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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to _______________
Commission file number: 000-22161
ZINDART LIMITED
(Exact Name of Registrant as Specified in its Charter)
Hong Kong S.A.R., China
(State or Other Jurisdiction of Incorporation or Organization)
Not Applicable
(I.R.S. Employer Identification No.)
Flat C&D, 25/F, Block 1, Tai Ping Industrial Centre
57 Ting Kok Road, Tai Po
New Territories, Hong Kong S.A.R., China
(Address of Principal Executive Offices)
Not Applicable
(Zip Code)
Registrant's telephone number, including area code: 011-852-2256-6000
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of ordinary shares ("Shares") outstanding as of August 10, 2001 was
8,834,125.
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE PAGE 15
REPORTS TO SHAREHOLDERS
Zindart Limited (the "Company") is publishing this report on Form 10-Q in order
to provide additional information to the Company's shareholders. However, the
Company, as a foreign private issuer, is not required to publish reports on this
form and may discontinue doing so at any time without prior notice. Moreover, as
a foreign private issuer, the Company is and will remain exempt from Section
14(a), 14(b), 14(c), and 14(f) of the Securities Exchange Act of 1934 (the
"Exchange Act"), and the Company's officers, directors and principal
shareholders are and will remain exempt from the reporting and "short-swing"
profit recovery provisions contained in Section 16 of the Exchange Act until
such time as the Company ceases to be a foreign private issuer.
Unless otherwise indicated, amounts denoted by "$" are U.S. dollars and amounts
denoted by "GBP" are pounds sterling of the United Kingdom.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands)
As of As of
June 30, March 31,
2001 2001
-------------- --------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and bank deposits $ 3,946 $ 8,738
Short-term investment 130 130
Accounts receivable, net 29,544 28,177
Inventories 17,909 13,783
Deposits and prepayments 6,363 5,888
Debt issuance cost 649 711
Loan receivable, current portion 2,050 500
-------------- --------------
Total current assets 60,591 57,927
Property, machinery and equipment, net 32,736 33,267
Loan receivable, non-current portion -- 1,800
Goodwill, net 46,716 47,210
-------------- --------------
Total assets $ 140,043 $ 140,204
============== ==============
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term bank borrowings $ 15,956 $ 10,872
Long-term bank loans, current portion 3,345 2,851
Capital lease obligations, current portion 1,867 1,901
Convertible note, current portion 1,267 1,276
Accounts payable 11,951 14,705
Receipts in advance 1,070 1,539
Accrued liabilities 13,988 11,165
Taxation payable 156 1,456
-------------- --------------
Total current liabilities 49,600 45,765
Long-term bank loans, non-current portion 10,788 11,822
Capital lease obligations, non-current portion 986 1,413
Convertible note, non-current portion 1,690 1,702
Deferred taxation 972 981
-------------- --------------
Total liabilities 64,036 61,683
-------------- --------------
Minority interests 1,367 1,253
-------------- --------------
Shareholders' equity
Common stock 571 571
Additional paid-in capital 38,634 38,634
Retained earnings 37,502 40,064
Accumulated other comprehensive loss (2,067) (2,001)
-------------- --------------
Total shareholders' equity 74,640 77,268
-------------- --------------
Total liabilities, minority interests and shareholders' equity $ 140,043 $ 140,204
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
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Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
June 30,
2001 2000
-------------- --------------
Net sales $ 28,265 $ 35,335
Cost of goods sold (20,937) (24,493)
-------------- --------------
Gross profit 7,328 10,842
Selling, general and administrative expenses (9,108) (8,896)
-------------- --------------
Operating (loss) income (1,780) 1,946
Other expense, net (673) (843)
Amortization of goodwill (494) (494)
-------------- --------------
(Loss) income before income taxes (2,947) 609
Income tax benefit 499 178
-------------- --------------
(Loss) income before minority interests (2,448) 787
Minority interests (114) (178)
-------------- --------------
Net (loss) income $ (2,562) $ 609
============== ==============
Basic (loss) earnings per share $(0.29) $0.07
Weighted average no. of shares outstanding - Basic 8,834 8,834
Diluted (loss) earnings per share $(0.29) $0.07
Weighted average no. of shares outstanding - Diluted 9,040 8,834
The accompanying notes are an integral part of these consolidated financial
statements.
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Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
June 30,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net (loss) income $ (2,562) $ 609
Adjustments to reconcile net (loss) income to net cash used in operating
activities-
Minority interests 114 178
Amortization of goodwill 494 494
Amortization of debt issuance cost 112 87
Depreciation of property, machinery and equipment 1,599 1,917
Deferred taxation (9) (6)
(Increase) decrease in operating assets-
Accounts receivable, net (1,367) (6,983)
Bills receivable -- (39)
Inventories (4,126) (191)
Deposits and prepayments (475) (1,110)
Increase (decrease) in operating liabilities-
Accounts payable (2,754) (1,363)
Receipts in advance (469) (133)
Accrued liabilities 2,823 973
Taxation payable (1,300) (616)
-------------- --------------
Net cash used in operating activities (7,920) (6,183)
-------------- --------------
Cash flows from investing activities:
Acquisitions of property, machinery and equipment (1,068) (913)
Decrease in loan receivable 250 --
-------------- --------------
Net cash used in investing activities (818) (913)
-------------- --------------
Cash flows from financing activities:
New short-term bank borrowings 14,203 14,293
Repayment of short-term bank borrowings (11,057) (9,533)
Repayment of long-term bank loans (540) (3,000)
Repayment of capital element of capital lease obligations (461) (406)
Repayment of convertible note (21) --
Payment of debt issuance cost (50) --
-------------- --------------
Net cash provided by financing activities 2,074 1,354
-------------- --------------
Effect of translation adjustments on cash (66) (1,168)
-------------- --------------
Net decrease in cash and cash equivalents (6,730) (6,910)
Cash and cash equivalents, as of beginning of the period 8,738 12,488
-------------- --------------
Cash and cash equivalents, as of end of the period $ 2,008 $ 5,578
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
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Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Zindart
Limited (the "Company") and its subsidiaries have been prepared in
accordance with generally accepted accounting principles in the United
States for interim financial reporting and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures required by generally accepted accounting principles for
complete financial statements have been condensed or omitted.
In the opinion of management, the accompanying financial statements
include all adjustments considered necessary to present fairly the
financial position, results of operations, and cash flows of the Company
for the periods presented. Also, we have made certain reclassification
to our historical financial statements to conform to the current
period's presentation. The results of operations for the three months
ended June 30, 2001 are not necessarily indicative of the results that
may be expected for fiscal year ending March 31, 2002. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-K for the fiscal year ended March 31, 2001, which have been filed
with the Securities and Exchange Commission.
2. Inventories
Inventories consist of:
As of As of
June 30, 2001 March 31, 2001
--------------- ---------------
$'000 $'000
Raw materials 7,811 4,529
Work-in-process 2,198 1,860
Finished goods 7,900 7,394
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17,909 13,783
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3. Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes guidance for
the reporting and display of comprehensive loss and its components. The
purpose of reporting comprehensive loss is to report a measure of all
changes in equity that resulted from recognized transactions and
other economic events of the period other than transactions with
stockholders. The components of accumulated other comprehensive loss
included in the accompanying consolidated balance sheets consist of
cumulative translation adjustments and unrealized loss on short-term
investment as of the end of each period.
Comprehensive loss and its components, net of tax, consist of:
Three Months Ended
June 30,
2001 2000
-------------- -------------
$'000 $'000
Net (loss) income (2,562) 609
Other comprehensive loss, net of tax:
Translation adjustments (66) (951)
--------- ---------
Comprehensive loss (2,628) (342)
========= =========
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4. (Loss) Earnings Per Share
The numerator in calculating both basic and diluted (loss) earnings per
share for each period is the reported net (loss) income. The denominator
is based on the following weighted-average number of common shares:
Three Months Ended
June 30,
2001 2000
-------------------- ------------------
'000 '000
Basic 8,834 8,834
Diluted 9,040 8,834
The difference between basic and diluted weighted average common shares
results from the assumption that dilutive stock options outstanding were
exercised. The diluted loss per share for the three months ended June
30, 2001 is anti-dilutive as a result of the net loss. Therefore, the
basic and diluted loss per share for the three months ended June 30,
2001 are the same. Options and convertible notes outstanding during the
three months ended June 30, 2000 were not included in the computation of
diluted earnings per share because they were anti-dilutive.
5. Segment Information
The Company organizes its operations into three business segments: (i)
manufacturing of die-cast and injection-molded plastic products under
OEM arrangements (the "Die-Cast Division"), (ii) manufacturing of paper
products under OEM arrangements (the "Paper Division") and (iii)
marketing and distribution of die-cast products under the proprietary
brand names owned by its subsidiary, Corgi Classics Limited (the "Corgi
Division"). The following table presents certain operating segment
information:
Die-Cast Paper Corgi Total
Division Division Division Segments
------------ ------------ ------------ ------------
$'000 $'000 $'000 $'000
Three Months Ended June 30, 2001
Net revenue 13,064 6,839 8,362 28,265
Operating income (loss) (1,284) 195 (691) (1,780)
Three Months Ended June 30, 2000
Net revenue 18,466 9,174 7,695 35,335
Operating income (loss) 1,689 983 (726) 1,946
Total identifiable assets*
June 30, 2001 42,484 20,768 30,075 93,327
June 30, 2000 50,438 22,750 24,544 97,732
*Identifiable assets represent total assets less goodwill.
6. Dividends
The Company did not declare any dividends for the three months ended
June 30, 2001 nor for the three months ended June 30, 2000.
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7. Supplemental Disclosure of Cash Flow Information
Cash paid for interest and income taxes is as follows:
Three Months Ended
June 30,
2001 2000
-------------------- ------------------
'000 '000
Interest 676 977
Income taxes 801 438
8. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Accounting for business combinations," and Statement No. 142,
"Goodwill and other intangible assets." The Company must adopt these
Statements by April 1, 2002. These Statements may affect the accounting
for business combinations consummated after June 30, 2001 and may affect
the Company's treatment of existing goodwill and other intangible assets
as of the adoption date. The Statements require, among other provisions,
companies to assess the possible impairment of goodwill existing at the
date of adoption and perform subsequent impairment tests on an annual
basis. Additionally, existing goodwill and intangible assets must be
reassessed and classified consistently in accordance with the
Statements' criteria. Under the new standards, the Company will no
longer amortize goodwill; however, intangible assets will continue to be
amortized over their estimated useful lives, which, if supportable, may
be a period that exceeds the current maximum period of 40 years.
Intangible assets with indeterminable useful lives will not be amortized
but assessed for impairment in accordance with Statement No. 142. The
Company has not yet completed an assessment of the impact that these new
standards may have on the accompanying financial statements and cannot
estimate whether such impact will be material.
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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,
changes in market demand for our products, changes in general economic
conditions, dependence on certain customers, the results of our planned growth
initiatives, competition, changes in governmental regulations, a decline in
capital markets, changes in the political, social and economic situations of
Hong Kong and the People's Republic of China ("PRC"), and other risks described
in the Company's Form 10-K for the fiscal year ended March 31, 2001. In some
cases, forward looking statements can be identified by terminology such as
"may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates,"
and similar expressions. The forward-looking statements are based on information
available to the Company on the date of this report, and the Company undertakes
no obligation to revise these forward-looking statements to reflect subsequent
events or circumstances.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto and the information
contained in this quarterly report on Form 10-Q.
OVERVIEW
The Company is a turnkey manufacturer of high-quality die-cast, injection-molded
and paper products that require a significant degree of engineering and
hand-assembly expertise to produce. The Company markets and distributes some of
its die-cast products under the Corgi brand name. The Company manufactures
die-cast collectibles, collectible holiday ornaments, toys, hand-made books,
specialty packaging and other paper products. The Company is headquartered in
Hong Kong and its manufacturing operations are located in the neighboring
Guangdong Province of the PRC. The Corgi products are marketed from the
Company's subsidiaries in the United Kingdom and the United States.
The Company's customers for die-cast and injection-molded products include
Hallmark Cards, Inc., Mattel Toys ("Mattel"), Sieper Werke GmbH, Alcone
Marketing Group Inc., Simon Marketing (HK) Ltd., Promotional Partners Group
Ltd., Freeplay Group, and Spin Master Far East Ltd. For books, paper and
packaging products, the Company's customers include Mattel, Intervisual Books,
Inc. ("IBI"), Jetta Co. Ltd., Penguin Putnam Inc. and Macmillan Children's
Books. The Company is dependent on sales to Hallmark Cards, Inc. and Mattel.
The Company organizes its operations into three business segments: (1)
manufacturing of die-cast and injection-molded plastic products under OEM
arrangements (the "Die-Cast Division"), (2) manufacturing of paper products
under OEM arrangements (the "Paper Division") and (3) marketing and distribution
of die-cast products under the proprietary brand name owned by its subsidiary,
Corgi Classics Limited (the "Corgi Division").
ACQUISITIONS
On July 28, 1999, the Company acquired (the "Corgi Acquisition") all of the
outstanding shares of Corgi Classics Limited ("Corgi UK"). Corgi UK is a
producer of collectible items and figurines. Pursuant to a Sale and Purchase
Agreement dated July 28, 1999 among the Company, Exitarena Limited
("Exitarena"), Christopher Guest, Esq. and certain other parties (collectively
with Mr. Guest, the "Stockholders"), Exitarena acquired all of the outstanding
shares of stock of Corgi UK from the Stockholders and Exitarena was subsequently
renamed Corgi Classics (Holdings) Ltd. As a result of the Corgi Acquisition,
Corgi UK became a wholly owned subsidiary of Exitarena which itself is a wholly
owned subsidiary of the Company. In consideration for the shares of stock of
Corgi UK, the Company paid total consideration of GBP29.0 million to the
Stockholders, including the procurement or repayment by Corgi UK's existing bank
indebtedness as well as certain preferred stock issued to a number of
Stockholders for GBP6.6 million and the issuance by Exitarena of a total of
GBP3.0 million in loan notes (the "Loan Note") to certain Stockholders who are
members of senior management of Corgi UK. The Loan Note carries with it a right
exercisable by the Noteholders (as defined in the Loan Note) to require the
Company to purchase the outstanding amount of the Loan Note in exchange for the
issuance to the Noteholders of shares of the Company at a price equal to 80
percent of the average market price of the common stock over a ten-day period
prior to exercise of the right, so long as the average market price is above
$12. This right is exercisable over a three-year period commencing on July 28,
1999 subject to certain conditions. The outstanding amount of the Loan Note as
of June 30, 2001 was GBP2.1
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million (equivalent to $3.0 million). The acquisition was recorded under the
purchase method of accounting.
The acquisition of Corgi UK was financed by a $30.0 million term loan extended
on July 28, 1999 to Exitarena by ABN AMRO Bank N.V. (London Branch) (the "Corgi
Term Loan"). A standby letter of credit facility between ABN AMRO Bank, N.V.
(Hong Kong Branch) and certain other financial institutions and the Company also
in the amount of $30.0 million, was entered into on the same date in support of
the Corgi Term Loan.
From July 1999 through March 2001, the Company repaid $21.0 million (70%) of its
original $30.0 million Corgi Term Loan. In order to release working capital to
expand its sales and marketing efforts, the Company completed a $9.0 million
refinancing (the "Refinancing Loan") with four international banks: ABN AMRO
Bank, N.V. (Hong Kong Branch), KBC Bank, N.V. (Hong Kong Branch), Standard
Chartered Bank and Rabo Bank (Hong Kong Branch) in March 2001. The Refinancing
Loan extends the loan terms and calls for scaling down the quarterly repayment
commitments. As of June 30, 2001, the outstanding amount under the Refinancing
Loan was $8.5 million.
On November 16, 1999, Corgi UK purchased certain assets from Lledo PLC
("Lledo"), 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 statements of operations data as a percentage
of net sales for the three months ended June 30, 2001 and 2000.
Three Months Ended
June 30,
2001 2000
-------------------- ------------------
Net sales 100.0% 100.0%
Gross profit 25.9% 30.7%
Selling, general and administrative expenses (32.2%) (25.2%)
Operating (loss) income (6.3%) 5.5%
Interest expense, net (2.1%) (2.3%)
Other expense, net (0.3%) (0.1%)
Amortization of goodwill (1.7%) (1.4%)
(Loss) income before income taxes (10.4%) 1.7%
Income tax benefit 1.8% 0.5%
Minority interests (0.4%) (0.5%)
Net (loss) income (9.1%) 1.7%
Net Sales. The Company's net sales were $28.3 million for the three months ended
June 30, 2001, a decrease of $7.0 million, or 19.8%, from $35.3 million from the
same period in 2000. The decrease was primarily due to the reduction in sales in
the Die-Cast Division and Paper Division as a result of an overall industry
downturn. The reduction was partially offset by the increase of the Corgi
Division's sales.
Gross Profit. The Company's gross profit was $7.3 million for the three months
ended June 30, 2001, a decrease of $3.5 million, or 32.4%, from $10.8 million
from the same period in 2000. Gross margin was 25.9% of sales for the three
months ended June 30, 2001 and 30.7% for the same period in 2000. The decrease
in gross profit was due to lower sales in the Die-Cast Division and Paper
Division. The decrease in gross margin was due to fixed costs set against lower
sales in both the Die-Cast Division and Paper Division as well as increased
manufacturing costs.
Selling, General and Administrative Expenses. The Company's selling, general and
administrative expenses were $9.1 million for the three months ended June 30,
2001, an increase of $212,000, or 2.4%, from $8.9 million from the same period
in 2000. The increase was due to higher advertising expenditures in the Corgi
Division. The increase was partially offset by the decrease of the Die-Cast and
Paper Divisions' expenses due to lower sales.
Interest Expense, Net. The Company's interest expense, net, was $588,000 for the
three months ended June 30, 2001, as compared to $826,000 for the same period in
2000. This decrease was due to the reduction of the principal of the term loan
used to finance the acquisition of Corgi Classics Limited as well as the
continuous interest rate reductions in the United States.
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Other Expense, Net. The Company's other expense, net, was $85,000 for the three
months ended June 30, 2001, as compared to $17,000 for the same period in 2000.
Amortization of Goodwill. The Company's amortization of goodwill was $494,000
for the three months ended June 30, 2001, which was equal to such expenses
during the same period in 2000.
Income Tax Benefit. The Company's income tax benefit was $499,000 for the three
months ended June 30, 2001, as compared to $178,000 for the same period in 2000.
The increase was due to the lower net income earned by the Company.
Minority Interests. The Company's minority interests were $114,000 for the three
months ended June 30, 2001 and $178,000 for the same period in 2000. The
decrease was due to the lower net income earned by the Company's subsidiaries.
Net (loss) Income. The Company's net loss was $2.6 million for the three months
ended June 30, 2001, a decrease $3.2 million from $609,000 in net income for the
same period in 2000. The decrease was primarily due to lower sales and lower
gross margins in the Die-Cast and Paper Divisions as well as higher selling,
general and administrative expenses incurred by the Corgi Division in connection
with its expansion into U.S. markets.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $2.0 million as of June 30, 2001. Cash used in
operating activities was $8.0 million for the three months ended June 30, 2001.
Cash used in investing activities for the three months ended June 30, 2001 was
$818,000. Such cash was used primarily in connection with the acquisition of
machinery and equipment. Cash generated from financing activities was $2.1
million for the three months ended June 30, 2001, primarily from new short-term
bank borrowings.
The Company has lines of credit with certain banks including: ABN AMRO Bank, KBC
Bank, Standard Chartered Bank, The Hong Kong and Shanghai Banking Corporation
Limited, and The Royal Bank of Scotland plc. As of June 30, 2001, the Company
had outstanding banking facilities of $51.4 million and unused facilities as of
the same date amounted to $16.1 million.
In January 2001, Corgi UK entered into two agreements (collectively, the "RBS
Loan Agreements") with The Royal Bank of Scotland plc ("RBS") to support the
Corgi Division's expansion into U.S. markets and general working capital
requirements. Under the terms of the RBS Loan Agreements, RBS agreed to provide
Corgi UK a term loan of $5.7 million (equivalent of GBP4 million) as well as a
revolving working capital facility of $4.2 million (equivalent GBP3 million). As
of June 30, 2001, the outstanding amounts for the RBS loans and revolving
working capital were $5.6 million and $1.4 million respectively.
Consistent with practice in industry, the Company offers accounts receivable
terms to its customers. This practice creates working capital requirements that
the Company generally finances with net cash balances, through short-term bank
borrowings. The Company's accounts receivable balance at June 30, 2001 was $29.5
million.
The Company's principal source of cash to fund its liquidity needs is net cash
from operating activities and available facilities under the lines of credit.
The Company believes that this source will be adequate to meet the Company's
anticipated future requirements for working capital and capital expenditures.
However, these resources may not be adequate to meet the Company's needs in the
future. In the event that the Company requires additional capital, it may be
required to issue additional equity securities, which could result in dilution
to existing stockholders, or to borrow such funds, which could adversely affect
operating results. Such capital may not be available on appropriate terms, if at
all.
In May 1999, the Company entered into a loan and security agreement (the
"IBI Agreement") with Intervisual Books, Inc. ("IBI"). Under the terms of IBI
Agreement, the Company agreed to provide a $2.3 million revolving credit
facility to IBI (the "IBI Credit Facility"), scheduled to mature in May 2000 and
secured by certain assets of IBI. Pursuant to the IBI Agreement, IBI extended
the IBI Credit Facility for an additional year and issued warrants to the
Company to purchase 150,000 shares of common stock of IBI at a price of $1.73
per share. The warrants are non-transferable and are exercisable during a
two-year period ending May 12, 2002.
IBI experienced net losses and negative cash flow during the fiscal year ended
December 31, 2000. At June 30, 2001,
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$2.1 million remained outstanding under the IBI Credit Facility. In April
2001, the Company entered into an amendment to the IBI Agreement, which extended
the maturity date of the IBI Facility to June 30, 2002. Pursuant to this
amendment, IBI repaid the Company $250,000 in April 2001. The amendment also
requires IBI to pay the Company $250,000 in March 2002. Management of the
Company is still monitoring the situation and expects to take necessary action
as appropriate at the time, to recover the loan. No assurances can be given as
to the ability of the Company to recover the amount due to the Company on the
IBI Credit Facility, and the inability to do so could have a material adverse
effect on Company's financial condition. Management of the Company will
determine whether the value of the loan could be impaired, and if appropriate,
record necessary provision.
SEASONALITY
The Company's operating results in the past have fluctuated and those results
may fluctuate in the future. The Company ceases production for a two-week period
during January or February of each year due to the Chinese New Year holiday,
which has caused revenues during the fourth fiscal quarter of each year to be
lower than revenues during the other three quarters. The Company may also
experience fluctuations in quarterly sales and related net income compared with
other quarters due to the timing of 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 the fiscal year are generally
higher than the second half. The Company may experience annual and quarterly
variations in operating results and, accordingly, the trading price of the
American Depository Shares may be subject to fluctuations in response to such
variations.
EXCHANGE RATE RISK
The Company's sales are denominated either in U.S. dollars, GBP or Hong Kong
dollars. The largest portion of the Company's expenses are denominated in Hong
Kong dollars, followed by Renminbi (the PRC's currency), GBP and U.S. dollars.
The Company is subject to a variety of risks associated with changes among the
relative values of the U.S. dollar, GBP, the Hong Kong dollar and Renminbi. The
Company does not currently hedge its foreign exchange positions. Any material
increase in the value of the Hong Kong dollar or Renminbi or GBP relative to the
U.S. dollar would increase the Company's expenses and therefore would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS FACTORS
The Company and its business are subject to a number of risks and uncertainties.
These risks and uncertainties include but are not limited to the following: (i)
the Company's long-term operating results depend upon its customers' ability to
conceive of, design and market new products and upon continuing market
acceptance of its customers' existing and future products; (ii) the Company
faces significant competition in each of its product segments; (iii) the Company
is subject to the financial conditions of certain major customers and may not be
able to collect accounts receivable; (iv) the Company's efficient and
cost-effective operation of certain of its facilities depends upon the
cooperation and support of PRC governmental bodies; (v) the Company's success is
substantially dependent upon retention of existing executive management and the
recruitment of executive managers in the future; (vi) most of the Company's
products are shipped to customers in the United States, which may, from time to
time, impose new quotas, duties, tariffs, or other charges or restrictions, or
adjust presently prevailing quota, duty or tariff levels; and (vii) the
Company's business, financial condition and results of operation may be
influenced by the general, political, social and economic situations in Hong
Kong and the PRC. These risks, among others, are more fully described in the
Risk Factors section of the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2001 filed with the Securities and Exchange Commission on
June 28, 2001.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary risk exposures arise from changes in interest rates and
foreign currency exchanges rates. The Company had $31.0 million in variable rate
debt outstanding at June 30, 2001. The Company does not currently hedge its
interest rate exposure. Based on its current level of variable rate debt, the
Company believes that its results from operations and cash flows would not be
adversely affected if the applicable interest rate were increased one
percent.
The Company is exposed to risk from changing foreign currency exchange rates.
The Company's sales are denominated either in U.S. dollars, GBP or Hong Kong
dollars. The majority of the Company's expenses are denominated in Hong Kong
dollars, followed by Renminbi, GBP and U.S. dollars. The Company is subject to
a variety of risks associated with changes among the relative value of the U.S.
dollar, the GBP, the Hong Kong dollar and the Renminbi. The Company does not
currently hedge its foreign exchange positions. Any material increase in the
value of the Hong Kong dollar or Renminbi relative to the U.S. dollar would
increase the Company's expenses and therefore would have a material adverse
effect on the Company's business, financial condition and results of
operations. If exchange rates on such currencies were to fluctuate 10%, the
Company believes that its results from operations and cash flows would not be
adversely affected.
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PART II. OTHER INFORMATION
Items 1, 2, 3 and 4 of Part II are not applicable and have been omitted.
ITEM 5. OTHER INFORMATION
On July 25, 2001, Phibe Wong resigned from her position as Chief Financial
Officer of the Company. The Company has named Len Kalkun, the current Finance
Director of Corgi UK, as interim Chief Financial Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this report.
None.
(b) Reports on Form 8-K.
None.
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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/ ALEXANDER M.K. NGAN
Dated: August 14, 2001 ------------------------------------
By: Alexander M.K. Ngan
Chief Executive Officer
(Principal Executive Officer)
/s/ LEN KALKUN
------------------------------------
Dated: August 14, 2001 By: Len Kalkun
Interim Chief Financial Officer
(Principal Financial Officer)
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