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 September 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 September 30,
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.).
1.
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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 6
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 5 OTHER INFORMATION 10
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURE PAGE 11
2.
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 period
ended September 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 unaudited consolidated
statements of operations for the three months and six months ended September 30,
1998, the audited consolidated balance sheet as of March 31, 1998 and the
unaudited consolidated balance sheet as of September 30, 1998 were actual.
Consolidated Statements of Operations
(Unaudited)
(in thousands of United States dollars, except per share amounts)
Unaudited Pro Forma Basis (1) Restated Basis (2)
------------------------ ----------------------- ------------------------
Three Months Six Months Three Months Six Months Three Months Six Months
Ended Ended Ended Ended Ended Ended
September 30, September 30, September 30,
1998 1998 1997 1997 1997 1997
---- ---- ---- ---- ---- ----
Net Sales $ 35,442 $ 64,809 $ 32,825 $ 58,791 $ 2,825 $ 58,791
Cost of sales (24,620) (44,847) (22,621) (40,634) (22,621) (40,634)
------------------------ ----------------------- ------------------------
Gross profit 10,822 19,962 10,204 18,157 10,204 18,157
Selling, general and administrative (5,406) (10,408) (5,114) (9,480) (5,038) (9,328)
expenses
Other income (expenses), net (14) (149) (488) (1,483) 191 370
Amortization of goodwill (211) (361) (154) (308) (2) (4)
------------------------ ----------------------- ------------------------
Income before income taxes 5,191 9,044 4,448 6,886 5,355 9,195
Provision for income taxes (511) (825) (476) (827) (476) (827)
------------------------ ----------------------- ------------------------
Income before minority interests 4,680 8,219 3,972 6,059 4,879 8,368
Minority interests (139) (592) (213) (272) (1,615) (2,445)
======================== ======================= ========================
Net income $ 4,541 $ 7,627 $ 3,759 $ 5,787 $ 3,264 $ 5,923
======================== ======================= ========================
Basic earnings per share $ 0.52 $ 0.87 $ 0.51 $ 0.78 $ 0.47 $ 0.85
Weighted avg. no. of shares outstanding - 8,813 8,793 7,392 7,381 7,005 6,994
Basic
Diluted earnings per share $ 0.51 $ 0.86 $ 0.51 $ 0.78 $ 0.46 $ 0.84
Weighted avg. no. of shares outstanding - 8,833 8,836 7,427 7,403 7,041 7,016
Diluted
3.
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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 and six months ended September 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 Form 10-K for the fiscal year ended March 31, 1998. 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 Company's Form
10-K for the fiscal year ended March 31, 1998.
4.
5
Consolidated Balance Sheets
(in thousands of United States dollars)
AS OF 9/30/98 AS OF 3/31/98
------------------ ------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and bank deposits $10,095 $22,373
Accounts receivable, net 33,201 24,700
Deposits and prepayments 1,589 1,897
Inventories, net 9,678 13,950
------------------ ------------------
Total current assets 54,563 62,920
Property, machinery and equipment, net 30,161 29,177
Construction-in-progress 576 403
Long-term investment -- 179
Goodwill, net 12,293 11,963
Deferred expenditures 1,000 1,185
================== ==================
Total assets $98,593 $105,827
================== ==================
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,087 $6,362
Receipts in advance 2,171 3,278
Accrued liabilities 13,336 12,670
Taxation payable 920 364
------------------ ------------------
Total current liabilities 25,514 22,674
Revolving credit facility 8,000 30,000
Deferred taxation 909 910
------------------ ------------------
Total liabilities 34,423 53,584
------------------ ------------------
Minority interests 932 1,416
------------------ ------------------
Shareholders' equity:
Common stock 527 500
Common stock reserved and to be issued 43 43
Additional paid-in capital 38,497 33,593
Reorganization adjustment (8,180) (8,180)
Retained earnings 32,484 24,857
Cumulative translation adjustments (133) 14
------------------ ------------------
Total shareholders' equity 63,238 50,827
================== ==================
Total liabilities, minority interests and shareholders' equity $98,593 $105,827
================== ==================
5.
X
6
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands of United States dollars)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 4,541 3,264 7,627 5,923
Adjustments to reconcile net income to net cash provided by (used
in) operating activities -
Amortization of goodwill 211 2 361 4
Amortization of deferred expenditures 91 -- 185 --
Depreciation of property, machinery and equipment 1,062 583 2,084 1,615
Net (gain) loss on disposals of property, machinery and (23) 5 (23) 5
equipment
Minority interests 139 1,615 592 2,445
(Increase) Decrease in operating assets:
Accounts receivable, net (1,973) (10,835) (8,086) (13,431)
Bills receivable -- (448) -- (914)
Deposits and prepayments 270 (87) 311 (1,197)
Inventories, net 1,543 1,228 4,272 (338)
Increase (Decrease) in operating liabilities:
Accounts payable 1,429 204 1,490 1,812
Receipts in advance (254) 728 (1,228) 1,110
Accrued liabilities 868 1,801 424 4,394
Taxation payable 475 479 556 699
Deferred taxation (1) -- (1) --
------------------------ -------------------------
Net cash provided by (used in) operating activities 8,378 (1,461) 8,564 2,127
------------------------ -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash outflow from increase in shareholdings of subsidiaries (575) -- (575) --
Acquisition of property, machinery and equipment (1,267) (905) (2,534) (1,894)
Additions of construction-in-progress (576) (1,750) (576) (4,488)
Proceeds from disposals of property, machinery and equipment 28 -- 28 --
Effect of reorganizations adjustment -- -- -- 23
------------------------ -------------------------
Net cash used in investing activities (2,390) (2,655) (3,657) (6,359)
------------------------ -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 97 -- 4,931 1,942
Decrease in bank overdrafts -- -- -- (2,075)
Decrease in import trust receipt bank loans -- (326) -- (359)
Repayment of long-term bank loans -- -- -- (305)
Repayment of revolving credit facility (6,000) -- (22,000) --
Repayment of capital element of capital lease obligations -- (317) -- (622)
(Increase) Decrease in due from related companies -- (8) -- 158
Finance from minority interests -- -- -- 31
------------------------ -------------------------
Net cash used in financing activities (5,903) (651) (17,069) (1,230)
------------------------ -------------------------
Effect of cumulative translation adjustments 29 -- (116) --
------------------------ -------------------------
Net increase (decrease) in cash and bank deposits 114 (4,767) (12,278) (5,462)
Cash and bank deposits, as of the beginning of the period 9,981 20,591 22,373 21,286
======================== =========================
Cash and bank deposits, as of the end of the period 10,095 15,824 10,095 15,824
======================== =========================
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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 quarter and six months ended September 30, 1998 and for the
same periods during the prior year. The consolidated statement of operations for
the quarter and six months ended September 30, 1998 discussed below were actual
and the consolidated statement of operations for the quarter and six months
ended September 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 period ended
September 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 Company's
Form 10-K for the year ended March 31, 1998. 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 quarter and six months ended September 30, 1998
and 1997.
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 30.5% 31.1% 30.8% 30.9%
Selling, general and administrative 15.3% 15.6% 16.1% 16.1%
expenses
Operating income 15.3% 15.5% 14.7% 14.8%
Other expense, net -- 1.5% 0.2% 2.5%
Amortization of goodwill 0.6% 0.5% 0.6% 0.5%
Income before income taxes 14.6% 13.6% 14.0% 11.7%
Provision for income taxes 1.4% 1.5% 1.3% 1.4%
Minority interests 0.4% 0.6% 0.9% 0.5%
Net income 12.8% 11.5% 11.8% 9.8%
Net sales. Net sales for the quarter ended September 30, 1998 were
$35.4 million, an increase of $2.6 million, or 7.9%, from the same period in
1997. Net sales for the six months ended September 30, 1998 were $64.8 million,
an increase of $6.0 million, or 10.2%, from the same period in 1997. The
increase was primarily due to the increase in sales of die-cast collectibles to
Mattel.
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Gross Profit. Gross profit was $10.8 million for the quarter ended
September 30, 1998, an increase of $0.6 million, or 5.9%, from the same period
in 1997. Gross profit was $20.0 million for the six months ended September 30,
1998, an increase of $1.8 million, or 9.9%, from the same period in 1997. Gross
margin was 30.5% for the quarter ended September 30, 1998 as compared to 31.1%
for the same period in 1997. Gross margin was 30.8% for the six months ended
September 30, 1998 as compared to 30.9% for the same period in 1997. Decrease in
gross margin was primarily due to increased subcontracting activities during the
peak manufacturing season of July and August.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.4 million for the quarter ended September 30,
1998, an increase of $0.3 million, or 5.9%, from the same period in 1997.
Selling, general and administrative expenses were $10.4 million for the six
months ended September 30, 1998, an increase of $0.9 million, or 9.5%, from the
same period in 1997. This increase resulted from additional selling expenses
associated with supporting the growth of the Company's business.
Other expenses, net. Other expenses were $0.0 for the quarter ended
September 30, 1998, a decrease of $0.5 million, or 97.1%, from the same period
in 1997. Other expenses were $0.1 million for the six months ended September 30,
1998, a decrease of $1.4 million, or 93.3%, from the same period in 1997. This
decrease resulted from (1) lower interest expense due to loan repayments during
the six months ended September 30, 1998, offset by increased commitment fee for
undrawn loan facility and (2) $504,000 transaction costs associated with the
acquisition of Hua Yang expensed during the first quarter in fiscal year of
1997.
Net income. As a result of the factors discussed above, net income was
$4.5 million for the quarter ended September 30, 1998, an increase of $0.7
million, or 18.4%, from the same period in 1997. Net income was $7.6 million for
the six months ended September 30, 1998, an increase of $1.8 million, or 31.0%,
from the same period in 1997.
Liquidity and Capital Resources
September 30, 1998 compared with March 31, 1998
During the six months ended September 30, 1998, the Company financed
its operations through cash from operations. Cash and cash equivalents and total
indebtedness were $10.1 million and $8.0 million, respectively, at September 30,
1998. Cash generated from operating activities was $8.6 million for the six
months ended September 30, 1998. Cash used by investing activities was $3.7
million, primarily as a result of (1) acquisition of property, machinery and
equipment (2) increased capital expenditure for Phase III of the Company's
Dongguan facility and (3) increased investment in subsidiaries.
During the six months ended September 30, 1998, the Company repaid
$22.0 million of its revolving credit facility from Credit Suisse First Boston.
As of September 30, 1998, the outstanding amount for such indebtedness was $8.0
million. The Company anticipates repayment of approximately $6.0 million of such
indebtedness in November 1998.
The Company has revolving lines of credit with two banks: Standard
Chartered Bank and The Hong Kong and Shanghai Corporation Limited. As of
September 30, 1998, the Company had banking facilities with these banks of up to
$16.9 million. In May 1998, the Company renegotiated these banking facilities.
As a result, these banks have released all loan covenants, mortgages over
properties and pledges of 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 and
internally generated cash flow. The Company's accounts receivable balance at
September 30, 1998 was $33.2 million.
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The Company's capital expenditures for the six months ended September
30, 1998 were $3.1 million. Phase III of the Dongguan facility is now under
construction and is 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 problem 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. Up to this
point, the evaluation process is running on schedule and no material problems
have arisen. Outside 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 updates and replacements. Based on the Company's 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 such 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:
27.1 Financial Data Schedule
10.
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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: November 12, 1998 By: Feather Fok
Chief Financial Officer
Chief Operating Officer
11.