due to marketing and other expenses incurred in
connection with the launch of Corgi's U.S. division, and higher interest expense
and goodwill amortization resulting from the Corgi acquisition.
Liquidity and Capital Resources
Cash and bank deposits were $5.6 million at June 30, 2000. Cash used in
operating activities was $6.2 million for the three months ended June 30, 2000.
Cash used in investing activities was $0.9 million, primarily in connection with
the acquisition of property, machinery and equipment.
The Company has 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 June 30, 2000, the Company had banking facilities
with these banks of up to $53.2 million. On July 28, 1999, the Company drew down
a $30.0 million term loan from ABN AMRO Bank in connection with the Corgi
acquisition. The loan bears interest at 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 ("the IBI
Agreement") with one of its customers, Intervisual Books Inc. ("IBI"), to
facilitate its acquisition of a distribution 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 is secured by certain assets of IBI. The facility was matured in May
2000. Pursuant to the IBI Agreement, IBI extended the facility for an additional
year and has issued warrants to the Company to purchase 150,000 shares of common
stock of IBI.
10.
11
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 and short-term bank borrowings. The Company's
accounts receivable balance at June 30, 2000 was $34.0 million.
Exchange Rate Risk
The Company's sales are denominated in either U.S. dollars, GBP 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), GBP and
U.S. dollars. The Company is subject to a variety of risks associated with
changes among the relative values of the U.S. dollar, GBP, Hong Kong dollar and
the renminbi. The Company does not currently hedge its foreign exchange
positions. Any material increase in the value of Hong Kong dollar or renminbi or
GBP relative to the U.S. dollar would increase the Company's expenses and
therefore would have a material adverse effect on the Company's business,
financial condition and results of operations.
Seasonality
The Company's operating results in the past have fluctuated and those
results may fluctuate in the future. The Company ceases production for a
two-week period during January or February of each year due to the 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.
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 $36.1 million in
variable rate debt outstanding at June 30, 2000. 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 by one
percent.
The Company is exposed to risk from changing foreign currency exchange
rates. The Company's sales are denominated either in U.S. dollars, GBP 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), GBP and
U.S. dollars. The Company is subject to a variety of risks associated with
changes among the relative values of the U.S. dollar, GBP, Hong Kong dollar and
the renminbi. The Company does not currently hedge its foreign exchange
positions. Any material increase in the value of GBP, Hong Kong dollar or
renminbi relative to the U.S. dollar would increase the Company's expenses and
therefore would have a material adverse effect on the Company's business,
financial condition and results of operations. If exchange rates on such
currencies were to fluctuate 10%, the Company believes that its results from
operations and cash flows would not be adversely affected.
11.
12
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
12.
13
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: August 14, 2000 By: Feather Fok
Chief Financial Officer
(Principal Financial Officer)
13.
14
Exhibit Index
Exhibit
Number Description
27.1 Financial Data Schedule
14.