1
United States Securities & 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, 1998
[ ] 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
(A Hong Kong Corporation)
I.R.S. Employer Identification #: Not Applicable
Flat C&D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road, Tai Po
N.T., Hong Kong
011-852-2665-6992
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 July 15, 1998
was 8,813,625 (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.).
Page 1 of 11
Exhibit Index Page 11
2
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 7
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 9
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURE PAGE 10
EXHIBIT INDEX 11
3
REPORTS TO SHAREHOLDERS
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.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated statements of operations for the first
quarter ended June 30, 1997 were prepared on both a restated basis and pro forma
basis as described in Notes (1) and (2) below. The Company believes that the pro
forma data may better present the Company's historical performance because it
gives retroactive effect to, among other things, the interest expense and
amortization of goodwill resulting from the acquisition referred to in Notes (1)
and (2) below. However, neither the pro forma data nor the restated data are
necessarily indicative of the results that would have been achieved had the
acquisition been effected on the dates indicated. The audited consolidated
balance sheet as of March 31, 1998, the unaudited consolidated statement of
operations for the first quarter ended June 30, 1998, the unaudited consolidated
balance sheet as of June 30, 1998 and the unaudited consolidated statements of
cash flows for the first quarter ended June 30, 1998 were prepared on an actual
basis.
Consolidated Statement of Operations
(Unaudited)
(in thousands of United States dollars, except per share amounts)
(Pro forma) (1) (Restated) (2)
Three Months Three Months Three Months
Ended June 30, Ended June 30, Ended June 30,
1998 1997 1997
-------- -------- --------
Net sales $ 29,367 $ 25,966 $ 25,966
Cost of sales (20,227) (18,013) (18,013)
-------- -------- --------
Gross profit 9,140 7,953 7,953
Selling, general and administrative expenses (5,002) (4,366) (4,290)
Other income (expense), net (135) (995) 180
Amortization of goodwill (150) (154) (2)
-------- -------- --------
Income before income taxes 3,853 2,438 3,841
Provision for income taxes (314) (351) (351)
-------- -------- --------
Income before minority interests 3,539 2,087 3,490
Minority interests (453) (59) (830)
-------- -------- --------
Net income $ 3,086 $ 2,028 $ 2,660
======== ======== ========
Basic earnings per share $ 0.35 $ 0.28 $ 0.38
======== ======== ========
Weighted average number of shares outstanding - Basic 8,772 7,369 6,983
======== ======== ========
Diluted earnings per share $ 0.35 $ 0.27 $ 0.38
======== ======== ========
Weighted average number of shares outstanding - Diluted 8,839 7,379 6,992
======== ======== ========
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(1) Pro Forma Basis. The pro forma data give effect to the acquisition of
Hua Yang Holdings Co., Ltd. ("Hua Yang") as if it had occurred on April
1, 1997 for the three months ended June 30, 1997. The pro forma
financial data set forth above reflect pro forma adjustments that are
based upon available information and certain assumptions that the
Company believes are reasonable. Further details regarding the pro
forma basis are contained in the Company's Registration Statement on
Form F-1, as amended (Registration Number 333-1834) (the "Registration
Statement"). Pro forma adjustments are comprised primarily of (i) an
increase in interest expense arising from borrowings to finance the
acquisition and the reduction of interest income due to utilization of
cash for the payment of part of the consideration of the acquisition of
Hua Yang and the redemption by Hua Yang of certain of its outstanding
preferred stock prior to the acquisition; (ii) an increase in goodwill
amortization resulting from the acquisition; (iii) a reversal of the
minority interests in the results of Hua Yang relating to shareholdings
in Hua Yang not held under common control; and (iv) amortization of
underwriting and management fees with respect to the borrowings to
finance the acquisition.
(2) Restated Basis. The restated financial information is presented after
inclusion of the operating results of Hua Yang to give retroactive
effect to the acquisition of Hua Yang as a reorganization of companies
under common control, similar to a pooling of interests, for all
periods presented. Under such presentation, net income is reduced
through the minority interests for the portion of shareholdings in Hua
Yang not held under common control. Further details regarding the
restated basis are contained in the Registration Statement.
Consolidated Balance Sheets
(in thousands of United States dollars)
As of June 30, As of March 31,
1998 1998
--------- ---------
(Unaudited)
Assets
Current assets:
Cash and bank deposits $ 9,981 $ 22,373
Accounts receivable, net 30,813 24,700
Deposits and prepayments 1,856 1,897
Inventories, net 11,221 13,950
--------- ---------
Total current assets 53,871 62,920
Property, machinery, equipment, net 29,825 29,177
Construction-in-progress -- 403
Long-term investment 179 179
Goodwill, net 11,811 11,963
Deferred expenditures 1,091 1,185
--------- ---------
Total assets $ 96,777 $ 105,827
========= =========
Liabilities, minority interests and shareholders' equity
Current liabilities:
Accounts payable $ 6,423 $ 6,362
Receipts in advance 2,304 3,278
Accrued liabilities 12,226 12,670
Taxation payable 445 364
--------- ---------
Total current liabilities 21,398 22,674
Revolving credit facility 14,000 30,000
Deferred taxation 910 910
--------- ---------
Total liabilities 36,308 53,584
--------- ---------
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As of June 30, As of March 31,
1998 1998
--------- ---------
(Unaudited)
Minority interests 1,866 1,416
--------- ---------
Shareholders' equity:
Common stock 526 500
Common stock reserved and to be issued 43 43
Additional paid-in capital 38,401 33,593
Reorganization adjustment (8,180) (8,180)
Retained earnings 27,943 24,857
Cumulative translation adjustments (130) 14
--------- ---------
Total shareholders' equity 58,603 50,827
--------- ---------
Total liabilities, minority interests and shareholders' equity $ 96,777 $ 105,827
========= =========
Consolidated Statements of Cash Flows
(in thousands of United States dollars)
(Unaudited)
For the Three Months Ended
June 30,
1998 1997
---- ----
Cash Flows from Operating Activities:
Net income 3,086 2,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 150 2
Depreciation of property, machinery and equipment 1,021 1,032
Minority interests 450 862
Amortization of deferred expenditures 94 --
(Increase) Decrease in operating assets:
Accounts receivable, net (6,113) (2,596)
Bills receivable -- (466)
Due from related companies -- 166
Deposits and prepayments 41 (1,110)
Inventories, net 2,729 (1,566)
Increase (Decrease) in operating liabilities:
Accounts payable 61 1,608
Receipts in advance (974) 382
Accrued liabilities (444) 2,593
Taxation payable 81 220
------- -------
Net cash provided by operating activities 182 3,787
------- -------
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For the Three Months Ended
June 30,
1998 1997
---- ----
Cash Flows from Investing Activities:
Acquisition of property, machinery and equipment (1,264) (992)
Additions of construction-in-progress -- (2,738)
Effect of reorganization adjustment -- 24
------- -------
Net cash used in investing activities (1,264) (3,706)
------- -------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 4,834 1,942
Repayment of short-term bank loans -- (2,108)
Repayment of long-term bank loans -- (305)
Repayment of revolving credit facility (16,000) --
Repayment of capital element of capital lease obligations -- (305)
-------- --------
Net cash used in financing activities (11,166) (776)
-------- --------
Effect of cumulative translation adjustments (144) --
-------- --------
Net decrease in cash and bank deposits (12,392) (695)
Cash and bank deposits, as of the beginning of the period 22,373 21,286
-------- --------
Cash and bank deposits, as of the end of the period 9,981 20,591
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the statement of operations data of
the Company for the three months ended June 30, 1998 and for the same period
during the prior year. The consolidated statement of operations for the three
months ended June 30, 1998 discussed below were prepared on an actual basis and
the consolidated statement of operations for the three months ended June 30,
1997 discussed below were prepared on a pro forma basis. The pro forma data give
effect to the acquisition of Hua Yang for the three months ended June 30, 1997
as if it had occurred on April 1, 1997. The pro forma financial data reflect pro
forma adjustments that are based upon available information and certain
assumptions that the Company believes are reasonable. Further details regarding
the pro forma basis are contained in the Registration Statement. The Company
believes that the pro forma data may better present the Company's historical
performance than the restated data set forth in "Item 1 - Financial Statements"
above because they give retroactive effect to, among other things, the interest
expense and amortization of goodwill resulting from the acquisition of Hua Yang.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. 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 the People's Republic of China, changes in market demand for the
Company's products, economic factors that include the international financial
situation in Asia, 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, as amended, for the fiscal year ended March 31, 1998, as
well as those discussed elsewhere in this Form 10-Q. The Company undertakes no
obligation to revise these forward-looking statements to reflect subsequent
events or circumstances.
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, 1998 and 1997.
For the Three Months Ended
June 30,
1998 1997
------ ------
Net sales 100.0% 100.0%
Gross profit 31.1% 30.6%
Selling, general and administrative
expenses 17.0% 16.8%
Operating income 14.1% 13.8%
Other expense, net 0.5% 3.8%
Amortization of goodwill 0.5% 0.6%
Income before income taxes 13.1% 9.4%
Provision for income taxes 1.1% 1.4%
Minority interests 1.5% 0.2%
Net income 10.5% 7.8%
Net sales. Net sales for the three months ended June 30, 1998 were
$29.4 million, an increase of $3.4 million, or 13.1%, from the same period in
1997. The increase primarily was due to the increase in sales of die-cast
collectibles to Mattel.
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Gross Profit. Gross profit was $9.1 million for the three months ended
June 30, 1998, an increase of $1.2 million, or 14.9%, from the same period in
1997. Gross margin was 31.1% for the three months ended June 30, 1998 as
compared to 30.6% for the same period in 1997. This margin growth was resulted
from improved cost control and reduced subcontracting activities during the
three months ended June 30, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.0 million for the three months ended June 30,
1998, an increase of $0.6 million, or 14.6%, from the same period in 1997. This
increase resulted from additional selling expenses and personnel costs
associated with supporting the growth of the Company's business.
Other income (expenses), net. Other expenses were $0.1 million for the
three months ended June 30, 1998, a decrease of $0.9 million, or 86.4%, from the
same period in 1997. This decrease resulted from (1) lower interest expense due
to loan repayments during the three months ended June 30, 1998 and (2) $504,000
transaction costs associated with the acquisition of Hua Yang expensed during
the three months ended June 30, 1997.
Net income. As a result of the factors discussed above, net income was
$3.1 million for the three months ended June 30, 1998, an increase of $1.1
million, or 52.2%, from the same period in 1997.
Liquidity and Capital Resources
During the three months ended June 30, 1998, Zindart financed its
operations through cash from operations. Cash and cash equivalents and total
indebtedness were $10.0 million and $14.0 million, respectively, at June 30,
1998. Cash generated from operating activities was $182,000 for the three months
ended June 30, 1998. Cash used by investing activities was $1.3 million,
primarily as a result of (1) increased capital expenditure for Phase III of the
Company's Dongguan facility and (2) acquisition of property, machinery and
equipment.
During the three months ended June 30, 1998, Zindart repaid $16.0
million of its revolving credit facility from Credit Suisse First Boston. As of
June 30, 1998, the outstanding amount for such indebtedness was $14.0 million.
The Company repaid approximately $6.0 million of such indebtedness in August
1998 and currently has approximately $22.0 million available for borrowing under
this credit facility.
Zindart has revolving lines of credit with two banks: Standard
Chartered Bank and The Hong Kong and Shanghai Corporation Limited. As of June
30, 1998, the Company had banking facilities with these banks of up to $16.9
million. In May 1998, Zindart renegotiated these banking facilities. As a
result, these banks have released all loan covenants, mortgages over properties
and pledges on inventory and accounts receivable.
Consistent with industry practices, 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,
internally generated cash flow and loans. The Company's accounts receivable
balance at June 30, 1998 was $30.8 million.
The Company's capital expenditures for the three months ended June 30,
1998 were $1.3 million. Phase III of Dongguan facility is now under construction
and expected to be completed in December 1998.
The Company's sales are denominated either in U.S. Dollars 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) 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. 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.
Year 2000 Compliance
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
Such Year 2000 problems may affect the Company's production,
distribution, financial, administrative and communication operations. The
Company has established an internal committee to evaluate any Year 2000 problems
that may affect the Company's business. In addition, the Company's internal
information systems experts are examining Year 2000 readiness from pertinent
aspects of the Company's business, including customer order-taking,
manufacturing, raw materials supply and plant process equipment. Outside
companies such as vendors, major customers, service suppliers, communications
providers and banks are being asked to verify their Year 2000 readiness and
testing such systems where appropriate.
External and internal costs specifically associated with modifying
internal-use software for Year 2000 compliance are expensed as incurred. To this
point, those costs have not been material. Such costs would not include normal
system upgrades and replacements. Based on our current plans and efforts to
date, management expects that there will be no material adverse effect on the
Company's operations as a result of Year 2000 issues. The Company cannot
guarantee, however, that all problems will be foreseen and corrected, or that
material disruption of the Company's business will not occur.
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PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Shareholders who hold at least five percent of the total number of the
Company's outstanding Ordinary Shares, or a group of at least 100 shareholders
who hold such Ordinary Shares on which there has been paid an average of at
least HK$2,000 per shareholder, may submit a proposal to be presented at the
Company's 1999 Annual General Meeting of Shareholders. Such proposals must be
deposited at the Company's registered office at least six weeks prior to the
Company's 1999 Annual General Meeting of Shareholders, which the Company
anticipates will take place in September 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
10.1 Consultancy Agreement between Alexander Ngan and Wealthy
Holdings Limited (a subsidiary of the Company) dated as of
August 10, 1998.
10.2 Employment Agreement between the Company and Alexander Ngan
dated as of August 10, 1998.
27.1 Financial Data Schedule
10
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, 1998 By: Feather Fok
Chief Financial Officer and
Chief Operating Officer
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EXHIBIT INDEX
10.1 Consultancy Agreement between Alexander Ngan and Wealthy Holdings
Limited (a subsidiary of the Company) dated as of August 10, 1998.
10.2 Employment Agreement between the Company and Alexander Ngan dated as of
August 10, 1998.
27.1 Financial Data Schedule