<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-8134
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ZINDART LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
HONG KONG 3944 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL IDENTIFICATION NUMBER)
CLASSIFICATION CODE
NUMBER)
</TABLE>
FLAT C&D, 25/F BLOCK 1, TAI PING INDUSTRIAL CENTRE
57 TING KOK ROAD, TAI PO, N.T., HONG KONG
GENERAL: 011-852-2665-6992
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CT CORPORATION SYSTEM
1633 BROADWAY, NEW YORK, NEW YORK 10019
(212) 246-5070
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
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GREGORY C. SMITH, ESQ. AUGUST J. MORETTI, ESQ.
JODIE M. BOURDET, ESQ. TIMOTHY G. HOXIE, ESQ.
JOHN S. WILLS, ESQ. SIMON LUK, ESQ.
COOLEY GODWARD LLP MAJDA BARAZZUTTI, ESQ.
ONE MARITIME PLAZA HELLER EHRMAN WHITE & MCAULIFFE
20TH FLOOR 525 UNIVERSITY AVENUE
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94301
(415) 693-2000 (650) 324-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
3,000,000 AMERICAN DEPOSITARY SHARES
REPRESENTING 3,000,000 ORDINARY SHARES
LOGO
Of the 3,000,000 American Depositary Shares ("ADSs") offered hereby,
1,000,000 ADSs are being sold by Zindart Limited (the "Company") and 2,000,000
are being sold by the Selling Shareholders. The Company will not receive any of
the proceeds from the sale of ADSs by the Selling Shareholders. Each ADS offered
hereby represents one Ordinary Share, par value $0.065 per share (a "Share"), of
the Company. The ADSs are evidenced by American Depositary Receipts ("ADRs"),
and are initially being offered hereby for sale by Van Kasper & Company and
Gerard Klauer Mattison & Co., Inc. (the "Representatives") and the several
underwriters named herein (together with the Representatives, the
"Underwriters") (the "Offering"). The ADSs are quoted on the Nasdaq National
Market under the symbol ZNDTY. On February 12, 1998, the last reported sale
price of the ADSs was $14.25 per ADS. See "Price Range of ADSs" and "Principal
and Selling Shareholders."
Upon completion of the Offering, funds under the management of the
ChinaVest IV Funds Group ("ChinaVest") will own or control 28.5% of the
Company's Shares. Two directors of the Company are partners of ChinaVest, and
may be deemed to beneficially own such Shares. See "Principal and Selling
Shareholders."
THE ADSS OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS," COMMENCING ON PAGE 9 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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=================================================================================================
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------------------------
Per ADS.................. $ $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)................. $ $ $ $
=================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $1,226,000.
(3) The Company and the Selling Shareholders have granted to the Underwriters
30-day options to purchase up to a total of 450,000 additional ADSs
representing 450,000 additional Shares on the same terms as set forth above,
solely for the purpose of covering over-allotments, if any (the
"Over-allotment Option"). If the Over-allotment Option is exercised in full,
the Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholders will be $ ,
$ , $ and $ , respectively. See "Principal and
Selling Shareholders" and "Underwriting."
The ADSs offered by the several Underwriters named herein are subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of the ADSs will be made against
payment therefor at the office of Van Kasper & Company, San Francisco,
California on or about , 1998.
VAN KASPER & COMPANY
GERARD KLAUER MATTISON & CO., INC.
, 1998
<PAGE> 3
REPORTS TO SHAREHOLDERS
The Company is subject to certain periodic reporting and informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). As a foreign private
issuer, the Company is exempt from the rules and regulations under the Exchange
Act requiring the furnishing and content of proxy statements, and its officers,
directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. Under the Exchange Act, the Company is not required to publish financial
statements as frequently, as promptly or containing the same information as
United States ("U.S.") companies. The Company intends to provide its securities
holders with annual reports in English containing audited financial statements
and such other periodic reports as the Company deems appropriate or as may be
required by law. The Company intends to publish its consolidated financial
statements in U.S. Dollars prepared in conformity with generally accepted
accounting principles in the U.S. ("U.S. GAAP"). The Company intends to make
publicly available certain summary financial information with respect to the
results of operations of the Company for each quarter of each fiscal year. The
Company has agreed to provide the Depositary referred to under "Description of
American Depositary Receipts" with annual reports of the Company, including a
review of operations and annual audited consolidated financial statements
prepared in conformity with U.S. GAAP. Upon receipt thereof, the Depositary will
promptly mail such reports to all holders of ADSs. The Depositary will also mail
to all holders of ADSs a notice containing the information (or a summary of the
information) contained in any notice of a shareholders' meeting received by the
Depositary and make available to all holders of ADSs such notices and all other
reports and other communications received by the Depositary from the Company.
------------------------
THIS PROSPECTUS DOES NOT COMPRISE AN OFFER TO SELL SHARES OR ADSs, DIRECTLY
OR INDIRECTLY, TO ANY MEMBER OF THE PUBLIC IN HONG KONG, OR ANY SECTION OF THE
PUBLIC IN HONG KONG. THIS PROSPECTUS HAS NOT BEEN APPROVED BY OR REGISTERED WITH
ANY REGULATORY AUTHORITY IN HONG KONG. NO SHARES OF THE COMPANY ARE TRADED ON
ANY STOCK EXCHANGE AND THERE IS NO INTENTION TO LIST SHARES OR ADSs ON ANY STOCK
EXCHANGE OTHER THAN THE LISTING OF ADSs AS CONTEMPLATED IN THIS PROSPECTUS.
------------------------
THE ADSs MAY NOT BE OFFERED OR SOLD IN THE UNITED KINGDOM OTHER THAN TO
PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING
OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR
BUSINESS OR OTHERWISE IN CIRCUMSTANCES THAT HAVE NOT RESULTED AND WILL NOT
RESULT IN AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM WITHIN THE MEANING OF THE
PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 OF THE UNITED KINGDOM, AND THIS
PROSPECTUS MAY ONLY BE ISSUED OR PASSED ON IN THE UNITED KINGDOM TO A PERSON WHO
IS OF A KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986
(INVESTMENT ADVERTISEMENT) (EXEMPTIONS) ORDER 1996 OR IS A PERSON TO WHOM SUCH A
DOCUMENT MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE ADSs OF THE
COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE ADSs ON THE
NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
3
<PAGE> 4
CURRENCY CONVERSIONS
All references in this Prospectus to "U.S. Dollars," "Dollars," "US$" or
"$" alone are to United States dollars; all references to "HK Dollars" or "HK$"
are to Hong Kong dollars; and all references to "Renminbi" or "Rmb" are to
Renminbi, which is the currency of the People's Republic of China (the "PRC").
This Prospectus contains translations of certain HK Dollar amounts into U.S.
Dollar amounts at specified rates. These translations should not be construed as
representations that the HK Dollar amounts actually represent or represented
such U.S. Dollar amounts or could be or could have been converted into U.S.
Dollars at the rates indicated. Unless otherwise stated, the translations of HK
Dollars into U.S. Dollars have been made at the rate of US$1.00 = HK$7.73.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is organized under the laws of Hong Kong and all or a
substantial portion of its assets are located outside the U.S. In addition,
certain of the directors and officers of the Company and certain of the experts
named herein are nationals or residents of Hong Kong or the PRC, and all or a
substantial portion of the assets of such persons are or may be located outside
the U.S. The Company has appointed CT Corporation System, 1633 Broadway, New
York, New York 10019 as its agent to receive service of process with respect to
any action brought against it in the United States District Court for the
Southern District of New York under the laws of the U.S. or any state, or any
action brought against it in the Supreme Court of the State of New York in the
County of New York under the laws of the State of New York. However, it may be
difficult for investors to enforce outside the U.S. judgments against the
Company or any of its officers and directors or the experts named herein
obtained in the U.S. in any such actions, including actions predicated upon the
civil liability provisions of the U.S. federal securities laws. It may also be
difficult for investors to effect service of process within the U.S. upon such
persons. The Company has been advised by its PRC counsel, Guangzhou Law Office,
and its Hong Kong counsel, Robert W.H. Wang & Co., that there is uncertainty as
to whether the courts of the PRC or Hong Kong would enforce (i) judgments of
U.S. federal or state courts obtained against the Company or such persons
predicated upon the civil liability provisions of U.S. federal or state laws or
(ii) claims against the Company or such persons predicated upon U.S. federal or
state laws in original actions brought in the PRC or Hong Kong.
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Except as otherwise noted, the term the "Company" refers to
Zindart Limited and its subsidiaries (including Hua Yang), the term "Zindart"
refers to Zindart Limited and its subsidiaries (excluding Hua Yang) and the term
"Hua Yang" refers to Hua Yang Holdings Co., Ltd., its main operating subsidiary,
Hua Yang Printing Holdings Co., Limited, and its other subsidiaries. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
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 manufactures
die-cast collectibles, collectible holiday ornaments and toys and, through its
acquisition of Hua Yang, 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 People's
Republic of China (the "PRC").
The Company addresses the market need for vendors that can manufacture
high-quality products in the required volumes and in a timely and cost-effective
manner. The Company provides a turnkey manufacturing service that enables it to
satisfy customers' requirements at every stage in the production process,
including component sourcing, product engineering and model making,
computer-aided mold design and production, and manufacturing and packaging of
the finished product. This coordinated, one-stop production process provides the
Company's customers with (i) shortened lead times from design to production,
(ii) a single participant in the manufacturing process instead of multiple
participants and (iii) increased efficiency, resulting in lower per-unit costs.
The Company's customers include many well-known marketers of die-cast and
injection-molded giftware and collectibles, as well as packagers and publishers
of books. Customers for die-cast and injection-molded products include Hallmark
Cards, Inc. ("Hallmark"), The Ertl Company ("Ertl"), Mattel(R) Toys
("Mattel(R)") and Hasbro, Inc. Customers for books, paper and packaging products
include Mattel(R), Disney Publishing, Inc., Intervisual Books, Inc., Reader's
Digest, Inc., The Metropolitan Museum of Art and Golden Books, Inc.
The Company has successfully developed long-term relationships with many of
its principal customers. The Company has been a leading supplier of die-cast
collectibles to Ertl since 1978. Furthermore, an Ertl affiliated company owns a
significant equity interest in the Company. The Company has also been a leading
supplier of collectible holiday ornaments to Hallmark since 1982. Most recently,
the Company expanded its business relationship with Mattel(R) to include
die-cast collectibles, substantially increasing its sales to this key customer.
In February 1998, Zindart acquired Hua Yang, a leading printer and
manufacturer of hand-made books, specialty packaging and other paper products.
The acquisition provides Zindart with its own packaging operation, which is an
integral part of providing its customers with a fully-integrated turnkey
manufacturing service. The Hua Yang Acquisition broadens Zindart's product lines
and customer base, and is consistent with its goal of becoming the leading
producer of high-quality hand-assembled consumer products in the PRC.
Additionally, management believes that the acquisition will yield economies of
scale through the consolidation of financial and administrative functions.
The Company's manufacturing operations are strategically located within
approximately 60 miles from Hong Kong. The PRC provides the Company with access
to a large pool of engineers and technically-trained craftsmen, as well as an
inexpensive labor force. In September 1997, the Company completed the
construction of a large, modern facility for its die-cast and injection-molded
products located on a 20-acre site in Dongguan, Guangdong Province (the
"Dongguan Facility"). This new location encompasses 895,000 square
5
<PAGE> 6
feet of production and production support space as well as 385,000 square feet
of dormitory space that can accommodate up to 10,000 employees. The Dongguan
Facility enables the Company to provide dedicated production space for selected
customers. The Company's hand-made book, specialty packaging and paper product
manufacturing facilities are located between Dongguan and Hong Kong in Shenzhen
(the "Shenzhen Facility").
The Company's net sales on a pro forma basis giving effect to the
acquisition of Hua Yang increased 14.7% to $95.6 million in fiscal 1997 from
$83.3 million in fiscal 1996. For the nine months ended December 31, 1997, net
sales on a pro forma basis increased 17.8% to $88.8 million from $75.3 million
in the nine months ended December 31, 1996.
Zindart's principal executive offices are located at Flat C&D, 25/F Block
1, Tai Ping Industrial Centre, 57 Ting Kok Road, Tai Po, N.T., Hong Kong, its
telephone number is 011-852-2665-6992 and its fax number is 011-852-2664-7066.
The Company's e-mail address is [email protected].
THE OFFERING
Securities offered by the
Company.................. 1,000,000 ADSs, each representing one Share.
Securities offered by the
Selling Shareholders....... 2,000,000 ADSs, each representing one Share.
Shares to be outstanding
after the Offering......... 8,399,667 Shares, of which 4,733,000 are
represented by ADSs.(1)
Use of proceeds............ For repayment of a portion of the indebtedness
incurred in connection with the Hua Yang
Acquisition and for general working capital
purposes. The Company will not receive any of the
net proceeds from the sale of ADSs by the Selling
Shareholders. See "The Hua Yang Acquisition," "Use
of Proceeds" and "Description of Senior Credit
Facility."
Over-allotment Option...... The Company and the Selling Shareholders have
granted the Underwriters options to purchase up to
a total of 450,000 additional ADSs solely for the
purpose of covering over-allotments, if any. See
"Underwriting."
Nasdaq National Market
symbol................... ZNDTY.
- ---------------
(1) Based on the number of Shares and ADSs outstanding at January 31, 1998.
Includes 666,667 Shares issued to the shareholders of Hua Yang at the
closing of the Hua Yang Acquisition, but excludes 333,333 Shares potentially
issuable to such shareholders in 1999. See "The Hua Yang Acquisition." Also
excludes 188,000 Shares reserved for issuance upon the exercise of
outstanding options at an exercise price of $9.13 per Share and 476,500
Shares reserved for future grant under the Company's equity incentive plan.
Except as otherwise noted herein, all information contained in this
Prospectus assumes that (i) the Hua Yang Acquisition is completed, (ii) the
distribution of all Shares by Zindart Pte Limited, a holding company that owns a
majority of the Company's outstanding Shares, to its shareholders is completed
and (iii) the Over-allotment Option will not be exercised. See "The Hua Yang
Acquisition" and "Underwriting."
This Prospectus includes trademarks of companies other than the Company.
6
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary consolidated financial data are of Zindart alone,
without giving any retroactive effect to the Hua Yang Acquisition. See "The Hua
Yang Acquisition." The following summary consolidated statement of operations
data for the years ended March 31, 1993, 1994, 1995, 1996 and 1997 and the
following summary consolidated balance sheet data as of March 31, 1997 were
derived from the audited financial statements of Zindart alone that are not
included elsewhere in this Prospectus. The following summary consolidated
statement of operations data for the nine months ended December 31, 1996 and
1997 and the following summary balance sheet data as of December 31, 1997 are
derived from the unaudited financial statements of Zindart alone, which are not
included elsewhere in this Prospectus and which, in the opinion of management,
contain all adjustments necessary for a fair presentation of such data. The
following summary consolidated financial data have been prepared in accordance
with U.S. GAAP, except that they have not been restated to give effect to the
Hua Yang Acquisition as a reorganization of companies under common control.
The summary unaudited pro forma consolidated statement of operations data
of the Company give effect to the Hua Yang Acquisition as if it had occurred (i)
on April 1, 1996 for the year ended March 31, 1997 and (ii) on April 1, 1997 for
the nine months ended December 31, 1997, with the expenses relating to the Hua
Yang Acquisition recorded in the nine months ended December 31, 1997. The
summary unaudited pro forma consolidated balance sheet data give effect to the
Hua Yang Acquisition as if it had occurred on December 31, 1997. The summary pro
forma financial data set forth below reflect pro forma adjustments that are
based upon available information and certain assumptions that the Company
believes are reasonable. The pro forma financial data are not necessarily
indicative of the results that would have been achieved had such transactions
been consummated as of the dates indicated or that may be achieved in the
future. The following summary consolidated financial data should be read in
conjunction with "The Hua Yang Acquisition," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Senior Credit Facility," "Pro Forma Financial Data" and the Consolidated
Financial Statements of the Company and Hua Yang and the notes thereto contained
elsewhere in this Prospectus.
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PRO FORMA
------------------------
NINE MONTHS ENDED NINE MONTHS
YEARS ENDED MARCH 31, DECEMBER 31, YEAR ENDED ENDED
---------------------------------------------------- ------------------- MARCH 31, DECEMBER 31,
1993 1994 1995 1996 1997 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- -------- ---------- ------------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 35,603 $ 35,583 $ 36,879 $ 46,930 $ 62,207 $ 48,670 $ 55,960 $ 95,616 $ 88,773
Cost of goods sold......... (27,309) (25,037) (25,644) (34,116) (45,732) (36,280) (39,216) (69,388) (61,393)
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............. 8,294 10,546 11,235 12,814 16,475 12,390 16,744 26,228 27,380
Selling, general and
administrative
expenses................. (5,080) (6,351) (6,806) (6,498) (8,945) (6,560) (9,002) (15,136) (14,919)
Interest income (expense),
net...................... (1) (21) 91 (194) (723) (572) 291 (3,560) (1,555)
Other income (expense),
net...................... 122 80 502 (406) 400 175 160 340 (349)
Amortization of goodwill... -- -- (10) (10) (10) (7) (7) (615) (464)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 3,335 4,254 5,012 5,706 7,197 5,426 8,186 7,257 10,093
Provision for income
taxes.................... (302) (436) (483) (488) (635) (464) (701) (781) (1,221)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before minority
interests.............. 3,033 3,818 4,529 5,218 6,562 4,962 7,485 6,476 8,872
Minority interests......... -- (83) (337) (622) (887) (734) (606) (887) (606)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income............... $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 5,675 $ 4,228 $ 6,879 $ 5,589 $ 8,266
======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings per common
share....................
Basic.................... $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 1.11 $ 0.85 $ 1.02 $ 0.97 $ 1.12
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted(1)............... $ 1.02 $ 1.11
======= =======
Weighted average number of
common shares
outstanding(2)
Basic.................... 5,000 5,000 5,000 5,000 5,103 5,000 6,719 5,769 7,386
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted.................. 6,760 7,426
======= =======
</TABLE>
7
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<TABLE>
<CAPTION>
DECEMBER 31, 1997
MARCH 31, -----------------------------------
1997 PRO FORMA
--------- AS
ACTUAL ACTUAL ADJUSTED(3)
--------- ------- PRO -----------
FORMA
-----------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash and bank deposits................................................ $12,531 $13,194 $ 8,802 $ 10,971
Working capital....................................................... 18,207 21,084 30,195 32,364
Property, machinery, equipment and capital leases, net................ 11,746 19,831 29,310 29,310
Total assets.......................................................... 45,611 59,030 97,136 99,305
Short-term debt(4).................................................... 2,361 646 1,284 1,284
Long-term debt and capital lease obligations, non-current portion..... 1,402 1,005 31,772 21,772
Shareholders' equity.................................................. 29,484 38,379 38,392 50,561
</TABLE>
- ------------------------------
(1) Diluted earnings per common share reflects the dilution that would have
resulted from the exercise of stock options. Pro forma diluted earnings per
common share is computed by dividing net income for the period by the
weighted average number of common shares outstanding and all dilutive
securities outstanding during the period and is adjusted for the issuance of
666,667 Shares, which represents the number of Shares issued at the closing
of the Hua Yang Acquisition. See "The Hua Yang Acquisition."
(2) The pro forma weighted average number of common shares outstanding is
adjusted for the issuance of 666,667 Shares, which represents the number of
Shares issued at the closing of the Hua Yang Acquisition. See "The Hua Yang
Acquisition."
(3) As adjusted to reflect the sale of 1,000,000 ADSs by the Company at an
assumed public offering price of $14.25 per ADS and the application of the
net proceeds therefrom. See "Use of Proceeds" and "Description of Senior
Credit Facility."
(4) Includes current portions of long-term debt and capital lease obligations.
8
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RISK FACTORS
An investment in the ADSs offered hereby involves a high degree of risk.
Prior to making an investment decision, prospective purchasers of the ADSs
offered hereby should consider carefully, together with the other information
contained in this Prospectus, the matters set forth below.
LIMITED PRECEDENT
Prospective investors should be aware of and take into consideration the
limited precedent with which to evaluate the potential risks and rewards related
to the development, financing, ownership and operation of a light manufacturing
company in the PRC.
LIMITED REPORTING REQUIREMENTS
As a foreign private issuer, the Company is exempt from the rules and
regulations under the Exchange Act prescribing the furnishing and content of
proxy statements, and its officers, directors and principal shareholders are
exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Exchange Act. Under the Exchange Act, the Company is not
required to publish financial statements as frequently, as promptly or
containing the same information as U.S. companies. See "Reports to Securities
Holders."
RISKS RELATING TO THE COMPANY
Dependence on Major Customers. Sales to three customers -- Hallmark, Ertl
and Mattel(R) -- account for a majority of the Company's total pro forma net
sales. Sales to Hallmark, Ertl and Mattel(R) as a percentage of the Company's
total pro forma net sales during fiscal 1997 and the nine months ended December
31, 1997 were approximately 45.4% and 55.3%, respectively. Sales to Mattel(R)
include sales by both Zindart and Hua Yang. Zindart began a business
relationship with Mattel(R) in February 1997. As a result, the Company may be
more susceptible to a loss of business from Mattel(R) than it would be from its
other customers with longer-term relationships. In this regard, Mattel(R)
manufactures a number of its products internally and could elect in the future
to do so with respect to the products currently manufactured by the Company.
Sales to the seven next largest customers as a percentage of the Company's total
pro forma net sales during fiscal 1997 and the nine months ended December 31,
1997 were approximately 24.1% and 21.2%, respectively. The Company's dependence
on these customers is expected to continue in the foreseeable future. Although
management believes that any one of its customers could be replaced eventually,
the loss of any one of its major customers, particularly Mattel(R), Hallmark or
Ertl, would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's sales transactions with all
of its customers are based on purchase orders received by the Company from time
to time that are subject to cancellation.
Introduction of New Products by Customers; Market Acceptance; Economic
Factors. The Company's long-term operating results depend substantially upon its
customers' ability to continue to conceive of, design and market new products
and upon continuing market acceptance of its customers' existing and future
products. In the ordinary course of their businesses, the Company's customers
continuously develop new products and create additions to their existing product
lines. Significant delays by the Company's customers in the introduction of, or
their failure to introduce or market, new products or additions to their
respective product lines would impair the Company's results of operations. The
die-cast collectible, collectible holiday ornament, toy and hand-made book
markets are affected by changing consumer tastes and interests, which are
difficult to predict and over which the Company's customers have little, if any,
control. These products in any event have limited life cycles and may be
discontinued by the customer at any time. Accordingly, there can be no assurance
that existing or future products of the Company's customers will maintain or
receive substantial market acceptance. In addition, since most of the products
manufactured by the Company are sold in the U.S., the Company's profitability
will also depend on the strength of the U.S. economy, which can affect U.S.
consumers' spending habits on such items as die-cast collectibles, collectible
holiday ornaments, toys and books. Any downturn in the U.S. economy could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with the Hua Yang Acquisition. The Hua Yang Acquisition is
Zindart's first major acquisition. The Company is in the process of integrating
Hua Yang's business with that of Zindart. Such
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integration will require significant management resources and attention that
could otherwise be devoted to the management of the Company's business. In
addition, the integration will require consolidating the management and
financial control systems historically used by the two business units while
preserving and melding the corporate cultures that have been instrumental in the
success of each unit. The manufacturing facilities of Hua Yang, which are much
older than those of Zindart and located about 30 miles from the Dongguan
Facility, are expected to continue to be operated separately from Zindart's
Dongguan Facility. There can be no assurance that management's efforts to
integrate the operations of the companies will be successful or that the
anticipated benefits of the business combination will be realized. The
dedication of management resources to such efforts may detract attention from
the day-to-day business of Zindart or Hua Yang. There can be no assurance that
there will not be substantial costs associated with such activities or that
there will not be other material adverse effects of these integration efforts,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "The Hua Yang Acquisition"
and "Business."
Leverage. The cash portion of the purchase price of Hua Yang was financed
with $5.0 million from the Company's working capital and a $30.0 million line of
credit, a portion of which will be repaid with the proceeds from this Offering,
leaving the Company with substantial outstanding indebtedness. The Company's
ability to meet its debt service obligations will be dependent upon the
Company's future performance, which is subject to numerous factors beyond the
Company's control. There can be no assurance that the Company will generate
sufficient cash flow to cover its debt service obligations and working capital
requirements. In addition, the Company's indebtedness may make it more
vulnerable to general economic and industry conditions and restrict its ability
to obtain financing to fund future capital requirements, including for the
expansion of its manufacturing facilities expected to be required by the end of
calendar 1999. Any failure or delay in meeting its debt service obligations
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Competition. The Company faces significant competition in each of its
product segments. In die-cast collectibles and collectible holiday ornaments,
the Company competes with several companies located primarily in the PRC. In
toys, the Company competes with numerous companies located all over the world.
In "pop-up" books, the Company competes with several companies located in
Southeast Asia and South America. In novelty and board books as well as
packaging, the Company competes with several companies located in Hong Kong. The
Company believes that the basis of competition in the manufacturing of all of
its products is price, quality, technical capabilities and the ability to
produce in required volumes and to timely meet delivery schedules. The Company
expects increased competition from other industry participants that may seek to
enter one or more of the Company's high margin product segments. Many of the
existing and potential competitors have significantly greater financial,
technical, manufacturing and marketing resources than the Company.
The Company does not believe that there are any significant barriers to
entry into the manufacture of its products, although the Company believes that
it currently holds certain competitive advantages. The Company does not
characterize its business as proprietary and does not own any patents or
copyrights or possess any material trade secrets. Accordingly, additional
participants may enter the market at any time. No assurance can be given as to
the ability of the Company to compete successfully with its current or future
competitors, and the inability to do so would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, certain of the Company's customers, including Mattel(R), manufacture a
substantial portion of their products internally. Any determination by a
principal customer to manufacture its products internally or to move
manufacturing from the Company to another third party would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Ability to Manage Growth and Fluctuations. Zindart has experienced
significant growth over the past few years and is expanding its manufacturing
operations. Hua Yang's operations have fluctuated significantly over the same
periods. The management of the Company's growth or fluctuations in levels of
operations, as appropriate, will require continued improvement and refinement of
the Company's operating, management
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and financial control systems, as well as a significant increase in the
Company's manufacturing, quality control, marketing, logistics and service
capabilities, any of which could place a significant strain on the Company's
resources. If the Company's management is unable to manage its operations
effectively, the quality of the Company's products, its ability to retain key
customers and its business, financial condition and results of operations could
be adversely affected. As part of its expansion, the Company will have to hire
additional management personnel and other employees. The expenses associated
with hiring, training and integrating such employees may be incurred prior to
the generation of any associated revenues, with a corresponding adverse effect
on the Company's business, financial condition and results of operations. In
addition, the failure to integrate new personnel on a timely basis could have an
adverse effect on the Company's business, financial condition and results of
operations.
Production Facilities; Capacity Limitations. The existing facilities of Hua
Yang are older than those of Zindart; Hua Yang will likely need upgraded and
expanded facilities by the end of calendar 1999 in order to handle projected
business. Hua Yang intends to either secure additional space in close proximity
to its existing facilities or move its operations to a new location closer to
Zindart's Dongguan Facility. In either case, Hua Yang will be required to incur
substantial additional costs in connection with upgrading or moving its
manufacturing facilities. Hua Yang leases its current facilities. In the event
that Hua Yang elects to relocate its facility prior to the expiration of its
lease in 2000, Hua Yang would be required to renegotiate the term of the lease
because it does not have an ownership interest in the facilities or such
facilities' leasehold improvements, and upon termination of its lease such
improvements would revert to the owner of the facilities. No assurance can be
given as to the ability of Hua Yang to renew or relocate its existing facilities
on acceptable terms and at an acceptable cost, and the inability of Hua Yang to
do so would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's manufacturing operations are conducted in the Dongguan
Facility and the Shenzhen Facility. The Company currently estimates that it may
exceed its manufacturing capacity in both of its manufacturing facilities by the
end of calendar 1999. As a result, the Company will need to build or acquire
additional manufacturing capacity in the near future. The inability of the
Company to obtain such capacity on a timely basis and on commercially reasonable
terms would have a material adverse effect on the Company's business, financial
condition and results of operations.
In order to increase manufacturing capacity, in December 1995 Hua Yang
entered into a three-year agreement to lease additional facilities and a
dormitory located adjacent to its existing factory. There currently is a dispute
between the local government and the purported lessor with respect to the
ownership of the land on which the additional facilities are located. Hua Yang
continues to occupy and operate from such premises and does not anticipate being
required to vacate prior to expiration of the lease in December 1998. Hua Yang
could be required to vacate the premises with little or no notice if Hua Yang's
leasehold interest were successfully challenged, which could result in
production delays and have an adverse effect on Hua Yang's business, financial
condition and results of operations.
If a natural disaster, such as a typhoon, fire or flood, were to destroy or
significantly damage any of the Company's facilities or if any such facility
were to otherwise become unavailable or inoperable, the Company would need to
obtain alternative facilities from which to conduct its operations, which would
result in significantly increased operating costs and significant delays in the
fulfillment of customer orders. No assurance can be given that alternative
facilities could be obtained at an affordable price or at all. Such increased
costs or delays, or inability to obtain alternative facilities, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on PRC Parties. The Dongguan Facility is owned by a Sino-foreign
contractual joint venture in which the Company has a majority interest. The
other party to this contractual joint venture is an entity that is controlled by
PRC governmental bodies. Upon moving to the Dongguan Facility, the Company also
entered into a subcontract processing agreement with a local industrial
development authority, which provides the Company with a labor pool for certain
production needs. Hua Yang operates its facility through a similar contractual
joint venture. The joint ventures for Zindart's and Hua Yang's facilities differ
in that the land use rights related to the Dongguan Facility, which are for a
term of 50 years, are in the name of Zindart
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while the land use rights and leasehold improvements related to Hua Yang's
facility are owned by Hua Yang's PRC joint venture partners.
The efficient and cost-effective operation of these facilities depends upon
the cooperation and support of the development authorities and the joint venture
partners (collectively, the "PRC Parties"). Should a dispute develop between the
Company and any of the PRC Parties, there can be no assurance that the Company
would be able to enforce its understanding of its agreements or interests with
any of such PRC Parties, which could result in a significant loss of, or
depreciation in the value of, the Company's property and facilities. In any
event, ownership interests of land and improvements are considerably more
attenuated in the PRC. The Company's investment in property, facilities and
improvements, particularly at the Dongguan Facility, are significant and could
not be replaced without a considerable new investment, if at all. The lack of
cooperation by any of the PRC Parties could subject the Company to additional
risks and costs, including the interruption or cessation of its present
operations in the PRC, all of which would have a material adverse effect on the
Company's business, financial condition and results of operations. In this
regard, Hua Yang occupies its manufacturing facilities pursuant to a joint
venture agreement with a third party located in the PRC. Pursuant to that
agreement, the PRC party is obligated to contribute the land upon which the
facilities are built to the joint venture. Instead, the PRC party has leased the
land to the joint venture. This is a breach by the PRC party of the terms of the
joint venture, and the Company is currently seeking to rectify the situation. No
assurance can be given as to the ability of the Company to cause the PRC party
to cure the breach. The Company is unable to assess the effect, if any, if the
Company were unable to do so.
Capital Needs; Uncertainty of Additional Financing. Zindart currently
estimates that it may exceed its manufacturing capacity in calendar 1999 and Hua
Yang is evaluating the possibility of moving its facilities to a new location.
In the event that the Company elects or is required to build new facilities at
the Company's expense, the cost of building such facilities would be
substantial. Upon completion of the Offering, the Company will have
approximately $10.0 million in borrowing availability under the Credit Facility
(as defined in "Description of Senior Credit Facility") and approximately $10.4
million under its other existing credit facilities, which may be used for
general purposes or for the construction or relocation of facilities. No
assurance can be given as to the availability or adequacy of these borrowings
for these or other needs. In the event that the Company requires additional
capital, it may be required to issue additional equity securities, which could
result in additional dilution to existing stockholders, or to borrow such funds,
which could adversely affect operating results. However, there can be no
assurance that the Company will be able to obtain additional financing, whether
in the form of debt or equity. Should the Company be unable to obtain additional
financing on acceptable terms, it may be required to limit development of new or
additional manufacturing facilities, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence on Raw Materials. The Company uses zinc alloy, various plastic
resins and paper in its manufacturing operations. The Company's financial
performance is dependent to a substantial extent on the cost of such raw
materials. The supply and demand for paper, zinc alloy and for both plastic
resins and the petrochemical intermediates from which plastic resins are
produced are subject to cyclical and other market factors and may fluctuate
significantly. As a result, the cost of raw materials to the Company is subject
to substantial increases and decreases over which the Company has no control
except by seeking to time its purchases in order to take advantage of favorable
market conditions. In the past, the Company has experienced significant
increases in the price of certain raw materials, which increases the Company was
not able to pass on fully to its customers. To the extent that future increases
in the cost of raw materials cannot be passed on to customers, such increases
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company purchases its raw materials from a limited number of suppliers.
The Company has no formal written agreements with any of its suppliers. The
Company is not dependent upon any single supplier for key materials. The Company
has not experienced any difficulty in obtaining needed materials and thus
believes that the lack of written agreements with its suppliers does not present
a risk to its business, but no assurance can be given that the Company will be
able to obtain sufficient quantities of such raw materials to
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meet its needs. Any lack of sufficient raw materials for its needs would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that it could continue to obtain
needed raw materials in the event that it experiences significant rapid growth,
in light of the current availability of such raw materials on the world markets.
However, to the extent the Company is unable to obtain needed raw materials in
such circumstances in sufficient quantities or at affordable prices, such
inability would have a material adverse effect on the Company's business,
financial condition and results of operations.
Reliance on Key Personnel. The success of the Company is substantially
dependent upon its executive management, as well as upon its ability to attract
and retain additional qualified design, manufacturing and marketing personnel.
Mr. George Sun, the Company's Chief Executive Officer, continues to be
responsible for providing leadership to and engaging in strategic planning for
the Company. He has transferred responsibility for managing all of Zindart's
day-to-day operations to the other management of Zindart. In addition, ChinaVest
actively assists the Company with respect to, among other things, executive
recruitment and financial management. The Company will be required to augment
its management team when ChinaVest ceases to provide such assistance. The loss
of the services of any of the Company's current executive management for any
reason could have a material adverse effect on the business, financial condition
and results of operations of the Company. The Company is not the beneficiary of
any "key person" life insurance policy on any such person. Successful expansion
of the Company's business will require additional management resources and may
require the hiring of additional senior management personnel. See "Management."
Possible Fluctuation in Operating Results; Reduced Revenue in the Fourth
Fiscal Quarter. 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 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. During the summer of 1997, Hua Yang experienced a
labor shortage due to celebrations of the return of Hong Kong to the PRC. As a
result, Hua Yang was not able to meet delivery schedules between June and
October 1997. Hua Yang expects that billing disputes and collection periods may
increase due to the delays. The Company may experience annual and quarterly
variations in operating results and, accordingly, the trading price of the ADSs
may be subject to fluctuations in response to such variations. In any event, it
is likely that the Company's operating results from time to time will not meet
the expectations of the Company's public market analysts, which will have an
adverse effect on the trading price of the ADSs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Potential Product Liability. The Company is engaged in businesses that
could result in possible claims for injury or damage resulting from its
products. The Company is not currently, nor has it been in the past, a defendant
in any product liability lawsuit. The Company does not maintain product
liability insurance. A successful claim brought against the Company by a
customer of the Company or a consumer and the adverse publicity that could
accompany any harm caused to a consumer by a product manufactured by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Government Regulations. U.S. customers of the Company are subject to the
provisions of, among other laws, the Federal Hazardous Substances Act and the
Federal Consumer Product Safety Act. These laws empower the Consumer Product
Safety Commission (the "CPSC") to protect consumers from hazardous toys and
other articles. The CPSC has the authority to exclude from the market articles
that are found to be unsafe or hazardous, and can require a recall of such
products under certain circumstances. Similar laws exist in some states and
cities in the U.S., as well as in Canada and Europe. The Company relies on its
customers to design products that comply with such safety standards and to test
the products to ensure compliance with applicable regulatory safety standards.
While the Company believes that its customers design and test the products the
Company manufactures for compliance with regulatory standards, and the Company
itself maintains quality assurance, there can be no assurance that the Company's
products will not be found to
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violate applicable laws, rules and regulations, which could have a material
adverse effect on the business, financial condition and results of operations of
the Company. In addition, there can be no assurance that more restrictive laws,
rules and regulations will not be adopted in the future, or that the Company's
products will not be marketed in the future in countries with more restrictive
laws, rules and regulations, either of which could make compliance more
difficult or expensive, and which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Effect of Principal Shareholders. ChinaVest currently beneficially owns or
controls 56.4% of the outstanding Shares and, upon completion of the Hua Yang
Acquisition, will own or control 55.1% of the outstanding Shares. Following this
Offering, ChinaVest will own or control approximately 28.5% of the outstanding
Shares (approximately 25.0% if the Over-allotment Option is exercised in full
and the options are allocated on a pro rata basis). As a principal shareholder,
ChinaVest has the ability to significantly influence, if not control, the
election of the Company's directors and most corporate actions of the Company.
Robert A. Theleen, Chairman of the Board of the Company, and Alexander M.K.
Ngan, a director of the Company, are partners in ChinaVest. Subject to an
agreement with Van Kasper & Company not to sell or dispose of any Shares of the
Company for a lock-up period of 90 days following the date of this Prospectus,
ChinaVest has the right to sell or dispose of such Shares. See "Principal and
Selling Shareholders" and "Shares Eligible for Future Sale."
Taxation. The Hong Kong statutory income tax rate is currently 16.5%, and
the PRC income tax rate on the Company's Sino-foreign joint ventures is
currently a maximum of 27.0%. The Company presently is exempt from PRC income
tax pursuant to tax holidays that decrease to partial exemptions in March 1997
and terminate as early as March 2001. The Company will be required to pay taxes
in the PRC based on the income, if any, of its subsidiaries as this tax holiday
expires. In fiscal 1997, the Company's effective tax rate on a pro forma basis
was 10.9%. The amount of income realized is based in a large measure on the
transfer prices the Company pays for the products manufactured in its joint
ventures located in the PRC. In the event that the PRC were to successfully
challenge the transfer prices established by the Company, the Company would
become subject to increased taxation in that jurisdiction. As a result, the
effective tax rate of the Company would increase, which in turn could have a
material adverse effect on the Company's business, financial condition and
results of operations. Under interpretations relating to allocation of income
under Hong Kong tax law, Zindart recognizes one-half of the gross profit of
Zindart as taxable income in Hong Kong, regardless of the amount of gross profit
realized in the PRC. In the event that these interpretations change or are held
invalid, the Company could be required to recognize more taxable income in Hong
Kong. As a result, the effective tax rate of the Company would increase, which
would in turn have a material adverse effect on the Company's business,
financial condition and results of operations. See Note 17 of the Notes to
Consolidated Financial Statements of Zindart and Note 13 to the Consolidated
Financial Statements of Hua Yang.
Year 2000 Compliance. The Company is currently in the process of updating
its internal management information systems so that they will have the
capability to manage and manipulate data involving the transition of dates from
1999 to 2000 without functional or data abnormality and without inaccurate
results relating to such dates. The Company is updating its current systems to
be Year 2000 compliant, but expects to replace its management information
systems before 2000. Any new systems implemented by the Company would be Year
2000 compliant.
Tariffs and Quotas. Most of the Company's products are shipped to customers
in the U.S. The U.S. may, from time to time, impose new quotas, duties, tariffs,
or other charges or restrictions, or adjust presently prevailing quota, duty or
tariff levels, which could adversely affect the Company's ability to continue to
export products to the U.S. at current or increased levels. The Company cannot
predict what regulatory changes may occur, if any, or the type or extent of any
financial impact on the Company that such changes may have in the future. In
addition, various forms of protectionist trade legislation have been proposed in
the U.S. Adverse changes in tariff structures or other trade policies could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Environmental Matters. The Company's operations involve the use of certain
toxic substances, including plastic resins, oil-based paints and cleaning
solvents. The Company is, and is likely to continue to be, subject to PRC
national, provincial and local environmental protection laws and regulations.
Such laws and
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regulations currently impose a uniform fee on industrial wastewater discharges
and a graduated schedule of pollution fees for the discharge into the
environment of waste substances in excess of applicable standards, require the
payment of fines for violations of laws, regulations or decrees, and provide for
possible closure by the central, provincial or local government of any facility
which fails to comply with orders requiring it to cease or cure certain
activities deemed by such authorities to be causing environmental damage. The
Company currently disposes of its waste substances in a manner it believes is
consistent with similarly-situated companies operating in the PRC. Such disposal
practices may not be consistent with those of companies operating in the U.S.
There can be no assurance that the Company will be in compliance with applicable
laws and regulations and will avoid incurring the consequences of
non-compliance, or that PRC authorities will not impose additional regulatory
requirements that would necessitate additional expenditures for environmental
compliance. Any such occurrence could have a material adverse effect on the
Company's business, financial condition and results of operations.
Employees. Substantially all of the Company's manufacturing and assembly
workers are young women who come from various rural provinces in the PRC for the
purpose of working for wages higher than are available in such rural regions.
These employees typically work for the Company for two to five years and then
return to their communities. In addition, approximately 20% of the factory
employees do not return to the Company each year after the Chinese New Year
holiday, and the Company must hire replacements. If these employees were able to
earn similar wages in their home provinces or higher wages in other industries,
the Company could experience labor shortages or could be required to increase
salaries to meet its labor needs, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's employees are not unionized, and the Company has not experienced
any labor strike. Union organizing and worker unrest are not common in the PRC.
No assurance can be given that labor conflicts will not develop. Any labor
conflicts could have a material adverse effect on the Company's business,
financial condition and results of operations. According to certain PRC labor
laws, all enterprises operating within the PRC are required to sign a formal
labor contract with their employees. Hua Yang and its joint ventures have only
recently required their affected employees to sign such agreements. As a result,
Hua Yang or its joint venturers may be liable for damages to the employees and
related fines or penalties to applicable government authorities. The Company
intends to undertake a review of employment policies at Hua Yang with the
objective of ensuring compliance with applicable law. While the Company does not
believe that this review will require material changes in Hua Yang's employment
policies adversely affecting Hua Yang's business, financial condition or results
of operations, there can be no assurance that this will be the case.
Limited Public Market; Possible Volatility of Market Price of ADSs. Prior
to this Offering, the public trading volume of the ADSs at times has been
relatively limited. There can be no assurance that a more active trading market
for the ADSs will develop after this Offering or that, if developed, it will be
sustained. Further, there is no public market for the Ordinary Shares underlying
the ADSs. In the past several years, many foreign issuers with market
capitalizations similar to that of the Company have been unable to sustain an
active trading market for their securities. The market price for the ADSs
following this Offering may be highly volatile, as has been the case with the
ADSs and the securities of other companies located in emerging market countries.
The market price of the ADSs may fluctuate substantially in response to numerous
factors, many of which are beyond the Company's control.
Shares Eligible for Future Sale. Sales of a substantial number of ADSs in
the public market, or the perception that such sales may occur, could adversely
affect the prevailing market price of the ADSs or the ability of the Company to
raise capital through a sale of its equity securities. The Company's officers
and directors, the Selling Shareholders and certain principal shareholders have
agreed not to sell, offer to sell, contract to sell or otherwise dispose of any
Shares or ADSs or securities exercisable for Shares or ADSs for a period of 90
days after the date of this Prospectus without the prior written consent of Van
Kasper & Company. Van Kasper & Company in its sole discretion may release such
securities for sale into the public market at any time without public
announcement. In addition, the Company has agreed that for a period of 90 days
after the date of the closing of this Offering, it will not issue, offer, sell,
grant options to purchase or otherwise dispose of any equity securities or
securities convertible into or exchangeable for equity securities, without the
prior written consent of Van Kasper & Company, except for (i) ADSs offered
hereby, (ii) Shares issued pursuant to the exercise of outstanding options and
(iii) options granted to its associates, officers,
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directors and consultants so long as none of such options become exercisable
during said 90-day period. Certain shareholders of the Company have agreed with
Van Kasper & Company to further limitations on resales through March 4, 1999,
and the Company has agreed to certain limitations on its ability to sell in a
public distribution other than through a registered offering of ADSs in the U.S.
or a private placement for the same period. Van Kasper & Company in its sole
discretion may release such securities for sale into the public market at any
time without public announcement. The Company has agreed to register for resale
under the Securities Act all of the Shares issued or issuable in connection with
the Hua Yang Acquisition. Of such Shares, 666,667 Shares will be eligible for
resale upon release from escrow in August 1998 and 333,333 Shares will be
eligible for resale in the event that the Earn-Out requirements for fiscal 1999
are satisfied. See "The Hua Yang Acquisition" and "Shares Eligible For Future
Sale."
COUNTRY RISKS
General. The Company conducts all of its product engineering, model-making,
mold-making and manufacturing operations in the PRC. In addition, some of the
Company's administrative, finance and accounting, marketing, and MIS activities
are located in Hong Kong. As a result, the Company's business, financial
condition and results of operations may be influenced by the general political,
social and economic situation in Hong Kong and the PRC. Accordingly, the Company
may be subject to political and economic risks, including political instability,
currency controls and exchange rate fluctuations, and changes in import/ export
regulations, tariffs, duties and quotas.
Market Decline in Southeast Asia. Several countries in Southeast Asia,
including Korea, Thailand and Indonesia, have experienced a significant
devaluation of their currencies and a decline in the value of their capital
markets. In addition, these countries have experienced a number of bank failures
and consolidations. Because virtually all of the Company's products are sold
into developed countries not experiencing these declines, the Company does not
believe that the declines in Southeast Asia will affect the demand for the
Company's products. Furthermore, because most of the Company's products are, or
at the Company's request may be, paid for in U.S. dollars, the Company believes
that it is less susceptible to the effects of a devaluation, if subsequently
experienced, in the Hong Kong dollar or the PRC Renminbi. The decline in the
currencies of these countries may, however, render the Company's products less
competitive if competitors in Southeast Asia are able to manufacture competitive
products at a lower effective cost. No assurance can be given as to the ability
of the Company's products to continue to compete with the products of
competitors from these countries or that currency or other effects of the
decline in Southeast Asia will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Exchange Rate Risk. All of 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 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.
Since 1983, the Hong Kong government has maintained a policy of linking the
U.S. Dollar and the Hong Kong dollar at an exchange rate of approximately
HK$7.80 to US$1.00. There can be no assurance that this link will be continued,
although the Company is not aware of any intention of the Hong Kong government
or the PRC to abandon the link. There has been significant volatility in the
exchange rates of Renminbi to U.S. Dollars in recent years. Over the last five
years, the Renminbi has experienced significant devaluation against most major
currencies. The January 1, 1994 establishment of the current floating exchange
rate system produced a significant devaluation of the Renminbi from $1.00 to Rmb
5.7 to approximately $1.00 to Rmb 8.3 as of December 31, 1997. The rates at
which exchanges of Renminbi into U.S. Dollars may take place in the future may
vary.
Inflation Risk. The annual inflation rate in Hong Kong was approximately
8.1%, 8.8% and 8.2% in 1994, 1995 and 1996, respectively. The annual inflation
rate in the PRC was approximately 21.7%, 14.8% and 8.3% in 1994, 1995 and 1996,
respectively. The Company does not consider that inflation in Hong Kong or the
PRC
16
<PAGE> 17
has had a material impact on its results of operations in recent years. No
assurance can be given that inflation in Hong Kong or the PRC will not have a
material adverse effect on the business, financial condition and results of
operations of the Company in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISKS RELATING TO HONG KONG
The Company's business, financial condition and results of operations may
be influenced by the political situation in Hong Kong and by the general state
of the Hong Kong economy. On July 1, 1997, sovereignty over Hong Kong was
transferred from the United Kingdom to the PRC, and Hong Kong became a Special
Administrative Region ("SAR") of the PRC. As provided in the Sino-British Joint
Declaration on the Question of Hong Kong and the Basic Law of the Hong Kong SAR
of the PRC (the "Basic Law"), the Hong Kong SAR has a high degree of autonomy
except in foreign affairs and defense. Under the Basic Law, the Hong Kong SAR
has its own legislature, legal and judicial system and economic autonomy for 50
years. Based on the current political conditions and the Company's understanding
of the Basic Law, the Company does not believe that the transfer of sovereignty
over Hong Kong has had or will have a material adverse effect on the Company's
business, financial condition or results of operations. There can be no
assurance, however, that changes in political, legal or other conditions will
not result in such an adverse effect.
RISKS RELATING TO THE PRC
Investment in the Company may be adversely affected by the political,
social and economic environment in the PRC. The PRC is controlled by the
Communist Party of China. Under its current leadership, the PRC has been
pursuing economic reform policies, including the encouragement of private
economic activity and greater economic decentralization. There can be no
assurance, however, that the PRC government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Economic
development may be limited as well by the imposition of austerity measures
intended to reduce inflation or reform moneylosing state-owned enterprises, the
inadequate development or maintenance of infrastructure or the unavailability of
adequate power and water supplies, transportation, raw materials and parts, or a
deterioration of the general political, economic or social environment in the
PRC, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, economic
reforms and growth in the PRC have been more successful in certain provinces
than others, and the continuation or increase of such disparities could affect
the political or social stability of the PRC.
MFN Status. The PRC currently enjoys Most-Favored-Nation ("MFN") status
granted by the U.S., pursuant to which the U.S. imposes the lowest applicable
tariffs on PRC exports to the U.S. The U.S. annually reconsiders the renewal of
MFN trading status for the PRC. No assurance can be given that the PRC's MFN
status will be renewed in future years. The PRC's loss of MFN status could
adversely affect the Company's business by raising prices for its products in
the U.S., which could result in a reduction in demand for the Company's products
by its U.S. customers. Furthermore, trade friction between the PRC and the U.S.
may have an influence on after-market prices of the ADSs offered hereby.
Loss of PRC Facilities; Nationalization; Expropriation. If for any reason
the Company were required to move its manufacturing operations outside of the
PRC, the Company's profitability, competitiveness and market position could be
materially jeopardized, and there could be no assurance that the Company could
continue its manufacturing operations. The Company's business and prospects are
dependent upon agreements with various entities controlled by PRC governmental
instrumentalities. Not only would the Company's operations and prospects be
materially and adversely affected by the failure of such entities to honor these
contracts, but it might be difficult to enforce these contracts in the PRC. The
Company's investment in property, facilities and improvements in the PRC,
particularly at the Dongguan Facility, are significant and comprise
substantially all the Company's assets. There can be no assurance that assets
and business operations in the PRC will not be nationalized, which could result
in the total loss of the Company's investments in that country, or that the
Company's ownership interest in its properties and facilities will not otherwise
be impaired, which could result in a significant loss of, or depreciation in the
value of, such assets. Following the formation of the PRC in 1949, the PRC
government renounced various debt obligations incurred by
17
<PAGE> 18
predecessor governments, which obligations remain in default, and expropriated
assets without compensation. Accordingly, an investment in the Company involves
a risk of total loss.
Government Control Over Economy. The PRC only recently has permitted
greater provincial and local economic autonomy and private economic activities.
The PRC central government has exercised and continues to exercise substantial
control over virtually every sector of the PRC economy. Accordingly, PRC
government actions in the future, including any decision not to continue to
support current economic reform programs and to return to a more centrally
planned economy, or regional or local variations in the implementation of
economic reform policies, could have a significant effect on economic conditions
in the PRC or particular regions thereof. Any such developments could affect
current operations of and property ownership by foreign investors.
PRC Law; Evolving Regulations and Policies. The PRC's legal system is a
civil law system based on written statutes in which decided legal cases have
little value as precedents, unlike the common law system in the U.S. The PRC
does not have a well-developed, consolidated body of law governing foreign
investment enterprises. As a result, the administration of laws and regulations
by government agencies may be subject to considerable discretion and variation.
In addition, the legal system of the PRC relating to foreign investments is both
new and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances. Definitive
regulations and policies with respect to such matters as the permissible
percentage of foreign investment and permissible rates of equity returns have
not yet been published, statements regarding these evolving policies have been
conflicting, and any such policies, as administered, are likely to be subject to
broad interpretation and discretion and to be modified, perhaps on a
case-by-case basis. As the legal system in the PRC develops with respect to
these new types of enterprises, foreign investors may be adversely affected by
new laws, changes to existing laws (or interpretations thereof) and the
preemption of provincial or local laws by national laws. In circumstances where
adequate laws exist, it may not be possible to obtain timely and equitable
enforcement thereof. The Company's activities in the PRC are by law subject, in
some circumstances, to administrative review and approval by various national
and local agencies of the PRC government. Although the Company believes that the
present level of support from local, provincial and national governmental
entities enjoyed by the Company benefits the Company's operations in connection
with administrative review and the receipt of approvals, there is no assurance
that such approvals, when necessary or advisable in the future, will be
forthcoming. The inability to obtain such approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FORWARD-LOOKING STATEMENTS
This Prospectus 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 which are subject to the "safe harbor" created by those
sections. The forward-looking statements may be found in "Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Forward-looking statements
not specifically set forth above may also be found in these and other sections
of this Prospectus. The Company's actual future results could differ materially
from those discussed in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
Prospectus. The Company disclaims any obligation to update these forward-looking
statements as a result of subsequent events.
18
<PAGE> 19
THE HUA YANG ACQUISITION
OVERVIEW
In February 1998, Zindart acquired 100% of the outstanding capital stock of
Hua Yang. Hua Yang is a leading printer and manufacturer of hand-made books,
specialty packaging and other paper products located in the PRC. The acquisition
was effected pursuant to an Exchange Agreement (the "Exchange Agreement"), a
copy of which is as an exhibit to the registration statement of which this
Prospectus is a part.
The Hua Yang Acquisition provides Zindart with its own packaging operation,
which is an integral part of providing its customers with a fully-integrated
turnkey manufacturing service. The acquisition broadens Zindart's product lines
and customer base, and is consistent with Zindart's goal of becoming the leading
producer of high-quality, hand-assembled consumer products in the PRC.
Additionally, management believes that the acquisition will yield economies of
scale through the consolidation of financial and administrative functions.
Hua Yang's net sales for the nine months ended December 31, 1997 and the
fiscal year ended March 31, 1997 were $32.8 million and $33.4 million,
respectively. As of December 31, 1997, Hua Yang had a backlog of approximately
$5.2 million, compared to $9.6 million at December 31, 1996. Hua Yang's net
income for the nine months ended December 31, 1997 and the fiscal year ended
March 31, 1997 was $3.8 million and $2.3 million, respectively. See the
Consolidated Financial Statements of Hua Yang and notes thereto included
elsewhere in this Prospectus.
TERMS OF TRANSACTION
In February 1998, Zindart entered into the Exchange Agreement with Hua Yang
Holdings Co., Ltd. ("Parent"), Hua Yang Printing Holdings Co., Limited
("Subsidiary"), HYP Holdings Limited ("HYP"), Karl Chan (BVI) Holdings Limited
("Chan Holdings"), Karl Chan ("Chan") (HYP, Chan Holdings and Chan are sometimes
hereinafter collectively referred to as the "Hua Yang Shareholders"), certain
investment funds operated by ChinaVest and Advent that are shareholders of HYP
(the "Principal HYP Shareholders") and ChinaVest Management Limited, as the
Agent on behalf of the Hua Yang Shareholders and the Principal HYP Shareholders.
Pursuant to the Exchange Agreement, the Hua Yang Shareholders exchanged all of
Parent's outstanding ordinary shares and preferred shares for $35.0 million in
cash and up to 1,000,000 Shares (collectively, the "Acquisition Consideration").
Of the 1,000,000 Shares, 666,667 were issued at the closing of the Hua Yang
Acquisition and placed in escrow for a period of six months to secure the
indemnification obligations of Hua Yang, the Hua Yang Shareholders, ChinaVest
and certain funds managed by Advent under the Exchange Agreement. The remaining
333,333 Shares will remain unissued until completion of an independent audit of
Hua Yang's financial results for the two-year period ending March 31, 1999. Upon
completion of the audit, a portion of such Shares will be issued to the extent
that Hua Yang's earnings before interest expense (net of interest income),
provision (benefit) for income taxes, depreciation and amortization ("EBITDA")
for such two-year period exceed $12.48 million. All of such Shares will be
issued if Hua Yang's EBITDA for such two-year period equals or exceeds $15.6
million (the "Earn-Out").
The Exchange Agreement contains detailed representations, warranties and
covenants by each of Subsidiary, Parent, the Hua Yang Shareholders and the
Principal HYP Shareholders relating to the business, assets and financial
condition of Subsidiary and Parent, including the joint ventures Shenzhen
Huaxuan Printing Product Co., Ltd. and Guangzhou Jin Yi Advertising Company Ltd.
The representations and warranties terminate on the second anniversary of the
closing date. Each of the Hua Yang Shareholders and the Principal HYP
Shareholders is jointly and severally liable for the accuracy of such
representations and warranties up to a maximum amount equal to the pro rata
portion of the Acquisition Consideration received by such Hua Yang Shareholder
(plus its portion of certain permitted redemptions of Parent preferred shares
prior to the closing) or Principal HYP Shareholder. Generally, no claim may be
made against any of the Hua Yang Shareholders and Principal HYP Shareholders in
respect of a breach of a representation or warranty until the aggregate amount
of all claims exceed $2.0 million. Certain representations and warranties,
including those involving due organization and valid existence, capitalization,
Parent's financial statements, bank accounts, real property, tax matters,
employee benefit plans and related party transactions, are not subject to this
deductible threshold.
19
<PAGE> 20
The Hua Yang Acquisition, which was approved by a committee of independent
members of Zindart's board of directors, closed in February 1998. As a condition
to the closing, Zindart received: (i) a legal opinion relating to Subsidiary,
Parent and the joint ventures; (ii) an opinion from Van Kasper & Company as to
the fairness of the transaction from a financial point of view to Zindart's
shareholders; and (iii) a release executed by each of the Hua Yang Shareholders
and the Principal HYP Shareholders in favor of Zindart, Parent and Subsidiary of
all claims arising prior to the closing date in their capacities as a
shareholder, officer or director of Parent or Subsidiary.
Pursuant to the Exchange Agreement, each of the Hua Yang Shareholders
agreed that for a period of two years from the closing date, it will not
directly or indirectly engage in the business of manufacturing or selling
die-cast, injection-molded products, hand-made books, specialty packaging and
other paper products or any similar business in Hong Kong, the PRC and other
countries. Zindart also granted certain demand registration rights in connection
with the Shares (or ADSs issuable upon exchange thereof) issued or to be issued
as part of the Acquisition Consideration. Such Shares were issued pursuant to
exemptions from the registration requirements of the Securities Act provided by
Regulation S and Regulation D thereunder.
Zindart financed $30.0 million of the cash portion of Acquisition
Consideration and related fees and expenses from a credit facility syndicated by
Credit Suisse First Boston, Hong Kong Branch. See "Description of Senior Credit
Facility." The remaining cash was provided from Zindart's working capital.
ACCOUNTING TREATMENT
The Company's majority shareholder is ZIC Holdings Limited, a Cayman
Islands corporation ("ZICHL"), which is in turn controlled by ChinaVest. Prior
to the acquisition, Hua Yang's majority shareholder was HYP Holdings Limited, a
Cayman Islands corporation, which is also controlled by ChinaVest. See
"Principal and Selling Shareholders." As a result, the Hua Yang Acquisition is
accounted for (i) as to the interest in Hua Yang beneficially owned by
ChinaVest, as a reorganization of companies under common control (similar to a
pooling of interests), and (ii) as to the remaining beneficial interest in Hua
Yang, as an acquisition.
Accordingly, unless otherwise noted herein, the Consolidated Financial
Statements of the Company and the other financial data of Zindart contained in
this Prospectus reflect the combined results of Zindart and approximately 42% of
the results of Hua Yang after giving retroactive effect on January 1, 1995 to
the acquisition of the interest in Hua Yang beneficially owned by ChinaVest. In
addition, the pro forma consolidated statement of operations data of the Company
give effect to the Hua Yang Acquisition as if it had occurred (i) on April 1,
1996 for the year ended March 31, 1997 and (ii) on April 1, 1997 for the nine
months ended December 31, 1997, with the expenses relating to the acquisition
recorded in the nine months ended December 31, 1997. The pro forma consolidated
balance sheet data give effect to the Hua Yang Acquisition as if it had occurred
on December 31, 1997.
The Hua Yang Acquisition will result in approximately $504,000 of estimated
transaction costs being expensed in the quarter ended March 31, 1998. The
remaining estimated transaction costs of $696,000 are included in the estimated
goodwill of $12.2 million associated with the acquisition, which will be
capitalized and amortized over 20 years. The Company estimates that the
amortization of goodwill will be approximately $83,000 in the quarter ended
March 31, 1998 and $152,000 per quarter in future quarters.
20
<PAGE> 21
USE OF PROCEEDS
The net proceeds to the Company from the sale of the ADSs offered hereby
are estimated to be approximately $12,169,000 at an assumed public offering
price of $14.25 per ADS, after deducting offering expenses and underwriting
discounts and commissions. The net proceeds will be used for the repayment of
$10.0 million of indebtedness incurred in the Hua Yang Acquisition, as permitted
by the Credit Facility, and for general working capital purposes. The terms of
the indebtedness to be repaid are described in "Description of Senior Credit
Facility." The Company will not receive any of the proceeds of the sale of ADSs
by the Selling Shareholders. Pending application of the net proceeds of this
Offering as described above, the Company intends to invest the net proceeds of
the Offering in bank time deposits or other short-term investment-grade,
interest-bearing instruments. For a description of the Company's capital needs,
see "Risk Factors -- Risks Relating to the Company -- Capital Needs; Uncertainty
of Additional Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
PRICE RANGE OF ADSS
The ADSs are traded on the Nasdaq National Market under the symbol ZNDTY.
The following table sets forth for the periods indicated the high and low sale
price for the ADSs.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
--------------------------------------------------------- ------- -------
<S> <C> <C>
1997
Fourth Quarter (beginning March 4, 1997)............... $10.250 $ 9.000
1998
First Quarter.......................................... $12.625 $ 8.750
Second Quarter......................................... $14.000 $ 9.500
Third Quarter.......................................... $16.500 $11.625
Fourth Quarter (through February 12, 1998)............. $14.500 $12.000
</TABLE>
As of January 31, 1998, there were two holders of record of Shares
(including the Depositary on behalf of the holders of ADSs) and 15 holders of
record of ADSs. See "Risk Factors -- Risks Relating to the Company -- Limited
Public Markets; Possible Volatility of Market Price of ADSs" and "-- Shares
Eligible for Future Sale."
DIVIDENDS AND DIVIDEND POLICY
While the Company may pay dividends in the future, the Company intends to
retain substantially all of its earnings for expansion of its operations in
accordance with its business strategy. The terms of the Company's credit
facilities limit the payment of dividends. See "Description of Senior Credit
Facility," "Description of Shares -- Dividends" and "Description of American
Depositary Receipts -- Dividends, Other Distributions and Rights."
In fiscal 1992 through fiscal 1995, Zindart declared and paid dividends per
Share in the amount of $0.44, $0.29, $0.39, and $0.21, respectively. The
aggregate amount of dividends paid in these fiscal years was $2,222,000,
$1,473,000, $1,959,000, and $1,073,000, respectively. In fiscal 1996, Zindart
distributed a dividend in kind of approximately $0.60 per Share consisting of
$2,994,000 of a loan receivable and amounts due from a debtor of Zindart.
Zindart did not declare a cash dividend in fiscal 1997 or in the nine months
ended December 31, 1997. Hua Yang has never declared any dividends.
Hua Yang redeemed outstanding preferred stock for $5.0 million upon
completion of the acquisition.
21
<PAGE> 22
CAPITALIZATION
The following table sets forth the consolidated capitalization as of
December 31, 1997 of (i) Zindart on a historical basis, without giving
retroactive effect to the Hua Yang Acquisition as a reorganization of companies
under common control, (ii) the Company on a pro forma basis giving retroactive
effect to the Hua Yang Acquisition as if it had occurred on December 31, 1997
and (iii) the Company on a pro forma basis as adjusted to give effect to the
sale by the Company of 1,000,000 ADSs offered hereby and the application of the
estimated net proceeds to be received by the Company therefrom, at an assumed
public offering price of $14.25 per ADS and after deducting the estimated
underwriting discounts and offering expenses payable by the Company. The
capitalization information set forth in the table below is unaudited and should
be read in conjunction with "The Hua Yang Acquisition" and "Pro Forma Financial
Data."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED(1)
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Capital lease obligations, current portion................... $ 646 $ 1,284 $ 1,284
======= ======= =======
Long-term debt:
Long-term bank loans......................................... $ -- $30,000 $20,000
Capital lease obligations, non-current portion............... 1,005 1,772 1,772
------- ------- -------
Total long-term debt................................. 1,005 31,772 21,772
------- ------- -------
Minority interests............................................. 1,650 1,650 1,650
------- ------- -------
Shareholders' equity:
Ordinary Shares; 6,733,000 shares issued and outstanding;
7,399,667 shares issued and outstanding, pro forma;
8,399,667 shares issued and outstanding, as adjusted(2)... 436 479 544
Additional paid-in capital................................... 14,104 22,894 34,998
Reorganization adjustment(3)................................. -- (8,316) (8,316)
Retained earnings............................................ 23,839 23,335 23,335
------- ------- -------
Total shareholders' equity........................... 38,379 38,392 50,561
------- ------- -------
Total capitalization................................. $41,034 $71,814 $73,983
======= ======= =======
</TABLE>
- ---------------
(1) As adjusted to reflect the sale of 1,000,000 ADSs by the Company at an
assumed public offering price of $14.25 per ADS and the application of the
net proceeds therefrom. See "Use of Proceeds" and "Description of Senior
Credit Facility."
(2) Excludes 188,000 Shares reserved for issuance upon the exercise of
outstanding options at an exercise price of $9.13 per Share and 476,500
Shares reserved for future grants under the Company's equity incentive plan.
(3) The reorganization adjustment represents approximately 42% of the excess of
the purchase consideration paid in the Hua Yang Acquisition (includes $35.0
million in cash and 666,667 Shares issued at a price, assumed for the
purposes of the acquisition, of $13.25 per Share) over the net tangible
assets of Hua Yang (after adjustment for the redemption of $5.0 million of
outstanding preferred stock of Hua Yang), and relates to the portion of the
acquisition that has been accounted for as a reorganization of companies
under common control.
22
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ZINDART
The following selected consolidated financial data are of Zindart alone,
without giving retroactive effect to the Hua Yang Acquisition as a
reorganization of companies under common control. See "The Hua Yang
Acquisition." The following selected consolidated statement of operations data
for the years ended March 31, 1993, 1994, 1995, 1996 and 1997 and the following
selected consolidated balance sheet data as of March 31, 1993, 1994, 1995, 1996
and 1997 were derived from the audited financial statements of Zindart alone,
which are not included elsewhere in this Prospectus. The following selected
consolidated statement of operations data for the nine months ended December 31,
1996 and 1997 and the following selected balance sheet data as of December 31,
1997 are derived from the unaudited financial statements of Zindart alone, which
are not included elsewhere in this Prospectus and which, in the opinion of
management, contain all adjustments necessary for a fair presentation of such
data. The following selected consolidated financial data have been prepared in
accordance with U.S. GAAP, except that they have not been restated to give
effect to the Hua Yang Acquisition as a reorganization of companies under common
control.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $35,603 $35,583 $36,879 $46,930 $62,207 $48,670 $55,960
Cost of goods sold..................................... (27,309) (25,037) (25,644) (34,116) (45,732) (36,280) (39,216)
------- ------- ------- ------- ------- ------- --------
Gross profit......................................... 8,294 10,546 11,235 12,814 16,475 12,390 16,744
Selling, general and administrative expenses........... (5,080) (6,351) (6,806) (6,498) (8,945) (6,560) (9,002)
Interest income (expense), net......................... (1) (21) 91 (194) (723) (572) 291
Other income (expense), net............................ 122 80 492 (416) 390 168 153
------- ------- ------- ------- ------- ------- --------
Income before income taxes........................... 3,335 4,254 5,012 5,706 7,197 5,426 8,186
Provision for income taxes............................. (302) (436) (483) (488) (635) (464) (701)
------- ------- ------- ------- ------- ------- --------
Income before minority interests..................... 3,033 3,818 4,529 5,218 6,562 4,962 7,485
Minority interests..................................... -- (83) (337) (622) (887) (734) (606)
------- ------- ------- ------- ------- ------- --------
Net income........................................... $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 5,675 $ 4,228 $ 6,879
======= ======= ======= ======= ======= ======= ========
Earnings per common share
Basic................................................ $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 1.11 $ 0.85 $ 1.02
======= ======= ======= ======= ======= ======= ========
Diluted(1)........................................... $ 1.02
========
Weighted average number of common shares outstanding
Basic................................................ 5,000 5,000 5,000 5,000 5,103 5,000 6,719
======= ======= ======= ======= ======= ======= ========
Diluted.............................................. 6,760
========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and bank deposits................................. $ 3,912 $ 4,068 $ 4,123 $ 3,294 $12,531 $13,194
Working capital........................................ 3,775 3,210 5,399 3,401 18,207 21,084
Property, machinery, equipment and capital leases,
net.................................................. 1,882 2,545 3,902 10,800 11,746 19,831
Total assets........................................... 13,905 16,846 23,070 31,710 45,611 59,030
Short-term debt(2)..................................... 1,052 1,020 1,780 8,899 2,361 646
Long-term debt and capital lease obligations,
non-current portion.................................. 745 420 859 2,128 1,402 1,005
Shareholders' equity................................... 5,112 6,887 10,011 11,608 29,484 38,379
</TABLE>
- ---------------
(1) Diluted earnings per common share reflects the dilution that would have
resulted from the exercise of stock options. Diluted earnings per common
share is computed by dividing net income for each period by the weighted
average number of common shares outstanding and all dilutive securities
outstanding during the periods.
(2) Includes current portions of long-term debt and capital lease obligations.
23
<PAGE> 24
HISTORICAL HUA YANG
The following selected consolidated financial data are of Hua Yang. The
following selected consolidated statement of operations data for the period from
January 1, 1995 to March 31, 1995 and the fiscal years ended March 31, 1996 and
1997 and the following selected consolidated balance sheet data as of March 31,
1996 and 1997 are derived from the audited Consolidated Financial Statements of
Hua Yang and notes thereto appearing elsewhere in this Prospectus, which have
been audited by Arthur Andersen & Co., independent public accountants. The
following selected consolidated balance sheet data as of March 31, 1995 have
been derived from the unaudited financial statements of Hua Yang not included
elsewhere in this Prospectus. The following selected consolidated statement of
operations data for the nine months ended December 31, 1996 and 1997 and the
following selected consolidated balance sheet data as of December 31, 1997 are
derived from the unaudited financial statements of Hua Yang included elsewhere
in this Prospectus, which, in the opinion of management, contain all adjustments
necessary for a fair presentation of such data. The following selected
consolidated financial data have been prepared in accordance with U.S. GAAP. The
following selected consolidated financial data should be read in conjunction
with "The Hua Yang Acquisition," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Senior Credit
Facility" and the Consolidated Financial Statements of Hua Yang and the notes
thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEARS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, DECEMBER 31,
----------- ---------------------- --------------------------
1995 1996 1997 1996 1997
----------- -------- --------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 6,600 $ 36,403 $ 33,409 $ 26,671 $ 32,813
Cost of goods sold............... (4,827) (22,794) (23,656) (18,657) (22,177)
------- ------- ------- ------- -------
Gross profit................... 1,773 13,609 9,753 8,014 10,636
Selling, general and
administrative expenses........ (1,698) (6,660) (5,888) (4,579) (5,689)
Interest income (expense), net... 1 (181) (155) (162) 227
Other income (expense), net...... 23 (14) (60) 12 (4)
Amortization of goodwill......... (234) (1,123) (1,176) (842) (816)
------- ------- ------- ------- -------
Income (loss) before income
taxes....................... (135) 5,631 2,474 2,443 4,354
Provision for income taxes....... -- -- (146) (114) (521)
------- ------- ------- ------- -------
Net income (loss).............. $ (135) $ 5,631 $ 2,328 $ 2,329 $ 3,833
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- -------- --------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and bank deposits........... $ 190 $ 2,973 $ 8,755 $ 7,316
Working capital.................. 6,957 12,820 15,889 20,311
Property, machinery, equipment
and capital leases, net........ 7,152 10,234 9,916 9,479
Total assets..................... 43,120 49,734 51,895 56,238
Short-term debt(1)............... 294 1,313 1,559 638
Long-term debt and capital lease
obligations, non-current
portion........................ -- 2,193 1,486 767
Shareholders' equity............. 36,346 41,975 44,257 48,145
</TABLE>
- ---------------
(1) Includes current portions of long-term debt and capital lease obligations.
24
<PAGE> 25
RESTATED COMPANY
The following selected consolidated financial data are that of Zindart and
approximately 42% of Hua Yang, as a result of giving retroactive effect to the
Hua Yang Acquisition as a reorganization of companies under common control
effective from January 1, 1995. The following selected consolidated statement of
operations data for the fiscal years ended March 31, 1995, 1996 and 1997 and the
following selected consolidated balance sheet data as of March 31, 1996 and 1997
are derived from the audited Consolidated Financial Statements of the Company
and notes thereto appearing elsewhere in this Prospectus, which have been
audited by Arthur Andersen & Co., independent public accountants. The following
selected consolidated balance sheet data as of March 31, 1995 have been derived
from unaudited financial statements of the Company not included elsewhere in
this Prospectus. The following selected consolidated statement of operations
data for the nine months ended December 31, 1996 and 1997 and the following
selected consolidated balance sheet data as of December 31, 1997 are derived
from the unaudited financial statements of the Company included elsewhere in
this Prospectus, which, in the opinion of management, contain all adjustments
necessary for a fair presentation of such data. The following selected
consolidated financial data have been prepared in accordance with U.S. GAAP. The
following selected consolidated financial data should be read in conjunction
with "The Hua Yang Acquisition," "Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Description of Senior Credit Facility" and the Consolidated Financial
Statements of the Company and the notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED DECEMBER 31,
--------------------------------- ---------------------
1995(1) 1996 1997 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 43,479 $ 83,333 $ 95,616 $ 75,341 $ 88,773
Cost of goods sold........................ (30,471) (56,910) (69,388) (54,937) (61,393)
--------- --------- --------- --------- ---------
Gross profit............................ 13,008 26,423 26,228 20,404 27,380
Selling, general and administrative
expenses................................ (8,504) (13,158) (14,833) (11,112) (14,691)
Interest income (expense), net............ 92 (375) (878) (734) 518
Other income (expense), net............... 515 (430) 330 180 148
--------- --------- --------- --------- ---------
Income before income taxes.............. 5,111 12,460 10,847 8,738 13,355
Provision for income taxes................ (483) (488) (781) (578) (1,221)
--------- --------- --------- --------- ---------
Income before minority interests........ 4,628 11,972 10,066 8,160 12,134
Minority interests........................ (394) (4,514) (2,920) (2,574) (3,303)
--------- --------- --------- --------- ---------
Net income.............................. $ 4,234 $ 7,458 $ 7,146 $ 5,586 $ 8,831
========= ========= ========= ========= =========
Earnings per common share
Basic................................... $ 0.80 $ 1.41 $ 1.33 $ 1.06 $ 1.26
========= ========= ========= ========= =========
Diluted(2).............................. $ 1.25
=========
Weighted average number of common shares
outstanding(3)
Basic................................... 5,280 5,280 5,383 5,280 6,999
========= ========= ========= ========= =========
Diluted................................. 7,039
=========
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1995 1996 1997 DECEMBER 31, 1997
-------- ------- ------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and bank deposits....................... $ 4,313 $ 6,267 $21,286 $20,510
Working capital.............................. 12,356 16,221 34,096 41,395
Property, machinery, equipment and capital
leases, net................................ 11,054 21,034 21,662 29,310
Total assets................................. 43,953 60,330 77,568 96,146
Short-term debt(4)........................... 2,074 10,212 3,920 1,284
Long-term debt and capital lease obligations,
non-current portion........................ 859 4,321 2,888 1,772
Shareholders' equity......................... 15,989 20,448 39,836 50,706
</TABLE>
- ------------------------------
(1) Includes approximately 42% of the operating results of Hua Yang for the
period from January 1, 1995 to March 31, 1995.
(2) Diluted earnings per common share reflects the dilution that would have
resulted from the exercise of stock options. Diluted earnings per common
share is computed by dividing net income for each period by the weighted
average number of common shares outstanding and all dilutive securities
outstanding during the periods and is adjusted for the issuance of 279,863
Shares, which represents an approximately 42% effective interest in the
number of Shares issued at the closing of the Hua Yang Acquisition. See "The
Hua Yang Acquisition."
(3) The weighted average number of common shares outstanding is adjusted for the
issuance of 279,863 Shares, which represents an approximate 42% effective
interest in the number of Shares issued at the closing of the Hua Yang
Acquisition. See "The Hua Yang Acquisition."
(4) Includes current portions of long-term debt and capital lease obligations.
26
<PAGE> 27
PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
The following unaudited pro forma consolidated statement of operations data
give effect to the Hua Yang Acquisition as if it had occurred (i) on April 1,
1996 for the year ended March 31, 1997 and (ii) on April 1, 1997 for the nine
months ended December 31, 1997, with the expenses relating to the acquisition
recorded in the nine months ended December 31, 1997. The unaudited pro forma
consolidated balance sheet data give effect to the Hua Yang Acquisition as if it
had occurred on December 31, 1997. The unaudited pro forma financial data set
forth below reflect pro forma adjustments that are based upon available
information and certain assumptions that the Company believes are reasonable.
The unaudited pro forma financial data are not necessarily indicative of the
results that would have been achieved had such transaction been consummated as
of the dates indicated or the results that may be achieved in the future. The
following unaudited pro forma consolidated financial data should be read in
conjunction with "The Hua Yang Acquisition," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Senior Credit Facility" and the Consolidated Financial Statements of the Company
and the notes thereto contained elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
-----------------------------------------
PRO FORMA
RESTATED(A) ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Net sales................................................ $ 95,616 $ $ 95,616
Cost of goods sold....................................... (69,388) (69,388)
------- ------
Gross profit........................................... 26,228 26,228
Selling, general and administrative expenses............. (14,833) (303)(b) (15,136)
Interest expenses........................................ (1,150) (2,410)(d) (3,560)
Interest income.......................................... 272 (272)(d) --
Other income (expenses), net............................. 340 340
Amortization of goodwill................................. (10) (605)(c) (615)
------- ------
Income before income taxes............................. 10,847 7,257
Provision for income taxes............................... (781) (781)
------- ------
Income before minority interests....................... 10,066 6,476
Minority interests....................................... (2,920) 2,033(e) (887)
------- ------
Net income............................................. $ 7,146 $ 5,589
======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1997
-----------------------------------------
PRO FORMA
RESTATED(A) ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Net sales................................................ $ 88,773 $ $ 88,773
Cost of goods sold....................................... (61,393) (61,393)
----------- ---------
Gross profit........................................... 27,380 27,380
Selling, general and administrative expenses............. (14,691) (228)(b) (14,919)
Interest expense......................................... (297) (1,258)(d) (1,555)
Interest income.......................................... 815 (815)(d) --
Other income (expense), net.............................. 155 (504)(f) (349)
Amortization of goodwill................................. (7) (457)(c) (464)
----------- ---------
Income before income taxes............................. 13,355 10,093
Provision for income taxes............................... (1,221) (1,221)
----------- ---------
Income before minority interests....................... 12,134 8,872
Minority interests....................................... (3,303) 2,697(e) (606)
----------- ---------
Net income............................................. $ 8,831 $ 8,266
========= ========
</TABLE>
27
<PAGE> 28
- ---------------
(a) The financial statements of the Company include approximately 42% of the
results of Hua Yang to give retroactive effect to the Hua Yang Acquisition
as a reorganization of companies under common control, similar to a pooling
of interests. See "The Hua Yang Acquisition -- Accounting Treatment."
(b) To record amortization of underwriting and management fees, which aggregate
approximately $850,000, over three years and an annual agency fee of $20,000
with respect to the Credit Facility.
(c) To record amortization of goodwill resulting from the Hua Yang Acquisition
over 20 years:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, 1997 DECEMBER 31, 1997
-------------- -------------------
<S> <C> <C>
Purchase consideration(1)................................ $ 43,833 $43,833
Estimated transaction cost related to the Hua Yang
Acquisition............................................ 1,200 1,200
------- -------
45,033 45,033
Less: Net tangible assets of Hua Yang (excluding
goodwill) after adjustment for the redemption of
certain outstanding preferred stock for $5.0 million... (24,023) (24,023)
------- -------
21,010 21,010
Ownership of Hua Yang not held under common control...... 57.6% 58.0%
------- -------
Goodwill................................................. $ 12,107 $12,190
======= =======
Periodic amortization.................................... $ 605 $ 457
======= =======
</TABLE>
(1) Includes $35.0 million in cash and 666,667 Shares (after excluding
333,333 Shares to be issued subject to the Earn-Out) issued at a
price, assumed for the purpose of the acquisition, of $13.25 per
Share.
(d) To provide for interest expenses that would have been incurred under the
Credit Facility and the reduction of interest income due to utilization of
cash for the payment of the Hua Yang Acquisition consideration and the
redemption of certain outstanding preferred stock by Hua Yang. See "The Hua
Yang Acquisition" and "Description of Senior Credit Facility."
(e) To reverse minority interests in the results of Hua Yang relating to
shareholdings in Hua Yang other than those held under common control. The
adjusted minority interests represents Zindart's minority equity interests
in its mold-making subsidiaries.
(f) To record approximately 42% of the transaction costs related to the Hua Yang
Acquisition, in respect of the portion of the acquisition accounted for as
reorganization of companies under common control, in the nine months ended
December 31, 1997. For the purposes of this presentation, no such costs were
recorded in the year ended March 31, 1997. See "The Hua Yang
Acquisition -- Accounting Treatment."
28
<PAGE> 29
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
PRO FORMA
RESTATED(A) ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and bank deposits................................. $20,510 $ (870)(b) $ 8,802
(838)(c)
(5,000)(d)
(5,000)(f)
Accounts receivable, net............................... 27,025 27,025
Bills receivable....................................... 1,257 1,257
Due from related companies............................. 11 11
Deposits and prepayments............................... 3,649 870(b) 4,157
(362)(c)
Inventories, net....................................... 14,145 14,145
----------- ---------
Total current assets........................... 66,597 55,397
Property, machinery, equipment and capital leases, net... 29,310 29,310
Long-term investment..................................... 179 179
Goodwill, net............................................ 60 12,190(e) 12,250
----------- ---------
Total assets................................... $96,146 $ 97,136
========= ========
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY:
Current liabilities:
Capital lease obligations, current portion............. $ 1,284 $ $ 1,284
Accounts payable....................................... 5,899 5,899
Receipts in advance.................................... 3,109 3,109
Accrued liabilities.................................... 13,109 13,109
Taxation payable....................................... 1,801 1,801
----------- ---------
Total current liabilities...................... 25,202 25,202
Long-term revolving bank loan facility................... -- 30,000(f) 30,000
Capital lease obligations, non-current portion........... 1,772 1,772
Deferred taxation........................................ 120 120
----------- ---------
Total liabilities.............................. 27,094 57,094
Minority interests....................................... 18,346 (16,696)(g) 1,650
Shareholders' equity..................................... 50,706 5,125(h) 38,392
(14,836)(i)
(504)(c)
(2,099)(j)
----------- ---------
Total liabilities, minority interests and
shareholders' equity......................... $96,146 $ 97,136
========= ========
</TABLE>
(a) The financial statements of the Company include approximately 42% of the net
assets of Hua Yang to give retroactive effect to the Hua Yang Acquisition as
a reorganization of companies under common control, similar to a pooling of
interests. See "The Hua Yang Acquisition -- Accounting Treatment."
(b) To record the payment of the underwriting and management fees with respect
to the Credit Facility.
(c) To record the payment of transaction costs related to the Hua Yang
Acquisition of approximately $1.2 million, with 42% of the total transaction
cost being expensed, in respect of the portion of the acquisition accounted
for as reorganization of companies under common control. See "The Hua Yang
Acquisition -- Accounting Treatment."
(d) To record payment relating to the redemption of outstanding preferred stock
of Hua Yang for $5.0 million upon completion of the Hua Yang Acquisition.
29
<PAGE> 30
(e) To record goodwill resulting from the Hua Yang Acquisition:
<TABLE>
<S> <C>
Purchase consideration(1)................................. $ 43,833
Estimated transaction cost related to the Hua Yang
Acquisition............................................. 1,200
--------
45,033
Less: Net tangible assets of Hua Yang (excluding goodwill)
after adjustment for the redemption of outstanding
preferred stock for $5.0 million........................ (24,023)
--------
21,010
Ownership of Hua Yang not held under common control....... 58.0%
--------
Goodwill.................................................. $ 12,190
========
</TABLE>
- ---------------
(1) Includes $35.0 million in cash and 666,667 Shares (after excluding
333,333 Shares to be issued subject to the Earn-Out) issued at a
price, assumed for the purpose of the acquisition, of $13.25 per
Share.
(f) To record the Credit Facility and $5.0 million in cash paid from the
Company's working capital.
(g) To reverse minority interests in the net asset values of Hua Yang relating
to shareholdings in Hua Yang other than those held under common control. The
adjusted minority interests represents Zindart's minority equity interests
in its mold-making subsidiaries.
(h) To record the issuance of approximately 58% of the 666,667 Shares (after
excluding 333,333 Shares to be issued subject to the Earn-Out) to be issued
to the holders of Shares of Hua Yang other than Shares held under common
control at the closing of the Hua Yang Acquisition at a price, assumed for
the purpose of the acquisition, of $13.25 per Share. Approximately 42% of
the 666,667 Shares had been accounted for retroactively in the consolidated
financial statements of the Company in respect of the portion of the
acquisition accounted for as a reorganization of companies under common
control. See "The Hua Yang Acquisition -- Accounting Treatment."
(i) To recognize approximately 42% of $35.0 million cash consideration ($30.0
million of which was financed by the Credit Facility and $5.0 million of
which was paid from the Company's working capital) to be paid in respect of
the portion of the Hua Yang Acquisition accounted for as a reorganization of
companies under common control.
(j) To record approximately 42% of the redemption of outstanding preferred stock
of Hua Yang in respect of the portion of the Hua Yang Acquisition accounted
for as a reorganization of companies under common control.
30
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to the statement of operations data of
Zindart and Hua Yang alone without giving retroactive effect to the Hua Yang
Acquisition as a reorganization of companies under common control. The following
discussion of the statement of operations data for Zindart alone is derived from
the historical financial statements of Zindart that are not included elsewhere
in this Prospectus. The following discussion of the statement of operations data
for Hua Yang alone are derived from the Consolidated Financial Statements of Hua
Yang that are included elsewhere in this Prospectus.
The financial statements of the Company appearing elsewhere in this
Prospectus for the fiscal years ended March 31, 1995, 1996 and 1997 give
retroactive effect to the acquisition of Hua Yang as a reorganization of
companies under common control, as described in Note 2 to the Consolidated
Financial Statements of the Company. These financial statements include all of
the operating results of Zindart and approximately 42% of the operating results
of Hua Yang for the years ended March 31, 1996 and 1997. For the year ended
March 31, 1995, the financial statements of Hua Yang include the operating
results of Hua Yang for the period from January 1, 1995 through March 31, 1995
only (the period in which Hua Yang and Zindart were under common control), and
the financial statements of the Company include all of the operating results of
Zindart for the complete year and approximately 42% of the operating results of
Hua Yang for the limited period only. Because the financial statements of the
Company and Hua Yang include statement of operations data for Hua Yang for only
this partial period in fiscal 1995, no information or discussion is included
below for the operating results of Hua Yang for fiscal 1995. Because the
financial statements of the Company appearing elsewhere in this Prospectus
include only a portion of the operating results of Hua Yang, no discussion is
included here with respect to these financial statements.
The fiscal year ended March 31, 1997 is referred to herein as fiscal 1997,
the fiscal year ended March 31, 1996 is referred to herein as fiscal 1996 and
the fiscal year ended March 31, 1995 is referred to herein as fiscal 1995.
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 manufactures
die-cast collectibles, collectible holiday ornaments and toys and, through its
acquisition of Hua Yang, 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 Company's customers for die-cast and injection-molded products include
Hallmark, Ertl, Mattel(R) and Hasbro, Inc. For books, paper and packaging
products, the Company's customers include Mattel(R), Disney Publishing, Inc.,
Intervisual Books, Inc., Reader's Digest, Inc., the Metropolitan Museum of Art
and Golden Books, Inc. The Company is dependent on sales to Hallmark, Ertl and
Mattel(R). See Risk Factors -- Risks Relating to the Company -- Dependence on
Major Customers."
In September 1997, the Company completed the construction of its Dongguan
Facility. This new location encompasses 895,000 square feet of production and
production support space as well as 385,000 square feet of dormitory space that
can accommodate up to 10,000 employees. The Dongguan Facility incorporates
dedicated production space for selected customers. The Company completed the
relocation of two other production facilities to the Dongguan Facility in
January 1998. The estimated costs for the relocation were provided for in fiscal
1997 and the first nine months of fiscal 1998. The Shenzhen Facility has 462,000
square feet of production, warehouse and dormitory space that accommodate
approximately 3,000 employees. See "Risk Factors -- Country Risks -- Dependence
on PRC Parties" and " --Risks Relating to the PRC -- Loss of PRC Facilities;
Nationalization; Expropriation."
Zindart completed the Hua Yang Acquisition in February 1998. The
consideration paid in such transaction was $35.0 million in cash and up to 1.0
million Shares. The Hua Yang Acquisition will result in approximately $504,000
of estimated transaction costs being expensed in the quarter ended March 31,
1998.
31
<PAGE> 32
The remaining estimated transaction costs of $696,000 are included in the
estimated goodwill of $12.2 million associated with the acquisition, which
goodwill will be capitalized and amortized over 20 years. The Company estimates
that the amortization of goodwill will be approximately $83,000 in the quarter
ended March 31, 1998 and $152,000 per quarter in future quarters.
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. During the summer of 1997, Hua Yang
experienced a labor shortage due to celebrations of the return of Hong Kong to
the PRC. As a result, Hua Yang was not able to meet delivery schedules between
June and October 1997. Hua Yang expects that billing disputes and collection
periods may increase due to the delays. The Company may experience annual and
quarterly variations in operating results and, accordingly, the trading price of
the ADSs may be subject to fluctuations in response to such variations. In any
event, it is likely that the Company's operating results from time to time, will
not meet the expectations of the Company's public market analysts, which will
have an adverse effect on the trading price of the ADSs. See "Risk Factors
- -- Risks Relating to the Company -- Ability to Manage Growth and Fluctuations"
and "-- Possible Fluctuations in Operating Results; Reduced Revenue in the
Fourth Fiscal Quarter."
32
<PAGE> 33
RESULTS OF OPERATIONS
The tables below set forth certain historical statement of operations data
for each of Zindart and Hua Yang as a percentage of their respective net sales
for fiscal 1996 and 1997 and the nine months ended December 31, 1996 and 1997
and for Zindart for fiscal 1995. The financial information presented below for
Zindart is that of Zindart alone, without giving retroactive effect to the Hua
Yang Acquisition as a reorganization of companies under common control. Such
financial information is derived from the audited and unaudited financial
statements of Zindart alone, which are not included elsewhere in this
Prospectus. See "Selected Consolidated Financial Data." The financial
information presented below for Hua Yang is that of Hua Yang alone, and is
derived from the Consolidated Financial Statements of Hua Yang included
elsewhere in this Prospectus. See "The Hua Yang Acquisition."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ----------------
1995 1996 1997 1996 1997
------- ------ ------ ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ZINDART RESULTS OF OPERATIONS:
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 30.5 27.3 26.5 25.5 29.9
Selling, general and administrative expenses... 18.5 13.8 14.4 13.5 16.1
Operating income............................... 12.0 13.5 12.1 12.0 13.8
Interest income (expense), net................. 0.2 (0.4) (1.2) (1.2) 0.5
Other income (expense), net.................... 1.3 (0.9) 0.6 0.3 0.3
Provision for income taxes..................... 1.3 1.0 1.0 1.0 1.3
Net income..................................... 11.4 9.8 9.1 8.7 12.3
HUA YANG RESULTS OF OPERATIONS:
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 37.4 29.2 30.0 32.4
Selling, general and administrative expenses... 18.3 17.6 17.2 17.3
Operating income............................... 19.1 11.6 12.9 15.1
Interest income (expense), net................. (0.5) (0.5) (0.6) 0.7
Other income (expense), net.................... (0.0) (0.2) 0.0 (0.0)
Amortization of goodwill....................... 3.1 3.5 3.2 2.5
Provision for income taxes..................... -- 0.4 0.4 1.6
Net income..................................... 15.5 7.0 8.7 11.7
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996
Net Sales. Zindart's net sales in the nine months ended December 31, 1997
were $56.0 million, an increase of $7.3 million, or 15.0%, from $48.7 million in
the nine months ended December 31, 1996. Such increase primarily was due to the
increase in sales of die cast collectibles to Mattel in the second and third
quarters, partially offset by constrained sales growth in the first quarter
resulting from one-time labor shortages that abated early in the second quarter.
Hua Yang's net sales in the nine months ended December 31, 1997 were $32.8
million, an increase of $6.1 million, or 23.0%, from $26.7 million in the nine
months ended December 31, 1996. Such increase resulted from additional marketing
efforts as well as a rebound in market share after Hua Yang reduced prices in
late fiscal 1997.
Gross Profit. Zindart's gross profit totaled $16.7 million in the nine
months ended December 31, 1997, an increase of $4.4 million, or 35.1%, from
$12.4 million in the nine months ended December 31, 1996. Gross margin was 29.9%
in the nine months ended December 31, 1997 and 25.5% in the nine months ended
December 31, 1996. Gross margin increased due to a change in product mix and
saving of overhead as a result of consolidation of old factories into the
expanded Dongguan Facility. During the nine months ended
33
<PAGE> 34
December 31, 1996, the Company incurred costs associated with operating the
Dongguan Facility at less than full capacity and training new employees.
Hua Yang's gross profit totaled $10.6 million in the nine months ended
December 31, 1997, an increase of $2.6 million, or 32.7%, from $8.0 million in
the nine months ended December 31, 1996. Gross margin was 32.4% in the nine
months ended December 31, 1997 and 30.0% in the nine months ended December 31,
1996.
Selling, General and Administrative Expenses. Zindart's selling, general
and administrative expenses totaled $9.0 million in the nine months ended
December 31, 1997, an increase of $2.4 million, or 37.2%, from $6.6 million in
the nine months ended December 31, 1996. Selling, general and administrative
expenses constituted 16.1% of net sales in the nine months ended December 31,
1997 and 13.5% in the nine months ended December 31, 1996. Selling, general and
administrative expenses increased due to additional selling expenses and
personnel costs associated with supporting growth of Zindart's business and
additional legal and professional expenses associated with Zindart's status as a
public company.
Hua Yang's selling, general and administrative expenses totaled $5.7
million in the nine months ended December 31, 1997, an increase of $1.1 million,
or 24.2%, from $4.6 million in the nine months ended December 31, 1996. Selling,
general and administrative expenses constituted 17.3% of net sales in the nine
months ended December 31, 1997 and 17.2% in the nine months ended December 31,
1996. Selling, general and administrative expenses increased primarily due to
higher freight costs.
Operating Income. Zindart's income from operations was $7.7 million in the
nine months ended December 31, 1997, an increase of $1.9 million, or 32.8%, from
$5.8 million in the nine months ended December 31, 1996. Hua Yang's income from
operations was $4.9 million in the nine months ended December 31, 1997, an
increase of $1.5 million, or 44.0%, from $3.4 million in the nine months ended
December 31, 1996.
Interest Income (Expense), Net. Zindart's interest income (expense), net
was $291,000 in the nine months ended December 31, 1997 as compared to
$(572,000) in the nine months ended December 31, 1996. The change was
attributable to decreased borrowings in the later period. Hua Yang's interest
income (expense), net was $227,000 in the nine months ended December 31, 1997 as
compared to $(162,000) in the nine months ended December 31, 1996. Such change
was attributable to higher interest income on larger cash balances maintained
during the later period. The Company's interest expense will increase
substantially upon completion of the Hua Yang Acquisition. See "Risk
Factors -- Risks Relating to the Company -- Leverage."
Other Income (Expense), Net. Zindart's other income (expense), net, totaled
$153,000 in the nine months ended December 31, 1997 as compared to $168,000 in
the nine months ended December 31, 1996. Hua Yang's other income (expense), net,
totaled $(4,000) in the nine months ended December 31, 1997, as compared to
$12,000 in the nine months ended December 31, 1996.
Amortization of Goodwill. Goodwill represents the excess of cost paid by
Hua Yang over the fair value of the net assets relating to the acquisition of
the business from the Chan family (see "Business -- Development of the
Company"), which is amortized on a straight-line basis over 20 years. The
amortization of goodwill for Hua Yang for the nine months ended December 31,
1997 and 1996 was $816,000 and $842,000, respectively.
Provision For Income Taxes. The effective income tax rate for Zindart and
Hua Yang was 8.6% and 12.0%, respectively, in the nine months ended December 31,
1997 and 8.6% and 4.7%, respectively, in the nine months ended December 31,
1996. See "Risk Factors -- Risks Relating to the Company -- Taxation."
Net Income. Based on the factors described above, Zindart's net income
totaled $6.9 million in the nine months ended December 31, 1997, an increase of
$2.7 million, or 62.7%, from $4.2 million in the nine months ended December 31,
1996. Hua Yang's net income totaled $3.8 million in the nine months ended
December 31, 1997, an increase of $1.5 million, or 64.6%, from $2.3 million in
the nine months ended December 31, 1996.
EBITDA. The earnings before interest expense (net of interest income),
provision (benefit) for income taxes and depreciation and amortization
("EBITDA") for Hua Yang was $5.9 million in the nine months ended December 31,
1997, an increase of $1.8 million, or 44.3%, from $4.1 million in the nine
months ended December 31, 1996. EBITDA is not a measurement of operating
performance calculated in accordance with
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U.S. GAAP and should not be considered as a substitute for operating income, net
income, cash flows from operating activities or other data or as a measure of
profitability or liquidity. Because all companies do not calculate EBITDA
identically, the presentation of EBITDA contained herein may not be comparable
to similarly entitled measures of other companies. The issuance of additional
Shares in the Hua Yang Acquisition pursuant to the Earn-Out is a function of the
attainment of certain EBITDA figures. See "The Hua Yang Acquisition."
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 1997 AND 1996
Net Sales. Zindart's net sales in fiscal 1997 were $62.2 million, an
increase of $15.3 million, or 32.6%, from $46.9 million in fiscal 1996. Such
increase was due to an increase in sales volume in all finished product
categories. Hua Yang's net sales in fiscal 1997 were $33.4 million, a decrease
of $3.0 million, or 8.2%, from $36.4 million in fiscal 1996. Such decrease was
due to a 31.4% decline in book sales, partially offset by an increase in
packaging and paper sales. The decline in book sales resulted from the entrance
of new competitors offering lower prices. Hua Yang lost market share until it
lowered prices late in fiscal 1997. See "Risk Factors -- Risks Relating to the
Company -- Competition" and "-- Country Risks -- Market Decline in Southeast
Asia."
Gross Profit. Zindart's gross profit totaled $16.5 million in fiscal 1997,
an increase of $3.7 million, or 28.6%, from $12.8 million in fiscal 1997. Gross
margin was 26.5% in fiscal 1997 and 27.3% in fiscal 1996. Gross margin decreased
because of the costs associated with operating the Dongguan Facility at less
than full capacity, training new employees and an increase in the production of
toy products, which carry a lower margin than other of Zindart's products.
Hua Yang's gross profit totaled $9.8 million in fiscal 1997, a decrease of
$3.8 million, or 28.3%, from $13.6 million in fiscal 1997. Gross margin was
29.2% in fiscal 1997 and 37.4% in fiscal 1996. Gross margin decreased because of
lower absorption of fixed overhead on a smaller sales base, an increase, as a
proportion of Hua Yang's overall business, of the lower margin packaging
business and a lowering of pricing in the book business late in fiscal 1997.
Selling, General and Administrative Expenses. Zindart's selling, general
and administrative expenses totaled $8.9 million in fiscal 1997, an increase of
$2.4 million, or 37.7%, from $6.5 million in fiscal 1996. Selling, general and
administrative expenses constituted 14.4% of net sales in fiscal 1997 and 13.8%
in fiscal 1996. Selling, general and administrative expenses increased due to an
increase in selling expenses and additional personnel costs to support the
increase in sales, and a $272,000 provision of relocation expenses made in
fiscal 1997.
Hua Yang's selling, general and administrative expenses totaled $5.9
million in fiscal 1997, a decrease of $772,000, or 11.6%, from $6.7 million in
fiscal 1996. Selling, general and administrative expenses constituted 17.6% of
net sales in fiscal 1997 and 18.3% in fiscal 1996. Selling, general and
administrative expenses decreased in absolute dollars because of lower freight
and sales expenses associated with the lower sales base and expense control
efforts initiated by management.
Operating Income. Zindart's income from operations was $7.5 million in
fiscal 1997, an increase of $1.2 million, or 19.2%, from $6.3 million in fiscal
1996. Hua Yang's income from operations was $3.9 million in fiscal 1997, a
decrease of $3.0 million, or 44.4%, from $6.9 million in fiscal 1996.
Interest Income (Expense), Net. Zindart's interest income (expense), net
was ($723,000) in fiscal 1997 as compared to ($194,000) in fiscal 1996. The
increase in interest expenses was attributable to increased borrowings of
Zindart to undertake the construction and machinery additions of the Dongguan
Facility. Hua Yang's interest income (expense), net was $(155,000) in fiscal
1997 as compared to $(181,000).
Other Income (Expense), Net. Zindart's other income (expense), net, totaled
$390,000 in fiscal 1997 as compared to $(416,000) in fiscal 1996. Other income
(expense), net, increased due to (i) a non-recurring trading net income of
$260,000 in fiscal 1997, (ii) a decrease of $69,000 resulting from aggregate
loss from foreign currency transactions in fiscal 1997 and (iii) a $358,000
write-off in fiscal 1996 related to listing
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<PAGE> 36
expenses for a proposed public offering in Singapore that was not completed. See
"Risk Factors -- Country Risks -- Exchange Rate Risk."
Hua Yang's other income (expense), net, totaled $(60,000) in fiscal 1997 as
compared to $(14,000) in fiscal 1996. Such change was attributable to a one-time
charge in fiscal 1997 for diminution in value of an investment in a subsidiary.
Amortization of Goodwill. The amortization of goodwill for Hua Yang for
fiscal 1997 and fiscal 1996 was $1.2 million and $1.1 million, respectively.
Provision For Income Taxes. The effective income tax rate for Zindart and
Hua Yang was 8.8% and 5.9%, respectively, in fiscal 1997 and 8.6% and 0.0%,
respectively, in fiscal 1996. See "Risk Factors -- Risks Relating to the
Company -- Taxation."
Net Income. Based on the factors described above, Zindart's net income was
$5.7 million in fiscal 1997, an increase of $1.1 million, or 23.5%, from $4.6
million in fiscal 1996. Hua Yang's net income was $2.3 million in fiscal 1997, a
decrease of $3.3 million, or 58.7%, from $5.6 million in fiscal 1996.
EBITDA. EBITDA for Hua Yang for fiscal 1997 was $5.0 million, a decrease of
$2.8 million, or 36.5%, from fiscal 1996.
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 1996 AND 1995
The results of operations for fiscal 1995 shown in the above table and the
comparison of those results with those of fiscal 1996 discussed below include
the operations of Zindart only.
Net Sales. Zindart's net sales in fiscal 1996 totaled $46.9 million, an
increase of $10.0 million, or 27.3%, from $36.9 million in fiscal 1995. This
growth resulted from an increase in sales volume in all finished product
categories. Mold sales increased by 95.5%, from $4.4 million to $8.6 million, as
a result of Zindart's acquisition of a 51% majority interest of Luen Tat Mould
Manufacturing Limited ("Luen Tat Mould") and the subsequent consolidation of
Luen Tat Mould's financial results with those of Zindart, as well as an increase
of Luen Tat Mould's sales.
Gross Profit. Zindart's gross profit totaled $12.9 million in fiscal 1996,
an increase of $1.7 million, or 14.1%, from $11.2 million in fiscal 1995. Gross
margin was 27.3% in fiscal 1996 compared to 30.5% in fiscal 1995. The gross
margin decreased because the sale of action figures and miniature figurine
playsets and molds as a percentage of total net sales increased. These products
generally have a lower gross margin than Zindart's other products. In fiscal
1996, Zindart obtained from its subcontractor a reduction of the subcontracting
fee, which resulted in a reduction in the provision relating to such fee. The
prices of Zindart's raw materials, zinc (approximately 13% of net sales) and
plastic (approximately 7% of net sales) increased substantially in the first
half of fiscal 1996. Zindart was able to pass on the increase in the cost of
zinc to its customers but had to absorb part of the increase in the cost of
plastic. In fiscal 1996, the annual average price of zinc alloy increased by
approximately 6.5% over the annual average price in fiscal 1995, but Zindart was
able to increase the average price of zinc alloy charged to its customers by
approximately 5.6%, nearly offsetting the price increase. The price of a plastic
resin frequently used by Zindart increased by approximately 16.9% from fiscal
1995 to fiscal 1996, and Zindart was unable to pass on the majority of this
additional cost to its customers. As a result, Zindart's gross profit margin
suffered in fiscal 1996. Zindart does not believe that increases in the price of
raw materials have materially affected Zindart's results of operations in any
other period. See "Risk Factors -- Risks Relating to the Company -- Dependence
on Raw Materials."
Selling, General and Administrative Expenses. Zindart's selling, general
and administrative expenses totaled $6.5 million in fiscal 1996 compared to $6.8
million in fiscal 1995, a decrease of $308,000, or 4.5%, as a result of the
transfer of certain engineering and administrative functions from Hong Kong to
the PRC and a reduction in provisions relating to management bonuses. Selling,
general and administrative expenses were 13.8% of net sales in fiscal 1996 as
compared to 18.5% of net sales in fiscal 1995, a decrease of 4.7%.
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<PAGE> 37
Operating Income. Zindart's income from operations totaled $6.3 million in
fiscal 1996 compared to $4.4 million in fiscal 1995, an increase of $1.9
million, or 42.6%. The operating margin increased from 12.0% of net sales in
fiscal 1995 to 13.5% of net sales in fiscal 1996.
Interest Income (Expense), Net. Zindart's interest income (expense), net
was $(194,000) in fiscal 1996 as compared to $91,000 in fiscal 1995. The
increase in interest expenses was due to increased borrowings to undertake the
construction of the Dongguan Facility.
Other Income (Expense), Net. Zindart's other income (expense), net, was a
net expense of $416,000 for fiscal 1996 compared to a net income of $492,000 in
fiscal 1995, a decrease of $908,000. The decrease was due primarily to (i) a
difference of $342,000 resulting from aggregate losses from foreign currency
transactions in fiscal 1996, versus aggregate gains from foreign currency
transactions in fiscal 1995 and (ii) a $358,000 write-off related to listing
expenses for a proposed public offering in Singapore that was not completed
during fiscal 1996.
Provision for Income Taxes. Zindart's effective income tax rate was 8.6% in
fiscal 1996 and 9.6% in fiscal 1995. The effective rate decreased because profit
contributions from subsidiaries of Zindart are not taxable and the proportion of
profits contributed from such subsidiaries was higher in fiscal 1996 than in
fiscal 1995.
Net Income. Zindart's net income totaled $4.6 million in fiscal 1996, an
increase of $404,000, or 9.6%, from $4.2 million in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Zindart. Zindart has financed its operations through cash from operations
and sales of equity securities. Zindart increased its working capital in March
and April 1997 in connection with Zindart's initial public offering, with net
proceeds to Zindart of approximately $14.1 million. Cash and bank deposits and
capital leases were $13.2 million and $1.7 million, respectively, at December
31, 1997. Cash generated from operating activities was $8.0 million for the nine
months ended December 31, 1997. Cash used in investing activities for the nine
months ended December 31, 1997 was $7.8 million, primarily as a result of
expenditures for the acquisition of plant and equipment and
construction-in-progress at the Dongguan Facility. Zindart's cash generated by
financing activities during such nine-month period was $509,000.
During the nine months ended December 31, 1997, Zindart repaid equipment
lease financings of $471,000 to two equipment lessors. As of December 31, 1997,
the aggregate outstanding amount under all capital leases was $1.7 million. As
of December 31, 1997, $2.3 million remained available to draw upon under these
leases. These leases require repayment in 48 monthly installments. The first and
second leases carry annual interest rates of 9.3% and 7.2%, respectively.
Zindart repaid short-term and long-term loans of $8.0 million in fiscal 1997. In
fiscal 1997, Zindart obtained equipment lease financing in the aggregate amount
of $1.5 million from two equipment lessors. The Company intends to terminate
these leases.
Zindart has revolving lines of credit with two banks: Standard Chartered
Bank and The Hong Kong and Shanghai Banking Corporation Limited. As of December
31, 1997, these lines of credit allowed for aggregate borrowings of up to $10.4
million. As of December 31, 1997, Zindart had no borrowing outstanding under
these revolving lines of credit. In May 1997, Zindart renegotiated its banking
facilities. As a result, the banks have released all loan covenants, mortgages
over properties and pledges of bank deposits previously made by Zindart.
Consistent with practice in the giftware, collectibles and toy industry,
Zindart offers accounts receivable terms to its customers. This practice has
created working capital requirements that Zindart generally has financed with
net cash balances, internally generated cash flow and loans. Zindart's accounts
receivable balance at December 31, 1997 was $13.2 million. Zindart has not
experienced any significant problems with collection of accounts receivable from
its customers.
Zindart's capital expenditures for the nine months ended December 31, 1997,
fiscal 1997 and fiscal 1996 were $7.8 million, $3.0 million and $7.3 million,
respectively.
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Hua Yang. Hua Yang has financed its operations through cash from
operations. Cash and bank deposits and capital lease obligations were $7.3
million and $1.4 million, respectively, at December 31, 1997. Of such capital
lease obligations, $638,000 were due and payable within one year with the
balance due within three years. As of December 31, 1997, Hua Yang had no
outstanding long-term debt but maintained working capital credit facilities with
Citibank N.A. and Standard Chartered Bank with unused borrowing capacity of
$15.0 million. Hua Yang's banking facilities are secured by all its assets. The
Company intends to terminate these facilities.
Cash generated from operating activities was $541,000 for the nine months
ended December 31, 1997. Cash used in investing activities was $340,000 for the
nine months ended December 31, 1997 as Hua Yang continued to invest in equipment
and minor leasehold improvements. Cash used in financing activities during such
nine-month period was $1.6 million due to repayment of bank borrowings and
capital lease obligations.
Consistent with the practice in the book and packaging industries, Hua Yang
offers accounts receivable terms to its customers. This practice creates working
capital requirements that Hua Yang generally finances with net cash balances and
internally generated cash. At December 31, 1997, Hua Yang's accounts receivable
balance was $13.8 million.
Hua Yang's capital expenditures for the nine months ended December 31,
1997, fiscal 1997 and fiscal 1996 were $705,000, $890,000 and $4.2 million,
respectively. 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. See "Risk Factors -- Country Risks -- Exchange Rate Risks" and
"-- Market Decline in Southeast Asia."
During the past three years, the rate of inflation in Hong Kong has been
approximately 8.1% to 8.8% per year and the rate of inflation in the PRC has
been approximately 8.3% to 21.7% per year. The Company believes that inflation
has not had a material impact on its business in recent years. No assurance can
be given that this will continue to be the case. See "Risk Factors -- Country
Risks -- Inflation Risk."
The Company. The Company's liquidity needs are expected to arise primarily
from debt service on indebtedness incurred in connection with the Hua Yang
Acquisition, working capital needs and the funding of capital expenditures and
investments. The Company has incurred substantial indebtedness in connection
with the Hua Yang Acquisition. The Credit Facility provides for revolving
borrowings in a maximum amount of up to $30.0 million, with a term of five
years, subject to the put option described below. All borrowings were fully
utilized in connection with the Hua Yang Acquisition. Borrowings under the
Credit Facility currently bear interest at a rate of LIBOR plus a margin of
2.0%. Interest is payable quarterly in arrears. The Company anticipates
repayment of approximately $10.0 million of such indebtedness with the net
proceeds from this Offering, as permitted by the Credit Facility.
After application of the net proceeds of this Offering, quarterly interest
payments will be approximately $531,000. Each lender under the Credit Facility
may demand repayment of its commitment under the Credit Facility at the end of
each of the third and fourth years following the closing date upon 90 days'
prior written notice. The Company may cancel the Credit Facility in whole or in
part at any interest payment date upon 90 business days' prior written notice.
See "Risk Factors -- Risks Relating to the Company -- Leverage" and "Description
of Senior Credit Facility." As required by the Credit Facility, the Company
expects to use approximately $3.1 million of its working capital to repay its
existing capital leases before the end of fiscal 1998.
As of December 31, 1997, the Company had capital commitments amounting to
approximately $552,000 in respect of purchase of machinery and tools. The
Company anticipates that its capital expenditures will increase substantially in
the event that the Company elects to move the Hua Yang facility or to build an
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expansion to the Dongguan Facility. See "Risk Factors -- Risks Relating to the
Company -- Production Facilities; Capacity Limitations."
On a pro forma basis as of December 31, 1997, the Company had cash and bank
deposits of approximately $8.8 million, $10.4 million available under its
existing lines of credit and total indebtedness of approximately $33.1 million.
The Company's principal source of cash to fund its liquidity needs will be
net cash from operating activities and borrowings under existing lines of credit
and the Credit Facility. The Company believes that these sources, with the net
proceeds from this Offering, will be adequate to meet the Company's anticipated
future requirements for working capital, capital expenditures and interest
payments on its existing indebtedness for at least the next 18 months. However,
there can be no assurance that these resources will be adequate to meet the
Company's needs, particularly in the event that the Company elects to move the
Shenzhen Facility or to expand the Dongguan Facility. In the event that the
Company requires additional capital, it may be required to issue additional
equity securities, which could result in additional dilution to existing
stockholders, or to borrow such funds, which could adversely affect operating
results. No assurance can be given that such capital will be available. See
"Risk Factors -- Risks Relating to the Company -- Production Facilities;
Capacity Limitations" and "-- Capital Needs; Uncertainty of Additional
Financing."
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BUSINESS
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 manufactures
die-cast collectibles, collectible holiday ornaments and toys and, through its
acquisition of Hua Yang, 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 Company's customers include many well-known marketers of die-cast and
injection-molded giftware and collectibles, as well as packagers and publishers
of books. Customers for die-cast and injection-molded products include Hallmark,
Ertl, Mattel(R) and Hasbro, Inc. Customers for books, paper and packaging
products include Mattel(R), Disney Publishing, Inc., Intervisual Books, Inc.,
Reader's Digest, The Metropolitan Museum of Art and Golden Books, Inc.
DEVELOPMENT OF THE COMPANY
Zindart was founded in 1978 by Mr. George Sun. In 1982, Zindart moved its
production to its first facility in the PRC. In the same year, Ertl acquired an
equity interest in Zindart. In 1983, Zindart began business with Hallmark.
Additional production capacity was added in 1987 with the opening of its second
PRC facility. In 1993, ChinaVest acquired a majority ownership position in
Zindart. By late 1994, in response to growth in sales, Zindart decided to build
the Dongguan Facility in order to expand and consolidate its manufacturing
operations. Relocation of the workers and production lines from Zindart's two
other facilities to the Dongguan Facility began in September 1996 and was
completed in January 1998. Today, Zindart has 895,000 square feet of production
and production support space as well as a 385,000 square foot dormitory.
In February 1998, Zindart acquired Hua Yang. The acquisition provides
Zindart with its own packaging operation, which is an integral part of providing
its customers with a fully-integrated turnkey manufacturing service. The Hua
Yang Acquisition broadens Zindart's product lines and customer base, and is
consistent with its goal of becoming the leading producer of high-quality
hand-assembled consumer products in the PRC. Additionally, management believes
that the acquisition will yield economies of scale through the consolidation of
financial and administrative functions.
Hua Yang's business was founded in Hong Kong in the 1950s as a small
business printer by C.M. Chan and his family. In the 1960s, the Chan family
purchased a two-color offset printing press and launched the packaging business,
primarily servicing Hong Kong-based toy manufacturers. By the mid-1980s, the
Chan family had acquired additional four-color presses and decided to diversify
into the hand-made book business, initially focusing on pop-up books. At the
time, given the high level of hand-work involved in pop-up books, the Chan
family opened an assembly plant in Shenzhen to access the large and inexpensive
labor force. In 1995, the Chan family sold the assets of the business to
ChinaVest and Advent. That same year, Hua Yang purchased two more six-color
presses and consolidated its printing and hand-assembly in the PRC, maintaining
its headquarters and sales force in Hong Kong.
THE COMPANY'S SOLUTION
The Company's customers seek suppliers that can manufacture high-quality
products in desired volume (i.e., both in large quantities and limited runs) in
a timely and cost-effective manner. In addition, the Company's customers seek to
eliminate the cost, time and complexity of identifying and managing multiple
vendors required to develop and produce a product. For example, marketers of
die-cast and injection-molded products often must hire different companies to
engage in product engineering, model and mold making, and manufacturing and
packaging of the finished product. Book customers often must turn to trading
houses, brokers or service intermediaries for product development and
engineering as well as component sourcing. The need to coordinate several
different companies in the manufacturing process can cause production delays,
inefficiencies in the management of multiple contractors, and quality and
reliability problems.
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The Company's full service, value-added approach to manufacturing addresses
these customer needs as follows:
- High-Quality Production
The Company uses modern computer-aided design and manufacturing equipment
to produce high-quality products. The Company also employs a highly-trained
workforce, including skilled, technically trained craftsmen and other capable
but relatively inexpensive laborers for its manufacturing and assembly
operations under the guidance of experienced management. The Company ensures
quality through rigorous quality control procedures at each step of the
production process. The Company has an employee training program geared
specifically toward inspection and quality control.
- Manufacturing Capacity
The Company currently employs approximately 10,000 production workers and
has an aggregate of 1,191,000 square feet of manufacturing space with the
capacity for up to 13,200 workers in its two manufacturing facilities. The
Company believes that this space, together with the anticipated increase in
efficiency for which the Dongguan Facility was designed, will allow the Company
to significantly increase its production capacity and meet anticipated demand
through calendar 1999. The added flexibility gained through increased production
capacity should enable the Company to further shorten production cycles, which
in turn will enable the Company to offer, among other things, a just-in-time
manufacturing service.
- Turnkey Manufacturing Service
The Company's turnkey manufacturing service fulfills a customer's
requirements at every stage in the production process, including component
sourcing, computer-aided product engineering and design, model and mold making
and manufacturing, assembling and packaging of the finished product. This
coordinated, one-stop production process provides the Company's customers with
(i) shortened lead times from design to production, (ii) a single participant in
the manufacturing process instead of the multiple participants previously
required and (iii) increased efficiency, resulting in lower per-unit costs. See
"-- Manufacturing."
- Commitment to Efficiency
The Company continually strives to increase efficiency and reduce costs for
the benefit of the Company and its customers. To date, the Company has been able
to achieve efficiencies by locating its production facilities in the PRC,
vertically integrating its production processes, and working in close
cooperation with its customers. The Company expects to achieve greater
efficiencies as a result of the consolidation of Zindart's operations in the
Dongguan Facility.
THE COMPANY'S STRATEGY
The Company's goal is to become the leading manufacturer of high-quality
die-cast and injection-molded collectibles, hand-made books, specialty packaging
and other paper products for the premier designers and marketers of such items.
The Company's business strategy to achieve this goal is to focus on the
following:
- Develop Additional Major Customers
Currently, the Company has a small core group of large customers, but also
manufactures products for many other customers. The Company expects that it may
be able to develop several of these smaller customers into major customers as
they become familiar with the benefits of the Company's turnkey manufacturing
service. With completion of the Dongguan Facility, the Company can now offer
major customers a dedicated production team and dedicated production space,
which can provide such customers with attractive advantages. For example, the
Company can customize its production facility to meet the specific needs of such
customers, and the customer is able to exercise greater control over the
production process, thereby enhancing quality control and cost efficiency,
increasing confidentiality, and expediting scheduling and delivery timetables.
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- Diversify Product Offerings
The Company has established itself as a leading manufacturer of die-cast
collectibles, collectible holiday ornaments and toys. Through its acquisition of
Hua Yang, the Company diversified its product offerings to include hand-made
books, specialty packaging and other paper products. The Company intends to
diversify its product offerings to include the manufacture of other consumer
products that utilize the Company's current competitive advantages and
production expertise. As part of its diversification strategy, the Company
intends to review additional strategic acquisition opportunities.
- Invest in Manufacturing Capacity
The Dongguan Facility provides the Company with additional production
space. This facility increases the Company's capacity and, the Company believes,
improves the quality of its operations and overall efficiency, which should in
turn enable the Company to meet additional demand for its manufacturing services
through calendar 1999. Assuming necessary financing is available, the Company
intends to purchase new equipment for its facilities and to further expand its
production capacity to meet customers' needs.
- Deploy Advanced Management Information Systems
The Company seeks to enhance its manufacturing and business processes
through the deployment of advanced management information systems enabling the
real-time monitoring and management of its operating and financial performance
and resources. The Company has contracted with a third party to develop custom
manufacturing software and intends to deploy a comprehensive enterprise software
solution, which the Company believes will result in considerable cost savings
and operating efficiencies.
MARKETS, PRODUCTS AND CUSTOMERS
Die-cast Collectibles
The Company manufactures a wide range of metal die-cast collectible scale
model replicas of automobiles, such as Mercedes Benz, BMW, Corvette and Mustang,
trucks, planes, farm implements and construction equipment, such as John Deere
and Caterpillar, and classic cars, such as the 1932 Cadillac, the 1964 Aston
Martin and the 1956 Ford Thunderbird. These replicas, which come in various
scales from 1/12th to 1/64th of the size of the original product, are medium-and
high-feature products that must meet exacting standards. Many of the die-cast
replicas have complex designs which require high-quality workmanship and
decorative details, with pad printing of as many as one hundred imprints. The
most complex of these models incorporate up to 200 moveable parts. The die-cast
scale model replicas manufactured by the Company are sold through hobby shops,
collectors' clubs, car and equipment dealers, toy and gift stores and other
channels. These products typically retail in the U.S. for between $150.00 and
$180.00 for the high-feature products, between $25.00 and $60.00 for the
medium-feature products and between $5.00 and $10.00 for the small scale
products. Many of these products have nostalgic appeal to adult consumers. In
addition, some of these products, especially the automobile replicas, have
attracted a following of collectors and are traded on a secondary market. The
Company believes, based on many years of sales experience, that many die-cast
collectibles have enduring consumer appeal. For example, the Company
manufactures on an annual basis several products for which molds were made
between five and ten years ago. These include the '70 Ford Mustang, '68 Pontiac
GTO, '67 Corvette convertible, Ford Roadster, Allis Chalmers Model "C" Tractor
and John Deere Skidsteer Loader.
The Company's primary customers for die-cast collectibles are Ertl and
Mattel(R). Ertl is a leading U.S. designer and marketer of die-cast collectible
replicas with fiscal year 1997 sales of over $200 million. Ertl was the
Company's first customer in 1978 and has been a customer ever since. In 1982, an
Ertl affiliated company, Ertl (Hong Kong) Limited, acquired a significant equity
interest in Zindart. Sales to Ertl continue to account for a significant portion
of the Company's net sales. In March 1997, Zindart started a business
relationship with Mattel(R), a leading U.S. designer and marketer of die-cast
collectible replicas and general toys, as a producer for the Hot Wheels(R)
Pro-Racing and Legend Series. With the increasing popularity of NASCAR racing,
Mattel(R) has introduced a successful NASCAR Hot Wheels(R) line called
"Pro-Racing." This line of
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1/64 scale model replicas are highly detailed, requiring 40 to 60 imprints per
car body. Sales to Mattel(R) constituted a significant portion of the Company's
net sales for the nine months ended December 31, 1997. See "Risk
Factors -- Risks Relating to the Company -- Dependence on Major Customers."
The Company's customers for die-cast collectibles include other well-known
designers and marketers of such products, such as Revell-Monogram, which has
been a customer of the Company since 1987, and SWG of Germany, which has been a
customer of the Company since 1989. Revell-Monogram is a leading worldwide
designer and marketer of plastic model kits and die-cast replicas of airplanes,
automobiles and ships marketed under the "Revell" and "Monogram" brand names.
SWG is one of the largest designers and marketers of die-cast replicas in
Germany, marketed under the brand name "Siku."
Collectible Holiday Ornaments
Hallmark, long known as a leading producer of greeting cards, successfully
diversified into collectible holiday ornaments and giftware products. Hallmark
relies on the Company to manufacture many of its Keepsake Ornaments, which
consist of a variety of Christmas ornaments, holiday-themed pieces and other
giftware both in die-cast zinc alloy and plastic. Hallmark's Keepsake Ornaments
products also include free-standing decorations such as die-cast replicas of
pedal cars. Production of Keepsake Ornaments products requires highly developed
hand spray painting skills and attention to quality by each member of the
Company's workforce in order to meet Hallmark's exacting aesthetic and quality
requirements.
The Keepsake Ornaments manufactured by the Company are collectibles sold
through authorized retail outlets. These products typically retail in the U.S.
for between $7.00 and $25.00. Many purchasers of Keepsake Ornaments consider
these products to be valuable, collectible items. In addition to traditional
holiday themes, many Keepsake Ornaments depict characters from storybooks and
films such as the Wizard of Oz, Star Trek, Pocahontas, the Flintstones, and
Peanuts, and various American icons such as Lou Gehrig and Babe Ruth. See "Risk
Factors -- Risks Relating to the Company -- Dependence on Major Customers."
Action Figures and Miniature Figurine Playsets
The Company also manufactures action figures and miniature figurine
playsets for various designers and marketers such as Hasbro, Inc. and Galoob
Toys, Inc. These products are used primarily as toys and include miniature
replicas of popular television and movie characters such as Thomas the Tank
Engine & Friends and various Disney and Sesame Street characters. These products
typically retail in the U.S. for between $5.00 and $15.00. The Company believes
that a developing trend among toymakers is to focus on profitability rather than
volume. As a result, many toymakers are moving into the sale of higher-priced
toys, the production of which requires high-quality and detailed manufacturing
skills of the type offered by the Company.
Books
The Company manufactures "pop-up" books, novelty books and board books.
Pop-up books are books containing specially die-cut, folded and glued paper
pieces that, when the book is opened, "pop" out of the book in three dimensions.
Most of the Company's "pop-up" books are targeted at children but a small
segment also caters to the adult and young adult markets. Novelty books,
sometimes also referred to as "book-plus," incorporate an extra or unusual
element. These elements often make the book interactive or provide play value;
examples include an electronic device, a noise maker, plastic, vinyl, textured
or scented materials, or a plush toy. Board books usually are die-cut or punched
into an unusual shape, thus requiring hand-assembly. These books are made of
heavy weight, stiff paperboard, are durable in nature and usually are targeted
at the children's market. Often board books come in a set of three or more
titles and are grouped together in a hand-assembled slip case, sleeve or custom
made box.
Specialty Packaging
Specialty packaging includes paper board and E-flute (corrugated) boxes
and, to a lesser extent, blister cards and inserts. Box packaging often requires
advanced printing techniques, including six and seven color printing, hot foil
stamping, spot or total coating, varnishing, embossing and lamination. After
printing, boxes
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are die-cut to shape with a drop-out window often included. PVC sheets, which
also are cut to shape and often incorporate some silk screen printing, are glued
in place by hand in the drop-out windows. Blister cards are simple backing
boards used in a plastic blister pack while insert cards are printed pieces of
board used as backing or filler inside a larger packaging box.
Other Paper Products
Other paper products manufactured by the Company include puzzles, board
games, photo albums, stationery sets and activity packs, all of which require
hand assembly.
MANUFACTURING
The Company offers a fully-integrated turnkey manufacturing service. With
this service, the Company integrates component sourcing, computer-aided product
engineering, model-making and mold-making, as well as manufacturing, assembling
and packing of finished product. This enables the Company to meet all of a
customer's design engineering and manufacturing needs and eliminating the need
for intermediaries. By coordinating product development and process design with
production and packaging, the Company is able to shorten the lead time from
conceptual design to product delivery and to lower product cost while
maintaining high quality and reliability.
The Company's die-cast and injection-molded production facilities are
located in Dongguan. The Dongguan Facility includes (i) a product engineering
area, (ii) model-making and mold-making areas, (iii) die-casting and
injection-molding areas, (iv) hand-spray and electrostatic painting and pad
printing areas, (v) assembly and packing areas, (vi) a warehouse, and (vii)
dormitory, dining and recreational facilities. The Company's product engineering
staff makes extensive use of sophisticated computer-aided design systems for the
development of prototype-scale models. The die-casting, injection-molding and
electrostatic painting areas operate on a two-shift basis. The hand-spray, pad
printing and assembly and packing areas run on a single-shift basis. Assembly
and hand painting areas account for most of the total work force and production
area.
The Company's hand-made book, specialty packaging and paper production
facilities are located in Shenzhen. The Shenzhen Facility includes (i) a
pre-press area, press rooms and print finishing area, (ii) die-cut, trimming,
guillotining and punching areas, (iii) packaging and book hand assembly areas,
(iv) a warehouse, and (v) dormitory and dining facilities. The press rooms
operate on a two-shift basis with six advanced German presses delivering up to
six-color printing capability. The die-cut department also runs on a two-shift
basis during the peak season. Hand assembly for both packaging and books
generally works one shift, adding an additional shift during the peak season,
and accounts for most of the total work force and production areas.
The Company uses zinc alloy and various plastic resins in its die-cast and
injection-molded production operations. The supply and demand for zinc alloy and
for both plastic resins and the petrochemical intermediates from which plastic
resins are produced are subject to cyclical and other market factors and can
fluctuate significantly. The Company acquires raw materials for its die-cast
production primarily from Australia, Belgium and Canada. Plastics used for
manufacturing collectible holiday ornaments and figurines are obtained from Hong
Kong. The Company's standard practice is to maintain a supply of raw materials
sufficient for approximately three months' production. See "Risks
Factors -- Risks Relating to the Company -- Dependence on Raw Materials."
Paper, ink and glue are the principal raw materials used by the Company in
the manufacture of books, specialty packaging and other paper products. The
Company uses many types of coated paper and board in a variety of grades,
depending on customers' quality and price requirements. The Company purchases a
majority of its paper from U.S. and European suppliers, but generally places
orders through trading companies or agents in Hong Kong. Additionally, the
Company acquires a small amount of paper from local sources in Hong Kong. Ink
and glue are ordered locally in Hong Kong.
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The plants and equipment owned and operated or leased by the Company are
subject to comprehensive PRC laws and regulations that involve substantial
risks. See "Risk Factors -- Risks Relating to the Company -- Environmental
Matters" and "-- Production Facilities; Capacity Limitations" and "-- Dependence
on PRC Parties" as well as "-- PRC Risks."
COMPETITION
The Company faces significant competition in each of its product segments.
In die-cast collectibles and collectible holiday ornaments, the Company competes
with several companies located primarily in the PRC. In toys, the Company
competes with numerous companies located all over the world. In "pop-up" books,
the Company competes with several companies located in Southeast Asia and South
America. In novelty and board books as well as packaging, the Company competes
with several companies located in Hong Kong. The Company believes that the basis
of competition in the manufacturing of all of its products is price, quality,
technical capabilities and the ability to produce in required volumes and to
timely meet delivery schedules. The Company expects increased competition from
other industry participants that may seek to enter one or more of the Company's
high margin product segments. Many of the existing and potential competitors
have significantly greater financial, technical, manufacturing and marketing
resources than the Company.
The Company does not believe that there are any significant barriers to
entry into the manufacture of its products, although the Company believes that
it currently holds certain competitive advantages. The Company does not
characterize its business as proprietary and does not own any patents or
copyrights or possess any material trade secrets. Accordingly, additional
participants may enter the market at any time. No assurance can be given as to
the ability of the Company to compete successfully with its current or future
competitors, and the inability to do so would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, certain of the Company's customers, including Mattel(R), manufacture a
substantial portion of their products internally. Any determination by a
principal customer to manufacture new products internally or to move
manufacturing from the Company to another third party would have a material
adverse effect on the Company's business, financial condition and results of
operations.
PROPERTIES
The Company is headquartered in approximately 26,100 square feet in Hong
Kong. The facilities in Hong Kong are owned by the Company, and the land on
which such facilities are located is subject to long-term leases.
The Company's manufacturing operations are conducted in the Dongguan
Facility and the Shenzhen Facility. The Company's manufacturing facilities have
an aggregate of approximately 1,191,000 square feet of manufacturing space and
approximately 551,000 square feet of dormitory space. Virtually all land in the
PRC is state-owned, but can be leased from the government on a long-term basis.
The Dongguan Facility is built on land held by Zindart pursuant to a 50-year
lease of this nature. The operation of the Dongguan Facility is structured as a
contractual joint venture with a PRC governmental entity, Dongguan Hengli
Trading General Company, which receives an annual fee from the Company but does
not share in the profits or losses of the venture. This contractual joint
venture has a term of 15 years. At the end of this term, the Company will
continue to own the principal assets of the joint venture, including the 50-year
land lease. Part of the operation of the Shenzhen Facility is structured as a
15-year contractual joint venture known as Shenzhen Huaxuan Printing Product
Co., Ltd. with Goshu Economic Development Company, Shenzhen, which receives an
annual fee from the Company but does not share in the profits or losses of the
venture. Unlike the Dongguan Facility, the Company does not own but leases its
factory building and land at the Shenzhen Facility. At the end of the joint
venture term, the Company will continue to own the other assets of the joint
venture, but the land and building will revert to the PRC party to the joint
venture company. See "Risk Factors -- Risks Relating to the
Company -- Production Facilities; Capacity Limitations" and "-- Dependence on
PRC Parties." The plants and equipment owned and operated or leased by the
Company are subject to comprehensive PRC laws and regulations that involve
substantial risks. See "Risk Factors -- Country Risks" and "-- PRC Risks."
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SUBSIDIARIES
The Company has a controlling interest in two mold-making subsidiaries. In
August 1994, Zindart acquired a 55% interest in Onchart Industrial Limited, a
British Virgin Islands corporation. In December 1994, Zindart acquired a 51%
interest in Luen Tat Mould. Prior to these acquisitions, Zindart had regularly
contracted with these companies to provide mold-making services to Zindart.
Presently, Luen Tat Mould conducts its mold-making operations in one of the
Company's factories, and provides the Company with the largest in-house mold and
model-making capacity in southern China. Dongguan Xinda Giftware Company Limited
is a contractual joint venture established in the PRC to own and operate the
Dongguan Facility. Such joint venture has a term of 15 years and expires in
November 2009. Under the joint venture contract and the supplemental agreement
thereto, the Company is entitled to 100% of the joint venture's income after
paying to its joint venture partner a pre-determined annual fee. See Note 3 of
Notes to the Consolidated Financial Statements of the Company.
Hua Yang is a subsidiary of the Company and has three subsidiaries. Hua
Yang Printing Holdings Co., Limited is 100% owned, based in Hong Kong, and
employs the sales, accounting and management staff for the book and packaging
businesses and holds the Hua Yang equity interests in its two Chinese joint
ventures/subsidiaries. Shenzhen Huaxuan Printing Product Co., Ltd. is a
contractual joint venture established in the PRC to operate the Shenzhen
Facility. Such joint venture has a term of 15 years and expires in October 2010.
Under the joint venture agreement, the Company is entitled to 100% of the joint
venture's income, after paying its joint venture partner a pre-determined annual
fee. See Note 2 of Notes to the Consolidated Financial Statements of Hua Yang.
BACKLOG AND SEASONALITY
The Company's die-cast and injection-molded product customers generally
contact the Company six to nine months in advance of product delivery in order
that the Company engineer and make the molds for the products. Thereafter, these
customers place production orders two to three months in advance of target
delivery dates. These purchase orders may be canceled by the customer upon
reimbursement of actual costs incurred and payment of a portion of lost profits,
as determined on a case-by-case basis.
The buying and ordering cycles for packaging and books differ. For
packaging, in November or December the Company reviews with its two core
customers their anticipated packaging needs for the upcoming year. By the
beginning of the calendar year, both Mattel(R) and Jetta will have provided the
Company with dollar and unit allocations for the year. This allocation will be
based on the Company's performance for the past year, capacity and technical
capability vis-a-vis the designs agreed by the customer. Every week thereafter,
the Company will receive purchase orders for covering the next four to six
weeks. Firm orders and packaging planning rarely extend beyond six weeks.
The buying cycle in books is much longer than in packaging and somewhat
variable, with a majority of activity grouped around the Frankfurt Book Fair
held in Germany every October and the Children's Book Fair held in Bologna,
Italy every April. The fairs are a time for Hua Yang's customers to present
their new book concepts and ideas to customers, with confirmed sales being
realized three to six weeks after each fair. Once Hua Yang's customers have
confirmed sales, they turn to printers to reserve production capacity. Orders
for reprints of old titles, however, can be booked anytime during the year but
generally fall outside of the peak summer production months.
As is customary in the PRC, each year the Company closes its facilities for
two weeks during the months of January or February in celebration of the Chinese
New Year holidays. As a result, the Company's fourth fiscal quarter production
and revenues have in the past been lower than in other quarters and are expected
to be lower than in future quarters. Except as attributable to the observance of
the New Year, the Company has not experienced seasonality in its die-cast and
injection-molded products business operations, although they could show
quarterly fluctuations based on the timing of orders placed by its customers.
The Company's book sales are weighted toward the Christmas season. As a result,
sales of books in the first half of each fiscal year are generally greater than
in the second half.
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TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company has no registered trademarks. The Company has applied for, but
not yet been granted, a United States patent on the structure of a particular
book. The Company's key employees have entered into confidentiality agreements
with the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 11,500 persons,
of whom approximately 9,100 were production workers, 1,370 were administrative
staff and 1,030 were engineering and technical personnel. As is customary for
employers in the PRC, each of the Company's production facilities includes
housing facilities for workers. The Company is committed to providing good
working and living conditions for its employees in the PRC. To that end, the
Company has adopted a code of conduct relating to human rights, including a
prohibition on use of child labor, and guidelines regarding worker safety, wages
and hours. The Company intends to retain outside consultants to review and
assist in improving the working and living conditions of its employees.
The Company provides training to its managers and executives in its Hong
Kong headquarters through courses conducted by industry professionals engaged by
the Company as well as by senior management. The courses cover management
skills, total quality management, ISO 9000 requirements and the technical
aspects of the Company's operations. In addition, the Company sponsors a number
of technical staff to attend night classes, and in-house seminars for workers
are held semi-annually by the quality control staff or the factory managers on
quality requirements. See "Risk Factors -- Risks Relating to the
Company -- Reliance on Key Personnel" and "-- Employees."
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and certain key employees of the Company and their
ages as of January 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------
<S> <C> <C>
George K. D. Sun 57 Founder, Chief Executive Officer and Director
Feather S. Y. Fok(1) 36 Chief Operating Officer, Chief Financial Officer
and Director
Sandra C. Shaw 40 President -- Hua Yang
Karl K. W. Chan(2) 55 Managing Director -- Hua Yang and Director
Andrew C. H. Mok 46 Executive Vice President of Operations
Tony D. H. Lai 56 Vice President of Production
C. W. Ng 38 Vice President of Quality and Industrial
Engineering
Koulman N. Zheng 42 Vice President of Engineering
Robert A. Theleen(1)(3) 52 Chairman of the Board
James E. Gilleran(3) 64 Director
Leo Paul Koulos 64 Director
Alexander M. K. Ngan(1) 46 Director
Gordon L. M. Seow(2) 65 Director
George B. Volanakis 50 Director
Stanley Wang(3) 55 Director
Victor J. H. P. Yang(2) 52 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Such individuals have agreed to join the Board of Directors upon the closing
of the Offering.
(3) Member of Audit Committee.
George K. D. Sun founded Zindart in 1978 and served as a Director and Chief
Executive Officer from 1978 to 1994. In 1994, Mr. Sun took a sabbatical to
pursue philanthropic activities. Mr. Sun returned to the Company in 1996 as a
Director and Chief Executive Officer. Mr. Sun has transferred to the Company's
current executive team responsibility for managing all of the Company's
day-to-day operations. Mr. Sun continues to be responsible for providing
leadership to, and engaging in strategic planning for, the Company.
Feather S. Y. Fok has served as a Director since August 1993 and has served
as Chief Operating Officer and Chief Financial Officer since 1993. Ms. Fok
joined the Company in January 1989. Before joining the Company, Ms. Fok worked
in the Audit & Business Advisory division of Arthur Andersen & Co. in Hong Kong.
Ms. Fok is a Certified Public Accountant in Hong Kong and an associate member of
the Hong Kong Society of Accountants. Ms. Fok is also a member of the Chartered
Association of Certified Accountants, United Kingdom. Ms. Fok received a
Bachelor's degree in Business Administration from the Chinese University of Hong
Kong.
Sandra C. Shaw has served as President of Hua Yang since November 1996 and
is responsible for the day-to-day management of Hua Yang. Between November 1996
and December 1997, she was seconded by Advent International Corporation to Hua
Yang to serve in such capacity. Ms. Shaw was a partner of Advent International
Corporation from May 1992 until her resignation in December 1997. Previously,
Ms. Shaw worked for Techno-Venture Group, a Japanese private equity firm, and
The First National Bank of Chicago. Ms. Shaw holds a B.A. from Wesleyan
University and an M.A.L.D. from the Fletcher School of Law and Diplomacy, Tufts
University. She also was a Monbusho Fellow at Tokyo University.
Karl K. W. Chan is joining the Board upon closing of the Offering. He has
served as Managing Director of Hua Yang (or its predecessor company) since the
mid-1970s. After attending Hong Kong Baptist
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University, Mr. Chan joined his father in the family printing business. Mr. Chan
assumed responsibility for the company in 1970s and in 1995 he sold a majority
interest in the business to ChinaVest and Advent. Mr. Chan focuses on developing
new products and initiating and maintaining core customer relations.
Andrew C. H. Mok was promoted to Executive Vice President of Operations in
April 1997 and is responsible for marketing, production and engineering. From
1995 to 1997, he served as Vice President of Marketing. Mr. Mok has over 20
years of working experience in the toy industry. Mr. Mok received a B.S. degree
in Mechanical Engineering from the University of Hong Kong.
Tony D. H. Lai has served as a Vice President of Production since October
1994 and is responsible for Zindart's production in the PRC. Mr. Lai served as
Director of the Company from October 1994 until his resignation from the Board
on May 16, 1997. Mr. Lai graduated from Shanghai Education University. He joined
the Company in 1989.
C. W. Ng joined the Company in May 1997 as Vice President of Production,
and has served as Vice President of Quality and Industrial Engineering since
January 1998. Prior to joining the Company, Mr. Ng worked for seven years at
Mattel. Mr. Ng has 14 years of production experience. Mr. Ng received a B.S.
degree in Industrial Engineering from the University of Hong Kong in 1982 and an
M.B.A. from Andrew University.
Koulman N. Zheng has served as Vice President of Engineering since 1993,
and is responsible for Luen Tat Mould's operations. Prior to joining the
Company, Mr. Zheng worked for many years as an engineer and operations manager
at various companies in the U.S. Mr. Zheng holds a 10% interest in Luen Tat
Mould. Mr. Zheng holds a B.S. and an M.S. degree in Mechanical Engineering from
San Francisco State University and Northeastern University, respectively. Mr.
Zheng also received a B.S. degree in Mechanical Engineering from the South
Chinese Institute of Technology in the PRC.
Robert A. Theleen serves as Chairman of the Board of the Company and is the
founder and Chairman of ChinaVest. Mr. Theleen joined the Board of Directors in
January 1997. Mr. Theleen is a director of several ChinaVest portfolio
companies. Mr. Theleen is a founding member of the executive committee of the
Hong Kong-Taipei Business Cooperation Committee of the Hong Kong General Chamber
of Commerce. Mr. Theleen received a B.A. degree from Duquesne University and an
M.B.A. from the American School of International Management.
James E. Gilleran joined the Board in March 1997. Mr. Gilleran has served
as Chairman of the Board and Chief Executive Officer of Bank of San Francisco
and its holding company since 1994. Prior thereto, Mr. Gilleran served as
Superintendent of Banks of the California State Banking Department. In addition,
Mr. Gilleran serves as a director of The Fritz Companies, Cooper Development
Company and Secor International, Inc. Mr. Gilleran received a B.B.A. degree from
Pace University.
Leo Paul Koulos joined the Board in March 1997. Mr. Koulos is President and
Chief Executive Officer of National Coupon Redemption Service, Inc., a national
clearinghouse for manufacturers' cents-off coupons. Mr. Koulos is also Chairman
and Chief Executive Officer of Coupon Processing Associates, Inc. and of its
Mexican affiliate, Enlace Vital, S.A. de C.V. Mr. Koulos received a B.A. degree
from the University of San Francisco.
Alexander M. K. Ngan has served as a Director since October 1995. Mr. Ngan
is a partner of ChinaVest, which he joined in 1993. Mr. Ngan is a director of
several privately held ChinaVest portfolio companies. Prior thereto, Mr. Ngan
worked for over 20 years in banking and financial consulting in Canada and Hong
Kong. Mr. Ngan received a Bachelors of Mathematics degree from the University of
Waterloo, Ontario. Mr. Ngan is a representative of ChinaVest on the Board.
Gordon L. M. Seow is joining the Board upon closing of the Offering. He is
a barrister-at-law from Lincoln's Inn, United Kingdom. Mr. Seow was a director
of Shell Eastern Petroleum (Pte) Ltd., Singapore and retired from the company in
1987 after 30 years of service. He then joined the Ministry of Foreign Affairs
in 1988 and served as Singapore's Commissioner to Hong Kong from 1988 to 1994
and subsequently retired. Mr. Seow is currently a director of several companies
in Singapore, including Hotel Properties Ltd, Kim Eng
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Holdings Ltd and Pacific Century Regional Developments Ltd. He is a member of
the advisory board of ChinaVest IV-B.
George B. Volanakis has served as a Director since November 1992. Mr.
Volanakis joined Ertl in 1988 and has served as President and Chief Executive
Officer of Ertl since 1993. Prior to joining Ertl, Mr. Volanakis was Senior Vice
President of Marketing for Mattel Inc. Mr. Volanakis has served as President of
Matchbox Toys U.S.A., Ltd. and as President and Chief Operating Officer of
Playskool Inc., a subsidiary division of Milton Bradley Company, Inc. Mr.
Volanakis is a former Chairman of the Toy Manufacturing Association in the
United States. Mr. Volanakis received a B.A. degree from Union College. Mr.
Volanakis is a representative of Ertl on the Board.
Stanley Wang joined the Board in March 1997. Mr. Wang is President and
Chief Executive Officer of PanTronix Corporation, which provides manufacturing
services for semiconductor components, subsystems and modules. Mr. Wang received
a business degree from the National Taiwan University and an M.B.A. degree from
Temple University.
Victor J. H. P. Yang is joining the Board upon closing of the Offering. He
is a founding partner of and has practiced for over 20 years with the Canadian
law firm Boughton Peterson Yang Anderson, Solicitors and resides currently in
the firm's Hong Kong office. He is also a consultant with Alan Lam and Norris
Yang, Solicitors. Mr. Yang has served on the Board of Directors of various
publicly listed companies in Canada, Singapore and Hong Kong.
For a description of certain risks relating to the management of the
Company, see "Risk Factors -- Risks Relating to the Company -- Reliance on Key
Personnel."
BOARD OF DIRECTORS COMPENSATION
The directors of the Company who are not executive officers and are not
affiliated with ChinaVest have received options to purchase up to 10,000 Shares.
Such options vest at a rate of 25% per year. These directors do not receive any
compensation for serving on the Board of Directors or any committee thereof, but
are reimbursed for their expenses for each Board of Directors meeting they
attend.
EXECUTIVE COMPENSATION
The aggregate amount of compensation paid by the Company to all directors
and officers as a group in fiscal 1997 was $1.7 million, of which $550,000 was
paid as discretionary bonuses. Compensation amounts include amounts reimbursed
to Advent for Ms. Shaw's services. In addition, approximately $32,000 was
contributed to the Company's provident fund (the Company's defined contribution
benefit plan administered by Jardine Matheson) in fiscal 1997 on behalf of the
Company's directors and officers.
The Company's executive officers and other key employees participate in the
Company's bonus plan, which generally provides for the payment of bonuses in an
aggregate amount not to exceed ten percent of the Company's pre-tax income.
Members of the Company's management recommend the size of the bonus pool to the
Company's Board of Directors for its approval and the allocation of the bonus
amounts to the Compensation Committee for its approval. An employee's bonus
amount is determined on the basis of the employee's position, performance during
the year, length of service and other factors. The Compensation Committee is
comprised of three directors, one of whom is the Chief Operating Officer.
The Company's executive officers and other key employees are also eligible
to participate in the Company's 1997 Equity Incentive Plan. See "-- 1997 Equity
Incentive Plan."
1997 EQUITY INCENTIVE PLAN
Scope. The Company's 1997 Equity Incentive Plan (the "Incentive Plan") is
designed to attract and retain qualified and competent personnel for positions
of substantial responsibility and to provide additional incentive to employees
and consultants of the Company. The Incentive Plan permits the Company to grant
options and bonuses covering either Shares or ADSs (each such grant being a
"Share Award"). Options
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<PAGE> 51
granted under the Incentive Plan may be Incentive Stock Options or Nonstatutory
Stock Options as determined by the Board of Directors or a duly appointed
committee of the Board (the "Administrator") at the time of the grant subject to
the applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). An aggregate of 672,500 Shares and ADSs has been reserved for issuance
under the Incentive Plan. As of January 31, 1998, Share Awards covering an
aggregate 196,000 Shares (including 196,000 ADSs representing an equal number of
Shares) had been granted under the Incentive Plan. Unless sooner terminated by
the Board, the Incentive Plan shall terminate on May 15, 2007. As of January 31,
1998, the total number of options granted to the executive officers and
directors was 92,500 with an exercise price of $9.13. The term of such options
may not exceed ten years.
Eligibility. Incentive Stock Options may be granted only to employees.
Nonstatutory Stock Options and other Share Awards may be awarded only to
employees, directors or consultants of the Company.
Administration. The Administrator has the authority to grant Share Awards
under the Incentive Plan and to determine a vesting schedule and exercise price
of such Share Awards. The Administrator also has full power and authority to
construe, interpret and administer the Incentive Plan.
Option Exercise Price; Adjustments; Amendments. The exercise price per
share of the shares to be granted pursuant to the Incentive Plan is determined
by the Administrator. In the case of an Incentive Stock Option granted to an
individual who at the time of the grant owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any parent or
subsidiary of the Company, the per-share exercise price may not be less than
110% of the fair market value on the date of grant. In the case of an Incentive
Stock Option granted to an individual other than a person described in the
previous sentence, the per-share exercise price may not be less than 100% of the
fair market value on the date of grant. In the case of a Nonstatutory Stock
Option, the per-share exercise price may not be less than 100% of the fair
market value on the date of grant. If any change is made in the capital stock of
the Company subject to the Incentive Plan without the receipt of consideration
by the Company, the Incentive Plan will be appropriately adjusted (i) as to the
class and maximum number of shares subject to it and (ii) the maximum number of
shares which may be granted to any person during any calendar year pursuant to
Share Awards. Outstanding grants under the Incentive Plan also will be
appropriately adjusted in the classes, number of shares and price per share
applicable to such outstanding grants. Such adjustment will be made by the
Administrator and such determination is final, binding and conclusive. The
Incentive Plan also provides for either acceleration or termination of grants
under the Incentive Plan in the event of a Change in Control (as defined). In
addition, the Board of Directors may at any time and from time to time amend the
Incentive Plan. However, rights and obligations under any Share Awards
outstanding under the Incentive Plan before any such amendment shall not be
impaired by such amendment unless (i) the Company requests the consent of the
person to whom the affected Share Awards were granted and (ii) such person
consents in writing.
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<PAGE> 52
The following table summarizes option grants made under the Incentive Plan
to the Company's executive officers during the current fiscal year. No options
were granted prior to fiscal 1998.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------------- ---------- ------------ ----------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
George K. D. Sun 15,000 13.3% $9.13 05/14/07 233,229 354,750
Feather S. Y. Fok 5,000 4.4% $9.13 05/14/07 74,400 118,250
Andrew C. H. Mok 2,500 2.2% $9.13 05/14/07 37,200 59,125
Tony D. H. Lai 10,000 8.8% $9.13 05/14/07 148,800 236,500
C. W. Ng 5,000 4.4% $9.13 05/14/07 74,400 118,250
</TABLE>
- ---------------
(1) Each option becomes exercisable in installments of 25% per year beginning in
May 1998.
(2) The dollar amount under the columns assumes that the market price of the
Common Stock from the date of the option grant appreciates at cumulative
annual rates of 5% and 10%, respectively, over the term of the option. The
assumed rates of 5% and 10% were established by the Securities and Exchange
Commission and therefore do not forecast possible future appreciation of the
Common Stock.
SERVICE AGREEMENTS
The Company has entered into service agreements with each of Mr. George
K.D. Sun, Mr. Tony D.H. Lai, Mr. Koulman N. Zheng, Mr. C.W. Ng, Mr. Andrew C.H.
Mok, Ms. Feather S.Y. Fok, and Mr. Karl Chan. Generally, these service
agreements are dated January 6, 1997, expire January 5, 1999, and provide for an
annual bonus of up to six months salary. The Company may enter into service
agreements with officers of Hua Yang upon completion of the Hua Yang
Acquisition. See "Risk Factors -- Risks Relating to the Company -- Reliance on
Key Personnel."
LIMITATION OF LIABILITY
The liability of officers and directors in Hong Kong is governed by common
law, which imposes general fiduciary duties such as the duty to act for the
benefit of the Company, to act with due skill, care and attention and to avoid
conflicts of interest.
Under Hong Kong law, the organizational documents of the Company may not
contain any provisions limiting the personal liability of directors to the
Company or its shareholders or indemnifying directors, officers, employees and
agents of the Company for acts performed in such capacity. The Underwriting
Agreement provides for indemnification by the Underwriters of the Company, its
directors and officers, and by the Company and the Selling Shareholders of the
Underwriters for certain liabilities, including liabilities arising under the
Securities Act and affords certain rights of contribution with respect thereto.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
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<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth beneficial ownership of the Company's
outstanding Shares as of January 31, 1998 and immediately following the
completion of this Offering by (i) each person known by the Company to own
beneficially more than 5% of the outstanding Shares, (ii) each member of the
Company's Board of Directors, (iii) each of the Company's executive officers,
(iv) each selling shareholder (each, a "Selling Shareholder") and (v) the
officers and directors of the Company as a group. Except as set forth below, the
address of each named individual is that of the Company. See "The Hua Yang
Acquisition."
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
SHARES OUTSTANDING(2)
SHARES BENEFICIALLY SHARES BENEFICIALLY -------------------
OWNED PRIOR TO OFFERED OWNED AFTER BEFORE AFTER
NAME OF BENEFICIAL OWNER OFFERING(1) HEREBY OFFERING OFFERING OFFERING
- ----------------------------------------- ------------------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
ZIC Holdings Limited(3).................. 3,800,000 1,688,889 2,111,111 51.4% 25.1%
ChinaVest IV Funds(4)(5)................. 2,856,487 -- 1,711,154 38.6% 20.4%
Robert A. Theleen(4)
Alexander M. K. Ngan(4)
Advent Funds(5)(6)....................... 941,867 -- 611,200 12.7% 7.3%
Longvest Management Limited(5)(7)........ 700,000 311,111 388,889 9.5% 4.6%
Heartland Advisors, Inc.(8).............. 657,700 -- 657,700 8.9% 7.8%
Ertl (Hong Kong) Limited(9).............. 500,000 -- 500,000 6.8% 6.0%
George B. Volanakis(9)
George K. D. Sun(7)(9)................... 330,000 -- 183,333 4.5% 2.2%
Feather S. Y. Fok(7)(9).................. 125,000 -- 69,444 1.7% *
Karl K. Chan(11)......................... 172,000 -- 172,000 2.3% 2.0%
Andrew C. H. Mok......................... -- -- -- * *
Tony D. H. Lai........................... 75,000 -- 41,667 1.0% *
C. W. Ng................................. -- -- -- * *
Koulman N. Zheng......................... -- -- -- * *
James E. Gilleran........................ 2,000 -- 2,000 * *
Leo Paul Koulos.......................... 2,000 -- 2,000 * *
Stanley Wang............................. -- -- -- * *
Gordon L. M. Seow(11).................... 10,000 -- 10,000 * *
Victor J. H. P. Yang .................... -- -- -- * *
All executive officers and directors as a
group (16 persons)(4)(6)(7)(10)(11).... 4,068,487 -- 2,687,598 54.9% 32.0%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership has been determined with reference to pecuniary
interest.
(2) Based on 7,399,667 Shares outstanding before the Offering and 8,399,667
Shares outstanding after the Offering. Includes 666,667 Shares issued to
the shareholders of Hua Yang at the closing of the Hua Yang Acquisition,
but excludes 333,333 Shares issuable to such shareholders in 1999 pursuant
to the Earn-Out. See "The Hua Yang Acquisition."
(3) The address of ZIC Holdings Limited ("ZICHL") is 12B Thomson Comm Building,
4-10, Thomson Road, Wanchai, Hong Kong. See footnote (5).
(4) Includes 2,577,000 shares beneficially owned by ZICHL prior to the Offering
(1,431,667 after the Offering). Robert A. Theleen and Alexander M. K. Ngan,
directors of the Company, are partners of ChinaVest. Messrs. Theleen and
Ngan disclaim beneficial ownership of all shares beneficially owned by
ChinaVest. The ChinaVest IV Funds consist of the following three limited
partnerships: ChinaVest IV, L.P., a Delaware limited partnership; ChinaVest
IV-A, L.P., a Delaware limited
53
<PAGE> 54
partnership; and ChinaVest IV-B, L.P., a Bermuda limited partnership. The
address of ChinaVest IV Funds is c/o ChinaVest Ltd., 19/F, Dina House,
Duddell Street, Central, Hong Kong.
(5) If beneficial ownership were determined under Rule 13d-3 rather than with
reference to pecuniary interest, the ChinaVest IV Funds, as the
shareholders of ZICHL, would beneficially own 4,079,487 Shares before the
Offering and 2,390,598 Shares after the Offering (representing 55.1% and
28.5%, respectively of the total Shares outstanding). Further, under such
rules Messrs. Theleen and Ngan, as general partners of the ChinaVest IV
Funds, may be deemed to beneficially own such Shares.
In the case of the Advent Funds, because such funds do not control ZIC
Holdings Limited, determining beneficial ownership under Rule 13d-3 would
result in such funds being deemed to beneficially own 197,867 Shares prior
to and after the Offering, representing 2.7% of the Shares outstanding
prior to the Offering and 2.4% of the Shares outstanding after the
Offering. Similarly, in the case of Longvest Management Limited,
determining beneficial ownership under Rule 13d-3 would result in Longvest
being deemed to beneficially own no Shares prior to or after the Offering.
(6) Includes 744,000 Shares beneficially owned by ZIHCL prior to the Offering
(413,333 after the Offering). Advent Funds consist of the following six
limited partnerships: Advent International Investors II, L.P., a
Massachusetts limited partnership, Advent Asia/Pacific Fund L.P., a Bermuda
limited partnership; and Asia/Pacific Special Situations Fund, L.P., a
Delaware limited partnership; Advent Global GECC L.P., a Delaware limited
partnership; Global Private Equity II-L.P., a Delaware limited partnership;
and Global Private Equity II-PGGM L.P., a Delaware limited partnership. The
address of Advent Funds is c/o Advent International Corporation, 5th Floor,
101 Federal St., Boston, Massachusetts 02110
(7) George K. D. Sun and Feather S. Y. Fok, directors and officers of the
Company, and Tony D. H. Lai, an officer of the Company, are shareholders of
Longvest Management Limited ("Longvest"). Mr. Sun is the sole officer of
Longvest, and thus may be deemed to beneficially own all Shares owned by
Longvest under Rule 13d-3. Mr. Sun, Ms. Fok and Mr. Lai beneficially own
47.1%, 17.9% and 10.7%, respectively, of the outstanding Shares owned by
Longvest. Zindart (De Zhen) Foundation Ltd., a charitable foundation
founded by Mr. Sun for the benefit of Zindart's employees, has a pecuniary
interest in 10.7% of the outstanding Shares owned by Longvest. Mr. Sun
disclaims any beneficial ownership of such Shares.
(8) Based on a Form 13G filed with the SEC on May 12, 1997.
(9) George B. Volanakis, a Director of the Company, is President and Chief
Executive Officer of Ertl. Mr. Volanakis disclaims beneficial ownership of
all shares held by Ertl (Hong Kong) Limited. The address of Ertl (Hong
Kong) Limited is 7/F Pasperons Centre, 1 Knutsford Terrace, Tsimshatsui,
Kowloon, Hong Kong.
(10) Includes 164,667 shares held by Mr. Karl Chan (BVI) Holdings Limited, a
British Virgin Islands corporation.
(11) Includes 10,000 shares issuable upon exercise of options, all of which are
exercisable as of the date of this table.
ChinaVest currently owns or controls 55.1% of the outstanding Shares.
Following this Offering, ChinaVest will own or control approximately 28.5% of
the outstanding Shares (approximately 25.0% if the Over-allotment Option is
exercised in full and the options are allocated on a pro rata basis). As a
principal shareholder, ChinaVest has the ability to significantly influence, if
not control, the election of the Company's directors and most corporate actions
of the Company. Robert A. Theleen, Chairman of the Board of the Company, and
Alexander M.K. Ngan, a director of the Company, are partners in ChinaVest.
Subject to an agreement with Van Kasper & Company not to sell or dispose of any
Shares of the Company for a lock-up period of 90 days following the date of this
Prospectus, ChinaVest has the right to sell or dispose of such Shares.
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<PAGE> 55
CERTAIN TRANSACTIONS
In February 1998, Zindart completed the Hua Yang Acquisition. Prior to such
completion, Zindart's two largest beneficial shareholders, ChinaVest and Advent,
also beneficially controlled 74.3% of the capital stock of Hua Yang, and Mr.
Karl Chan, a director of the Company following this Offering, also beneficially
owned Shares of Hua Yang. Van Kasper & Company, one of the Representatives, has
delivered an opinion to the Company's Board of Directors that the Hua Yang
Acquisition is fair to the shareholders of the Company. See "The Hua Yang
Acquisition."
Ertl has been one of Zindart's two largest customers in each of the past
three fiscal years. Ertl beneficially owns 6.8% of the Company's Shares and has
a representative on the Company's Board of Directors. All sales transactions
with Ertl are negotiated on an arm's-length basis.
In 1992, Zindart granted Mr. George Sun an option to buy from the Company a
leasehold apartment in Hong Kong at the Company's original cost. In 1995, Mr.
Sun exercised his option to buy this leasehold apartment pursuant to the terms
of the option.
In 1994, Zindart sold its interest in four associated companies, Zindart
Investment (China) Company Limited, G&D Children Products Company Limited,
Zindart Investment Company Limited and Yuehai Recreation World Limited to
Zindart Entertainment & Leisure Limited ("ZEL"), a company controlled by ZICHL
(the "ZEL Transaction"). The interests were sold by Zindart at its cost,
approximately $350,000, and Zindart recorded the sale as a loan by the Company
to ZEL with an interest rate of 2.0% above the Hong Kong prime lending rate.
Subsequently, Zindart made other advances to ZEL with similar interest rates
such that as of September 30, 1995, the balance owing to Zindart by ZEL was
approximately $2,994,000. On September 30, 1995, Zindart declared and
distributed a dividend in kind of the debt owing from ZEL at its face value.
Zindart advanced ZICHL $95,000 in fiscal year 1994 on an interest-free
basis for working capital purposes. These advances were repaid in fiscal year
1995 (the "ZICHL Advance"). In February 1996, Zindart borrowed $259,000 from Hua
Yang Printing Holdings Co., Limited. This loan was unsecured and had an interest
rate of 2.0% above the Hong Kong prime lending rate. This loan was repaid by
Zindart in March 1996.
In fiscal 1995, Zindart loaned $517,000 to Sinomex, Inc., a company in
which ZICHL owned a 28.6% equity interest at the time the loan was made (the
"Sinomex Loan"). The loan carried an interest rate of 2.0% above the Hong Kong
prime lending rate, and was used for working capital purposes. The principal
amount of the loan, along with all accrued interest, was repaid in full in
fiscal year 1996.
In 1996, Hua Yang agreed to hire the employees, assume the business and buy
the inventory and fixed assets of Jumbo Light International Ltd., a company
indirectly owned and controlled by Mr. Karl K. W. Chan, a director of the
Company. Jumbo Light manufactures packaging and other paper products for various
Hong Kong and U.S. customers. Hua Yang paid Jumbo Light $213,000.
During fiscal 1995 and fiscal 1996, Hua Yang paid $105,000 and $421,000,
respectively, in management fees to HYP Holdings Co., Ltd., a shareholder of Hua
Yang then controlled by ChinaVest, for the services of three executives that
helped to manage Hua Yang. All three executives became employees of Hua Yang in
fiscal 1996 and thereafter their salaries were paid directly by Hua Yang.
Amounts due to related parties of $11,000 at December 31, 1997 represented from
payments made by Hua Yang on HYP Holdings Co., Ltd.'s behalf for legal fees.
Rental expenses paid to Mr. Chan for the nine months ended December 31,
1997, fiscal 1997, fiscal 1996 and fiscal 1995 were $253,000, $338,000, $338,000
and $176,000, respectively. These rental payments are made by Hua Yang's PRC
joint venture subsidiary for leasing a portion of the Shenzhen Facility in which
Mr. Chan has a partial interest.
The Company has entered into service agreements with its executive
officers, and the Company intends to enter into service agreements with certain
officers of Hua Yang. See "Management -- Service Agreements." In addition, the
shareholders of Hua Yang have agreed to pay Sandra Shaw, an executive officer of
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<PAGE> 56
the Company, certain incentive compensation due to her in cash and securities of
the Company that such shareholders receive in the Hua Yang Acquisition.
From November 1996 to December 1997 an agreement was in effect pursuant to
which Advent International Corporation was paid a monthly reimbursement for
Sandra Shaw's expenses. From November 1996 to May 1997, the reimbursement rate
was $25,000 per month and thereafter it was $28,190 per month.
In February 1998 Hua Yang Printing Holdings Co., Limited advanced the sum
of 5.0 million to Hua Yang Holdings Co., Ltd. for the redemption of certain
preferred shares of the latter entity upon the closing of the Hua Yang
Acquisition. Such advance was made in the form of repayment of a loan owed to
the latter entity by the former.
From January 1995 to January 1996, Hua Yang rented its headquarters space
from Hua Yang Trading, a company owned and controlled by Mr. Chan and other
members of his family.
Mr. Chan has received compensation as an employee from Hua Yang as follows:
$59,707 for the period from January 17 to March 31, 1995; $323,415 for the
period from April 1, 1995 to March 31, 1996; and $258,732 for the period from
April 1, 1996 to March 31, 1997.
The Company does not intend to enter into any future transactions with
affiliates similar to the ZEL Transaction, the ZICHL Advance or the Sinomex
Loan. The Company intends that all future transactions with affiliates will be
approved by a committee of disinterested directors.
The Company is undertaking the Offering primarily to pay a portion of the
indebtedness incurred in connection with the Hua Yang Acquisition. To increase
the size of the Offering, the Company has invited certain significant
shareholders to sell a portion of their Shares in the Offering. The Company
intends to pay the reasonable expenses (exclusive of applicable taxes and
underwriting discounts) incurred by the Selling Shareholders.
56
<PAGE> 57
DESCRIPTION OF SENIOR CREDIT FACILITY
The following summary of the Company's revolving credit facility (the
"Credit Facility") does not purport to be complete and is subject to the
detailed provisions thereof and related documents entered into in connection
with the Credit Facility, which are filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Credit Facility provides for revolving borrowings in a maximum amount
of up to $30.0 million, for a term of five years from the closing date, subject
to the early termination option more fully described below. Advances under the
Credit Facility are repayable at the end of the three-month interest period
applicable to that advance; amounts repaid may be immediately reborrowed.
Prepayment may be made at the end of each interest period. Borrowings under the
Credit Facility are secured by a pledge of the Company's shares of capital stock
of Hua Yang and an assignment of all dividends and distributions and income in
respect of such shares. Additionally, the Company has agreed to a negative
pledge of the assets of the Company and its subsidiaries. Borrowings under the
Credit Facility are available for working capital and general corporate purposes
and partially financed the acquisition of Hua Yang.
Borrowings under the Credit Facility bear interest at a rate per annum
determined for successive three-month intervals with reference to the
three-month London inter-bank offered rate ("LIBOR") at the beginning of each
such interval plus a margin of 2.0%. Interest is payable quarterly in arrears.
The Company is required to pay certain fees in connection with the Credit
Facility, including an up-front fee for the lenders' underwriting and management
fees, an agency fee paid annually, a commitment fee payable quarterly ranging
from 0.50% to 0.85% of the undrawn portion of the Credit Facility and a put
waiver fee of 0.25% of a lender's commitment in consideration for each such
lender's waiver of its rights to early terminate the Credit Facility.
Each lender under the Credit Facility will be able to demand repayment of
its commitment under the Credit Facility at the end of each of the third and
fourth years following the closing date upon 90 days' prior written notice. The
Company will be able to cancel the Credit Facility in whole or in part at any
interest payment date upon 90 business days' prior written notice and further
borrowings will not be permitted to the extent canceled.
The Credit Facility contains certain financial covenants which require the
Company to maintain a specified net worth, debt ratio, interest-coverage ratio
and ratio of total interest-bearing liabilities to net worth. The Credit
Facility contains customary representations and warranties and requires
compliance by the Company with certain other covenants, including, without
limitation, covenants limiting (i) the payment of dividends and other
distributions, (ii) asset dispositions, including the Company's ownership of Hua
Yang and (iii) liens on the assets of the Company or its subsidiaries, and
covenants requiring the continued Nasdaq National Market listing of the ADSs.
The Credit Facility also contains customary events of default.
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<PAGE> 58
DESCRIPTION OF SHARES
The authorized shares of the Company consist of 15,000,000 Ordinary Shares
with a par value of approximately $0.065, 8,399,667 of which will be issued and
outstanding upon the closing of the Offering. The following statements are
summaries of the material provisions of the Company's Memorandum of Association
and Articles of Association and the Companies Ordinance (Chapter 32) of the laws
of Hong Kong (the "Companies Ordinance"). These summaries do not purport to be
complete and are qualified in their entirety by reference to the full Memorandum
and Articles of Association which have been filed as exhibits to the Company's
Registration Statement of which this Prospectus is a part.
GENERAL
All of the Ordinary Shares of the Company offered through the ADSs hereby,
when issued, will be fully paid and non-assessable. Certificates representing
the Shares are issued in registered form. Shareholders of the Company who are
non-residents of Hong Kong for exchange control purposes may freely hold and
vote their Shares. The Shares are not entitled to any sinking fund or redemption
rights.
The ADSs have been approved for inclusion on the Nasdaq National Market,
subject to official notice of issuance. The Shares will not be listed.
VOTING RIGHTS
Under the Companies Ordinance, any action to be taken by the shareholders
in general meeting requires the affirmative vote of either an ordinary or a
special resolution passed at such meeting. An ordinary resolution is one passed
by the majority of such shareholders as are entitled to, and do, vote in person
or by proxy at a general meeting of the Company. A special resolution is one
passed by not less than three-quarters of such shareholders as are entitled to,
and do, vote in person or by proxy at a general meeting of the Company.
Generally, resolutions of the shareholders of the Company are passed by ordinary
resolution. However, the Companies Ordinance stipulates that certain matters,
such as amendment of the Company's Memorandum or Articles of Association,
repurchases of Shares by the Company, removing a director and winding up the
Company, may only be passed as special resolutions.
Subject to any special voting rights granted to any additional class of
shares, on a show of hands every shareholder who is present in person at a
general meeting of the Company shall have one vote, and on a poll every
shareholder who is present in person or by proxy shall have one vote for every
share in the capital of the Company of which it is the holder.
Any action to be taken by the shareholders requires the affirmative vote of
the holders of the relevant majority of the Shares at a meeting of shareholders.
There are no cumulative voting rights. Accordingly, the holders of a majority of
the Shares voting for the election of directors can elect all the directors if
they choose to do so.
Following this Offering, ChinaVest will own or control approximately 28.5%
of the outstanding Shares (approximately 25.0% if the Over-allotment Option is
exercised in full and the options are allocated on a pro rata basis). As a
principal shareholder, ChinaVest has the ability to significantly influence, if
not control, the election of the Company's directors and most corporate actions
of the Company. See "Principal and Selling Shareholders."
MODIFICATION OF RIGHTS
Subject to the Companies Ordinance, any of the rights from time to time
attaching to any class of Ordinary Shares may (whether or not the Company is
being wound up) be altered or abrogated with the consent in writing of the
holders of not less than three-quarters of the issued Ordinary Shares of that
class or with the sanction of a special resolution passed at a separate general
meeting of the holders of Ordinary Shares.
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<PAGE> 59
ISSUE OF SHARES
Under the Companies Ordinance, the directors of the Company may, without
prior approval of the shareholders, offer to issue new Shares in the Company to
existing shareholders pro rata. The directors may not issue new Shares of the
Company in any other manner without the prior approval of the shareholders in a
general meeting. Any such approval given in a general meeting shall continue in
force until the conclusion of the following annual general meeting or the
expiration of the period within which the next annual general meeting is
required by law to be held. If such approval is given, the authorized but
unissued Shares of the Company shall be at the disposal of the Board of
Directors, which may offer, allot, grant options over or otherwise dispose of
them to such persons, at such times and for such consideration and upon such
terms and conditions as the directors may determine. This authority to issue
authorized but unissued Shares has been granted to the Board of Directors, which
authority will expire at the Company's next annual general meeting of
shareholders unless renewed at such meeting.
The shareholders may remove any director before the expiration of his or
her term only upon the vote of at least three-quarters of the issued Shares at a
general meeting of shareholders.
DIVIDENDS
Subject to the Companies Ordinance and as set out in the Articles of
Association, the shareholders in a general meeting may from time to time declare
dividends to be paid to the shareholders according to their rights and interests
in the profits available for distribution. No dividend shall be declared in
excess of the amount recommended by the Board of Directors.
In addition to dividends declared in a general meeting upon the
recommendation of the Board of Directors, the Board of Directors may from time
to time declare and pay to the shareholders such interim dividends as appear to
the Board of Directors to be justified by the financial position of the Company;
the Board of Directors may also pay any fixed dividend which is payable on any
Shares of the Company on any other dates, whenever the Company's financial
position, in the opinion of the Board of Directors, justifies such payment.
MISCELLANEOUS
The shareholders have no redemption rights, conversion rights or preemptive
rights on the transfer of securities of the Company.
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<PAGE> 60
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the material provisions of the Deposit
Agreement (the "Deposit Agreement"), dated as of March 5, 1997, by and among the
Company, The Bank of New York, as depositary (the "Depositary"), and the owners
(the "Owners") and holders from time to time of American Depositary Receipts
("ADRs") issued thereunder.
This summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the Deposit Agreement, including the
form of ADRs, which is an exhibit to the Company's Registration Statement of
which this Prospectus is a part. Terms used herein and not otherwise defined
will have the meanings set forth in the Deposit Agreement. Copies of the Deposit
Agreement, the Memorandum of Association and the Articles of Association of the
Company will be available for inspection at the Corporate Trust Office of the
Depositary, currently located at 101 Barclay Street, New York, New York 10286,
and at the principal office of the agent of the Depositary (the "Custodian"),
currently located at the Hong Kong office of The Hong Kong and Shanghai Banking
Corporation Limited. The Depositary's principal executive office is located at
48 Wall Street, New York, New York 10286.
AMERICAN DEPOSITARY RECEIPTS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the Deposit
Agreement. Each ADS will represent one Share or evidence of the right to receive
one Share. Only persons in whose names ADRs are registered on the books of the
Depositary will be treated by the Depositary and the Company as Owners.
DEPOSIT, TRANSFER AND WITHDRAWAL
The Depositary has agreed, subject to the terms and conditions of the
Deposit Agreement, that upon delivery to the Custodian of Shares (or evidence of
rights to receive Shares) and pursuant to appropriate instruments of transfer in
a form satisfactory to the Custodian, together with all such certifications as
may be required by the Depositary or the Custodian in accordance with the
provisions of the Deposit Agreement, the Depositary will, upon payment of the
fees, charges and taxes provided in the Deposit Agreement, execute and deliver
at its Corporate Trust Office to, or upon the written order of, the person or
persons named in the notice of the Custodian delivered to the Depositary or
requested by the person depositing such Shares with the Depositary, an ADR or
ADRs, registered in the name or names of such person or persons, and evidencing
the authorized number of ADSs requested by such person or persons.
Upon surrender at the Corporate Trust Office of the Depositary of an ADR
for the purpose of withdrawal of the Shares represented by the ADSs evidenced by
such ADR, and upon payment of the fees of the Depositary for the surrender of
ADRs, governmental charges and taxes provided in the Deposit Agreement, and
subject to the terms and conditions of the Deposit Agreement, the Owner of such
ADR will be entitled to delivery, to it or upon its order, of the number of
Shares at the time represented by the ADS or ADSs evidenced by such ADR. The
forwarding of share certificates, other securities, property, cash and other
documents of title for such delivery will be at the risk and expense of the
Owner.
Subject to the terms and conditions of the Deposit Agreement and any
limitations established by the Depositary, the Depositary may execute and
deliver ADRs prior to the receipt of Shares (a "Pre-Release") and deliver Shares
upon the receipt and cancellation of ADRs which have been Pre-Released, whether
or not such cancellation is prior to the termination of such Pre-Release or the
Depositary knows that such ADR has been Pre-Released. The Depositary may receive
ADRs in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release must
be (a) preceded or accompanied by a written representation from the person to
whom the ADRs or Shares are to be delivered that such person, or its customer,
owns the Shares or ADRs to be remitted, as the case may be, (b) at all times
fully collateralized with cash or such other collateral as the Depositary deems
appropriate, (c) terminable by the Depositary on not more than five business
days' notice and (d) subject to such further indemnities and credit regulations
as the Depositary deems appropriate. The number of ADSs which are outstanding at
any time as a result of Pre-Releases will not normally exceed thirty percent of
the Shares deposited under the Deposit Agreement; provided, however, that the
Depositary reserves the right to change or disregard such limit from time to
time as it deems appropriate.
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The Depositary may retain for its own account any compensation received by
it in connection with the foregoing.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
The Depositary will convert or cause to be converted into U.S. Dollars, to
the extent that in its judgment it can do so on a reasonable basis and can
transfer the resulting U.S. Dollars to the United States, all cash dividends and
other cash distributions denominated in a currency other than Dollars, including
Hong Kong Dollars ("Foreign Currency"), that it receives in respect of the
deposited Shares, and will distribute the resulting U.S. Dollar amount (net of
the expenses incurred by the Depositary in converting such Foreign Currency) to
the Owners entitled thereto in proportion to the number of ADSs representing
such Shares evidenced by ADRs held by them, respectively. Such distribution may
be made upon an averaged or other practicable basis without regard to any
distinctions among Owners on account of exchange restrictions or the date of
delivery of any ADR or ADRs or otherwise. The amount distributed to the Owners
of ADRs will be reduced by any amount on account of taxes to be withheld by the
Company or the Depositary. See "-- Liability of Owner for Taxes."
If the Depositary determines that in its judgment any Foreign Currency
received by the Depositary cannot be converted on a reasonable basis into U.S.
Dollars, or if any approval or license of any government or agency thereof which
is required for such conversion is denied or in the opinion of the Depositary is
not obtainable, or if any such approval or license is not obtained within a
reasonable period as determined by the Depositary, the Depositary may distribute
the Foreign Currency received by the Depositary to, or in its discretion may
hold such Foreign Currency uninvested and without liability for interest thereon
for the respective accounts of, the Owners entitled to receive the same. If any
such conversion of Foreign Currency, in whole or in part, cannot be effected for
distribution to some of the Owners entitled thereto, the Depositary may in its
discretion make such conversion and distribution in U.S. Dollars to the extent
permissible to the Owners entitled thereto and may distribute the balance of the
Foreign Currency received by the Depositary to, or hold such balance uninvested
and without liability for interest thereon for, the respective accounts of the
Owners entitled thereto.
If any distribution upon any Shares consists of a dividend in, or free
distribution of, Shares, the Depositary may, and will if the Company so
requests, distribute to the Owners of outstanding ADRs entitled thereto, in
proportion to the number of ADSs evidenced by the ADRs held by them,
respectively, additional ADRs evidencing the aggregate number of ADSs that
represents the number of Shares received as such dividend or free distribution,
subject to the terms and conditions of the Deposit Agreement with respect to the
deposit of Shares and the issuance of ADSs evidenced by ADRs, including the
withholding of any tax or other governmental charge and the payment of fees of
the Depositary as provided in the Deposit Agreement. In lieu of delivering ADRs
for fractional ADSs in the event of any such dividend or free distribution, the
Depositary will sell the number of Shares represented by the aggregate of such
fractions and distribute the net proceeds in accordance with the Deposit
Agreement. If additional ADRs are not so distributed, each ADS will thenceforth
also represent the additional Shares distributed upon the Shares represented
thereby.
If the Company offers or causes to be offered to the holders of any Shares
any rights to subscribe for additional Shares or any rights of any other nature,
the Depositary will have discretion as to the procedure to be followed in making
such rights available to any Owners of ADRs or in disposing of such rights for
the benefit of any Owners and making the net proceeds available to such Owners
or, if by the terms of such rights offering or for any other reason, the
Depositary may not either make such rights available to any Owners, or dispose
of such rights and make the net proceeds available to such Owners, then the
Depositary shall allow the rights to lapse. If at the time of the offering of
any rights the Depositary determines in its discretion that it is lawful and
feasible to make such rights available to all Owners or to all or certain Owners
but not to other Owners, the Depositary may distribute to any Owner to whom it
determines the distribution to be lawful and feasible, in proportion to the
number of ADSs held by such Owner, warrants or other instruments therefor in
such form as it deems appropriate. If the Depositary determines in its
discretion that it is not lawful and feasible to make such rights available to
all or certain Owners, it may sell the rights, warrants or other instruments in
proportion to the number of ADSs held by the Owners to whom it has determined it
may not
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lawfully or feasibly make such rights available, and allocate the net proceeds
of such sales for the account of such Owners otherwise entitled to such rights,
warrants or other instruments, upon an averaged or other practical basis without
regard to any distinctions among such Owners because of exchange restrictions or
the date of delivery of any ADR or ADRs, or otherwise.
In circumstances in which rights would not otherwise be distributed, if an
Owner of ADRs requests the distribution of warrants or other instruments in
order to exercise the rights allocable to the ADSs of such Owner, the Depositary
will make such rights available to such owner upon written notice from the
Company to the Depositary that (a) the Company has elected in its sole
discretion to permit such rights to be exercised and (b) such owner has executed
such documents as the Company has determined in its sole discretion are
reasonably required under applicable law. Upon instruction pursuant to such
warrants or other instruments to the Depositary from such Owner to exercise such
rights, upon payment by such Owner to the Depositary for the account of such
Owner of an amount equal to the purchase price of the Shares to be received in
exercise of the rights, and upon payment of the fees of the Depositary as set
forth in such warrants or other instruments, the Depositary will, on behalf of
such Owner, exercise the rights and purchase the Shares, and the Company shall
cause the Shares so purchased to be delivered to the Depositary on behalf of
such Owner. As agent for such Owner, the Depositary will cause the Shares so
purchased to be deposited and will execute and deliver ADRs to such Owner,
pursuant to the Deposit Agreement.
The Depositary will not offer rights to Owners unless both the rights and
the securities to which such rights relate are either exempt from registration
under the Securities Act with respect to a distribution to all Owners or are
registered under the provisions of such Act. If an Owner of ADRs requests the
distribution of warrants or other instruments, notwithstanding that there has
been no such registration under the Securities Act, the Depositary will not
effect such distribution unless it has received an opinion from recognized
counsel in the United States for the Company upon which the Depositary may rely
that such distribution to such Owner is exempt from such registration. The
Depositary will not be responsible for any failure to determine whether it is
lawful or feasible to make such rights available to owners in general or any
owner in particular.
Whenever the Depositary receives any distribution other than cash, Shares
or rights in respect of the Shares, the Depositary will cause the securities or
property received by it to be distributed to the Owners entitled thereto, in
proportion to their holdings, in any manner that the Depositary may deem
equitable and practicable for accomplishing such distribution; provided,
however, that if in the opinion of the Depositary such distribution cannot be
made proportionately among the Owners entitled thereto, or if for any other
reason (including, but not limited to, any requirement that the Company or the
Depositary withhold an amount on account of taxes or other governmental charges
or that such securities must be registered under the Securities Act in order to
be distributed to Owners or holders) the Depositary deems such distribution not
to be feasible, the Depositary may adopt such method as it may deem equitable
and practicable for the purpose of effecting such distribution, including, but
not limited to, the public or private sale of the securities or property thus
received, or any part thereof. The net proceeds of any such sale (net of the
fees of the Depositary) will be distributed by the Depositary to the Owners
entitled thereto as in the case of a distribution received in cash.
If the Depositary determines that any distribution of property (including
Shares and rights to subscribe therefor) is subject to any taxes or other
governmental charges which the Depositary is obligated to withhold, the
Depositary may, by public or private sale, dispose of all or a portion of such
property in such amount and in such manner as the Depositary deems necessary and
practicable to pay such taxes or charges. The Depositary will distribute the net
proceeds of any such sale after deduction of such taxes or charges to the owners
entitled thereto in proportion to the number of ADSs held by them.
Upon any change in nominal value, split-up, consolidation or any other
reclassification of Shares, or upon any recapitalization, reorganization, merger
or consolidation or sale of assets affecting the Company or to which it is a
party, any securities which shall be received by the Depositary or Custodian in
exchange for, in conversion of, or in respect of, Shares will be treated as new
Shares under the Deposit Agreement. The ADSs will thenceforth represent, in
addition to the existing Shares, the right to receive the new Shares so received
in exchange or conversion, unless additional ADRs are delivered pursuant to the
following sentence. In any such case the Depositary may, and will if the Company
so requests, execute and deliver additional ADRs as in the
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case of a dividend in Shares or call for the surrender of outstanding ADRs to be
exchanged for new ADRs specifically representing such new Shares.
RECORD DATES
Whenever any cash dividend or other cash distribution shall become payable
or any distribution other than cash shall be made, or whenever rights shall be
issued with respect to the Shares, or whenever for any reason the Depositary
causes a change in the number of Shares that are represented by each ADS, or
whenever the Depositary shall receive notice of any meeting of holders of
Shares, the Depositary will fix a record date (a) for the determination of the
Owners who will be (i) entitled to receive such dividend, distribution or
rights, or the net proceeds of the sale thereof or (ii) entitled to give
instructions for the exercise of voting rights at any such meeting or (b) on or
after which each ADS will represent the changed number of Shares, all subject to
the provisions of the Deposit Agreement.
VOTING OF SHARES
Upon receipt of notice of any meeting of holders of Shares, if requested in
writing by the Company, the Depositary will, as soon as practicable thereafter,
mail to all Owners a notice, the form of which notice will be in the sole
discretion of the Depositary, containing (a) such information included in such
notice of meeting received by the Depositary from the Company, (b) a statement
that the Owners as of the close of business on a specified record date will be
entitled, subject to any applicable provision of Hong Kong law and of the
Articles of Association of the Company, to instruct the Depositary as to the
exercise of the voting rights, if any, pertaining to the amount of Shares or
other Deposited Securities represented by their respective ADSs and (c) a
statement as to the manner in which such instruments may be given. Upon the
written request of an Owner as of such record date received on or before the
date established by the Depositary for such purpose, the Depositary will
endeavor, insofar as practicable, to vote or cause to be voted the amount of
Shares or other Deposited Securities represented by the ADSs evidenced by such
ADRs in accordance with the instructions set forth in such request. The
Depositary will not vote or attempt to exercise the right to vote that attaches
to the Shares or other Deposited Securities, other than in accordance with such
instructions.
There can be no assurance that the Owners generally or any Owner in
particular will receive the notice described in the preceding paragraph
sufficiently prior to the date established by the Depositary for the receipt of
instructions to ensure that the Depositary will vote the Shares in accordance
with the provisions set forth in the preceding paragraph.
REPORTS AND OTHER COMMUNICATIONS
The Depositary will make available for inspection by Owners at its
Corporate Trust Office any reports and communications, including any proxy
soliciting material, received from the Company, which are both (a) received by
the Depositary as the holder of the Shares and (b) made generally available to
the holders of such Shares by the Company. The Depositary will also, upon
written request, send to the Owners copies of such reports when furnished by the
Company pursuant to the Deposit Agreement. Any such reports and communications,
including any proxy soliciting material, furnished to the Depositary by the
Company will be furnished in English.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of ADRs and any provisions of the Deposit Agreement may at any
time and from time to time be amended by agreement between the Company and the
Depositary in any respect which they may deem necessary or desirable; provided,
however, that any amendment that imposes or increases any fees or charges (other
than taxes and other governmental charges, registration fees, cable, telex or
facsimile transmission costs, delivery costs or other such expenses) or which
otherwise prejudices any substantial existing right of Owners will not take
effect as to outstanding ADRs until the expiration of 30 days after notice of
any amendment has been given to the Owners. Every Owner, at the time any
amendment so becomes effective, will be deemed, by continuing to hold such ADR,
to consent and agree to such amendment and to be bound
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by the Deposit Agreement as amended thereby. In no event will any amendment
impair the right of the Owner to surrender its ADR and receive therefor the
Shares represented thereby, except to comply with mandatory provisions of
applicable law.
The Depositary will at any time at the direction of the Company terminate
the Deposit Agreement by mailing notice of such termination to the Owners of the
ADRs then outstanding at least 90 days prior to the date fixed in such notice
for such termination. The Depositary may likewise terminate the Deposit
Agreement by mailing notice of such termination to the Company and the Owners of
all ADRs then outstanding if, any time after 90 days have expired after the
Depositary will have delivered to the Company a written notice of its election
to resign and a successor depositary will not have been appointed and accepted
its appointment, in accordance with the terms of the Deposit Agreement. If any
ADRs remain outstanding after the date of termination of the Deposit Agreement,
the Depositary thereafter will discontinue the registration of transfers of
ADRs, will suspend the distribution of dividends to the Owners thereof and will
not give any further notices or perform any further acts under the Deposit
Agreement, except the collection of dividends and other distributions pertaining
to the Shares, the sale of rights and the delivery of underlying Shares along
with any dividends or other distributions received with respect thereto and net
proceeds of the sale of any rights or other property, in exchange for
surrendered ADRs (after deducting, in each case, the fees of the Depositary for
the surrender of an ADR and other expenses set forth in the Deposit Agreement
and any applicable taxes or governmental charges). At any time after the
expiration of one year from the date of termination, the Depositary may sell the
Shares then held thereunder and hold uninvested the net proceeds of such sale,
together with any other cash, unsegregated and without liability for interest,
for the pro rata benefit of the Owners that have not theretofore surrendered
their ADRs, such Owners thereupon becoming general creditors of the Depositary
with respect to such net proceeds. After making such sale, the Depositary will
be discharged from all obligations under the Deposit Agreement, except to
account for net proceeds and other cash (after deducting, in each case, the fee
of the Depositary and other expenses set forth in the Deposit Agreement for the
surrender of an ADR and any applicable taxes or other governmental charges).
CHARGES OF DEPOSITARY
The Depositary will charge any party depositing or withdrawing Shares or
any party surrendering ADRs or to whom ADRs are issued (including, without
limitation, issuance pursuant to a stock dividend or stock split declared by the
Company or an exchange of stock regarding the ADRs or Shares or a distribution
of ADRs pursuant to Section 4.3 of the Deposit Agreement) as applicable: (a)
taxes and other governmental charges; (b) such registration fees as may from
time to time be in effect for the registration of transfers of Shares generally
on the share register of the Company or Foreign Registrar and applicable to
transfers of Shares to the name of the Depositary or its nominee or the
Custodian or its nominee on the making of deposits or withdrawals; (c) such
cable, telex and facsimile transmission expenses as are expressly provided in
the Deposit Agreement to be at the expense of persons depositing Shares or
Owners; (d) such expenses as are incurred by the Depositary in the conversion of
Foreign Currency pursuant to Section 4.5 of the Deposit Agreement; (e) a fee of
$5.00 or less per 100 ADSs (or portion thereof) for the execution, delivery and
surrender of ADRs pursuant to the Deposit Agreement; (f) a fee of $.02 or less
per ADS (or portion thereof) for any cash distribution made pursuant to the
Deposit Agreement; and (g) a fee for the distribution of securities pursuant to
Section 4.2 of the Deposit Agreement, such fee being in an amount equal to the
fee for the execution and delivery of ADSs referred to above which would have
been charged as a result of the deposit of such securities (for purposes of this
clause (g) treating all such securities as if they were Shares), but which
securities are instead distributed by the Depositary to Owners.
The Depositary, pursuant to the Deposit Agreement, may own and deal in any
class of securities of the Company and its affiliates and in ADRs.
LIABILITY OF OWNER FOR TAXES
If any tax or other governmental charge shall become payable by the
Custodian or the Depositary with respect to any ADR or any Shares represented by
the ADRs, such tax or other governmental charge will be payable by the Owner of
such ADR to the Depositary. The Depositary may refuse to effect any transfer of
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such ADR or any withdrawal of Shares underlying such ADR until such payment is
made, and may withhold any dividends or other distributions or sell for the
account of the Owner thereof any part or all of the Shares underlying such ADR
and may apply such dividends, distributions or the proceeds of any such sale to
pay any such tax or other governmental charge and the Owner of such ADR will
remain liable for any deficiency.
GENERAL
Neither the Depositary nor the Company will be liable to any Owner or
holder of any ADR, if by reason of any provision of any present or future law or
regulation of the United States, or any other country, or of any governmental or
regulatory authority or stock exchange, or by reason of any provision, present
or future, of the Articles of Association of the Company, or by reason of any
act of God or war or other circumstances beyond its control, the Depositary or
the Company shall be prevented or forbidden from, or be subject to any civil or
criminal penalty on account of, performing any act or thing which by the terms
of the Deposit Agreement it is provided will be done or performed; nor will the
Depositary or the Company incur any liability to any Owner or holder of any ADR
by reason of any nonperformance or delay, caused as aforesaid, in the
performance of any act or thing which by the terms of the Deposit Agreement will
or may be done or performed, or by reason of any exercise of, or failure to
exercise, any discretion provided for under the Deposit Agreement. Where, by the
terms of a distribution pursuant to the Deposit Agreement, or an offering or
distribution pursuant to the Deposit Agreement, or for any other reason, such
distribution or offering may not be made available to Owners, and the Depositary
may not dispose of such distribution or offering on behalf of such Owners and
make the net proceeds available to such Owners, then the Depositary will not
make such distribution or offering, and will allow the rights, if applicable, to
lapse.
The Company and the Depositary assume no obligation nor will they be
subject to any liability under the Deposit Agreement to Owners or holders of
ADRs except that they agree to perform their respective obligations specifically
set forth under the Deposit Agreement without negligence or bad faith.
The ADRs are transferable on the books of the Depositary, provided that the
Depositary may close the transfer books at any time or from time to time when
deemed expedient by it in connection with the performance of its duties. As a
condition precedent to the execution and delivery, registration or transfer,
split-up, combination or surrender of any Shares, the Depositary, the Custodian
or the Foreign Registrar may require payment from the person presenting the ADR
or the depositor of the Shares of a sum sufficient to reimburse it for any tax
or other governmental charge and any stock transfer or registration fee with
respect thereto (including any such tax or charge and fee with respect to Shares
being deposited or withdrawn) and payment of any applicable fees payable by the
Owners and holders of ADRs. The Depositary may refuse to deliver ADRs, to
register the transfer of any ADR or to make any distribution on, or related to,
Shares until it has received such proof of citizenship or residence, exchange
control approval or other information as it may deem necessary or proper. The
delivery, transfer, registration of transfer of outstanding ADRs and surrender
of ADRs generally may be suspended or refused during any period when the
transfer books of the Depositary, the Company or the Foreign Registrar are
closed or if any such action is deemed necessary or advisable by the Depositary
or the Company, at any time or from time to time. Notwithstanding any other
provision of the Deposit Agreement or the ADRs, the surrender of outstanding
ADRs and withdrawal of the deposited Shares may not be suspended subject only to
(i) temporary delays caused by closing the transfer books of the Depositary or
the Company or the deposit of Shares in connection with voting at a
shareholders' meeting, or the payment of dividends, (ii) the payment of fees,
taxes and similar charges, and (iii) compliance with any U.S. or foreign laws or
governmental regulations relating to the ADRs or to the withdrawal of the
deposited Shares. Without limitation of the foregoing, the Depositary shall not
knowingly accept for deposit under the Deposit Agreement any Shares required to
be registered under the provisions of the Securities Act unless a registration
statement is in effect as to such Shares.
The Depositary will keep books for the registration and transfer of ADRs,
which at all reasonable times will be open for inspection by the Owners,
provided that such inspection will not be for the purpose of communicating with
Owners in the interest of a business object other than the business of the
Company or a matter related to the Deposit Agreement or the ADRs.
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The Depositary may appoint one or more co-transfer agents for the purpose
of effecting transfers, combinations and split-ups of ADRs at designated
transfer offices on behalf of the Depositary. In carrying out its functions, a
co-transfer agent may require evidence of authority and compliance with
applicable laws and other requirements by Owners or persons entitled to ADRs and
will be entitled to protection and indemnity to the same extent as the
Depositary.
GOVERNING LAW
The Deposit Agreement is governed by the laws of the State of New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,399,667 Shares
issued and outstanding, assuming no exercise of the Over-allotment Option. Of
such Shares, (i) 4,733,000 Shares were or will be sold as ADSs pursuant to a
registration statement under the Securities Act and are therefore eligible for
resale without restriction unless such Shares are held by "affiliates" of the
Company; (ii) 3,000,000 Shares will be eligible for resale 90 days following the
date of this Prospectus upon expiration of the lockup agreements described
below; (iii) the 666,667 Shares issued in connection with the Hua Yang
Acquisition will be eligible for resale from time to time without restriction
upon the filing of a registration statement pursuant to Rule 415 or pursuant to
Regulation S at any time upon release from escrow and expiration of the lock-up
agreements described below and (iv) the remaining 333,333 Shares will be
eligible for resale similarly to the event that the Earn-Out requirements for
fiscal 1999 are satisfied.
All of the outstanding shares not previously registered under the
Securities Act (other than the shares issued or issuable in the Hua Yang
Acquisition) have been held for greater than two years and therefore are
eligible for resale pursuant to Rule 144(k) without registration under the
Securities Act or compliance with the notice or volume limitations of Rule 144.
All of the Shares beneficially owned by ChinaVest and Advent will be eligible
for resale pursuant to Rule 144(k) without registration under the Securities Act
or compliance with the notice or volume requirements of Rule 144 90 days
following any distribution to the limited partners of such funds or such time as
the funds cease to be "affiliates" of the Company.
The Company's officers and directors, the Selling Shareholders and certain
principal shareholders have agreed not to sell, offer to sell, contract to sell
or otherwise dispose of any Shares or ADSs or securities exercisable for Shares
or ADSs for a period of 90 days after the date of this Prospectus without the
prior written consent of Van Kasper & Company. In addition, the Company has
agreed that for a period of 90 days after the date of the closing of this
Offering, it will not issue, offer, sell, grant options to purchase or otherwise
dispose of any equity securities or securities convertible into or exchangeable
for equity securities without the prior written consent of Van Kasper & Company,
except for (i) ADSs offered hereby, (ii) Shares issued pursuant to the exercise
of outstanding options and (iii) options granted to its associates, officers,
directors and consultants so long as none of such options become exercisable
during said 90 day period. The Company, Van Kasper & Company and certain of the
Company's significant shareholders have agreed that such shareholders will not
transfer any Shares of the Company for a period of two years ending March 4,
1999, except: (i) in a private transaction not involving a public offering,
provided the transferees agree to be bound by the provisions of the agreement or
(ii) in a registered public distribution in the United States by means of an
offering of ADSs into the U.S. market or pursuant to Rule 144. In addition, the
Company agreed not to offer any of its securities to the public outside the
United States unless the Company and Van Kasper & Company mutually agree that a
public offering of ADSs could not be effected in the United States at such time
on commercially reasonable terms. Van Kasper & Company in its sole discretion
may release such securities for sale into the public market at any time without
public announcement.
In general, Rule 144, as in effect on the date of this Prospectus, permits
a person who has beneficially owned Shares for at least one year to sell within
any three-month period a number of shares not exceeding the greater of: (i) one
percent of the then outstanding shares of the class and (ii) the average weekly
trading volume of such shares on the Nasdaq National Market during the four
calendar weeks preceding the date on which a notice of sale is filed with the
Commission. Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information on the Company. A person who is not deemed an affiliate of the
Company at any time during the 90 days preceding a sale and who beneficially
owns Shares for at least two years is entitled to sell such shares under Rule
144(k) without regard to volume limitations, manner of sale provisions, notice
requirements or the availability of current public information on the Company.
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TAXATION
The following discussion under "United States Federal Income Taxation"
generally summarizes the principal United States federal income tax consequences
of an investment in the ADSs. The discussion under "Hong Kong Taxation"
generally summarizes the material Hong Kong tax consequences of an investment in
the ADSs and the material Hong Kong taxes applicable to the Company's operations
in Hong Kong. The discussion under "PRC Taxation" generally summarizes the
material PRC taxes applicable to the Company's investment in the PRC. The
discussion does not deal with all possible tax consequences relating to an
investment in the ADSs and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in
securities, insurance companies and tax-exempt entities) may be subject to
special rules. In particular, the discussion does not address the tax
consequences under state or local law or the laws of countries other than the
United States, Hong Kong and the PRC. Accordingly, prospective investors should
consult their own tax advisors regarding the particular tax consequences to them
of an investment in the ADSs. The following discussion is based upon laws and
relevant interpretations thereof in effect as of the date of this Prospectus,
all of which are subject to change, possibly with retroactive effect.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion summarizes, in the opinion of Cooley Godward LLP,
San Francisco, California, the United States federal income tax considerations
that are likely to be material to a holder of the ADSs that is a United States
citizen or resident, a United States domestic corporation or partnership, an
estate the income of which is subject to United States federal income taxation
regardless of its source, or a trust if (i) a court within the United States is
able to exercise primary supervision over its administration, (ii) one or more
United States persons have the authority to control all substantial decisions
who owns the ADSs as a capital asset (a "United States Investor"). For purposes
of the following discussion, a United States Investor who acquires the ADSs
shall be deemed to own the Shares represented thereby. The summary does not
address the United States federal income tax treatment of certain types of
investors (such as non-United States Investors, insurance companies, tax-exempt
entities, banks, broker-dealers and investors who or that hold Shares as part of
hedging, conversion or other risk reduction transactions or are subject to the
alternative minimum tax provisions of the Code (defined below)), all of whom may
be subject to tax rules that differ significantly from those summarized below.
Prospective investors, including investors other than United States Investors,
are advised to consult their own tax advisors with respect to their particular
circumstances and with respect to the effects of state, local or foreign tax
laws to which they may be subject.
This summary is based on the Code, Treasury regulations, court decisions
and current administrative rulings and pronouncements of the United States
Internal Revenue Service ("IRS") in effect as of the date of this Prospectus,
all of which are subject to change, possibly with retroactive effect. There can
be no assurance that future changes in applicable law or administrative and
judicial interpretations thereof will not adversely affect the tax consequences
discussed herein. Prospective purchasers are advised to consult their own tax
advisors regarding the tax consequences of acquiring, holding or disposing of
the Shares in light of their particular circumstances.
Taxation of the Company. The Company will be subject to United States
federal income tax only to the extent it has income which has its source in the
United States or is effectively connected with a United States trade or
business. Income derived by the Company from its business in the PRC or Hong
Kong should not constitute United States source income. It is possible that the
Company may invest the net proceeds of this Offering, future earnings from the
business, or proceeds derived from the sale of Shares in United States
securities or cash equivalents. Income derived from United States securities or
cash equivalents will generally constitute United States source income and may
therefore be subject to United States federal income tax unless a statutory or
income tax treaty exemption applies.
Taxation of Shareholders. The following discussion does not purport to
address the tax consequences to non-United States Investors or to a person who
owns, directly or indirectly (or is deemed to own after the application of
certain complex attribution rules), the Company's Shares giving the holder the
right to exercise 10% or more of the total voting power of the Company's
outstanding Shares (a "10-Percent Shareholder" of the Company), other than as
discussed below under "-- Special United States Federal Income Tax
Considerations -- Controlled Foreign Corporations." Non-United States Investors
and any person contem-
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plating or at risk of becoming a 10-Percent Shareholder are advised to consult
their own tax advisors regarding the tax consequences to them of an investment
in the Shares.
Basis in Shares. A United States Investor will generally have a basis in
the Shares equal to his, her or its purchase price for United States federal
income tax purposes.
Dividends. A United States Investor receiving a distribution on the Shares
will be required to include such distribution in gross income as a taxable
dividend to the extent such distribution is paid from current or accumulated
earnings and profits of the Company as determined for United States federal
income tax purposes. Distributions in excess of the current and accumulated
earnings and profits of the Company will first be treated, for United States
federal income tax purposes, as a nontaxable return of capital to the extent of
the United States Investor's basis in the Shares and then as gain from the sale
or exchange of a capital asset. Dividends paid by the Company will not be
eligible for the corporate dividends received deduction.
The Company has officially adopted the United States dollar as the currency
in which it keeps its books and records. Accordingly, any dividend would be paid
in U.S. dollars. Nevertheless, the amount of any dividend paid in Hong Kong
dollars or any other foreign currency will be equal to the United States dollar
value of the Hong Kong dollars or such other currency on the date of receipt,
regardless of whether the United States Investor converts the payment into
United States dollars. Gain or loss, if any, recognized by a United States
Investor on the sale or disposition of Hong Kong dollars or another foreign
currency will generally be United States source ordinary income or loss.
In general, a United States Investor (other than a 10-Percent Shareholder
of the Company) will be entitled to claim a foreign tax credit only for taxes
(such as withholding taxes), if any, imposed on dividends paid to such United
States Investor and not for taxes, if any, imposed on the Company or on any
entity in which the Company has made an investment. Dividends received with
respect to Shares will generally be characterized as "passive income" for
purposes of applying the foreign tax credit limitation. To the extent that the
Company's income is derived from United States sources, dividends which it pays
to United States Investors may be considered United States source income for
purposes of applying the foreign tax credit limitation.
Dispositions of Shares. Subject to the discussion below of the consequences
of the Company being treated as a Passive Foreign Investment Company or a
Foreign Investment Company, gain or loss realized by a United States Investor
(other than a 10-Percent Shareholder of the Company) on the sale or other
disposition of Shares will be subject to United States federal income tax as
capital gain or loss in an amount equal to the difference between such United
States Investor's basis in the Shares and the amount realized on the
disposition. Such capital gain or loss will be long-term capital gain or loss if
the United States Investor has held the Shares for more than one year at the
time of the sale or exchange. Recent United States tax legislation reduced to
20% the maximum rate of tax on long-term capital gains on most capital assets
held by an individual for more than one year but not more than 18 months. In
addition, gain on most capital assets held by an individual for more than one
year but not more than 18 months is subject to tax at a maximum rate of 28%.
SPECIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Passive Foreign Investment Company. The Company has not been a passive
foreign investment company ("PFIC") for United States federal income tax
purposes for prior taxable years and believes that it will not be treated as a
PFIC for the current and future taxable years, but this conclusion is a factual
determination made annually and thus is subject to change. The Company will be a
PFIC with respect to a United States Investor if, for any taxable year in which
such United States Investor held the Company's Shares, either (i) at least 75%
of the gross income of the Company for the taxable year is passive income, or
(ii) at least 50%, on average for the Company's taxable year, of the Company's
assets (by value or, if the Company so elects, by adjusted basis, or for tax
years beginning after December 31, 1997, by fair market value) is attributable
to assets that produce or are held for the production of passive income (in each
case taking into account the Company's pro rata share of the gross income and
the value of the assets of any company in which the Company owns, directly or
indirectly, 25% or more of the stock by value (the "look-through" rule)). For
this purpose, passive income generally includes dividends, interest, royalties,
rents (other than rents and royalties derived in the active conduct of a trade
or business and not derived from a related
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person), annuities, and gains from assets that produce passive income. The
Company anticipates that, under the "look-through" rules described above, most
of the income that it derives from manufacturing in the PRC will not constitute
passive income and that most of its investment in such manufacturing will not
constitute assets held for the production of passive income. The Company
anticipates, therefore, that it will not be a PFIC.
If the Company were to be treated as a PFIC, then, unless a United States
Investor who owns Shares in the Company elects to have the Company treated as a
"qualified electing fund" (a "QEF") as described below, the following rules
apply:
1. Distributions made by the Company during a taxable year to a United
States Investor who owns Shares in the Company that are an "excess distribution"
(defined generally as the excess of the amount received with respect to the
Shares in any taxable year over 125% of the average received in the shorter of
either the three previous years or such United States Investor's holding period
before the taxable year) must be allocated ratably to each day of such
shareholder's holding period. The amount allocated to the current taxable year
must be included as ordinary income in gross income for that year. The amount
allocated to each prior taxable year is taxed as ordinary income at the highest
rate in effect for such shareholder in that prior year and the tax is subject to
an interest charge at the rate applicable to deficiencies in income taxes.
2. The entire amount of any gain realized upon the sale or other
disposition of the Shares will be treated as an excess distribution made in the
year of sale or other disposition and as a consequence will be treated as
ordinary income and, to the extent allocated to years prior to the year of sale
or disposition, will be subject to the interest charge described above.
A shareholder that makes a QEF election will be currently taxable on his,
her or its pro rata share of the Company's ordinary earnings and net capital
gain (at ordinary income and capital gains rates, respectively) for each taxable
year of the Company, regardless of whether or not distributions were actually
received. A shareholder that makes a QEF election for the first taxable year in
which the Company is a PFIC and in which the shareholder owns shares in the
Company and maintains this election for all subsequent years in which the
shareholder owns shares in the Company will be subject to the foregoing
treatment only in such years in which the Company actually satisfies the income
or asset tests for PFIC status described above. The shareholder's basis in his,
her or its Shares will be increased to reflect taxed but undistributed income.
Distributions of income that had previously been taxed will result in a
corresponding reduction of basis in the Shares and will not be taxed again as a
distribution to the shareholder.
In addition, under recently enacted tax legislation, a shareholder of a
PFIC may make a mark-to-market election with respect to the stock of certain
PFICs with marketable stock. The election may be made for tax years beginning
after December 31, 1997. Under such an election, the shareholder would determine
his, her or its income or loss with respect to the PFIC stock as of the close of
each taxable year. For example, an electing shareholder would include in income
each year an amount equal to the excess, if any, of the fair market value of the
PFIC stock as of the close of the taxable year over the shareholder's adjusted
basis in such stock. Any income included in income pursuant to the
mark-to-market election would be treated as ordinary income. Alternatively, for
tax years where the shareholder's adjusted basis in the PFIC stock exceeds its
fair market value, an electing shareholder may, subject to certain limitations,
be entitled to a deduction.
Special rules apply with respect to the calculation of the amount of the
foreign tax credit with respect to excess distributions by a PFIC or inclusions
under a QEF.
A United States Investor who owns Shares in the Company during any year
that the Company is a PFIC must file Internal Revenue Service Form 8621 with the
Internal Revenue Service (as well as attaching a copy to his, her or its income
tax return).
Controlled Foreign Corporations. Sections 951 through 964 and Section 1248
of the Code relate to controlled foreign corporations ("CFC"). The CFC
provisions may impute some portion of such a corporation's undistributed income
to certain shareholders on a current basis and convert into dividend income some
portion of gains on dispositions of stock which would otherwise qualify for
capital gains treatment. In general, the CFC provisions will apply to the
Company only if 10-Percent Shareholders who are United States
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Investors own in the aggregate (or are deemed to own after application of
complex attribution rules), more than 50% (measured by voting power or value) of
the Shares of the Company. The Company does not believe that it will be a CFC
after this Offering. It is possible that the Company could become a CFC in the
future. Even if the Company were classified as a CFC in a future year, however,
the CFC rules referred to above would apply only with respect to 10-Percent
Shareholders who are United States Investors.
Personal Holding Company/Foreign Personal Holding Company/Foreign
Investment Company. A corporation will be classified as a personal holding
company (a "PHC") if at any time during the last half of a tax year (i) five or
fewer individuals (without regard to their citizenship or residence) directly or
indirectly or by attribution own more than 50% in value of the corporation's
stock and (ii) at least 60% of its ordinary gross income, as specially adjusted,
consists of personal holding company income (defined generally to include
dividends, interest, royalties, rents and certain other types of passive
income). A PHC is subject to a United States federal income tax of 39.6% on its
undistributed personal holding company income (generally limited, in the case of
a foreign corporation, to United States source income).
A corporation will be classified as a foreign personal holding company (an
"FPHC") and not a PHC if at any time during a tax year (i) five or fewer
individual United States citizens or residents directly or indirectly or by
attribution own more than 50% of the total combined voting power or value of the
corporation's stock and (ii) at least 60% of its gross income consists of
foreign personal holding company income (defined generally to include dividends,
interest, royalties, rents and certain other types of passive income). Each
United States shareholder in an FPHC is required to include in gross income, as
a dividend, an allocable share of the FPHC's undistributed foreign personal
holding company income (generally the taxable income of the FPHC, as specially
adjusted).
A corporation will be classified as a foreign investment company (a "FIC")
if for any taxable year it (i) is registered under the Investment Company Act of
1940, as amended, as a management company or share investment trust or is
engaged primarily in the business of investing or trading in securities or
commodities (or any interest therein) and (ii) 50% or more of the value or the
total combined voting power of all the corporation's stock is owned directly or
indirectly (including stock owned through the application of attribution rules)
by United States persons. In general, unless an FIC elects to distribute 90% or
more of its taxable income (determined under United States tax principles as
specially adjusted) to its shareholders, gain on the sale or exchange of FIC
stock is treated as ordinary income (rather than capital gain) to the extent of
such shareholder's ratable share of the corporation's earnings and profits for
the period during which such stock was held.
The Company believes that it is not and will not be a PHC, FPHC or FIC
after this Offering. However, no assurance can be given as to the Company's
future status.
U.S. Information Reporting and Backup Withholding. Dividends paid in the
United States are generally subject to the information reporting requirements of
the Code. Dividends paid in the United States may be subject to backup
withholding at the rate of 31% unless the holder provides a taxpayer
identification number on a properly completed Form W-9 or otherwise establishes
an exemption.
The amount of any backup withholding will not constitute additional tax and
will be allowed as a credit against the United States Investor's federal income
tax liability.
Filing of Information Returns. Under a number of circumstances, a United
States Investor acquiring Shares of the Company may be required to file an
information return. In particular, any United States Investor who becomes the
owner, directly or indirectly, of 10% or more of the Shares of the Company will
be required to file such a return. Other filing requirements may apply, and
United States Investors should consult their own tax advisors concerning these
requirements.
HONG KONG TAXATION
In the opinion of Robert W.H. Wang & Co., Hong Kong counsel to the Company,
the following correctly summarizes the taxes applicable to the Company and its
shareholders under Hong Kong law:
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Profits Tax. The Company is subject to profits tax on all profits
(excluding capital profits) arising in or derived from Hong Kong. The source of
income is therefore the relevant factor, and this is generally regarded as a
question of fact. There are certain situations in which the Hong Kong tax
authorities are prepared to accept apportionment of chargeable profits, for
example when a Hong Kong-based company has manufacturing facilities in the PRC.
The proportion of income originating from the PRC and Hong Kong respectively in
such situations is a question of fact. However, where apportionment is
appropriate, the Hong Kong tax authorities usually adopt a 50:50 allocation
unless compelling circumstances dictate otherwise. Profits tax is levied at the
rate of 16.5% for corporations and 15.0% for unincorporated entities. Generally
speaking, business losses may be carried forward indefinitely to be offset
against future profits of the Company. See "Risk Factors -- Risks Relating to
the Company -- Taxation."
Capital Gains/Taxation of Dividends. Hong Kong does not have any form of
capital gains tax. Neither does it have any form of dividend taxation or
withholding taxes, and hence profits accumulated in a Hong Kong company can be
distributed as dividends without tax deduction in Hong Kong. However, Hong Kong
profits tax will be charged on trading gains from the sale of property that are
derived from or arise in Hong Kong, by persons carrying on a trade in Hong Kong
where such gains are from such trade. Liability for Hong Kong profits tax would
therefore arise in respect of trading gains from the sale of the ADSs or Shares
realized by persons carrying on a business of trading or dealing in securities
in Hong Kong.
Estate Duty. Estate duties are imposed upon the value of properties
situated in Hong Kong that pass to a person's estate upon his or her death. ADSs
or Shares that are registered outside Hong Kong are not regarded as properties
situated in Hong Kong for estate duty purposes.
Stamp Duty. Hong Kong stamp duty is generally payable by the purchaser on
every purchase, and by the seller on every sale, of shares of Hong
Kong-incorporated companies. The duty is charged to both the purchaser and the
seller at the rate of HK$1.50 per HK$1,000 or part thereof of the consideration
for, or (if greater) the value of, the shares transferred. In addition, a fixed
duty of HK$5 is currently payable on an instrument of transfer of such shares.
Under the current practices of the Hong Kong Inland Revenue Department, if
ADSs are not specifically identified to correspond with particular underlying
Shares, the issuance of ADSs upon the deposit of Shares issued directly to the
Depositary or for the account of the Depositary should not be subject to stamp
duty, nor should any Hong Kong stamp duty be payable upon the transfer of ADSs
outside Hong Kong.
PRC TAXATION
In the opinion of the Guangzhou Law Office, PRC counsel to the Company, the
following correctly summarizes the taxes applicable to the Company's investment
in the PRC under PRC law:
Income Tax. The Company's investment is subject to the Income Tax Law of
the PRC for Enterprises with Foreign Investment and Foreign Enterprises ("the
Foreign Investment Enterprise Tax Law"). Pursuant to the Foreign Investment
Enterprise Tax Law, Sino-foreign equity and contractual joint venture
enterprises generally are subject to an income tax at an effective rate of 33%,
which is comprised of a state tax of 30% and a local tax of 3%. The Foreign
Investment Enterprise Tax Law generally exempts Sino-foreign equity and
contractual joint venture enterprises engaged in manufacturing with an operating
term of more than ten years from state and local income taxes for two years
starting from the first profitable year of operations, followed by a 50%
reduction for the next three years. The first profitable year for the Company's
operations at the Company's previous Xin Xing facility was the year ended March
31, 1995, and the first profitable year for the Dongguan Facility has not yet
occurred as the joint venture has just started operations.
Value-Added Tax ("VAT"). Effective January 1, 1994, all goods produced or
processed in the PRC, other than real property and goods produced or processed
for export, are subject to a new VAT at each stage or sale in the process of
manufacture, processing and distribution through the sale to the ultimate
consumer of the goods. The new basic VAT rate for the Company is 17% of the sale
price of the item. The seller of the goods adds 17% to the sale price of the
item, separately invoiced (except in the case of retail sales), and collects the
applicable amount of VAT through the sale of the item. The amount of the
seller's VAT liability
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to the Tax Bureau is calculated as the amount of sales multiplied by the
applicable VAT rate. The amount of the seller's VAT liability may be reduced by
deducting the invoiced amount of VAT included in the materials, parts and other
items purchased by the seller and used in producing the goods.
The Value-Added Tax Provisional Regulations do not permit the seller to
deduct from its VAT liability the amount of VAT included in the purchase price
of fixed assets purchased by the seller. Thus, although the book value of fixed
assets, including plant and equipment purchased by the Company will be the
depreciated cost (ordinarily the purchase price plus VAT) paid at the time of
such purchase, the Company is not permitted to deduct from its VAT liability in
respect of products sold.
Taxation of Dividends from the PRC. Dividends distributed to the Company
can be remitted from the PRC without any PRC taxation. Although the Foreign
Investment Enterprise Tax Law provides that certain remittances of foreign
exchange earnings from the PRC are subject to PRC withholding tax, dividends
received by foreign investors from a foreign investment enterprise are exempt
from withholding tax. The Company's PRC subsidiaries are qualified as foreign
investment enterprises, so withholding tax is not applicable to dividends
received by the Company from these subsidiaries.
Taxation of Disposition of Interest in PRC Subsidiaries. In the event the
Company transfers its interest in its PRC subsidiaries, the amount received in
excess of its original capital contribution would be subject to PRC withholding
tax at the rate of 20%.
In the event that the Company's PRC subsidiaries are liquidated, the
portion of the balance of their assets or remaining property, after deducting
undistributed profits, various funds and liquidation expenses, that exceeds the
Company's paid-in capital would be treated as income from liquidation, which
would be subject to income tax at the same rate that would apply to the
Company's income as described under "Income Tax."
CERTAIN FOREIGN ISSUER CONSIDERATIONS
The Company is a limited liability company incorporated under the Companies
Ordinance of Hong Kong. The Company is therefore governed by and subject to the
provisions of Hong Kong law.
Under Hong Kong law, there are currently no restrictions on the degree of
foreign ownership of a company incorporated in Hong Kong. Likewise, there are
currently no restrictions on the rights of non-Hong Kong owners to exercise
voting rights in respect of shares held by them in Hong Kong-incorporated
companies.
There are currently no foreign exchange control restrictions imposed by
Hong Kong law that affect the Company. There are currently no foreign exchange
control restrictions on the ability of the Company to transfer funds into and
out of Hong Kong or to pay dividends to United States residents who are holders
of the Shares or ADSs.
In accordance with Hong Kong law, share certificates are only issued in the
name of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any special capacity, the Company is
not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. The Company will take no notice of
any trust applicable to any of its securities whether or not it had notice of
such trust.
The rights and liabilities of the shareholders of the Company are governed
by the Companies Ordinance and the Memorandum of Association and Articles of
Association. Under Hong Kong law, shareholders are liable to pay the full
purchase price of shares or ADSs registered in their name, but are not otherwise
subject to liabilities vis-a-vis the Company in their capacity as shareholders.
See "Taxation -- Hong Kong Taxation."
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UNDERWRITING
The Underwriters named below, acting through their representatives, Van
Kasper & Company and Gerard Klauer Mattison & Co., Inc. (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in an
Underwriting Agreement with the Company and the Selling Shareholders, to
purchase from the Company and the Selling Shareholders the number of ADSs set
forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF ADSS
-------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company....................................
Gerard Klauer Mattison & Co., Inc.......................
---------
Total................................................... 3,000,000
=========
</TABLE>
The ADSs are being offered by the Underwriters named herein, subject to
receipt and acceptance by them, to their right to reject any order in whole or
in part, and to certain other conditions. The Underwriters are committed to
purchase all of the above ADSs being offered if any are purchased.
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the ADSs to the public at the offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at that price less a concession not in excess of $ per ADS, and
such dealers may re-allow to certain dealers a discount not in excess of
$ per ADS. After the Offering, the public offering price, concessions
and re-allowance to dealers may be changed by the Representatives as a result of
market conditions or other factors.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable by the Representatives within 30 days after the date
of this Prospectus, to purchase up to 450,000 additional ADSs at the offering
price, less underwriting discounts and commissions. The Representatives may
exercise the Over-allotment Option solely for the purpose of covering
over-allotments, if any, incurred in the sale of the ADSs offered hereby. To the
extent that the Over-allotment Option is exercised, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage of the
additional ADSs as the number of ADSs to be purchased and offered by that
Underwriter in the above table bears to the total number of ADSs offered
hereunder.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters for certain liabilities, including liabilities under the Securities
Act.
Pursuant to the terms of lock-up agreements, the Company, its officers and
directors, the Selling Shareholders and certain other significant shareholders
have agreed not to sell, offer to sell, contract to sell, or otherwise dispose
of any Shares or ADSs or securities exercisable for Shares or ADSs for a period
of 90 days after the date of this Prospectus without the prior written consent
of Van Kasper & Company. In addition, the Company has agreed that for a period
of 90 days after the date of the closing of this Offering, it will not issue,
offer, sell, grant options to purchase or otherwise dispose of any equity
securities or securities convertible into or exchangeable for equity securities,
without the prior written consent of Van Kasper & Company, except for
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(i) ADSs offered hereby, (ii) Shares issued pursuant to the exercise of
outstanding options, and (iii) options granted to its associates, officers,
directors and consultants so long as none of such options becomes exercisable
during said 90-day period. Certain shareholders of the Company have agreed with
Van Kasper & Company to further limitations on resales through March 4, 1999,
and the Company has agreed to certain limitations on its ability to sell in a
public distribution other than through a registered offering of ADSs in the U.S.
or a private placement for the same period. Van Kasper & Company in its sole
discretion may release such securities for sale into the public market at any
time without public announcement. See "Shares Eligible for Future Sale."
Van Kasper & Company has provided financial advice and consulting services
to the Company in connection with the Hua Yang Acquisition. In connection
therewith, it has received fees of $175,000 and will receive reimbursement of
expenses up to $30,000. See "The Hua Yang Acquisition."
Credit Suisse First Boston is expected to be one of the Underwriters in the
Offering. Credit Suisse First Boston has provided the Company with financial
advice and is the leading bank to the Company in financing the Hua Yang
Acquisition. In connection with such financing and financial advice, Credit
Suisse First Boston has received from the Company fees of approximately $1.5
million plus reimbursement of expenses. See "Description of Credit Facility."
Each of the Underwriters has represented and agreed that: (i) it has not
offered or sold and will not offer or sell the ADSs to persons in the United
Kingdom, other than to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 of the
United Kingdom; (ii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue and sale of the ADSs to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisement) (Exemptions)
Order 1996 or is a person to whom such a document may otherwise lawfully be
issued or passed on; and (iii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the ADSs, from or otherwise involving the
United Kingdom.
Until the distribution of the ADSs is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the ADSs. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the ADSs. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the ADSs. If the
Underwriters create a short position in the ADSs in connection with the
Offering, i.e., if they sell more ADSs than are set forth on the cover page of
this Prospectus, the Underwriters may reduce that short position by purchasing
ADSs in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the Over-allotment Option. The
Underwriters may also impose a penalty bid on certain Underwriters and selling
group members. This means that if the Underwriters purchase ADSs in the open
market to reduce the Underwriters' short position or to stabilize the price of
the ADSs, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of this
Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security. Neither the Company nor any of the
Underwriters makes any representations or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the ADSs. In addition, neither the Company nor any of the Underwriters
makes any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
The Underwriters have advised the Company that the Underwriters and dealers
may engage in passive market making transactions in the ADSs in accordance with
rules promulgated by the Securities and
75
<PAGE> 76
Exchange Commission. In general, a passive market maker may not bid for or
purchase the ADSs at a price that exceeds the highest independent bid. In
addition, the net daily purchases made by any passive market maker generally may
not exceed 30% of its average daily trading volume in the ADSs during a
specified two-month prior period or 200 ADSs, whichever is greater. A passive
market maker must identify passive market making bids as such on the Nasdaq
electronic inter-dealer reporting system. Passive market making may have the
effect of stabilizing or maintaining the market price of the ADSs at a level
above that which might otherwise prevail in the open market. Underwriters and
dealers are not required to engage in passive market making and may discontinue
such activities at any time.
76
<PAGE> 77
LEGAL MATTERS
Certain legal matters are being passed upon for the Company by its U.S.
counsel, Cooley Godward LLP, San Francisco, California. The validity of the
issuance of the Shares and certain legal matters as to Hong Kong law are being
passed upon for the Company by Robert W.H. Wang & Co., Hong Kong, and certain
legal matters as to PRC law are being passed upon for the Company by the
Guangzhou Law Office, Guangzhou, the PRC. Certain legal matters as to U.S. law
are being passed upon for the Underwriters by Heller Ehrman White & McAuliffe,
Palo Alto and San Francisco, California.
EXPERTS
The financial statements of each of the Company and Hua Yang as of March
31, 1996 and 1997 and for the periods ended March 31, 1995, 1996 and 1997
included in this Prospectus have been audited by Arthur Andersen & Co.,
independent public accountants, as stated in their reports appearing herein and
are so included herein in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form F-1 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act with respect to
the ADSs being offered in this Offering. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain items of which
are omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. The omitted information may be inspected and copied at the
public reference facilities maintained by the Securities and Exchange Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Securities and Exchange Commission's regional offices located at Seven World
Trade Center, New York, New York 10048 and CitiCorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained from
the public reference section of the Securities and Exchange Commission at
prescribed rates. Statements contained in this Prospectus as to the contents of
any contract or other document filed as an exhibit to the Registration Statement
are not necessarily complete and in each instance reference is made to the copy
of the document filed as an exhibit to the Registration Statement, each
statement made in this Prospectus relating to such documents being qualified in
all respects by such reference. For further information with respect to the
Company and the securities being offered hereby, reference is hereby made to
such Registration Statement, including the exhibits thereto and the financial
statements, notes, and schedules filed as a part thereof.
77
<PAGE> 78
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE COMPANY (ZINDART LIMITED):
Report of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheets -- audited as of March 31, 1996 and 1997 and unaudited
as of December 31, 1997........................................................ F-3
Consolidated Statements of Operations -- audited for each of the three years ended
March 31, 1995, 1996 and 1997 and unaudited for the nine-month periods ended
December 31, 1996 and 1997..................................................... F-4
Consolidated Statements of Cash Flows -- audited for each of the three years ended
March 31, 1995, 1996 and 1997 and unaudited for the nine-month periods ended
December 31, 1996 and 1997..................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity -- audited for each of
the three years ended March 31, 1995, 1996 and 1997 and unaudited for the
nine-month period ended December 31, 1997...................................... F-7
Notes to Consolidated Financial Statements........................................ F-8
HUA YANG:
Report of Independent Public Accountants.......................................... F-27
Consolidated Balance Sheets -- audited as of March 31, 1996 and 1997 and unaudited
as of December 31, 1997........................................................ F-28
Consolidated Statements of Operations -- audited for the three-month period ended
March 31, 1995 and each of the two years ended March 31, 1996 and 1997 and
unaudited for the nine-month periods ended December 31, 1996 and 1997.......... F-29
Consolidated Statements of Cash Flows -- audited for the three-month period ended
March 31, 1995 and each of the two years ended March 31, 1996 and 1997 and
unaudited for the nine-month periods ended December 31, 1996 and 1997.......... F-30
Consolidated Statements of Changes in Shareholders' Equity -- audited for the
three-month period ended March 31, 1995 and each of the two years ended 1996
and 1997 and unaudited for the nine-month period ended December 31, 1997....... F-32
Notes to Consolidated Financial Statements........................................ F-33
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Zindart Limited:
We have audited the accompanying consolidated balance sheets of Zindart
Limited (incorporated in Hong Kong; the "Company") and Subsidiaries (the
"Group") as of March 31, 1996 and 1997, and the related consolidated statements
of operations, cash flows and changes in shareholders' equity for the years
ended March 31, 1995, 1996 and 1997. The accompanying financial statements give
retroactive effect, for all periods presented, to the acquisition of Hua Yang
Holdings Co., Ltd. as a reorganization of companies under common control as
described in Note 1 to the accompanying financial statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zindart
Limited and Subsidiaries as of March 31, 1996 and 1997, and the results of their
operations and their cash flows for the years ended March 31, 1995, 1996 and
1997, after giving retroactive effect to the acquisition of Hua Yang Holdings
Co., Ltd. as a reorganization of companies under common control as described in
Note 1 to the accompanying financial statements, in conformity with generally
accepted accounting principles in the United States of America.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
February 10, 1998.
F-2
<PAGE> 80
ZINDART LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1997 (AUDITED)
AND DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
--------------- 31,
NOTE 1996 1997 1997
------ ------ ------ -----------
$'000 $'000
$'000
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and bank deposits........................................ 6,267 21,286 20,510
Accounts receivable, net...................................... 5 & 22 16,360 16,811 27,025
Bills receivable.............................................. 351 -- 1,257
Due from immediate holding company............................ 22 3 -- --
Due from related companies.................................... 22 517 166 11
Deposits and prepayments...................................... 6 1,842 1,664 3,649
Inventories, net.............................................. 7 13,700 13,882 14,145
------ ------ ------
Total current assets.................................. 39,040 53,809 66,597
Property, machinery, equipment and capital leases, net.......... 8 21,034 21,662 29,310
Construction-in-progress........................................ 9 -- 1,851 --
Long-term investment............................................ 10 179 179 179
Goodwill, net................................................... 11 77 67 60
------ ------ ------
Total assets.......................................... 60,330 77,568 96,146
====== ====== ======
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings.................................... 12 7,711 2,522 --
Long-term bank loans, current portion......................... 14 905 94 --
Capital lease obligations, current portion.................... 15 1,596 1,304 1,284
Accounts payable.............................................. 6,206 4,517 5,899
Receipts in advance........................................... 958 1,797 3,109
Accrued liabilities........................................... 13 4,960 8,772 13,109
Taxation payable.............................................. 483 707 1,801
------ ------ ------
Total current liabilities............................. 22,819 19,713 25,202
Long-term bank loans, non-current portion....................... 14 2,060 211 --
Capital lease obligations, non-current portion.................. 15 2,261 2,677 1,772
Deferred taxation............................................... 17 120 120 120
------ ------ ------
Total liabilities..................................... 27,260 22,721 27,094
------ ------ ------
Minority interests.............................................. 12,622 15,011 18,346
------ ------ ------
Shareholders' equity:
Common stock, par value $0.0646 (equivalent of HK$0.5):
-- authorized -- 5,000,000 shares as of March 31, 1996,
10,000,000 shares as of March 31, 1997 and 15,000,000
shares as of December 31, 1997;
-- outstanding and fully paid -- 5,000,000 shares as of
March 31, 1996, 6,500,000 shares as of March 31, 1997 and
6,733,000 shares as of December 31, 1997;.................. 16 323 420 436
-- outstanding and to be issued -- 279,863 shares as of
March 31, 1996, March 31, 1997 and December 31, 1997....... 18 18 18
Additional paid-in capital.................................... 3,690 15,794 17,794
Reorganization adjustment..................................... 5,132 6,644 8,619
Retained earnings............................................. 11,285 16,960 23,839
------ ------ ------
Total shareholders' equity............................ 20,448 39,836 50,706
------ ------ ------
Total liabilities, minority interests and
shareholders' equity................................ 60,330 77,568 96,146
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 81
ZINDART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NOTE
---- NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------ -------------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... 23.a 43,479 83,333 95,616 75,341 88,773
Cost of goods sold............. (30,471) (56,910) (69,388) (54,937) (61,393)
---------- ---------- ---------- ---------- ----------
Gross profit.............. 13,008 26,423 26,228 20,404 27,380
Selling, general and
administrative expenses...... (8,504) (13,158) (14,833) (11,112) (14,691)
Interest expenses.............. (139) (623) (1,150) (883) (297)
Interest income................ 231 248 272 149 815
Other income (expenses), net... 515 (430) 330 180 148
---------- ---------- ---------- ---------- ----------
Income before income
taxes................... 5,111 12,460 10,847 8,738 13,355
Provision for income taxes..... 17 (483) (488) (781) (578) (1,221)
---------- ---------- ---------- ---------- ----------
Income before minority
interests............... 4,628 11,972 10,066 8,160 12,134
Minority interests............. (394) (4,514) (2,920) (2,574) (3,303)
---------- ---------- ---------- ---------- ----------
Net income................ 4,234 7,458 7,146 5,586 8,831
========== ========== ========== ========== ==========
Earnings per common share
-- Basic..................... $ 0.80 $ 1.41 $ 1.33 $ 1.06 $ 1.26
========== ========== ========== ========== ==========
-- Diluted................... N/A N/A N/A N/A $ 1.25
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 82
ZINDART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- --------------------------
1995 1996 1997 1996 1997
------- ------- ------- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ 4,234 7,458 7,146 5,586 8,831
Adjustments to reconcile net income to net
cash provided by operating activities --
Amortization of goodwill................ 10 10 10 7 7
Depreciation of property, machinery and
equipment............................ 1,103 1,890 2,817 1,950 2,502
Net (gain) loss on disposals of
property, machinery and equipment.... (114) (13) (51) 45 49
Provision for permanent diminution in
value on investment in a
subsidiary........................... -- -- 84 -- --
Minority interests...................... 394 4,514 2,920 2,574 3,303
(Increase) Decrease in operating
assets --
Accounts receivable, net................ (485) (4,580) (451) (2,524) (10,214)
Bills receivable........................ (143) (208) 351 351 (1,257)
Deposits and prepayments................ 325 (153) 178 312 (1,985)
Inventories, net........................ (2,507) (2,958) (182) (729) (263)
Increase (Decrease) in operating
liabilities --
Accounts payable........................ (1,485) 1,388 (1,689) (810) 1,382
Receipts in advance..................... 990 (615) 839 522 1,312
Accrued liabilities..................... 2,275 (693) 3,812 3,812 4,337
Taxation payable........................ (93) (117) 224 452 1,094
------- ------- ------- ------- -------
Net cash provided by operating
activities........................... 4,504 5,923 16,008 11,548 9,098
------- ------- ------- ------- -------
Cash flows from investing activities:
Net cash inflow from acquisition of
subsidiaries............................ 1,755 -- -- -- --
Increase in investment of a subsidiary.... -- -- (323) (323) --
Decrease in investment of a subsidiary.... -- -- 239 239 --
Acquisition of long-term investment....... -- (179) -- -- --
Acquisition of property, machinery and
equipment............................... (4,736) (8,973) (2,052) (2,634) (8,503)
Additions of construction-in-progress..... -- -- (1,851) -- --
Proceeds from disposals of property,
machinery and equipment................. 1,290 246 109 169 155
(Increase) Decrease in due from immediate
holding company......................... -- (3) 3 3 --
(Increase) Decrease in due from ultimate
holding company......................... (95) 95 -- -- --
(Increase) Decrease in due from related
companies............................... (1,695) 539 351 (16) 155
Decrease in due from a director........... 77 -- -- -- --
Effect of reorganization adjustment....... -- -- 41 64 23
------- ------- ------- ------- -------
Net cash used in investing activities... (3,404) (8,275) (3,483) (2,498) (8,170)
------- ------- ------- ------- -------
</TABLE>
F-5
<PAGE> 83
ZINDART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED) (CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- --------------------------
1995 1996 1997 1996 1997
------- ------- ------- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................... -- -- 12,201 -- 2,016
Increase in stock issuance cost........... -- -- -- (561) --
Increase (Decrease) in bank overdrafts.... 634 1,910 (203) (1,392) (2,163)
New short-term bank loans................. -- 8,693 14,588 11,839 --
Repayment of short-term bank loans........ -- (4,985) (18,297) (13,478) --
New import trust receipt bank loans....... 25 8,425 9,079 6,888 1,722
Repayment of import trust receipt bank
loans................................... -- (7,895) (10,356) (6,875) (2,081)
New long-term bank loans.................. 1,035 3,036 -- -- --
Repayment of long-term bank loans......... (283) (1,065) (2,660) (641) (305)
New capital lease obligations............. 107 776 -- 727 --
Repayment of capital element of capital
lease obligations....................... (300) (425) (1,327) (1,471) (925)
Increase (Decrease) in due to related
companies............................... 124 (124) -- -- --
Decrease in due to a director............. (61) (2,652) -- -- --
Dividends paid............................ (1,959) (1,073) -- -- --
Finance from minority interests........... (119) (2) (87) (57) 32
Dividends paid by subsidiaries to their
minority shareholders................... (63) (308) (444) -- --
------- ------- ------- ------- -------
Net cash (used in) provided by financing
activities.............................. (860) 4,311 2,494 (5,021) (1,704)
------- ------- ------- ------- -------
Effect of cumulative translation
adjustments............................. 5 (5) -- -- --
------- ------- ------- ------- -------
Net increase (decrease) in cash and bank
deposits................................ 245 1,954 15,019 4,029 (776)
Cash and bank deposits, as of beginning of
year.................................... 4,068 4,313 6,267 6,267 21,286
------- ------- ------- ------- -------
Cash and bank deposits, as of end of
year.................................... 4,313 6,267 21,286 10,296 20,510
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 84
ZINDART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------
ISSUED TO BE ISSUED
------------------ ------------------ ADDITIONAL CUMULATIVE
NUMBER OF NUMBER OF PAID-IN REORGANIZATION RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS ADJUSTMENTS
--------- ------ --------- ------ ---------- -------------- -------- -----------
'000 $'000 '000 $'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31,
1994................... 5,000 323 -- -- -- -- 6,564 --
Acquisition of Hua Yang
Holdings Co., Ltd.
(Note 1)............... -- -- 280 18 3,690 2,228 -- --
Net income............... -- -- -- -- -- -- 4,234 --
Transfer to
reorganization
adjustment............. -- -- -- -- -- 42 (42) --
Dividend................. -- -- -- -- -- -- (1,073) --
Translation
adjustments............ -- -- -- -- -- -- -- 5
----- --- --- --- ----- ----- ------ ---- --
Balance as of March 31,
1995................... 5,000 323 280 18 3,690 2,270 9,683 5
Net income............... -- -- -- -- -- -- 7,458 --
Transfer to
reorganization
adjustment............. -- -- -- -- -- 2,862 (2,862) --
Dividend................. -- -- -- -- -- -- (2,994) --
Translation
adjustments............ -- -- -- -- -- -- -- (5)
----- --- --- --- ----- ----- ------ ---- --
Balance as of March 31,
1996................... 5,000 323 280 18 3,690 5,132 11,285 --
Issuance of common
stock.................. 1,500 97 -- -- 14,903 -- -- --
Common stock issuance
expenditures........... -- -- -- -- (2,799) -- -- --
Change in effective
interest in Hua Yang
Holdings Co., Ltd...... -- -- -- -- -- 41 -- --
Net income............... -- -- -- -- -- -- 7,146 --
Transfer to
reorganization
adjustment............. -- -- -- -- -- 1,471 (1,471) --
----- --- --- --- ----- ----- ------ ---- --
Balance as of March 31,
1997................... 6,500 420 280 18 15,794 6,644 16,960 --
Issuance of common stock
(unaudited)............ 233 16 -- -- 2,308 -- -- --
Common stock issuance
expenditures
(unaudited)............ -- -- -- -- (308) -- -- --
Change in effective
interest in Hua Yang
Holdings Co., Ltd.
(unaudited)............ -- -- -- -- -- 23 -- --
Net income (unaudited)... -- -- -- -- -- -- 8,831 --
Transfer to
reorganization
adjustment
(unaudited)............ -- -- -- -- -- 1,952 (1,952) --
----- --- --- --- ----- ----- ------ ---- --
Balance as of December
31, 1997 (unaudited)... 6,733 436 280 18 17,794 8,619 23,839 --
===== === === === ===== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 85
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
During the period from April 1, 1994 (the earliest date covered by the
accompanying financial statements) to December 28, 1995, the Company was wholly
owned by Zindart Holdings Limited ("ZHL"; a company incorporated in the Cayman
Islands). On December 29, 1995, ZHL transferred its entire interest in 5,000,000
shares of common stock of the Company (after the effect of the Share Split as
described below) to Zindart Pte Limited ("ZPL"; a company incorporated in
Singapore) in return for 100% interest in ZPL. In January 1996, ZHL underwent a
voluntary liquidation and distributed its entire interest in ZPL to its
shareholders. Thereafter, ZPL is majority owned by ZIC Holdings Limited
("ZICHL"; a company incorporated in the Cayman Islands), which is majority owned
by the ChinaVest IV Funds.
During the period from April 1, 1994 (the earliest date covered by the
accompanying financial statements) to December 10, 1996, the Company had 250,000
shares of common stock, par value HK$10.00 each, outstanding. On December 11,
1996, the Company consummated a 20 for 1 stock split (the "Share Split") and as
a result 5,000,000 shares of common stock, par value HK$0.50 each, were
outstanding. The Share Split has been reflected retroactively in the
accompanying balance sheets and in all per share computations. In March 1997,
the Company issued 1,500,000 shares of common stock, par value HK$0.50 each, for
cash consideration of $10.00 per share through a public offering, and raised net
proceeds of approximately $12,201,000. In April 1997, the Company issued 225,000
shares of common stock, par value HK$0.50 each, for cash consideration of $10.00
per share pursuant to options granted to the underwriters of the aforesaid
public offering, and raised net proceeds of approximately $1,942,000. In October
1997, the Company issued 8,000 shares of Common Stock, par value HK$0.50 each,
for cash consideration of $9.125 per share pursuant to the exercise of stock
options granted under the Company's 1997 equity incentive plan.
In December 1997, ZPL has resolved to undergo a voluntary liquidation and
is in the process of distributing its entire interest in 5,000,000 shares of
common stock of the Company to its shareholders. Thereafter, the Company will be
majority owned (3,800,000 shares of common stock) by ZICHL, which in turn is
majority owned by the ChinaVest IV Funds.
In February 1998, the Company completed its acquisition of the entire
issued capital stock of Hua Yang Holdings Co., Ltd. ("HYHCL"; a company
incorporated in the Cayman Islands), which was 74.3% owned by HYP Holdings
Limited (a company incorporated in the Cayman Islands), which in turn was
majority (56.5%) owned by the same ChinaVest IV Funds as ZICHL. The acquisition
consideration is (i) $35,000,000 in cash, and (ii) up to 1,000,000 shares of
common stock of the Company, of which 666,667 shares of common stock of the
Company, valued at $13.25 per share, were issued upon completion of the
acquisition and the remaining 333,333 shares of common stock of the Company will
be issuable contingent upon HYHCL's attainment of certain financial results
according to a pre-determined formula over a two-year period ending March 31,
1999. The acquisition is accounted for (i) as to the effective interest of
approximately 42% owned by the ChinaVest IV Funds as a reorganization of
companies under common control, similar to a pooling of interests, and (ii) as
to the remaining interest as an acquisition. The following is an unaudited pro
forma summary of the consolidated results of the Group after giving retroactive
effect to the acquisition as to (i) the effective interest of HYHCL owned by the
ChinaVest IV Funds on the basis of reorganization of companies under common
control, similar to a pooling of interests, and (ii) the remaining interest of
HYHCL as if such acquisition had occurred on April 1, 1996 for the year ended
March 31, 1997, and on April 1, 1997 for the nine months ended December 31,
1997, with the expenses relating to the acquisition recorded in the statement of
operations during the nine months ended December 31, 1997 (note: the unaudited
pro forma summary is not necessarily indicative either of the results of
operations that would
F-8
<PAGE> 86
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES -- (CONTINUED)
have occurred had the acquisition been consummated as of April 1, 1996 or April
1, 1997 or the results of operations that may be achieved in the future:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
1997 1997
---------- -----------------
$'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Pro forma net sales............................. 95,616 88,773
====== ======
Pro forma net income............................ 5,589 8,266
====== ======
Pro forma earnings per common share
-- Basic...................................... $ 0.97 $ 1.12
====== ======
-- Diluted.................................... N/A $ 1.11
======
</TABLE>
In connection with the acquisition of HYHCL, the Company drew down a loan
of $30,000,000 under a revolving credit facility for a term of five years (the
lenders have an option to demand repayment after three years). As collateral for
the revolving credit facility, the Company has pledged its shareholding in
HYHCL, including assignment of its entitlement to dividends, distributions and
income in respect of this shareholding, and has agreed to comply with certain
restrictive financial covenants.
The Company and its subsidiaries, excluding HYHCL and its subsidiaries,
(collectively referred hereinafter as the "Zindart operations") are principally
engaged in the manufacturing of die-cast and injection-molded plastic products.
The Zindart operations maintain its head office in Hong Kong where it
coordinates sales and marketing and administrative functions. Its production
facilities are located in Guangdong Province, the People's Republic of China
(the "PRC").
HYHCL and its subsidiaries (collectively referred hereinafter as the "Hua
Yang operations") are principally engaged in printing and assembly of hand-made
books, specialty packaging and other paper products. The Hua Yang operations
maintain their head office in Hong Kong where it coordinates sales and
marketing, purchasing and certain administrative functions. Its production
facilities are located in Guangdong Province, the PRC.
2. BASIS OF PRESENTATION
The consolidated financial statements are presented after inclusion of
approximately 42% of the results of HYHCL, the effective interest of HYHCL owned
by the ChinaVest IV Funds, to give retroactive effect for all periods presented
to the acquisition of HYHCL as a reorganization of companies under common
control, similar to a pooling of interests, effective from January 1, 1995 (the
date that HYHCL was acquired by the ChinaVest IV Funds), as described in Note 1.
F-9
<PAGE> 87
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of March 31, 1997 were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
EQUITY
INTEREST
PLACE OF ATTRIBUTABLE
NAME INCORPORATION TO THE GROUP
- -------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Zindart operations
Dongguan Xinda Giftware Company Limited....................... The PRC Note a
Guangzhou Zindart (Xin Xing) (Giftware) Company Limited....... The PRC Note b
Luen Tat Mould Manufacturing Limited.......................... The British 51% - Note c
Virgin Islands
Onchart Industrial Limited.................................... The British 55%
Virgin Islands
Onchart Industrial Limited.................................... Hong Kong 55%
Wealthy Holdings Limited...................................... The British 100%
Virgin Islands
Hua Yang operations
Hua Yang Holdings Co., Ltd.................................... Cayman Islands 100%
Hua Yang Printing Holdings Co., Limited....................... Hong Kong 100%
Shenzhen Huaxuan Printing Product Co., Ltd.................... The PRC Note d
Guangzhou Jin Yi Advertising Company Ltd...................... The PRC Note e
</TABLE>
NOTES --
a. Dongguan Xinda Giftware Company Limited is a contractual joint venture
established in the PRC to be operated for 15 years until November 2009. Under
the joint venture contract and the supplemental agreement thereto, the Group
is entitled to 100% of the joint venture's income after paying to its joint
venture partner a pre-determined annual fee.
b. Guangzhou Zindart (Xin Xing) (Giftware) Company Limited is a contractual
joint venture established in the PRC to be operated for 15 years until
December 2008. Under the joint venture contract and the supplemental
agreement thereto, the Group is entitled to 100% of the joint venture's
income after paying to its joint venture partner a pre-determined rental for
the factory premises occupied by the joint venture.
c. According to a shareholders' agreement dated October 10, 1994, the Group is
entitled to share only 41% of the profit of Luen Tat Mould Manufacturing
Limited.
d. Shenzhen Huaxuan Printing Product Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 15 years until May 2010. Under the
joint venture agreement, the Group is entitled to 100% of the joint venture's
income after paying to its joint venture partner a pre-determined annual fee.
e. Guangzhou Jin Yi Advertising Company Ltd. is a contractual joint venture
established in the PRC. The total investment was HK$2,500,000 (equivalent to
approximately $323,000) and the Group subsequently recovered HK$1,852,000
(equivalent to approximately $239,000) of its investment cost. As of March
31, 1997, the Group was in the process of dissolving Guangzhou Jin Yi
Advertising Company Ltd. and had made a full provision against the remaining
balance of its investment in Guangzhou Jin Yi Advertising Company Ltd.
There is no restriction on the distribution of the subsidiaries' retained
earnings.
F-10
<PAGE> 88
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of consolidation
The consolidated financial statements include the accounts of the Company,
its subsidiaries and its contractual joint ventures which are considered as de
facto subsidiaries. All material intra-group balances and transactions have been
eliminated on consolidation.
b. Goodwill
Goodwill, being the excess of cost over the fair value of the Group's share
of the net assets of subsidiaries acquired, is amortized on a straight-line
basis over ten years. The amortization recorded during the years ended March 31,
1995, 1996 and 1997 was approximately $10,000, $10,000 and $10,000,
respectively, and during the nine months ended December 31, 1996 and 1997 was
approximately $7,000 and $7,000, respectively. Accumulated amortization as of
March 31, 1996 and 1997 and December 31, 1997 was approximately $20,000, $30,000
and $37,000, respectively. Management assesses the remaining life of the
goodwill annually, taking into consideration the current operating results and
future prospects of the subsidiaries.
c. Contractual joint ventures
A contractual joint venture is an entity established between the Group and
one or more other parties, with the rights and obligations of the joint venture
partners governed by a contract. If the Group owns more than 50% of the joint
venture and is able to govern and control its financial and operating policies
and its board of directors, such joint venture is considered as a de facto
subsidiary and is accounted for as a subsidiary.
d. Inventories
Inventories are stated at the lower of cost, on a weighted average basis,
or market value. Costs of work-in-process and finished goods are composed of
direct materials, direct labour and an attributable portion of production
overheads.
e. Property, machinery, equipment and capital leases
Property, machinery, equipment and capital leases are recorded at cost.
Gains or losses on disposals are reflected in current operations. Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets as follows: land and buildings -- 10 to
50 years, machinery and tools -- 3 to 10 years, furniture and office
equipment -- 5 to 8 years, and motor vehicles -- 4 to 5 years. All ordinary
repair and maintenance costs are expensed as incurred.
The Company recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without interest
charges), indicates that future operations will not produce sufficient revenue
to cover the related future costs, including depreciation, and when the carrying
amount of the asset cannot be realized through sale. Measurement of the
impairment loss is based on the fair value of the assets.
f. Construction-in-progress
Construction-in-progress represents factories and office buildings under
construction and machinery pending installation.
Interest costs incurred during the period of construction or installation
are capitalized and amortized over the estimated useful lives of the related
assets. Interest costs capitalized during the years ended March 31,
F-11
<PAGE> 89
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
f. Construction-in-progress -- (Continued)
1995, 1996 and 1997 were approximately $23,000, $206,000 and $68,000,
respectively, and during the nine months ended December 31, 1996 and 1997 were
approximately Nil and Nil, respectively.
g. Long-term investments
Investments held for the long-term are stated at market value. Income from
investments is accounted for to the extent of dividends received and receivable.
h. Sales
Sales represent the invoiced value of merchandise/molds supplied to
customers. Sales are recognized when the merchandise is shipped and title passes
to customers.
i. Income taxes
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
j. Operating leases
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
k. Foreign currency translation
The Company considers United States dollars as its functional currency as
majority of the Group's business activities are based in United States dollars.
The translation of the financial statements of subsidiaries into United
States dollars is performed for balance sheet accounts using the closing
exchange rate in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate during each reporting period. The gains
or losses resulting from translation are included in shareholders' equity
separately as cumulative translation adjustments. Aggregate gains (losses) from
foreign currency transactions included in the results of operations for the
years ended March 31, 1995, 1996 and 1997 were approximately $209,000,
$(220,000) and $(85,000), respectively, and for the nine months ended December
31, 1996 and 1997 were approximately $78,000 and $37,000, respectively.
l. Earnings per common share
Basic earnings per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income for each
year/period by the weighted average number of shares of common stock outstanding
during the years/periods, as if the Company had acquired the effective interest
in the common shares of HYHCL owned by the ChinaVest IV Funds as of the
beginning of years/periods as a of reorganization of companies under common
control, similar to a pooling of interests (see Note 1). The weighted average
number of shares used to compute basic earnings per common share are
approximately
F-12
<PAGE> 90
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
l. Earnings per common share -- (Continued)
5,280,000, 5,280,000 and 5,383,000 for the years ended March 31, 1995, 1996 and
1997, respectively, and approximately 5,280,000 and 6,999,000 for the nine
months ended December 31, 1996 and 1997, respectively.
Diluted earnings per common share reflects the dilution that would have
resulted from the exercise of stock options. Diluted earnings per common share
is computed by dividing net income for each year/period by the weighted average
number of shares of common stock and all dilutive securities during the
years/periods, as if the Company had acquired the effective interest of common
shares of HYHCL owned by the ChinaVest IV Funds as of the beginning of
years/periods as a reorganization of companies under common control, similar to
a pooling of interests (see Note 1). The weighted average number of shares used
to compute diluted earnings per common share is approximately 7,039,000 for the
nine months ended December 31, 1997.
m. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
n. Fair value of financial instruments
The Group's financial instruments consist of cash, cash equivalents, bills
receivable, trade receivables and trade payables. The book values of these
instruments are considered to be representative of their fair values.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables.................................... 16,667 17,661 27,758
Less: Allowance for doubtful accounts................ (307) (850) (733)
------ ------ ------
Accounts receivable, net............................. 16,360 16,811 27,025
====== ====== ======
</TABLE>
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Deposits for acquisition of molds.................... 1,083 1,097 1,352
Rental and utility deposits.......................... 94 94 150
Prepayments.......................................... 445 273 1,913
Others............................................... 220 200 234
------ ------ ------
1,842.. 1,664 3,649
====== ====== ======
</TABLE>
F-13
<PAGE> 91
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................ 9,582 8,886 10,363
Work-in-process...................................... 2,642 2,590 1,672
Finished goods....................................... 1,988 3,253 3,215
------ ------ ------
14,212.. 14,729 15,250
Less: Allowance for obsolescence..................... (512) (847) (1,105)
------ ------ ------
Inventories, net..................................... 13,700 13,882 14,145
====== ====== ======
</TABLE>
8. PROPERTY, MACHINERY, EQUIPMENT AND CAPITAL LEASES
Property, machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Property, machinery and equipment:
Land............................................... 2,456 2,456 4,648
Buildings.......................................... 6,198 6,398 11,371
Machinery and tools................................ 9,791 10,785 13,711
Furniture and office equipment..................... 2,397 3,108 4,242
Motor vehicles..................................... 458 515 814
Capital leases:
Machinery and tools................................ 5,451 6,813 5,234
Furniture and office equipment..................... 321 358 80
Motor vehicles..................................... 315 124 28
------ ------ ------
Cost................................................. 27,387 30,557 40,128
Less: Accumulated depreciation:
Property, machinery and equipment.................. (4,607) (7,209) (9,582)
Capital leases..................................... (1,746) (1,686) (1,236)
------ ------ ------
Property, machinery, equipment and capital leases,
net................................................ 21,034 21,662 29,310
====== ====== ======
</TABLE>
As of March 31, 1996 and 1997 and December 31, 1997, land and buildings
with a net book value of approximately $800,000, $705,000 and $684,000,
respectively, were situated in Hong Kong and were held under leases expiring in
2047, and land and buildings with a net book value of approximately $7,152,000,
$7,112,000 and $14,054,000, respectively, were situated in the PRC and were held
under land use right for fifty years until 2044 or 2047.
Land and buildings with a net book value of approximately $7,817,000 and
Nil and machinery with a net book value of approximately $4,674,000 and
$4,283,000 as of March 31, 1997 and December 31, 1997, respectively, were
mortgaged or pledged under certain loan agreements.
F-14
<PAGE> 92
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CONSTRUCTION-IN-PROGRESS
Construction-in-progress comprised:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Construction costs..................................... -- 1,783 --
Interest cost capitalized.............................. -- 68 --
----- ----- ------
-- 1,851 --
===== ===== ==========
</TABLE>
10. LONG-TERM INVESTMENT
On March 1, 1996, the Group acquired from several individuals, including a
minority shareholder of a subsidiary, an 18% interest in Luen Tat Model Design
Company Limited (a company incorporated in the British Virgin Islands) for a
cash consideration of $179,000. The cost of $179,000 approximated the market
value of this investment as of March 31, 1996 and 1997 and December 31, 1997.
11. GOODWILL
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31
1996 1997 1997
----- ----- ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................. 97 97 97
Less: Accumulated amortization....................... (20) (30) (37)
----- ----- ------
Goodwill, net........................................ 77 67 60
===== ===== ==========
</TABLE>
12. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31
1996 1997 1997
----- ----- ------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Bank overdrafts........................................ 2,366 2,163 --
Short-term bank loans.................................. 3,709 -- --
Import trust receipt bank loans........................ 1,636 359 --
----- ----- ------
7,711 2,522 --
===== ===== ==========
</TABLE>
Short-term bank borrowings were denominated in Hong Kong dollars and bore
interest at the floating commercial bank lending rates in Hong Kong, which
ranged from 8.63% to 10.50% per annum as of March 31, 1997. They were
collaterized by certain land and buildings, bank deposits, accounts receivable
and inventories of the Group. They were drawn for working capital purposes and
were renewable with the consent of the relevant banks.
F-15
<PAGE> 93
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHORT-TERM BANK BORROWINGS -- (CONTINUED)
Supplemental information with respect to short-term bank borrowings for the
year ended March 31, 1997 and for the nine months ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED WEIGHTED
AMOUNT AMOUNT AVERAGE AVERAGE
OUTSTANDING OUTSTANDING INTEREST RATE INTEREST RATE
DURING THE DURING THE AT THE END OF DURING THE
YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD
----------- ----------- ------------- -------------
$'000 $'000
<S> <C> <C> <C> <C>
Year ended March 31, 1997:
Bank overdrafts.................... 3,955 1,983 9.32% 9.40%
======== ======== ========= =========
Short-term bank loans.............. 3,837 2,248 --% 8.86%
======== ======== ========= =========
Import trust receipt bank loans 3,543 1,947 8.82% 8.82%
======== ======== ========= =========
Nine months ended December 31, 1997
(unaudited):
Bank overdrafts.................... 2,163 313 --% 8.99%
======== ======== ========= =========
Import trust receipt bank loans.... 359 46 --% 8.63%
======== ======== ========= =========
</TABLE>
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------- -------------
1996 1997 1997
----- ----- -------------
<S> <C> <C> <C>
$'000 $'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Accruals for operating expenses
-- Workers' wages and bonus.......................... 595 1,439 1,717
-- Management bonus.................................. 572 817 915
-- Rental expenses................................... 408 463 349
-- Subcontracting charges............................ 619 412 744
-- Freight charges and packaging fees................ 261 225 681
-- Others............................................ 675 1,171 1,125
Commission............................................. 387 538 356
Accruals for raw materials purchases................... 1,345 1,962 6,310
Accruals for plant relocation expenses................. -- 272 198
Accruals for common stock issuance expenditures........ -- 810 127
Provision for claims................................... -- -- 472
Others................................................. 98 663 115
----- ----- ------
4,960 8,772 13,109
===== ===== ======
</TABLE>
F-16
<PAGE> 94
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LONG-TERM BANK LOANS
Long-term bank loans were denominated in Hong Kong dollars, and bore
interest rates ranged from 10.5% to 11.0% per annum as of March 31, 1997. They
were collateralized by certain land and buildings and bank deposits of the
Group, and were repayable as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------- DECEMBER 31,
1996 1997 1997
----- --- -------------
<S> <C> <C> <C>
$'000 $'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
-- Within one year.................................... 905 94 --
-- Over one year but not exceeding two years.......... 1,688 94 --
-- Over two years but not exceeding three years....... 254 94 --
-- Over three years but not exceeding four years...... 94 23 --
-- Over four years but not exceeding five years....... 24 -- --
----- --- ------
Total bank loans........................................ 2,965 305 --
Less: Current portion................................... (905) (94) --
----- --- ------
Non-current portion..................................... 2,060 211 --
===== === ======
</TABLE>
15. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under the capital leases, together with the
present value of the minimum lease payments are:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ -------------
<S> <C> <C> <C>
$'000 $'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
-- Within one year................................. 1,932 1,570 1,555
-- Over one year but not exceeding two years....... 1,219 1,544 1,510
-- Over two years but not exceeding three years.... 781 1,330 401
-- Over three years but not exceeding four years... 675 296 19
-- Over four years but not exceeding five years.... 77 -- --
----- ------ ------
Total minimum lease payments......................... 4,684 4,740 3,485
Less: Amount representing interest................... (827) (759) (429)
----- ------ ------
Present value of minimum lease payments.............. 3,857 3,981 3,056
Less: Current portion................................ (1,596) (1,304) (1,284)
----- ------ ------
Non-current portion.................................. 2,261 2,677 1,772
===== ====== ======
</TABLE>
16. COMMON STOCK AND OPTIONS
a. Common stock
During the period from April 1, 1994 (the earliest date covered by the
accompanying financial statements) to December 10, 1996, the Company had 250,000
shares of common stock, par value HK$10.00 each, authorized and outstanding. On
December 11, 1996, the Company consummated a 20 for 1 stock split ("the Share
Split") and as a result 5,000,000 shares of common stock, par value HK$0.50
each, were outstanding. The Share Split has been reflected retroactively in the
accompanying balance sheets and in all per share computations. On January 31,
1997, the Company increased its authorized share capital from
F-17
<PAGE> 95
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMON STOCK AND OPTIONS -- (CONTINUED)
HK$2,500,000 to HK$5,000,000, by the creation of 5,000,000 new shares of common
stock, par value HK$0.50 each, ranking pari passu in all respects with the then
existing shares. In March 1997, the Company issued 1,500,000 shares of common
stock, par value HK$0.50 each, for cash consideration of $10.00 per share
through a public offering, and raised net proceeds of approximately $12,201,000.
In April 1997, the Company issued 225,000 shares of common stock, par value
HK$0.50 each, for cash consideration of $10.00 per share pursuant to options
granted to the underwriters of the aforesaid public offering, and raised net
proceeds of approximately $1,942,000. In October 1997, the Company issued 8,000
shares of common stock, par value HK$0.50 per share, for cash consideration of
$9.125 per share pursuant to the exercise of stock options granted under the
Company's 1997 equity incentive plan. On December 31, 1997, the Company
increased its authorized share capital from HK$5,000,000 to HK$7,500,000 by the
creation of 5,000,000 new shares of common stock, par value HK$0.50 per share,
ranking pari passu in all respects with the then existing shares.
As described in Note 1, the Company is contracted to issue up to 1,000,000
shares of common stock in connection with its acquisition of HYHCL, of which
666,667 shares of common stock of the Company were issued upon completion of the
acquisition in February 1998 and the remaining 333,333 shares of common stock of
the Company will be issuable contingent upon HYHCL's attainment of certain
financial results according to a pre-determined formula during a two-year period
ending March 31, 1999. The accompanying financial statements have given
retroactive effect, for all periods presented, to the issuance of the 279,863
shares of common stock relating to the acquisition of the effective interest of
HYHCL owned by the ChinaVest IV Funds, on the basis of reorganization of
companies under common control, similar to a pooling of interests.
b. Options
The Company has reserved issuance of an aggregate of 672,500 shares of
common stock, par value HK$0.50 per share, under the Company's 1997 equity
incentive plan, which will expire on May 14, 2007.
In May 1997, the Company granted common stock options under the 1997 equity
incentive plan to purchase 196,000 shares of common stock of the Company at an
exercise price of $9.125 per share, which was equal to the quoted market value
of the shares immediately before the date on which the stock options were
granted. The stock options are exercisable according to a pre-determined vesting
schedule from 1997 to 2000. 8,000 options were exercised during the nine months
ended December 31, 1997.
17. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
operate. The Company and the Hong Kong subsidiaries are subject to Hong Kong
profits tax at a rate of 16.5%. The British Virgin Islands subsidiaries are
incorporated under the International Business Companies Act of the British
Virgin Islands and, accordingly, are exempted from payment of the British Virgin
Islands income taxes. The Cayman Islands subsidiary is incorporated under the
Companies Law of the Cayman Islands as a limited liability exempted company and,
accordingly, is exempted from payment of the Cayman Islands income taxes until
2014. The joint venture enterprises established in the open coastal areas of the
PRC are subject to PRC income taxes at a rate of 27% (24% state tax and 3% local
tax), while the joint venture enterprise established in a special economic zone
in the PRC is subject to PRC income tax at a rate of 15%. However, these joint
venture enterprises are exempted from state and local income taxes for two years
starting from the first year of profitable operations and then followed by a 50%
reduction for the next three years. The first profitable year for Guangzhou
Zindart (Xin Xing) (Giftware) Company Limited was the year ended March 31, 1995;
and the first profitable year for Shenzhen Huaxuan Printing Product Co., Ltd.
was the year ended March 31, 1997. Dongguan Xinda Giftware Company Limited was
in a loss position during the year ended March 31, 1997.
F-18
<PAGE> 96
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. INCOME TAXES -- (CONTINUED)
If the tax holidays for the joint venture enterprises established in the
PRC did not exist, the Group's income tax liabilities would have been increased
by approximately $71,000, $63,000 and $298,000 for the years ended March 31,
1995, 1996 and 1997, respectively, and approximately $323,000 and $380,000 for
the nine months ended December 31, 1996 and 1997, respectively. Basic earnings
per common share would have been approximately $0.79, $1.40 and $1.27 for the
years ended March 31, 1995, 1996 and 1997, respectively, and approximately $1.00
and $1.21 for the nine months ended December 31, 1996 and 1997, respectively.
Diluted earnings per common share would have been approximately $1.20 for the
nine months ended December 31, 1997.
Provision for income taxes for the years ended March 31, 1995, 1996 and
1997 and for the nine months ended December 31, 1996 and 1997 represented
provision for current Hong Kong profits tax. The reconciliation of the Hong Kong
statutory profits tax rate to the effective income tax rate based on income
before income taxes stated in the consolidated statements of operations is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEAR ENDED MARCH 31, 31,
---------------------- ---------------------------
1995 1996 1997 1996 1997
---- ---- ---- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Hong Kong statutory profits tax rate........... 16.5% 16.5% 16.5% 16.5% 16.5%
Effect of tax exemption for the PRC joint
ventures..................................... (1.4)% (0.5)% (3.0)% (4.0)% (3.1)%
Non-taxable income arising from activities
which qualified as offshore.................. (5.4)% (4.2)% (4.6)% (4.4)% (4.9)%
Non-taxable/non-deductible activities.......... (0.2)% (7.9)% (1.7)% (1.5)% 0.6%
---- ---- ---- ---- ----
Effective income tax rate 9.5% 3.9% 7.2% 6.6% 9.1%
==== ==== ==== ==== ====
</TABLE>
Components of deferred tax balances as of March 31, 1996 and 1997 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------- DECEMBER 31,
1996 1997 1997
---- ---- -------------
<S> <C> <C> <C>
$'000 $'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Accumulated difference between taxation allowance and depreciation
expenses........................................................ 120 120 120
=== === ===
</TABLE>
18. DIVIDENDS
Dividends comprised:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEAR ENDED MARCH 31, 31,
------------------------- ---------------------------
1995 1996 1997 1996 1997
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
$'000 $'000 $'000 $'000 $'000
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash dividend............................... 1,073 -- -- -- --
Dividend in kind............................ -- 2,994 -- -- --
----- ----- ----- ----- -----
1,073 2,994 -- -- --
===== ===== ===== ===== =====
</TABLE>
Dividend for the year ended March 31, 1996 of approximately $2,994,000 was
settled in kind by distributing to the shareholder the loan receivable from a
related company of approximately $1,889,000 and the amount due from that related
company of approximately $1,105,000.
F-19
<PAGE> 97
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS
a. Capital commitments
As of March 31, 1996 and 1997 and December 31, 1997, the Group had capital
commitments amounting to approximately $161,000, $2,849,000 and $552,000,
respectively, in respect of construction of factories in the PRC and purchase of
machinery and tools.
b. Operating lease commitments
The Group has various operating lease agreements for factory premises and
office equipment, which extend through 2007. Rental expenses for the years ended
March 31, 1995, 1996 and 1997 were approximately $1,112,000, $1,565,000 and
$1,719,000, respectively, and for the nine months ended December 31, 1996 and
1997 were approximately $1,233,000 and $1,350,000, respectively. Most leases
contain renewal options. Future minimum rental payments as of March 31, 1997 and
December 31, 1997, under agreements classified as operating leases with
non-cancellable terms in excess of one year, are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- -------------
<S> <C> <C>
$'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Payable during the following period
-- Within one year......................................... 1,170 326
-- Over one year but not exceeding two years............... 841 169
-- Over two years but not exceeding three years............ 550 78
-- Over three years but not exceeding four years........... 303 73
-- Over four years but not exceeding five years............ 303 73
-- Thereafter.............................................. 1,244 343
----- -----
4,411 1,062
===== =====
</TABLE>
c. Commitment relating to contractual joint ventures
Under the supplementary joint venture agreement for the establishment of
Dongguan Xinda Giftware Company Limited and the joint venture agreement for the
establishment of Shenzhen Huaxuan Printing Product Co., Ltd., the Group has
committed to pay pre-determined annual fees to the third-party joint venture
partners for the period from October 1995 to October 2010. As of March 31, 1997
and December 31, 1997, the total commitments for these pre-determined fees are
approximately $7,130,000 and $6,719,000, respectively, which are analyzed as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- -------------
<S> <C> <C>
$'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Payable during the following period
-- Within one year......................................... 393 404
-- Over one year but not exceeding two years............... 411 423
-- Over two years but not exceeding three years............ 429 442
-- Over three years but not exceeding four years........... 449 462
-- Over four years but not exceeding five years............ 469 483
-- Thereafter.............................................. 4,979 4,505
----- -----
7,130 6,719
===== =====
</TABLE>
F-20
<PAGE> 98
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. RETIREMENT PLAN
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
The employees of the Zindart operations in Hong Kong after completing a
probation period may join the Group's defined contribution provident fund
managed by an independent trustee. Both the Group and its Hong Kong employees
make monthly contributions to the scheme of 5% of the employees' basic salaries.
The Hong Kong employees are entitled to receive their entire contribution
together with accrued interest thereon at any time upon leaving the Group, and
100% of the Group's employer contribution and the accrued interest thereon upon
retirement or leaving the Group after completing ten years of service or at a
reduced scale of between 30% to 90% after completing three to nine years of
service. Any forfeited contributions made by the Group and the accrued interest
thereon are used to reduce future employer's contributions. The aggregate amount
of the Group's employer contributions (net of forfeited contributions) for the
years ended March 31, 1995, 1996 and 1997 are approximately $97,000, $71,000 and
$78,000, respectively, and for the nine months ended December 31, 1996 and 1997
are approximately $32,000 and $91,000, respectively. The employees of the Hua
Yang operations in Hong Kong are not covered by any pension scheme.
The Group has no other post-retirement or post-employment benefit plans.
21. BANKING FACILITIES
As of March 31, 1997 and December 31, 1997, the Group had banking
facilities of approximately $30,428,000 and $29,281,000, respectively, for
overdrafts, loans and trade financing. Unused facilities as of the same dates
amounted to approximately $26,956,000 and $27,630,000, respectively. These
facilities were secured by:
a. Mortgages over the Group's land and buildings with a net book value
of approximately $7,817,000 and Nil and pledges over the Group's machinery
with a net book value of approximately $4,674,000 and $4,283,000 as of
March 31, 1997 and December 31, 1997, respectively;
b. Pledges over the Group's bank deposits of approximately $1,940,000
and Nil as of March 31, 1997 and December 31, 1997, respectively; and
c. Floating charge on all accounts receivable and inventories relating
to the Hua Yang operations.
F-21
<PAGE> 99
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. RELATED PARTY TRANSACTIONS
The Group entered into the following transactions with related companies:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------- --------------------------
1995 1996 1997 1996 1997
------ ------ ------ ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales to ERTL and ERTL's related company
(Note a)................................... 11,824 12,081 17,694 14,455 12,714
Management fee paid to ZIC Holdings Limited
(Note b)................................... 128 421 -- -- --
Management fee paid to related companies..... 171 -- -- -- --
Rental expenses paid to Mr. Karl Chan Kok
Wai, a director of HYHCL, and a company
majority owned by him...................... 176 338 338 253 253
Purchase of assets from Jumbo Light
International Limited (Note c)
- -- Inventories............................... -- 59 -- -- --
- -- Equipment................................. -- 154 -- -- --
Rental income from a related company......... -- 8 -- -- --
Interest income from related companies....... 85 68 -- -- --
Interest expense paid to
- -- a related company......................... -- 3 -- -- --
- -- a director 1 7 -- -- --
====== ====== ====== ========= =========
</TABLE>
The Group had the following outstanding balances with related companies:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable from ERTL and ERTL's related
company (Note a)..................................... 1,536 1,582 1,724
===== ===== ==========
Due from related companies
-- ZIC Holdings Limited (Note b)..................... 11 -- --
-- Jumbo Light International Limited (Note c)........ 184 160 --
-- Hua Yang Printing Company Limited (Note c)........ 319 -- --
-- HYP Holdings Limited (Note d)..................... 3 6 11
----- ----- ------
517 166 11
===== ===== ==========
Due from immediate holding company..................... 3 -- --
===== ===== ==========
</TABLE>
The balances due from immediate holding company and related companies were
unsecured, non-interest bearing and without pre-determined repayment terms.
Notes --
a. ERTL (Hong Kong) Ltd. ("ERTL") is a minority shareholder of Zindart Pte
Limited, the majority shareholder of the Company.
b. ZIC Holdings Limited is an intermediate holding company of the Company.
F-22
<PAGE> 100
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. RELATED PARTY TRANSACTIONS -- (CONTINUED)
c. Jumbo Light International Limited and Hua Yang Printing Company Limited are
beneficially owned by Mr. Karl Chan Kok Wai, who is a director of and has
beneficial interest in HYHCL.
d. HYP Holdings Limited is the ultimate holding company of HYHCL.
23. SEGMENTAL ANALYSIS
a. Net sales
Net sales comprised:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------- --------------------------
1995 1996 1997 1996 1997
------ ------ ------ ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of die-cast products........... 17,499 19,934 22,910 18,854 30,889
Sales of injection-molded plastic
products........................... 14,989 18,372 29,601 22,360 17,237
Sales of books....................... 5,369 25,831 17,697 15,103 18,896
Sales of paper box packaging......... 852 8,271 13,053 9,436 12,788
Sales of molds and others............ 4,770 10,925 12,355 9,588 8,963
------ ------ ------ ------ ------
43,479 83,333 95,616 75,341 88,773
====== ====== ====== ====== ======
</TABLE>
Geographical analysis of net sales is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------- --------------------------
1995 1996 1997 1996 1997
------ ------ ------ ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Hong Kong............................ 2,109 9,543 5,422 4,435 4,367
U.S.A. (export sales)................ 31,459 54,548 64,556 57,453 68,068
Europe (export sales)................ 9,087 16,184 23,149 12,136 13,077
Others (export sales)................ 824 3,058 2,489 1,317 3,261
------ ------ ------ ------ ------
43,479 83,333 95,616 75,341 88,773
====== ====== ====== ====== ======
</TABLE>
b. Assets
Substantially all of the Group's assets are located in Hong Kong and the
PRC.
F-23
<PAGE> 101
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SEGMENTAL ANALYSIS -- (CONTINUED)
c. Major customers
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------- ---------------------------
1995 1996 1997 1996 1997
---- ---- ---- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Hallmark Cards (HK) Limited (a
subsidiary of Hallmark Cards,
Inc.).............................. 26.5% 15.2% 18.5% 18.1% 15.4%
ERTL and ERTL's related company *.... 27.2% 14.6% 18.5% 19.2% 14.3%
Mattel Toys (H.K.) Ltd./Mattel Vendor
Operations Asia Ltd................ 0.5% 5.6% 8.4% 7.2% 25.6%
A buying office of Sieper Werke
GmbH............................... 6.3% 3.5% 4.2% 4.5% 3.5%
Intervisual Books Inc................ 2.7% 5.4% 3.7% 4.6% 3.2%
Hasbro Far East Limited.............. 6.9% 5.2% 1.3% 1.6% 2.2%
</TABLE>
Note:
* ERTL is a minority shareholder of Zindart Pte Limited, the majority
shareholder of the Company.
d. Major suppliers
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
------------------- ---------------------------
1995 1996 1997 1996 1997
--- --- --- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Lucky Products Factory Ltd.............. 6.5% 4.4% 9.0% 5.2% 4.2%
Mattel Toys (H.K.) Ltd.................. -- 3.3% 6.6% 5.4% 4.8%
Lee Kee Metal Company Limited........... 6.8% 2.5% 2.4% 2.7% 0.8%
Y.T. Cheng (Ching Tai) Limited.......... 5.4% 1.2% 1.4% 1.4% 1.3%
Voltra Hymsun Ltd....................... 0.3% 6.0% 0.4% 0.4% 0.4%
Nan Hai Da Zheng Xin He Jing Chang...... -- -- -- -- 7.5%
</TABLE>
24. OPERATING RISK
a. Country risk
The Group's operations are conducted in Hong Kong and the PRC. Accordingly,
the Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong and
the PRC, and by the general state of the Hong Kong and the PRC economies.
Effective from July 1, 1997, sovereignty over Hong Kong was transferred
from the United Kingdom to the PRC, and Hong Kong became a Special
Administrative Region of the PRC (an "SAR"). As provided in the Basic Law of the
Hong Kong SAR of the PRC, the Hong Kong SAR will have full economic autonomy and
its own legislative, legal and judicial systems for fifty years. The Group's
management does not believe that the transfer of sovereignty over Hong Kong has
had an adverse impact on the Company's financial and operating environment.
There can be no assurance, however, that changes in political or other
conditions will not result in such an adverse impact.
F-24
<PAGE> 102
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. OPERATING RISK -- (CONTINUED)
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Group's results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.
b. Dependence on strategic relationship
The Group conducts its manufacturing operations through its contractual
joint ventures established between the Group and several PRC parties. The
deterioration of any or all these strategic relationships may have an adverse
effect on the operations of the Group.
c. Concentration of credit risk
Concentration of accounts receivable as of March 31, 1996 and 1997 and
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------- DECEMBER 31,
1996 1997 1997
---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C>
Five largest accounts receivable........................ 31% 45% 45%
=== === ===
</TABLE>
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.
25. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. Cash paid for interest and income taxes are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------- ---------------------------
1995 1996 1997 1996 1997
---- ---- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
$'000 $'000 $'000 $'000 $'000
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest.............................. 162 829 1,218 909 297
=== === ===== === ===
Income taxes.......................... 742 605 557 126 127
=== === ===== === ===
</TABLE>
b. Supplemental disclosure of investing activities:
(i) During the year ended March 31, 1996, the Group paid a dividend in
kind of approximately $2,994,000 by distributing a loan receivable from a
related company of approximately $1,889,000 and an amount due from that
related company of approximately $1,105,000.
(ii) During the years ended March 31, 1996 and 1997, the Group entered
into capital lease arrangements in respect of (i) originally owned assets
and obtained cash finance of $776,000 and Nil, respectively, and (ii) newly
acquired assets with a capital value of approximately $3,130,000 and
$1,451,000, respectively.
F-25
<PAGE> 103
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
26. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of
operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------- --------------------------
1995 1996 1997 1996 1997
------ ------ ------ ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Depreciation of property, machinery and
equipment
-- owned assets............................ 815 1,490 1,897 1,431 2,011
-- assets held under capital leases........ 288 400 920 519 491
Provision for bad and doubtful trade
receivables................................ 281 -- 543 59 408
Provision for slow-moving and obsolete
inventories................................ 453 -- 335 58 259
Provision for claims......................... -- -- -- -- 472
Interest expenses for
-- bank overdrafts and loans............... 93 691 766 655 15
-- capital lease obligations............... 68 128 452 254 282
-- amount due to a director................ 1 7 -- -- --
-- amount due to a related company......... -- 3 -- -- --
Less: amount capitalized as property,
machinery and equipment and
construction-in-progress................... (23) (206) (68) -- --
------ ------ ------ ------ ------
139 623 1,150 909 297
Operating lease rentals for
-- premises................................ 1,089 1,554 1,710 1,214 1,233
-- machinery and equipment................. 23 11 9 19 117
Repairs and maintenance expenses............. 471 525 682 388 374
Interest income from
-- bank deposits........................... 146 180 272 149 815
-- amount due from related companies....... 85 68 -- -- --
Net foreign exchange gain (loss)............. 209 (220) (85) 78 37
</TABLE>
F-26
<PAGE> 104
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Hua Yang Holdings Co., Ltd.:
We have audited the accompanying consolidated balance sheets of Hua Yang
Holdings Co., Ltd. (incorporated in the Cayman Islands; the "Company") and
Subsidiaries (the "Group") as of March 31, 1996 and 1997, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the period from January 17, 1995 (date of incorporation) to March 31,
1995 and for the years ended March 31, 1996 and 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hua Yang
Holdings Co., Ltd. and Subsidiaries as of March 31, 1996 and 1997, and the
results of their operations and their cash flows for the period from January 17,
1995 (date of incorporation) to March 31, 1995 and for the years ended March 31,
1996 and 1997, in conformity with generally accepted accounting principles in
the United States of America.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
January 27, 1998.
F-27
<PAGE> 105
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1997 (AUDITED)
AND DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
NOTE 1996 1997 1997
---- ------ ------ ------------
<S> <C> <C> <C> <C>
$'000 $'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and bank deposits................................. 2,973 8,755 7,316
Accounts receivable, net............................... 4 8,045 7,553 13,819
Bills receivable....................................... 351 -- 1,257
Due from ultimate holding company...................... 16 3 6 11
Due from related companies............................. 16 514 160 --
Deposits and prepayments............................... 314 275 326
Inventories, net....................................... 5 6,186 5,292 4,908
------ ------ ------
Total current assets........................... 18,386 22,041 27,637
Property, machinery, equipment and capital leases, net... 6 10,234 9,916 9,479
Goodwill, net............................................ 7 21,114 19,938 19,122
------ ------ ------
Total assets................................... 49,734 51,895 56,238
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings............................. 8 656 881 --
Long-term bank loans, current portion.................. 10 94 94 --
Capital lease obligations, current portion............. 11 563 584 638
Accounts payable....................................... 2,099 2,482 2,634
Accrued liabilities.................................... 9 2,154 1,965 3,387
Taxation payable....................................... -- 146 667
------ ------ ------
Total current liabilities...................... 5,566 6,152 7,326
Long-term bank loans, non-current portion................ 10 306 211 --
Capital lease obligations, non-current portion........... 11 1,887 1,275 767
------ ------ ------
Total liabilities.............................. 7,759 7,638 8,093
------ ------ ------
Shareholders' equity:
Common stock, par value $0.0129 (equivalent of HK$0.1);
authorized -- 30,000,000 shares as of March 31, 1996
and 1997 and December 31, 1997; outstanding and
fully paid -- 20,000,000 shares as of March 31, 1996
and 20,176,471 shares as of March 31, 1997 and
December 31, 1997................................... 12 258 260 260
Preferred stock, par value $0.00129 (equivalent of
HK$0.01); authorized -- 3,000,000,000 shares as of
March 31, 1996 and 1997 and December 31, 1997;
outstanding and fully paid -- 280,000,000 shares as
of March 31, 1996 and 1997 and December 31, 1997.... 12 363 363 363
Additional paid-in capital............................. 12 35,813 35,873 35,873
Retained earnings...................................... 5,496 7,824 11,657
Cumulative translation adjustments..................... 45 (63) (8)
------ ------ ------
Total shareholders' equity..................... 41,975 44,257 48,145
------ ------ ------
Total liabilities and shareholders' equity..... 49,734 51,895 56,238
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 106
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 17, 1995 (DATE OF INCORPORATION)
TO MARCH 31, 1995 (AUDITED) AND
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD/YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------ -----------------------
NOTE 1995 1996 1997 1996 1997
---- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$'000 $'000 $'000 $'000 $'000
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... 17.a 6,600 36,403 33,409 26,671 32,813
Cost of goods sold............. (4,827) (22,794) (23,656) (18,657) (22,177)
---------- ---------- ---------- ---------- ----------
Gross profit.............. 1,773 13,609 9,753 8,014 10,636
Selling, general and
administrative expenses...... (1,698) (6,660) (5,888) (4,579) (5,689)
Interest expenses.............. (2) (221) (282) (222) (137)
Interest income................ 3 40 127 60 364
Other income (expenses), net... 23 (14) (60) 12 (4)
Amortization of goodwill....... (234) (1,123) (1,176) (842) (816)
---------- ---------- ---------- ---------- ----------
Income (Loss) before
income taxes............ (135) 5,631 2,474 2,443 4,354
Provision for income taxes..... 13 -- -- (146) (114) (521)
---------- ---------- ---------- ---------- ----------
Net income (loss)......... (135) 5,631 2,328 2,329 3,833
========== ========== ========== ========== ==========
Earnings (Loss) per common
share........................ $ (0.01) $ 0.28 $ 0.12 $ 0.12 $ 0.19
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding.... 20,000,000 20,000,000 20,077,840 20,033,844 20,176,471
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 107
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 17, 1995 (DATE OF INCORPORATION)
TO MARCH 31, 1995 (AUDITED) AND
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD/YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... (135) 5,631 2,328 2,329 3,833
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Amortization of goodwill............. 234 1,123 1,176 842 816
Depreciation of property, machinery
and equipment..................... 157 869 1,151 629 938
Net (gain) loss on disposals of
property, machinery and
equipment......................... 7 (7) 6 45 49
Provision for permanent diminution in
value on investment in a
subsidiary........................ -- -- 84 -- --
Others............................... -- -- 62 62 --
(Increase) Decrease in operating
assets --
Accounts receivable, net............. 921 (565) 492 (1,716) (6,266)
Bills receivable..................... (143) (208) 351 351 (1,257)
Deposits and prepayments............. 59 (200) 39 (100) (51)
Inventories, net..................... (912) (791) 894 1,342 384
Increase (Decrease) in operating
liabilities --
Accounts payable..................... (1,570) (414) 383 (162) 152
Accrued liabilities.................. 1,308 845 (189) 20 1,422
Taxation payable..................... -- -- 146 114 521
------- ------- ------- ------- -------
Net cash provided by (used
in) operating activities... (74) 6,283 6,923 3,756 541
------- ------- ------- ------- -------
Cash flows from investing activities:
Acquisition of new business, net of
cash and bank deposits acquired... (25,739) -- -- -- --
Increase in investment of a
subsidiary........................ -- -- (323) (323) --
Decrease in investment of a
subsidiary........................ -- -- 239 239 --
Acquisition of property, machinery
and equipment..................... (1,539) (4,177) (890) (480) (705)
Proceeds from disposals of property,
machinery and equipment........... 212 233 51 168 155
Increase in due from ultimate holding
company........................... -- (3) (3) (3) (5)
(Increase) Decrease in due from
related companies................. (409) (105) 354 36 160
Effect of cumulative translation
adjustments....................... 47 (2) (108) (28) 55
------- ------- ------- ------- -------
Net cash used in investing
activities................. (27,428) (4,054) (680) (391) (340)
</TABLE>
F-30
<PAGE> 108
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 17, 1995 (DATE OF INCORPORATION)
TO MARCH 31, 1995 (AUDITED) AND
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED) (CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD/YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- --------------------------
1995 1996 1997 1996 1997
------- ------- ------- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issuance of common
stock and preferred stock............ 27,326 -- -- -- --
Increase (Decrease) in bank
overdrafts........................... 294 -- 522 -- (522)
New import trust receipt bank loans..... -- 4,681 2,511 1,878 1,722
Repayment of import trust receipt bank
loans................................ -- (4,319) (2,808) (2,287) (2,081)
New long-term bank loans................ -- 471 -- -- --
Repayment of long-term bank loans....... -- (71) (95) (71) (305)
New capital lease obligations........... -- 2,545 -- -- --
Repayment of capital element of capital
lease obligations.................... -- (95) (591) (435) (454)
Increase (Decrease) in due to a related
company.............................. 72 (72) -- -- --
Repayment of due to a director.......... -- (2,586) -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities.......... 27,692 554 (461) (915) (1,640)
------- ------- ------- ------- -------
Net increase (decrease) in cash and bank
deposits................................ 190 2,783 5,782 2,450 (1,439)
Cash and bank deposits, as of beginning of
period/year............................. -- 190 2,973 2,973 8,755
------- ------- ------- ------- -------
Cash and bank deposits, as of end of
period/year............................. 190 2,973 8,755 5,423 7,316
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 109
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 17, 1995 (DATE OF INCORPORATION)
TO MARCH 31, 1995 (AUDITED) AND
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK ------------------ ADDITIONAL RETAINED CUMULATIVE
------------------ NUMBER OF PAID-IN EARNINGS TRANSLATION
AMOUNT SHARES AMOUNT CAPITAL -------- ADJUSTMENTS
------ --------- ------ ---------- $'000 -----------
NUMBER OF $'000 '000 $'000 $'000 $'000
SHARES
---------
'000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 17, 1995
(date of incorporation)..... -- -- -- -- -- -- --
Issuance of common stock and
preferred stock for cash.... 15,000 194 210,000 272 26,860 -- --
Issuance of common stock and
preferred stock for
acquisition of business
(Note 1).................... 5,000 64 70,000 91 8,953 -- --
Net loss...................... -- -- -- -- -- (135) --
Translation adjustments....... -- -- -- -- -- -- 47
------ --- ------- --- ------ ------ ----
Balance as of March 31,
1995........................ 20,000 258 280,000 363 35,813 (135) 47
Net income.................... -- -- -- -- -- 5,631 --
Translation adjustments....... -- -- -- -- -- -- (2)
------ --- ------- --- ------ ------ ----
Balance as of March 31,
1996........................ 20,000 258 280,000 363 35,813 5,496 45
Issuance of common stock...... 176 2 -- -- 60 -- --
Net income.................... -- -- -- -- -- 2,328 --
Translation adjustments....... -- -- -- -- -- -- (108)
------ --- ------- --- ------ ------ ----
Balance as of March 31,
1997........................ 20,176 260 280,000 363 35,873 7,824 (63)
Net income (unaudited)........ -- -- -- -- -- 3,833 --
Translation adjustments
(unaudited)................. -- -- -- -- -- -- 55
------ --- ------- --- ------ ------ ----
Balance as of December 31,
1997 (unaudited)............ 20,176 260 280,000 363 35,873 11,657 (8)
====== === ======= === ====== ====== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 110
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Hua Yang Holdings Co., Ltd. (the "Company") was incorporated in the Cayman
Islands on January 17, 1995. On January 26, 1995, the Company issued to HYP
Holdings Limited (a company incorporated in the Cayman Islands) 15,000,000
shares of common stock for cash consideration of HK$0.10 per share (par value),
and 210,000,000 shares of preferred stock for cash consideration of HK$1.00 per
share (par value of HK$0.01 per share and premium of HK$0.99 per share), and
raised an aggregate amount of HK$211,500,000 (equivalent to approximately
$27,326,000). In January 1995, the Company through its wholly owned
subsidiary -- Hua Yang Printing Holdings Co., Limited (a company incorporated in
Hong Kong and formerly known as Hi-Link International Limited) acquired certain
assets and liabilities and the major business operations of Hua Yang Printing
Company Limited (a company incorporated in Hong Kong and majority owned by Mr.
Karl Chan Kok Wai) for a consideration of HK$282,000,000 (equivalent to
approximately $36,434,000), which was settled by cash of HK$211,500,000,
5,000,000 shares of common stock of the Company valued at HK$0.10 per share (par
value), and 70,000,000 shares of preferred stock of the Company valued at
HK$1.00 per share (par value of HK$0.01 per share and premium of HK$0.99 per
share).
On May 28, 1995, Hua Yang Printing Holdings Co., Limited entered into an
agreement to establish a contractual joint venture in the People's Republic of
China (the "PRC") to be operated for an initial term of operations of 15
years -- Shenzhen Huaxuan Printing Product Co., Ltd. ("SHPP"). Hua Yang Printing
Holdings Co., Limited contributed to SHPP capital of Rmb20,000,000 (equivalent
to approximately $2,418,000), representing 100% of the registered capital of
SHPP. Pursuant to the joint venture agreement, Hua Yang Printing Holdings Co.,
Limited is entitled to all of the profit and has to assume all of the loss of
SHPP, while the PRC joint venture partner is entitled to a pre-determined annual
fee (see Note 14.b).
On April 25, 1996, the Group invested in a 90% interest in Guangzhou Jin Yi
Advertising Company Ltd., a contractual joint venture established in the PRC,
for HK$2,500,000 (equivalent to approximately $323,000), and subsequently
recovered HK$1,852,000 (equivalent to approximately $239,000) of its investment
cost. As of March 31, 1997, the Group was in the process of dissolving Guangzhou
Jin Yi Advertising Company Ltd. and had made full provision against the
remaining balance of its investment in Guangzhou Jin Yi Advertising Company Ltd.
On October 22, 1996, the Company issued to Mr. Karl Chan Kok Wai 176,471
shares of common stock of the Company in return for his executive services as a
director of the Company. These shares were valued at approximately $62,000
(equivalent to approximately HK$2.72 per share -- par value of HK$0.10 per share
and premium of HK$2.62 per share). As a result, the Company was 74.3% owned by
HYP Holdings Limited and 25.7% owned by a company controlled by Mr. Karl Chan
Kok Wai or Mr. Karl Chan Kok Wai.
The Company is an investment holding company. Its wholly owned
subsidiaries -- Hua Yang Printing Holdings Co., Limited and Shenzhen Huaxuan
Printing Product Co., Ltd. are engaged in printing and assembly of books, paper
box packaging and other paper products. The Group maintains its head office in
Hong Kong where it coordinates sales and marketing, purchasing and certain
administrative functions. Its production facilities are located in Guangdong
Province, the PRC.
F-33
<PAGE> 111
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as the "Group") as of March 31, 1997 were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
EQUITY INTEREST
PLACE OF ATTRIBUTABLE TO PRINCIPAL
NAME INCORPORATION THE GROUP ACTIVITIES
---------------------------------------- ------------- ---------------- --------------------
<S> <C> <C> <C>
Hua Yang Printing....................... Hong Kong 100% Printing and
Holdings Co., assembly of
Limited books and
specialty
packaging
Shenzhen Huaxuan........................ The PRC 100% Printing and
Printing Product Co., Ltd. assembly of
("SHPP") books and
specialty
packaging
Guangzhou Jin Yi........................ The PRC 90% Inactive
Advertising Company
Ltd.
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of consolidation
The consolidated financial statements include the accounts of the Company,
its subsidiaries and its contractual joint ventures which are considered as de
facto subsidiaries. All material intra-group balances and transactions have been
eliminated on consolidation.
b. Contractual joint ventures
A contractual joint venture is an entity established between the Group and
one or more other parties, with the rights and obligations of the joint venture
partners governed by a contract. If the Group owns more than 50% of the joint
venture and is able to govern and control its financial and operating policies
and its board of directors, such joint venture is considered as a de facto
subsidiary and is accounted for as a subsidiary.
c. Inventories
Inventories are stated at the lower of cost, on a first-in first-out basis,
or market value. Costs of work-in-progress and finished goods are composed of
direct materials, direct labour and an attributable portion of production
overheads.
d. Property, machinery, equipment and capital leases
Property, machinery, equipment and capital leases are recorded at cost.
Gains or losses on disposals are reflected in current operations. Depreciation
for financial reporting purpose is provided using the straight-line method over
the estimated useful lives of the assets as follows: land and buildings -- 50
years, machinery and tools -- 3 to 10 years, furniture and office equipment -- 5
to 8 years, and motor vehicles -- 4 years. All ordinary repair and maintenance
costs are expensed as incurred.
The Company recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without interest
charges), indicates that future operations will not produce sufficient revenue
to cover the related future costs, including depreciation, and when the carrying
amount of the asset cannot be realized through sale. Measurement of the
impairment loss is based on the fair value of the assets.
F-34
<PAGE> 112
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
e. Goodwill
Goodwill, being the excess of cost over the fair value of the net assets
relating to the acquisition of the business of Hua Yang Printing Company Limited
(see Note 1), is amortized on a straight-line basis over twenty years. The
amortization recorded during the period/years ended March 31, 1995, 1996 and
1997 was approximately $234,000, $1,123,000 and $1,176,000, respectively, and
during the nine months ended December 31, 1996 and 1997 was approximately
$842,000 and $816,000, respectively. Accumulated amortization as of March 31,
1996 and 1997 and December 31, 1997 was approximately $1,357,000, $2,533,000 and
$3,349,000, respectively. Management assesses the remaining life of the goodwill
annually, taking into consideration of current operating results and future
prospects of the business.
f. Sales
Sales represent the invoiced value of merchandise supplied to customers.
Sales are recognized when the merchandise is shipped and title passes to
customers.
g. Income taxes
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
h. Operating leases
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
i. Foreign currency translation
The Company considers United States dollars as its functional currency as a
substantial portion of the Group's business activities are based in United
States dollars.
The translation of the financial statements of subsidiaries into United
States dollars is performed for balance sheet accounts using the closing
exchange rate in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate during each reporting period. The gains
or losses resulting from translation are included in shareholders' equity
separately as cumulative translation adjustments. Aggregate gains (losses) from
foreign currency transactions included in the results of operations for the
period/years ended March 31, 1995, 1996 and 1997 were approximately $27,000,
$(60,000) and $6,000, respectively, and for the nine months ended December 31,
1996 and 1997 were approximately $6,000 and $(39,000), respectively.
j. Earnings per common share
Earnings per common share is computed by dividing net income for each
period/year by the weighted average number of shares of common stock outstanding
during the periods/years.
F-35
<PAGE> 113
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
k. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
l. Fair value of financial instruments
The Group's financial instruments consist of cash, cash equivalents, bills
receivable, trade receivables and trade payables. The book values of these
instruments are considered to be representative of their fair values.
4. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Trade receivables...................................... 8,313 8,267 14,416
Less: Allowance for doubtful accounts.................. (268) (714) (597)
----- ----- ------
Accounts receivable, net............................... 8,045 7,553 13,819
===== ===== ======
</TABLE>
5. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Raw materials.......................................... 4,378 3,927 3,325
Work-in-process........................................ 1,472 1,142 735
Finished goods......................................... 789 752 1,636
----- ----- -----
6,639 5,821 5,696
Less: Allowance for obsolescence....................... (453) (529) (788)
----- ----- -----
Inventories, net....................................... 6,186 5,292 4,908
===== ===== =====
</TABLE>
F-36
<PAGE> 114
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, MACHINERY, EQUIPMENT AND CAPITAL LEASES
Property, machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Property, machinery and equipment:
Land............................................... 357 357 357
Buildings.......................................... 357 357 357
Machinery and tools................................ 5,579 5,906 5,966
Furniture and office equipment..................... 1,310 1,819 2,166
Motor vehicles..................................... 178 165 214
Capital leases:
Machinery and tools................................ 3,458 3,449 3,453
------ ------ ------
Cost................................................. 11,239 12,053 12,513
Less: Accumulated depreciation:
Property, machinery and equipment.................. (867) (1,723) (2,411)
Capital leases..................................... (138) (414) (623)
------ ------ ------
Property, machinery, equipment and capital leases,
net................................................ 10,234 9,916 9,479
====== ====== ======
</TABLE>
Land and buildings were located in Hong Kong and were held under leases
expiring in 2047.
As of March 31, 1996 and 1997 and December 31, 1997, land and buildings
with a net book value of approximately $710,000, $694,000 and Nil, respectively,
and machinery with a net book value of approximately $4,908,000, $4,674,000 and
$4,283,000, respectively, were mortgaged or otherwise pledged as collateral for
the Group's banking facilities.
7. GOODWILL
<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................. 22,471 22,471 22,471
Less: Accumulated amortization....................... (1,357) (2,533) (3,349)
------ ------ ------
Goodwill, net........................................ 21,114 19,938 19,122
====== ====== ======
</TABLE>
8. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- ------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Bank overdrafts.......................................... -- 522 --
Import trust receipt bank loans.......................... 656 359 --
--
--- ---
656 881 --
=== === ==
</TABLE>
F-37
<PAGE> 115
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHORT-TERM BANK BORROWINGS -- (CONTINUED)
Short-term bank borrowings were denominated in Hong Kong dollars and bore
interest at the floating commercial bank lending rates in Hong Kong, which
ranged from 8.63% to 8.75% per annum as of March 31, 1997. They were
collateralized by certain land and buildings, machinery, accounts receivable and
inventories of the Group. They were drawn for working capital purposes and were
renewable with the consent of the relevant banks.
Supplemental information with respect to short-term bank borrowings for the
year ended March 31, 1997 and for the nine months ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE
AMOUNT AMOUNT WEIGHTED WEIGHTED
OUTSTANDING OUTSTANDING AVERAGE INTEREST AVERAGE INTEREST
DURING THE DURING THE RATE AT THE END RATE DURING THE
YEAR/PERIOD YEAR/PERIOD OF YEAR/PERIOD YEAR/PERIOD
----------- ----------- ---------------- ----------------
$'000 $'000
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
Bank overdrafts............................. 1,159 340 8.63% 8.69%
===== === ==== ====
Import trust receipt bank loans............. 971 504 8.63% 8.63%
===== === ==== ====
NINE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
Bank overdrafts............................. 522 108 -- 8.99%
===== === ==== ====
Import trust receipt bank loans............. 359 46 -- 8.63%
===== === ==== ====
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Accruals for operating expenses
-- Subcontracting charges............................ 348 314 687
-- Salaries and bonus................................ 165 385 500
-- Freight charges................................... 224 225 271
-- Others............................................ 411 788 727
Accruals for raw materials purchases................... 1,006 253 730
Provision for claims................................... -- -- 472
----- ----- -----
2,154 1,965 3,387
===== ===== =====
</TABLE>
F-38
<PAGE> 116
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM BANK LOANS
Long-term bank loans were denominated in Hong Kong dollars and bore
interest at rates ranging from 10.50% to 11.00% per annum as of March 31, 1997.
They were collateralized by certain land and buildings, machinery, accounts
receivable and inventories of the Group, and were repayable as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
-- Within one year..................................... 94 94 --
-- Over one year but not exceeding two years........... 94 94 --
-- Over two years but not exceeding three years........ 94 94 --
-- Over three years but not exceeding four years....... 94 23 --
-- Over four years but not exceeding five years........ 24 -- --
----- ---- - -----
Total bank loans......................................... 400 305 --
Less: Current portion.................................... (94) (94) --
----- ---- - -----
Non-current portion...................................... 306 211 --
===== ===== =====
</TABLE>
11. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under the capital leases, together with the
present value of the minimum lease payments are:
<TABLE>
<CAPTION>
MARCH 31,
--------------- DECEMBER 31,
1996 1997 1997
----- ----- -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
-- Within one year................................... 781 779 780
-- Over one year but not exceeding two years......... 781 779 770
-- Over two years but not exceeding three years...... 781 673 91
-- Over three years but not exceeding four years..... 675 76 --
-- Over four years but not exceeding five years...... 77 -- --
----- ----- -----
Total minimum lease payments........................... 3,095 2,307 1,641
Less: Amount representing interest..................... (645) (448) (236)
----- ----- -----
Present value of minimum lease payments................ 2,450 1,859 1,405
Less: Current portion.................................. (563) (584) (638)
----- ----- -----
Non-current portion.................................... 1,887 1,275 767
===== ===== =====
</TABLE>
12. SHARE CAPITAL
Upon incorporation, the Company had an authorized share capital of
HK$33,000,000, divided into 30,000,000 shares of common stock with a par value
of HK$0.10 per share and 300,000,000 shares of preferred stock with a par value
of HK$0.10 per share. On January 26, 1995, the Company consummated a 10 for 1
stock split of its preferred stock and as a result 3,000,000,000 shares of
preferred stock with a par value of HK$0.01 per share were authorized. The
preferred stock is redeemable at HK$1.00 per share upon approval
F-39
<PAGE> 117
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHARE CAPITAL -- (CONTINUED)
by the Company's Board of Directors, carries no voting rights, is not entitled
to dividends, and must be redeemed in full upon winding up before any
distribution is made to holders of common stock.
Subsequent to the stock split on January 26, 1995, the Company issued
15,000,000 shares of common stock for cash consideration of HK$0.1 per share
(par value) and 210,000,000 shares of preferred stock for cash consideration of
HK$1.00 per share (par value of HK$0.01 per share and premium of HK$0.99 per
share). In addition, the Company issued 5,000,000 shares of common stock at a
value of HK$0.10 per share (par value) and 70,000,000 shares of preferred stock
at a value of HK$1.00 per share (par value of HK$0.01 per share and premium of
HK$0.99 per share) as part of the consideration for the acquisition of certain
assets, liabilities and the major business operations of Hua Yang Printing
Company Limited (see Note 1).
On October 22, 1996, the Company issued to Mr. Karl Chan Kok Wai 176,471
shares of common stock in return for his executive services as a director of the
Company, with the shares valued at approximately $62,000, representing a per
share par value of HK$0.10 and premium of HK$2.62.
13. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
operate. The Company is incorporated under the Companies Law of the Cayman
Islands as a limited liability exempted company and, accordingly, is exempted
from payment of the Cayman Islands income taxes until 2014. The Hong Kong
subsidiary is subject to Hong Kong profits tax at a rate of 16.5%. The joint
venture enterprise -- SHPP is established in a special economic zone in the PRC
and is subject to PRC income taxes at a rate of 15%. However, SHPP is exempted
from PRC state and local income taxes for two years starting from the first year
of profitable operations and then followed by a 50% reduction for the next three
years. The first profitable year for SHPP was the year ended March 31, 1997.
If the tax holiday for SHPP did not exist, the Group's income tax
liabilities would have been increased by approximately Nil and $246,000 for the
years ended March 31, 1996 and 1997, respectively, and approximately $273,000
and $376,000 for the nine months ended December 31, 1996 and 1997, respectively.
Provision for income taxes for the year ended March 31, 1997 and for the
nine months ended December 31, 1996 and 1997 represented provision for current
Hong Kong profits tax. The reconciliation of the Hong Kong statutory profits tax
rate to the effective income tax rate based on income (loss) before income taxes
stated in the consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
------------------------- ---------------------------
1995 1996 1997 1996 1997
----- ----- ----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Hong Kong statutory profits tax
rate.............................. 16.5% 16.5% 16.5% 16.5% 16.5%
Effect of tax exemption for SHPP.... -- -- (11.0)% (12.3)% (7.7)%
Non-taxable income arising from
activities which qualified as
offshore.......................... -- (2.3)% -- -- --
Non-taxable/non-deductible
activities........................ -- 5.2% 7.7% 6.1% 3.2%
Tax loss not recognized............. (16.5)% (19.4)% (7.3)% (5.6)% --
----- ----- ----- ----- -----
Effective income tax rate........... -- -- 5.9% 4.7% 12.0%
===== ===== ===== ===== =====
</TABLE>
F-40
<PAGE> 118
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
a. Operating lease commitments
The Group has various operating lease agreements for factory premises,
which extend through 2007. Rental expenses for the period/years ended March 31,
1995, 1996 and 1997 were approximately $176,000, $941,000 and $929,000,
respectively, and for the nine months ended December 31, 1996 and 1997 were
approximately $697,000 and $544,000, respectively. Most leases contain renewal
options. Future minimum rental payments as of March 31, 1997 and December 31,
1997, under agreements classified as operating leases with non-cancellable terms
in excess of one year, are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
$'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Payable during the following period
-- Within one year........................................ 546 326
-- Over one year but not exceeding two years.............. 533 169
-- Over two years but not exceeding three years........... 323 78
-- Over three years but not exceeding four years.......... 303 73
-- Over four years but not exceeding five years........... 303 73
-- Thereafter............................................. 1,244 343
----- -----
3,252 1,062
===== =====
</TABLE>
b. Commitment related to a contractual joint venture
Under the joint venture agreement for the establishment of Shenzhen Huaxuan
Printing Product Co., Ltd., the Group has committed to pay a pre-determined
annual fee to the third-party joint venture partner during the period from
October 1995 to October 2010. As of March 31, 1997 and December 31, 1997, the
total commitment for this pre-determined fee are $6,626,000 and $6,367,000,
respectively, which are analyzed as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
$'000 $'000
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Payable during the following period
-- Within one year........................................ 354 368
-- Over one year but not exceeding two years.............. 372 387
-- Over two years but not exceeding three years........... 390 406
-- Over three years but not exceeding four years.......... 410 426
-- Over four years but not exceeding five years........... 430 447
-- Thereafter............................................. 4,670 4,333
----- -----
6,626 6,367
===== =====
</TABLE>
15. BANKING FACILITIES
As of March 31, 1997 and December 31, 1997, the Group had banking
facilities of approximately $15,247,000 and $14,961,000, respectively, for
overdrafts, loans and trade financing. Unused facilities as of the same dates
amounted to approximately $13,415,000 and $14,961,000, respectively. These
facilities were secured by:
F-41
<PAGE> 119
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. BANKING FACILITIES -- (CONTINUED)
a. mortgages over the Group's land and buildings with a net book value
of approximately $694,000 and Nil as of March 31, 1997 and December 31,
1997, respectively;
b. pledges over the Group's machinery with a net book value of
approximately $4,674,000 and $4,283,000 as of March 31, 1997 and December
31, 1997, respectively; and
c. floating charge on all of the Group's accounts receivable and
inventories.
16. RELATED PARTY TRANSACTIONS
The Group entered into the following transactions with related companies:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
---------------------- ---------------------------
1995 1996 1997 1996 1997
---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
$'000 $'000 $'000 $'000 $'000
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Purchase of assets from Jumbo Light
International Limited (Note a)
-- Inventories....................... -- 59 -- -- --
-- Equipment......................... -- 154 -- -- --
Management fee paid to ZIC Holdings
Limited (Note b)..................... 105 421 -- -- --
Rental expenses paid to Mr. Karl Chan
Kok Wai, a director, and a company
majority owned by him................ 176 338 338 253 253
=== === === ===
</TABLE>
The Group had the following outstanding balances with related companies:
<TABLE>
<CAPTION>
MARCH 31,
------------- DECEMBER 31,
1996 1997 1997
---- ---- -------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Due from HYP Holdings Limited, the
ultimate holding company................................ 3 6 11
=== === ==
Due from related companies
-- Jumbo Light International Limited
(Note a)............................................. 184 160 --
-- Hua Yang Printing Company Limited
(Note a)............................................. 319 -- --
-- ZIC Holdings Limited (Note b)........................ 11 -- --
--- ---
--
514 160
--
=== ===
==
</TABLE>
The balances due from the ultimate holding company and the related
companies were unsecured, non-interest bearing and without pre-determined
repayment terms.
NOTES --
a. Jumbo Light International Limited and Hua Yang Printing Company Limited
are beneficially owned by Mr. Karl Chan Kok Wai, who is a director of
and has beneficial interest in the Company.
b. ZIC Holdings Limited is a company in which certain directors of the
Company are also directors.
F-42
<PAGE> 120
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SEGMENTAL ANALYSIS
a. Net sales
Net sales comprised:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
----------------------- -------------------------
1995 1996 1997 1996 1997
----- ------ ------ ----------- -----------
$'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of books............................ 5,369 25,831 17,697 15,103 18,896
Sales of paper box packaging.............. 852 8,271 13,053 9,436 12,788
Others.................................... 379 2,301 2,659 2,132 1,129
----- ------ ------ ------ ------
6,600 36,403 33,409 26,671 32,813
===== ====== ====== ====== ======
</TABLE>
Geographical analysis of net sales is as follows:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
----------------------- -------------------------
1995 1996 1997 1996 1997
----- ------ ------ ----------- -----------
$'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Hong Kong................................. 2,109 9,543 5,422 4,435 4,367
U.S.A. (export sales)..................... 3,399 20,228 19,244 14,821 17,461
United Kingdom (export sales)............. 581 3,358 5,176 4,419 5,651
Europe except United Kingdom (export
sales).................................. 71 856 1,714 1,679 2,073
Others (export sales)..................... 440 2,418 1,853 1,317 3,261
----- ------ ------ ------ ------
6,600 36,403 33,409 26,671 32,813
===== ====== ====== ====== ======
</TABLE>
b. Assets
Substantially all of the Group's assets are located in Hong Kong and the
PRC.
c. Major customers
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
------------------ -------------------------
1995 1996 1997 1996 1997
---- ---- ---- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Mattel HK Ltd. ................................ 3.0% 12.8% 23.8% 20.4% 26.0%
Jetta Co., Ltd. ............................... 11.8% 10.8% 12.1% 12.3% 11.2%
Intervisual Books Inc. ........................ 17.9% 12.4% 10.6% 13.0% 8.8%
Imago Publishing Ltd. ......................... 4.0% 4.8% 6.5% 7.7% 2.6%
The Putnam Publishing Group.................... 9.5% 5.4% 5.9% 5.2% 0.7%
Joshua Morris Publishing Inc./Victoria House
Publishing Ltd. ............................. 11.6% 9.5% 4.7% 5.7% 7.4%
Watermark International Inc. .................. 6.4% 0.8% 0.7% 0.9% 0.8%
UR1 International Fty. Ltd..................... -- -- 3.8% -- 5.7%
Van Der Meer Paper Design Ltd.................. 5.0% 3.7% 2.7% 3.4% 5.1%
==== ==== ==== ==== ====
</TABLE>
F-43
<PAGE> 121
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SEGMENTAL ANALYSIS -- (CONTINUED)
d. Major suppliers
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------- -------------------------
1995 1996 1997 1996 1997
--- ---- ---- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Mattel Toys (H.K.) Ltd. ........................ -- 6.7% 16.3% 14.3% 12.5%
Sun Hing Paper Co. Ltd. ........................ 5.8% 10.0% 9.7% 9.8% 10.5%
Sung Kee Hong Ltd. ............................. 6.9% 8.6% 9.6% 8.8% 10.8%
U Kwong Industrial Ltd. ........................ 0.7% 4.1% 8.3% 7.0% 6.2%
Votra Hymsum Ltd. .............................. 1.1% 12.5% 1.0% 1.0% 0.9%
Spicer Paper (H.K.) Ltd. ....................... 6.9% 4.5% 2.1% 2.0% 0.9%
Yuen Cheung Paper Merchant...................... 2.0% 4.0% 4.6% 4.3% 8.6%
Riverwood International Asia Pacific............ -- -- 3.8% 2.0% 6.3%
=== ==== ==== ==== ====
</TABLE>
18. OPERATING RISK
a. Country risk
The Group's operations are conducted in Hong Kong and the PRC. Accordingly,
the Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong and
the PRC, and by the general state of the Hong Kong and the PRC economies.
Effective from July 1, 1997, sovereignty over Hong Kong was transferred
from the United Kingdom to the PRC, and Hong Kong became a Special
Administrative Region of the PRC (the "Hong Kong SAR"). As provided in the Basic
Law of the Hong Kong SAR of the PRC, the Hong Kong SAR will have full economic
autonomy and its own legislative, legal and judicial systems for fifty years.
The Group's management does not believe that the transfer of sovereignty over
Hong Kong has an adverse impact on the Company's financial and operating
environment. There can be no assurance, however, that changes in political or
other conditions will not result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Group's results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.
b. Dependence on strategic relationship
The Group conducts its manufacturing operations through a contractual joint
venture (SHPP) established between the Group and a PRC party. The deterioration
of this strategic relationship may have an adverse effect on the operations of
the Group.
F-44
<PAGE> 122
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. OPERATING RISK -- (CONTINUED)
c. Concentration of credit risk
Concentration of accounts receivable as of March 31, 1996 and 1997 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------- DECEMBER 31,
1996 1997 1997
---- ---- ------------
$'000
$'000 $'000 (UNAUDITED)
<S> <C> <C> <C>
Five largest accounts receivable.......................... 49% 61% 58%
==== ==== ===
</TABLE>
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. Cash paid for interest is as follows:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
------------------------- ---------------------------
1996 1997 1996 1997
----- ----- ----------- -----------
$'000 $'000 $'000 $'000
1995 (UNAUDITED) (UNAUDITED)
-----
$'000
<S> <C> <C> <C> <C> <C>
Interest.............................. 2 221 282 222 137
==== ==== ==== ==== ====
</TABLE>
b. Supplemental disclosure of non-cash investing activities:
During the year ended March 31, 1996, the Group entered into capital lease
arrangements to purchase property, machinery and equipment with a total capital
value at the inception of leases of approximately $2,545,000.
c. Supplemental disclosure of non-cash financing activities:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
------------------------- ---------------------------
1996 1997 1996 1997
----- ----- ----------- -----------
$'000 $'000 $'000 $'000
1995 (UNAUDITED) (UNAUDITED)
-----
$'000
<S> <C> <C> <C> <C> <C>
Issuance of common stock and
preferred stock for acquisition of
business (NOTE 1).................. 9,108 -- -- -- --
==== ==== ==== ==== ====
</TABLE>
F-45
<PAGE> 123
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- (CONTINUED)
d. Supplemental disclosure of investing activities:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
-------------------------- ---------------------------
1996 1997 1996 1997
----- ----- ----------- -----------
$'000 $'000 $'000 $'000
1995 (UNAUDITED) (UNAUDITED)
------
$'000
<S> <C> <C> <C> <C> <C>
Fair value of assets acquired....... 20,625 -- -- -- --
Liabilities assumed................. (6,662) -- -- -- --
Goodwill............................ 22,471 -- -- -- --
Common stock issued................. (9,108) -- -- -- --
--- ----- ---- - ---- - ---- -
Cash paid........................... 27,326 -- -- -- --
Less: Cash acquired................. (1,587) -- -- -- --
--- ----- ---- - ---- - ---- -
Net cash paid for acquisition of 25,739 -- -- -- --
business..........................
====== ===== ===== ===== =====
</TABLE>
20. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of
operations:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
------------------------- ---------------------------
1996 1997 1996 1997
----- ----- ----------- -----------
$'000 $'000 $'000 $'000
1995 (UNAUDITED) (UNAUDITED)
-----
$'000
<S> <C> <C> <C> <C> <C>
Depreciation of property, machinery
and equipment
-- owned assets................... 157 731 875 422 731
-- assets held under capital
leases......................... -- 138 276 207 207
Provision for bad and doubtful trade
receivables....................... 268 -- 446 59 408
Provision for slow-moving and
obsolete inventories.............. 453 -- 76 58 259
Provision for claims................ -- -- -- -- 472
Provision for permanent diminution
in value of investment in a
subsidiary........................ -- -- 84 -- --
Interest expenses for
-- bank overdrafts and loans...... 2 172 85 68 9
-- capital lease obligations...... -- 49 197 154 128
Operating lease rentals for
premises.......................... 176 941 929 697 544
Repairs and maintenance expenses.... 15 11 10 8 10
Salary and employee benefits........ 703 4,580 5,004 3,967 3,750
Interest income from bank
deposits.......................... 3 40 127 60 364
Net foreign exchange gain (loss).... 27 (60) 6 6 (39)
=== ===== ===== ===== =====
</TABLE>
F-46
<PAGE> 124
LOGO
<PAGE> 125
LOGO
<PAGE> 126
======================================================
No person has been authorized to give any information or to make any
representation in connection with the Offering being made hereby not contained
in this Prospectus, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company, the
Underwriters or any other person. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy any securities offered hereby in
any jurisdiction in which it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Shareholders............... 3
Currency Conversions.................. 4
Enforceability of Civil Liabilities... 4
Prospectus Summary.................... 5
Risk Factors.......................... 9
Forward-Looking Statements............ 18
The Hua Yang Acquisition.............. 19
Use of Proceeds....................... 21
Price Range of ADSs................... 21
Dividends and Dividend Policy......... 21
Capitalization........................ 22
Selected Consolidated Financial
Data................................ 23
Pro Forma Financial Data.............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 31
Business.............................. 40
Management............................ 48
Principal and Selling Shareholders.... 53
Certain Transactions.................. 55
Description of Senior Credit
Facility............................ 57
Description of Shares................. 58
Description of American Depositary
Receipts............................ 60
Shares Eligible for Future Sale....... 67
Taxation.............................. 68
Certain Foreign Issuer
Considerations...................... 73
Underwriting.......................... 74
Legal Matters......................... 77
Experts............................... 77
Additional Information................ 77
Index to Financial Statements......... F-1
</TABLE>
------------------------
======================================================
======================================================
3,000,000
AMERICAN DEPOSITARY SHARES
REPRESENTING 3,000,000 ORDINARY SHARES
LOGO
[DOLL GRAPHIC]
--------------------------------
PROSPECTUS
--------------------------------
VAN KASPER & COMPANY
GERARD KLAUER MATTISON & CO., INC.
MARCH , 1998
======================================================
<PAGE> 127
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
of the securities being registered, other than the underwriting discount and
commission. All of the amounts are estimates except for the SEC registration fee
and NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................... $ 16,656
NASD filing fee................................................ 5,330
Blue Sky fees and expenses..................................... 5,000
Printing and engraving expenses................................ 200,000
Legal fees and expenses........................................ 350,000
Accounting fees and expenses................................... 250,000
Miscellaneous expenses......................................... 399,014
----------
Total.......................................................... $1,226,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 9 of the Underwriting Agreement, a copy of
which is filed as Exhibit 1.1 hereto, which provides for indemnification of the
directors and officers of the Company who sign the Registration Statement by the
Underwriters against certain liabilities, including those arising under the
Securities Act, in certain circumstances.
Under Hong Kong law, the organizational documents may not contain any
provisions indemnifying directors, officers, employees and agents of the Company
for acts performed in such capacity. The Company intends to purchase standard
directors' and officers' liability insurance on behalf of its directors and
executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant granted incentive stock options and/or non-statutory stock
options to employees, directors and consultants under its 1997 Equity Incentive
Plan exercisable for up to an aggregate of 196,000 shares of the Registrant's
Shares at an exercise price of $9.125 per share. No options to purchase Shares
have been cancelled or have lapsed without being exercised.
In connection with its acquisition of Hua Yang, the Company issued an
aggregate 666,667 Shares to Karl Chan, HYP Holdings Limited and Mr. Karl Chan
(BVI) Holdings Limited, the shareholders of Hua Yang, pursuant to Regulation S
and/or Regulation D of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement among Zindart Limited, Van Kasper &
Company and Gerard Klauer Mattison & Co., Inc.
2.1 Exchange Agreement among Zindart Limited, Hua Yang Holdings Co., Ltd.,
Hua Yang Printing Holdings Co., Limited, the shareholders of Hua Yang
Holdings Co., Limited and certain beneficial owners of such shareholders
3.1(1) Amended and Restated Memorandum of Association of the Company
3.2* Amended and Restated Articles of Association of the Company
</TABLE>
II-1
<PAGE> 128
<TABLE>
<C> <S>
4.1(1) Deposit Agreement between Zindart Limited and The Bank of New York
4.2(2) 1997 Equity Incentive Plan of the Company.
5.1 Opinion of Robert W.H. Wang & Co., Hong Kong counsel to the Company as to
certain legal matters with respect to the legality of the Shares
8.1 Opinion of Cooley Godward LLP, as to certain tax matters in the U. S.
8.2* Opinion of Guangzhou Law Office, the PRC counsel to the Company, as to
certain tax matters in the PRC
8.3 Opinion of Robert W.H. Wang & Co., Hong Kong counsel to the Company, as
to certain tax matters in Hong Kong (included in Exhibit 5.1)
10.1(a)(1) Sino-Foreign Co-Operation Contract, Zindart Toys (Dongguan) Company
Limited, between Dongguan Hengli Trading General Company and Zindart
Industrial Company Limited, dated September 8, 1994
10.1(b)(1) Sino-Foreign Co-Operation, Zindart Toys (Dongguan) Company Limited,
Supplemental Contract, between Dongguan Hengli Trading General Company
and Zindart Industrial Company Limited, dated December 5, 1995
10.1(c)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1993) No. 49
10.1(d)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1994) No. 664
10.1(e)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1994) No. 665
10.1(f)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1994) No. 666
10.2 Processing Agreement between Zindart Limited and Dongguan Hengli Industry
Development Company dated August 18, 1997.
10.3 Sino-Foreign Cooperation Contract between Shenzhen City Boan District
Xixian Town Gushu Economic Development Company Limited and Hua Yang
Printing Holdings Co. Limited dated 28th May, 1995.
10.4 Standard Chartered Bank, Banking Facilities, dated May 12 and October 4,
1997.
10.5 Hong Kong Bank, Banking Facilities, dated January 22, 1997
10.6(1) Agreement Regarding Future Share Distributions, dated January 31, 1997,
between Van Kasper & Company, Zindart Limited and Zindart Pte. Limited.
10.7 Form of First Amendment to Agreement Regarding Future Share Distributions
among Van Kasper & Company, Zindart Limited, ZIC Holdings Limited, Ertl
(Hong Kong) Limited and Longvest Management Limited
10.8** Form of Service Agreement
10.9** Form of Sales Restriction Agreement
10.10 Revolving Credit Facility Agreement among Zindart Limited, Credit Suisse
First Boston Hong Kong Branch, Credit Suisse First Boston Singapore
Branch, Credit Suisse First Boston Labuan Branch and Standard Chartered
Bank dated as of February 9, 1998.
10.11* Termination Agreement regarding the Zhong Xin factory between the Company
and the Guangzhou Light Industry Holdings Toys Import and Export Company
effective December 31, 1997.
10.12* Termination Agreement regarding the Xin Xing factory between the Company
and the Guangzhou Xinjiap Huangpu Economic Development Company dated May
7, 1997.
</TABLE>
II-2
<PAGE> 129
<TABLE>
<C> <S>
10.13* Agreement of Utilization of Factory, Warehouse and Dormitory dated
January 24, 1995.
10.14* Tenancy Agreement for the Nan Yang factory between Bo An Area Xi Heung
Zhen Goo Yung Cheun Committee and Hua Yang dated April 1, 1997.
10.15* Tenancy Agreement for Dong Sand Factory dated December 22, 1995.
10.16* Tenancy Agreement of Dormitory between Goo Yung Economics Development Co.
and Hua Yang dated August 1997.
10.17 Management Agreement between the Company and Karl K. W. Chan dated
January 31, 1998.
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen & Co., independent auditors
23.2 Consent of Robert W.H. Wang & Co. (included in Exhibit 5.1)
23.3 Consent of Cooley Godward LLP
23.4* Consent of Guangzhou Law Office (included in Exhibit 8.2)
23.5** Consent of Gordon L.M. Seow
23.6** Consent of Karl K.W. Chan
23.7** Consent of Victor J. H. P. Yang
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
F-1 (File No. 333-17973).
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-8 (File No. 333-7786).
* To be filed by amendment.
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 130
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement at the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To provide the Underwriter at the closing specified in the underwriting
agreement, ADRs in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies it has reasonable grounds to believe that it meets all of the
requirements for filing Form F-1 and has caused this Amendment No. 1 to its
Registration Statement on Form F-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hong Kong, on February 17, 1998.
ZINDART LIMITED
By: /s/ GEORGE K.D. SUN
--------------------------------------
George K.D. Sun
Chief Executive Officer
II-5
<PAGE> 132
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Feather Fok and George K.D. Sun, and each
of them, such individual's true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for such individuals and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any registration statement related to the offering contemplated by this
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
as fully and to intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ GEORGE K.D. SUN Chief Executive Officer Date: February 17, 1998
- ---------------------------------------- and Director
George K.D. Sun
/s/ FEATHER S.Y. FOK Chief Operating Officer, Date: February 17, 1998
- ---------------------------------------- Chief Financial Officer
Feather S.Y. Fok and Director (Principal
Financial Officer)
/s/ VICKIE W.K. SO Financial Controller Date: February 17, 1998
- ---------------------------------------- (Principal Accounting
Vickie W.K. So Officer)
/s/ ROBERT A. THELEEN Chairman of the Board Date: February 17, 1998
- ----------------------------------------
Robert A. Theleen
/s/ ALEXANDER M.K. NGAN Director Date: February 17, 1998
- ----------------------------------------
Alexander M.K. Ngan
/s/ GEORGE VOLANAKIS Director Date: February 17, 1998
- ----------------------------------------
George Volanakis
/s/ JAMES E. GILLERAN Director Date: February 17, 1998
- ----------------------------------------
James E. Gilleran
/s/ LEO PAUL KOULOS Director Date: February 17, 1998
- ----------------------------------------
Leo Paul Koulos
/s/ STANLEY WANG Director Date: February 17, 1998
- ----------------------------------------
Stanley Wang
/s/ BANK OF NEW YORK Authorized U.S. Date: February 17, 1998
- ---------------------------------------- Representative
Bank of New York
</TABLE>
II-6
<PAGE> 133
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
PAGE
------------
<C> <S> <C>
1.1* Form of Underwriting Agreement among Zindart Limited, Van
Kasper & Company and Gerard Klauer Mattison & Co., Inc.
2.1 Exchange Agreement among Zindart Limited, Hua Yang Holdings
Co., Ltd., Hua Yang Printing Holdings Co., Limited, the
shareholders of Hua Yang Holdings Co., Limited and certain
beneficial owners of such shareholders
3.1(1) Amended and Restated Memorandum of Association of the Company
3.2* Amended and Restated Articles of Association of the Company
4.1(1) Deposit Agreement between Zindart Limited and The Bank of New
York
4.2(2) 1997 Equity Incentive Plan of the Company.
5.1 Opinion of Robert W.H. Wang & Co., Hong Kong counsel to the
Company as to certain legal matters with respect to the
legality of the Shares
8.1 Opinion of Cooley Godward LLP, as to certain tax matters in the
U. S.
8.2* Opinion of Guangzhou Law Office, the PRC counsel to the
Company, as to certain tax matters in the PRC
8.3 Opinion of Robert W.H. Wang & Co., Hong Kong counsel to the
Company, as to certain tax matters in Hong Kong (included in
Exhibit 5.1)
10.1(a)(1) Sino-Foreign Co-Operation Contract, Zindart Toys (Dongguan)
Company Limited, between Dongguan Hengli Trading General
Company and Zindart Industrial Company Limited, dated September
8, 1994
10.1(b)(1) Sino-Foreign Co-Operation, Zindart Toys (Dongguan) Company
Limited, Supplemental Contract, between Dongguan Hengli Trading
General Company and Zindart Industrial Company Limited, dated
December 5, 1995
10.1(c)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1993) No. 49
10.1(d)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1994) No. 664
10.1(e)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1994) No. 665
10.1(f)(1) Land Use Certificate for State-Owned Land, Dongguan Government
State-Owned (1994) No. 666
10.2 Processing Agreement between Zindart Limited and Dongguan
Hengli Industry Development Company dated August 18, 1997.
10.3 Sino-Foreign Cooperation Contract between Shenzhen City Boan
District Xixian Town Gushu Economic Development Company Limited
and Hua Yang Printing Holdings Co. Limited dated 28th May,
1995.
10.4 Standard Chartered Bank, Banking Facilities, dated December 24,
1996 and May 12, 1997.
10.5 Hong Kong Bank, Banking Facilities, dated May 22, 1996
</TABLE>
<PAGE> 134
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
PAGE
------------
<C> <S> <C>
10.6(1) Agreement Regarding Future Share Distributions, dated January
31, 1997, between Van Kasper & Company, Zindart Limited and
Zindart Pte. Limited.
10.7 Form of First Amendment to Agreement Regarding Future Share
Distributions among Van Kasper & Company, Zindart Limited, ZIC
Holdings Limited, Ertl (Hong Kong) Limited and Longvest
Management Limited
10.8** Form of Service Agreement
10.9** Form of Sales Restriction Agreement
10.10 Revolving Credit Facility Agreement among Zindart Limited,
Credit Suisse First Boston Hong Kong Branch, Credit Suisse
First Boston Singapore Branch, Credit Suisse First Boston
Labuan Branch and Standard Chartered Bank dated as of February
9, 1998.
10.11* Termination Agreement regarding the Zhong Xin factory between
the Company and the Guangzhou Light Industry Holdings Toys
Import and Export Company effective December 31, 1997.
10.12* Termination Agreement regarding the Xin Xing factory between
the Company and the Guangzhou Xinjiap Huanngpu Economic
Development Company dated May 7, 1997.
10.13* Agreement of Utilization of Factory, Warehouse and Dormitory
dated January 24, 1995.
10.14* Tenancy Agreement for the Nan Yang factory between Bo An Area
Xi Heung Zhen Goo Yung Cheun Committee and Hua Yang dated April
1, 1997.
10.15* Tenancy Agreement for Dong Sand Factory dated December 22,
1995.
10.16* Tenancy Agreement of Dormitory between Goo Yung Economics
Development Co. and Hua Yang dated August 1997.
10.17 Management Agreement between the Company and Karl K. W. Chan
dated January 31, 1998.
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen & Co., independent auditors
23.2 Consent of Robert W.H. Wang & Co. (included in Exhibit 5.1)
23.3 Consent of Cooley Godward LLP
23.4* Consent of Guangzhou Law Office (included in Exhibit 8.2)
23.5** Consent of Gordon L.M. Seow
23.6** Consent of Karl K.W. Chan
23.7** Consent of Victor J. H. P. Yang
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
F-1 (File No. 333-17973).
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-8 (File No. 333-7786).
* To be filed by amendment.
** Previously filed.
<PAGE> 1
Exhibit 2.1
EXCHANGE AGREEMENT
among
ZINDART LIMITED,
HUA YANG HOLDINGS CO. LIMITED,
HUA YANG PRINTING HOLDINGS CO. LIMITED,
THE SHAREHOLDERS OF HUA YANG HOLDINGS CO. LIMITED,
THE PRINCIPAL SHAREHOLDERS OF HYP HOLDINGS LIMITED
and
CHINAVEST MANAGEMENT LIMITED
_______________________________
Dated as of February 10, 1998
_______________________________
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. THE EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Exchange Price . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Restrictions On Transfer . . . . . . . . . . . . . . . . . . . 4
1.5 Conversion of Purchaser Stock . . . . . . . . . . . . . . . . 5
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSIDIARY, PARENT, THE
SELLING SHAREHOLDERS AND THE PRINCIPAL HYP SHAREHOLDERS . . . 5
2.1 Due Organization; No Subsidiaries; Etc. . . . . . . . . . . . 6
2.2 Articles of Association, Memorandum of Association and
Joint Venture Agreements; Records . . . . . . . . . . . . . . 6
2.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . 8
2.5 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . 10
2.8 Receivables; Major Customers . . . . . . . . . . . . . . . . . 10
2.9 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.10 Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . 11
2.11 Real Property . . . . . . . . . . . . . . . . . . . . . . . . 11
2.12 Proprietary Assets . . . . . . . . . . . . . . . . . . . . . . 11
2.13 Subsidiary Contracts . . . . . . . . . . . . . . . . . . . . . 12
2.14 Liabilities; Major Suppliers . . . . . . . . . . . . . . . . . 13
2.15 Compliance With Legal Requirements . . . . . . . . . . . . . . 13
2.16 Governmental Authorizations . . . . . . . . . . . . . . . . . 14
2.17 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.18 Employee and Labor Matters . . . . . . . . . . . . . . . . . . 15
2.19 Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . 16
2.20 Environmental Matters . . . . . . . . . . . . . . . . . . . . 18
2.21 Sale of Products; Performance of Services . . . . . . . . . . 18
2.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.23 Related Party Transactions . . . . . . . . . . . . . . . . . . 20
2.24 Certain Payments, Etc. . . . . . . . . . . . . . . . . . . . . 20
2.25 Proceedings; Orders . . . . . . . . . . . . . . . . . . . . . 20
2.26 Authority; Binding Nature of Agreements . . . . . . . . . . . 21
2.27 Non-Contravention; Consents . . . . . . . . . . . . . . . . . 22
2.28 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.29 Selling Shareholders and Principal HYP Shareholders . . . . . 23
2.30 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . 23
2.31 Chan Holdings and Chan Only Representations . . . . . . . . . 23
2.32 HYP and Principal HYP Shareholder Only Representations . . . . 24
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . 24
3.1 Valid Issuance of Purchaser Stock . . . . . . . . . . . . . . 24
3.2 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.3 Acquisition of Shares. . . . . . . . . . . . . . . . . . . . . 25
3.4 Authority; Binding Nature of Agreement. . . . . . . . . . . . 25
3.5 Securities Act. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4. PRE-CLOSING COVENANTS OF PARENT, SUBSIDIARY, THE SELLING
SHAREHOLDERS AND THE PRINCIPAL HYP SHAREHOLDERS . . . . . . . 25
4.1 Access and Investigation. . . . . . . . . . . . . . . . . . . 25
4.2 Operation of Business. . . . . . . . . . . . . . . . . . . . . 25
4.3 Filings and Consents. . . . . . . . . . . . . . . . . . . . . 27
4.4 Notification; Updates to Disclosure Schedule. . . . . . . . . 28
4.5 Payment of Indebtedness by Related Parties. . . . . . . . . . 28
4.6 No Negotiation. . . . . . . . . . . . . . . . . . . . . . . . 28
4.7 Best Efforts. . . . . . . . . . . . . . . . . . . . . . . . . 28
4.8 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 5. PRE-CLOSING COVENANTS OF PURCHASER . . . . . . . . . . . . . . 29
SECTION 6. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION TO CLOSE . . . 29
6.1 Satisfactory Completion of Pre-Acquisition Review. . . . . . . 29
6.2 Accuracy of Representations. . . . . . . . . . . . . . . . . . 29
6.3 Performance of Obligations. . . . . . . . . . . . . . . . . . 29
6.4 Approval of Purchaser's Board of Directors and
Shareholders; Consents . . . . . . . . . . . . . . . . . . . . 30
6.5 No Material Adverse Change. . . . . . . . . . . . . . . . . . 30
6.6 Additional Documents . . . . . . . . . . . . . . . . . . . . . 30
6.7 No Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 30
6.8 No Claim Regarding Stock Ownership or Sale Proceeds. . . . . . 30
6.9 No Prohibition. . . . . . . . . . . . . . . . . . . . . . . . 30
6.10 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.11 Shaw Management Agreement. . . . . . . . . . . . . . . . . . . 31
6.12 Chan Employment Agreement. . . . . . . . . . . . . . . . . . . 31
SECTION 7. CONDITIONS PRECEDENT TO SELLING SHAREHOLDERS' OBLIGATION
TO CLOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . 31
7.2 Purchaser's Performance. . . . . . . . . . . . . . . . . . . . 31
7.3 No Injunction. . . . . . . . . . . . . . . . . . . . . . . . . 31
7.4 No Material Adverse Change. . . . . . . . . . . . . . . . . . 31
</TABLE>
ii.
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 8. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.1 Termination Events. . . . . . . . . . . . . . . . . . . . . . 31
8.2 Termination Procedures. . . . . . . . . . . . . . . . . . . . 32
8.3 Effect of Termination. . . . . . . . . . . . . . . . . . . . . 32
SECTION 9. INDEMNIFICATION, ETC. . . . . . . . . . . . . . . . . . . . . 32
9.1 Survival of Representations and Covenants. . . . . . . . . . . 32
9.2 Indemnification by Selling Shareholders and Principal
HYP Shareholders . . . . . . . . . . . . . . . . . . . . . . . 33
9.3 Threshold. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.4 Maximum Liability . . . . . . . . . . . . . . . . . . . . . . 34
9.5 Right to Require Cure of Breach. . . . . . . . . . . . . . . . 35
9.6 No Contribution. . . . . . . . . . . . . . . . . . . . . . . . 35
9.7 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.8 Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.9 Nonexclusivity of Indemnification Remedies. . . . . . . . . . 35
9.10 Defense of Third Party Claims. . . . . . . . . . . . . . . . . 35
9.11 Exercise of Remedies by Indemnitees Other Than Purchaser. . . 36
SECTION 10. REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . 36
10.1 Demand Registration . . . . . . . . . . . . . . . . . . . . . 36
10.2 Piggyback Registrations . . . . . . . . . . . . . . . . . . . 38
10.3 Expenses Of Registration . . . . . . . . . . . . . . . . . . . 39
10.4 Obligations Of Purchaser . . . . . . . . . . . . . . . . . . . 39
10.5 Termination Of Registration Rights . . . . . . . . . . . . . . 40
10.6 Delay Of Registration; Furnishing Information . . . . . . . . 40
10.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 40
10.8 Assignment Of Registration Rights . . . . . . . . . . . . . . 42
10.9 Amendment Of Registration Rights . . . . . . . . . . . . . . . 42
10.10 Limitation On Subsequent Registration Rights . . . . . . . . . 42
10.11 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . 43
10.12 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 11. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . 43
11.1 Noncompetition; Confidentiality . . . . . . . . . . . . . . . 43
11.2 Joint and Several Liability. . . . . . . . . . . . . . . . . . 45
11.3 Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.4 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 46
11.5 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . 46
11.6 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . 47
11.7 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.8 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
</TABLE>
iii.
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
11.9 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
11.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 48
11.11 Governing Law; Venue. . . . . . . . . . . . . . . . . . . . . 48
11.12 Successors and Assigns. . . . . . . . . . . . . . . . . . . . 49
11.13 Remedies Cumulative; Specific Performance. . . . . . . . . . . 49
11.14 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.15 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.16 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 50
11.17 Parties in Interest. . . . . . . . . . . . . . . . . . . . . . 50
11.18 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . 50
11.19 Dollars. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.20 Post-Closing Covenant. . . . . . . . . . . . . . . . . . . . . 50
11.21 Representations. . . . . . . . . . . . . . . . . . . . . . . . 50
11.22 Construction. . . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
EXHIBITS
EXHIBIT A Definitions
EXHIBIT B Escrow Agreement
EXHIBIT C Form of General Release
iv.
<PAGE> 6
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "AGREEMENT") is entered into as of
February 10, 1998 by and among ZINDART LIMITED, a Hong Kong corporation
("PURCHASER"), HUA YANG HOLDINGS CO. LIMITED, a Cayman Islands corporation
("PARENT"), HUA YANG PRINTING HOLDINGS CO. LIMITED, a Hong Kong corporation
("SUBSIDIARY"), HYP HOLDINGS LIMITED, a Cayman Islands corporation ("HYP"),
KARL CHAN (BVI) HOLDINGS LIMITED, a British Virgin Islands corporation ("CHAN
HOLDINGS"), KARL CHAN, an individual ("CHAN") (HYP, Chan Holdings and Chan are
sometimes hereinafter collectively referred to as the "SELLING SHAREHOLDERS"),
and CHINAVEST IV, L.P., a Delaware limited partnership, CHINAVEST IV-A, L.P., a
Delaware limited partnership, CHINAVEST IV-B, L.P., a Bermuda limited
partnership, ADVENT GLOBAL GECC LIMITED PARTNERSHIP, a Delaware limited
partnership, ADVENT INTERNATIONAL INVESTORS II LIMITED PARTNERSHIP, a Delaware
limited partnership, GLOBAL PRIVATE EQUITY II - LIMITED PARTNERSHIP, a Delaware
limited partnership, GLOBAL PRIVATE EQUITY II - PGGM LIMITED PARTNERSHIP, a
Delaware limited partnership, ASIA/PACIFIC SPECIAL SITUATIONS FUND LIMITED
PARTNERSHIP, a Delaware limited partnership, and ADVENT ASIA/PACIFIC FUND
LIMITED PARTNERSHIP, a Bermuda limited partnership (the ChinaVest and Advent
entities are sometimes hereinafter collectively referred to as the "PRINCIPAL
HYP SHAREHOLDERS"), and CHINAVEST MANAGEMENT LIMITED, a Bermuda corporation
(including its successors, the "AGENT"). Certain capitalized terms used in
this Agreement are defined in EXHIBIT A attached hereto.
RECITALS
A. Parent and one additional shareholder hold all of Subsidiary's
issued and outstanding ordinary shares, with a par value of HK$1.00 per share
(the "SUBSIDIARY ORDINARY SHARES").
B. HYP owns beneficially and of record 15,000,000 of Parent's
ordinary shares, with a par value of HK$0.10 per share (the "PARENT ORDINARY
SHARES"), and 181,012,500 of Parent's preferred shares, with a par value of
HK$0.01 per share (the "PARENT PREFERRED SHARES"); Chan Holdings owns
beneficially and of record 5,000,000 Parent Ordinary Shares and 60,337,500
Parent Preferred Shares; and Chan owns beneficially and of record 176,471
Parent Ordinary Shares and no Parent Preferred Shares (the Parent Ordinary
Shares and the Parent Preferred Shares being collectively referred to as the
"PARENT SHARES"), which constitute all of the outstanding shares of capital
stock of Parent.
C. Prior to the Closing (as defined below), Parent will redeem
all or a portion of the Parent Preferred Shares from its shareholders holding
Parent Preferred Shares on a pro rata basis for an aggregate of $5,000,000.
D. The Principal HYP Shareholders together own 96.5% of the
outstanding shares of capital stock of HYP.
E. The Selling Shareholders desire to effect an exchange of all
the Parent Shares for the consideration, and on the terms and subject to the
conditions, set forth in this Agreement.
AGREEMENT
The parties, intending to be legally bound, hereby agree as follows:
SECTION 1. THE EXCHANGE.
1.
<PAGE> 7
1.1 GENERAL. At the Closing, on the terms and subject to the
conditions of this Agreement, (a) the Selling Shareholders shall sell, assign,
transfer and deliver the Parent Shares to Purchaser in exchange for the
consideration set forth in Section 1.2, and (b) Purchaser shall deliver the
consideration described in Section 1.2 to the Selling Shareholders in exchange
for the Parent Shares and the performance of the other conditions described
herein.
1.2 EXCHANGE PRICE. As consideration for the Parent Shares and
the execution and delivery of the documents described in Section 1.3, Purchaser
shall pay to the Selling Shareholders the following (collectively, the
"CONSIDERATION"): (i) $35,000,000 in cash; and (ii) up to One Million
(1,000,000) of the ordinary shares of Purchaser (the "PURCHASER STOCK"). The
Consideration shall be paid to the Selling Shareholders as follows:
(a) At the Closing, Purchaser shall pay to the Agent (as
defined in Section 11.3 hereof) $35,000,000 in cash for distribution, after
payment of certain expenses and items agreed to among the Selling Shareholders,
to the Selling Shareholders in the amount of each Selling Shareholder's Pro
Rata Share.
(b) At the Closing, pursuant to the terms of the Escrow
Agreement in the form of EXHIBIT B attached hereto (the "ESCROW AGREEMENT"),
Purchaser shall reserve for the ultimate benefit of the Selling Shareholders a
total of Six Hundred Sixty-Six Thousand Six Hundred Sixty-Seven (666,667)
shares of Purchaser Stock (the "ESCROW SHARES") by depositing with the Escrow
Agent (as defined therein) completed but unexecuted share certificates in the
name of The Bank of New York (as depositary) to hold the same for each Selling
Shareholder in the amounts designated in writing by the Selling Shareholders.
As provided in the Escrow Agreement, the Escrow Shares (subject to adjustment
in the event of any stock split, subdivision or recapitalization of the
Purchaser Stock) shall be held by the Escrow Agent for one hundred eighty (180)
days following the Closing Date as security for the indemnification provisions
of Section 9 hereof.
(c) Up to a total of Three Hundred Thirty-Three Thousand
Three Hundred Thirty-Three (333,333) shares of Purchaser Stock (subject to
adjustment in the event of any stock split, subdivision or recapitalization of
the Purchaser Stock), in an amount for each Selling Shareholder of such Selling
Shareholder's Pro Rata Share (the "EARN-OUT SHARES"), shall be issued by
Purchaser and delivered to the Selling Shareholders only in the event that the
Subsidiary EBITDA during the Earn-Out Period equals or exceeds the benchmarks
indicated below:
<TABLE>
<CAPTION>
SUBSIDIARY EBITDA PERCENTAGE OF EARN-
DURING EARN-OUT PERIOD OUT SHARES TO BE ISSUED
---------------------- -----------------------
<S> <C>
Equal to $12,480,000 0%
Greater than $12,480,000 (100% x (Subsidiary EBITDA - $12,480,000))
but less than $15,600,000 / $3,120,000, rounded to the nearest
whole percentage number
Equal to or greater than
$15,600,000 100%
</TABLE>
The Subsidiary EBITDA shall be determined by an audit (the "AUDIT") acceptable
to Purchaser of the Earn-Out Period conducted by Arthur Andersen & Co., at
Purchaser's expense, within ninety (90) days after the end of the earn-Out
Period. In the event Subsidiary effects a fundamental change in its business
following the Closing, the Subsidiary EBITDA benchmarks set forth above shall
be subject to adjustment pursuant to mechanisms to be mutually agreed upon by
Purchaser and the Agent or some other designated representative
2.
<PAGE> 8
of the Selling Shareholders. A fundamental change would include, but not be
limited to, the relocation of Subsidiary's manufacturing facilities or the
construction of new manufacturing facilities. In the event that the Subsidiary
EBITDA as determined by the Audit meets the threshold amounts shown above, all
or a portion of the Earn-Out Shares shall be delivered to the Selling
Shareholders as soon as practicable, but in no event later than forty-five (45)
days, after the completion of the Audit.
(d) Except as provided in Section 10.3 hereof, any taxes
applicable to, imposed upon or arising out of the exchange of the Parent Shares
to Purchaser and the other transactions contemplated by this Agreement,
including but not limited to any income, transfer, sales, use, gross receipts
or documentary stamp taxes, shall be split evenly by the Selling Shareholders,
on the one hand, and Purchaser, on the other hand.
1.3 CLOSING.
(a) The closing of the transactions contemplated hereby
(the "CLOSING") shall take place at the offices of Cooley Godward LLP, One
Maritime Plaza, 20th Floor, San Francisco, California at 5:00 p.m. (California
time) on February 10, 1998 (or at such other place or time as Purchaser and the
Selling Shareholders may designate). For purposes of this Agreement,
"SCHEDULED CLOSING TIME" shall mean the time and date as of which the Closing
is required to take place pursuant to this Section 1.3(a) and "CLOSING DATE"
shall mean the time and date as of which the Closing actually takes place.
(b) At the Closing:
(1) each Selling Shareholder shall deliver to
Purchaser share transfer forms in respect of the Parent Shares being exchanged
by such Selling Shareholder, duly endorsed (or accompanied by duly executed
stock powers);
(2) each Selling Shareholder and Principal HYP
Shareholder shall execute and deliver to Purchaser, Subsidiary and Parent a
General Release in the form of EXHIBIT C attached hereto;
(3) each Selling Shareholder and Principal HYP
Shareholder shall execute and deliver to Purchaser, Subsidiary and Parent a
certificate (the "CLOSING CERTIFICATE") setting forth its representation and
warranty that (A) each representation and warranty made by it in this Agreement
was accurate in all respects as of the date of this Agreement, (B) except as
expressly set forth in the Closing Certificate, each representation and
warranty made by it in this Agreement is accurate in all respects as of the
Closing Date as if made on the Closing Date, (C) each covenant and obligation
that it is required to have complied with or performed pursuant to this
Agreement at or prior to the Closing has been duly complied with and performed
in all respects, and (D) except as expressly set forth in the Closing
Certificate, each condition set forth in Sections 6.4(c), 6.5, 6.7 and 6.8 has
been satisfied in all respects; and
(4) all persons designated in writing by
Purchaser prior to the Closing shall resign from their positions as directors
and officers of Subsidiary and Parent.
1.4 RESTRICTIONS ON TRANSFER.
(a) RESTRICTIONS ON HYP AND PRINCIPAL HYP SHAREHOLDERS.
(1) Each of HYP and the Principal HYP
Shareholders understands and acknowledges that the Purchaser Stock (or American
Depositary Shares) to be delivered to it has not been registered under the
Securities Act and may not be offered or sold unless such securities are
registered under the Securities Act or an exemption from the registration
requirements is available.
3.
<PAGE> 9
(2) Each certificate representing shares of
Purchaser Stock delivered to HYP or the Principal HYP Shareholders shall
(unless otherwise permitted by the provisions of this Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws or as
provided elsewhere in this Agreement):
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE
ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED."
(3) Notwithstanding the foregoing, each of HYP
and the Principal HYP Shareholders agrees and acknowledges that any securities
held from time to time by "affiliates" (as that term is used in the Securities
Act) shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE HELD BY A
PERSON WHO MAY BE DEEMED TO BE AN AFFILIATE OF THE ISSUER FOR
PURPOSES OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED."
(4) Except as provided in Section 1.5 of the
Escrow Agreement, neither HYP nor any of the Principal HYP Shareholders shall
convey their Purchaser Stock or any interest therein until the date such
Purchaser Stock is issued and, if applicable, released from escrow.
(b) RESTRICTIONS ON CHAN HOLDINGS AND CHAN.
(1) Each of Chan Holdings and Chan understands
and acknowledges that the Purchaser Stock (or American Depositary Shares) to be
delivered to it has not been registered under the Securities Act and may not be
offered or sold in the United States or to U.S. persons or for the account or
benefit of a U.S. person unless such securities are registered under the
Securities Act, or an exemption from the registration requirements is
available.
(2) If requested by Purchaser, each certificate
representing shares of Purchaser Stock delivered to Chan Holdings or Chan shall
(unless otherwise permitted by the provisions of this Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend provided elsewhere in this Agreement) prior to release
from escrow:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR
FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS UNTIL 40 DAYS
AFTER THE DATE OF ORIGINAL ISSUANCE OF THE SECURITIES, EXCEPT
IN ACCORDANCE WITH REGULATION S PROMULGATED UNDER THE ACT.
TERMS USED ABOVE HAVE THE MEANINGS GIVEN TO THEM BY REGULATION
S."
(3) Notwithstanding the foregoing, each of Chan
Holdings and Chan agrees and acknowledges that any securities held from time to
time by "affiliates" (as that term is used in the Securities Act) shall bear
the following legend:
4.
<PAGE> 10
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE HELD BY A
PERSON WHO MAY BE DEEMED TO BE AN AFFILIATE OF THE ISSUER FOR
PURPOSES OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED."
(4) Neither Chan Holdings nor Chan shall convey
their Purchaser Stock or any interest therein during a period of forty (40)
days from, with respect to the Escrow Shares, the Closing Date or, with respect
to the Earn-Out Shares, if applicable, the date the Earn-Out Shares are issued.
(5) In the event that the provisions of
Regulation S are amended or any successor provision is adopted, the Earn- Out
Shares shall be subject to the restriction and legends contained in Section
1.4(a).
1.5 CONVERSION OF PURCHASER STOCK. If Purchaser's American
Depositary Shares ("AMERICAN DEPOSITARY SHARES"), are publicly traded, then
after the issuance and delivery of the Earn-Out Shares to the Selling
Shareholders, if applicable, or at any time after the release of the Escrow
Shares and delivery of such Escrow Shares to the Selling Shareholders pursuant
to the terms of the Escrow Agreement, each share of Earn- Out Shares or Escrow
Shares, as applicable, shall be convertible at any time, at the option of the
Holder thereof, into American Depositary Shares, subject to compliance with
applicable law and the terms and provisions of the Depositary Agreement of
Purchaser then in effect. Before any Holder shall be entitled to convert the
same into American Depositary Shares, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of Purchaser, its
depositary and any transfer agent for the Purchaser Stock, and shall give
written notice to Purchaser at such office that he elects to convert the same
and shall state therein the name or names in which he wishes the certificate(s)
for American Depositary Shares to be issued. Purchaser shall, as soon as
practicable thereafter, issue and deliver to such Holder a certificate(s) for
the number of American Depositary Shares to which he shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of surrender of the shares of Purchaser
Stock to be converted, and the person or persons entitled to receive the
American Depositary Shares issuable upon such conversion shall be treated for
all purposes as the record Holder or Holders of such American Depositary Shares
on such date.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSIDIARY, PARENT, THE SELLING
SHAREHOLDERS AND THE PRINCIPAL HYP SHAREHOLDERS.
Each of Subsidiary, Parent, the Selling Shareholders and the Principal
HYP Shareholders jointly and severally (except with respect to the
representations contained in Section 2.31 hereof which is being made solely by
the Chan and Chan Holdings and except with respect to the representations
contained in Section 2.32 hereof which is being made solely by HYP and the
Principal HYP Shareholders) represents and warrants to Purchaser that, except
as disclosed or otherwise referred to in the Disclosure Schedule or in any of
the documents identified in the Disclosure Schedule and provided to Purchaser
or its counsel, or as set forth in the Financial Statements or the notes to the
Financial Statements, the following statements are true and accurate:
2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC.
(a) Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of Hong Kong. Parent is a
corporation duly organized, validly existing and in good standing under the
laws of the Cayman Islands. Each of the Joint Ventures is a contractual joint
venture duly organized, validly existing and in good standing under the laws of
the PRC. Each of Subsidiary and Parent and the Joint Ventures (collectively,
the "COMPANIES") has all necessary power and authority: (1) to conduct its
business
5.
<PAGE> 11
in the manner in which its business is currently being conducted and in the
manner in which its business is proposed to be conducted; (2) to own and use
its assets in the manner in which its assets are currently owned and used and
in the manner in which its assets are proposed to be owned and used; and (3) to
perform its obligations under all Contracts.
(b) None of the Companies has ever conducted any business
under or otherwise used, for any purpose or in any jurisdiction, any fictitious
name, assumed name, trade name or other name, other than the names "Hua Yang
Printing Holdings Co. Limited," "Hua Yang Holdings Co. Limited," "Shenzhen
Huaxuan Printing Product Co., Ltd." and "Guangzhou Jin Yi Advertising Company
Limited."
(c) None of the Companies is or has ever been required to
be qualified, authorized, registered or licensed to do business as a foreign
corporation or entity in any jurisdiction.
(d) Part 2.1 of the Disclosure Schedule accurately sets
forth, as to each of the Companies (if applicable), (1) the names of the
members of the board of directors, (2) the names of the members of each
committee of the board of directors and (3) the names and titles of the
executive officers.
(e) None of the Companies nor any of their respective
shareholders or equityholders has ever approved, or commenced any proceeding or
made any election contemplating, the dissolution or liquidation of the
Companies or the winding up or cessation of the business or affairs of the
Companies.
(f) None of the Companies has any subsidiaries (except
that Subsidiary is a wholly-owned subsidiary of Parent and other than the Joint
Ventures), and none of the Companies has ever owned, beneficially or otherwise,
any shares or other securities of, or any direct or indirect ownership interest
of any nature in, any Entity.
2.2 ARTICLES OF ASSOCIATION, MEMORANDUM OF ASSOCIATION AND JOINT VENTURE
AGREEMENTS; RECORDS.
(a) Each of the Companies has delivered to Purchaser
accurate and complete copies of (as appropriate): (1) its articles of
association, memorandum of association and joint venture agreements, including
all amendments thereto; (2) its stock or equity records; and (3) the minutes
and other records of the meetings and other proceedings (including any actions
taken by written consent or otherwise without a meeting) of its shareholders,
equityholders, its board of directors or governing board and all committees
thereof. There have been no meetings or other proceedings of the shareholders,
the board of directors or governing board or any committee thereof of the
Companies that are not fully reflected in such minutes or other records.
(b) To the best of the Knowledge of the Companies, the
Selling Shareholders and the Principal HYP Shareholders, there has not been any
violation of any of the provisions of, as to each of the Companies, (1) the
articles of association, memorandum of association or joint venture agreements
or (2) any resolution adopted by its shareholders or equityholders, board of
directors or governing board or any committee thereof; and no event has
occurred, and no condition or circumstance exists, that might (with or without
notice or lapse of time) constitute or result directly or indirectly in such a
violation.
(c) The books of account, stock records, minute books and
other records of each of the Companies are accurate, up-to-date and complete,
and have been maintained in accordance with sound and prudent business
practices in Hong Kong, the Cayman Islands and the PRC. All of the records of
the Companies are in the actual possession and direct control of Subsidiary,
Parent or the Joint Ventures. Each of the Companies has at all times had in
place an adequate and appropriate system of internal controls that is
6.
<PAGE> 12
at least as comprehensive and effective as the systems of internal controls
customarily maintained by Comparable Entities.
2.3 CAPITALIZATION.
(a) Subsidiary's authorized capital stock consists of
10,000 Subsidiary Ordinary Shares, of which 1,000 shares are issued and
outstanding. Parent holds 999 of the issued and outstanding Subsidiary
Ordinary Shares and Dennis Smith holds 1 of the issued and outstanding
Subsidiary Ordinary Shares. Parent's authorized capital stock consists of (a)
30,000,000 Parent Ordinary Shares, of which 20,176,471 shares (constituting all
of the Parent Ordinary Shares) are issued and outstanding, and (b)
3,000,000,000 Parent Preferred Shares, of which 241,350,000 shares
(constituting all of the Parent Preferred Shares) are issued and outstanding.
(b) The Selling Shareholders have, and Purchaser shall
acquire at the Closing, good and valid title to the Parent Shares free and
clear of any Encumbrances. HYP owns beneficially and of record 15,000,000
Parent Ordinary Shares, and 181,012,500 Parent Preferred Shares; Chan Holdings
owns beneficially and of record 5,000,000 Parent Ordinary Shares and 60,337,500
Parent Preferred Shares; and Chan owns beneficially and of record 176,471
Parent Ordinary Shares and no Parent Preferred Shares, which constitute all of
the outstanding shares of capital stock of Parent. Upon the consummation of
the transactions contemplated by this Agreement, Purchaser shall have acquired
all of the outstanding shares of capital stock of Parent.
(c) Subsidiary holds 100% of the issued and outstanding
registered capital of Shenzhen Huaxuan Printing Product Co., Ltd. Parent,
Subsidiary and Shenzhen Huaxuan Printing Product Co., Ltd. collectively hold
90% of the issued and outstanding registered capital of Guangzhou Jin Yi
Advertising Company Limited.
(d) All of the Parent Shares and the outstanding shares
of capital stock of Subsidiary (1) have been duly authorized and validly
issued, (2) are fully paid-up and (3) have been issued in full compliance with
all applicable securities laws and other applicable Legal Requirements. The
Selling Shareholders have delivered to Purchaser accurate and complete share
transfer forms evidencing the Parent Ordinary Shares.
(e) There is no: (1) outstanding subscription, option,
call, warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of the Companies; (2)
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or other
securities of the Companies; (3) Subsidiary Contract under which the Companies
is or may become obligated to sell or otherwise issue any shares of its capital
stock or any other securities; or (4) condition or circumstance that may
directly or indirectly give rise to or provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled to acquire or
receive any shares of capital stock or other securities of the Companies.
(f) Except as set forth herein, none of the Companies has
ever repurchased, redeemed or otherwise reacquired any shares of capital stock
or other securities.
2.4 FINANCIAL STATEMENTS.
(a) Parent has delivered to Purchaser the following
financial statements and notes (collectively, the "FINANCIAL STATEMENTS"):
7.
<PAGE> 13
(1) the audited consolidated balance sheets of
Parent and its subsidiaries as of March 31, 1996 and 1997, and the related
audited consolidated statements of operations, consolidated statements of cash
flows and consolidated statements of changes in shareholders' equity of Parent
and its subsidiaries for the period from January 17, 1995 to March 31, 1995 and
for the years ended March 31, 1996 and 1997, together with the notes thereto
and the unqualified report and certification of Arthur Andersen & Co. relating
thereto;
(2) the unaudited consolidated balance sheets of
Parent and its subsidiaries as of December 31, 1997 (the "UNAUDITED INTERIM
BALANCE SHEET"), and the related unaudited consolidated statements of
operations, consolidated statements of cash flows and consolidated statements
of changes in shareholders' equity of Parent and its subsidiaries for the six
months ended December 31, 1997, together with the notes thereto.
(b) All of the Financial Statements are accurate and
complete in all material respects, and the dollar amount of each line item
included in the Financial Statements is accurate in all material respects. The
financial statements and notes referred to in Section 2.4(a)(1) present fairly
the consolidated financial position of the Companies and the consolidated
results of operations, changes in shareholders' equity and cash flows of the
Companies for the periods presented. The financial statements and notes
referred to in Section 2.4(a)(2) present fairly the financial position of the
Companies as of the date thereof and the results of operations, changes in
shareholders' equity and cash flows of the Companies for the period covered
thereby, subject to normally recurring year-end adjustments, which adjustments
will not be material either individually or in the aggregate. The Financial
Statements have been prepared in accordance with GAAP, applied on a consistent
basis throughout the periods covered.
2.5 ABSENCE OF CHANGES. Except as set forth in Part 2.5 of the
Disclosure Schedule, since March 31, 1997:
(a) there has not been any material adverse change in the
business, condition, assets, liabilities, operations, financial performance,
net income or prospects (or in any aspect or portion thereof) of the Companies,
and no event has occurred that might have an adverse effect on the business,
condition, assets, liabilities, operations, financial performance, net income
or prospects (or on any aspect or portion thereof) of the Companies;
(b) there has not been any loss, damage or destruction
to, or any interruption in the use of, any assets (whether or not covered by
insurance) of the Companies;
(c) none of the Companies has declared, accrued, set
aside or paid any dividend or made any other distribution in respect of any
shares of capital stock or equity (other than as provided in Section 4.2(i)
hereof);
(d) none of the Companies has sold or otherwise issued
any shares of capital stock or any other securities;
(e) none of the Companies has amended its articles of
association, memorandum of association or joint venture agreement or has
effected or been a party to any Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(f) none of the Companies has purchased or otherwise
acquired any material asset from any other Person, except for supplies acquired
by Subsidiary in the Ordinary Course of Business;
8.
<PAGE> 14
(g) none of the Companies has leased or licensed any
material asset from any other Person;
(h) none of the Companies has made any capital
expenditure outside the Ordinary Course of Business or in excess of $100,000
(individually);
(i) none of the Companies has sold or otherwise
transferred, or has leased or licensed, any asset to any other Person except
for products sold by each of Subsidiary or the Joint Ventures from its
inventory in the Ordinary Course of Business;
(j) none of the Companies has written off as
uncollectible, or established any extraordinary reserve with respect to, any
account receivable or other indebtedness;
(k) none of the Companies has pledged or hypothecated any
of its assets or otherwise permitted any of its assets to become subject to any
Encumbrance other than in the Ordinary Course of Business;
(l) none of the Companies has made any loan or advance to
any other Person;
(m) none of the Companies has (1) established or adopted
any Employee Benefit Plan, or (2) paid any bonus or made any profit-sharing or
similar payment to, or increased the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of its
directors, officers or employees;
(n) none of the Companies has entered into, and neither
the Companies nor any of the assets owned or used by either of them has become
bound by, any Contract that is not an Excluded Contract;
(o) no Subsidiary Contract has been amended or
terminated;
(p) none of the Companies has incurred, assumed or
otherwise become subject to any Liability, other than accounts payable (of the
type required to be reflected as current liabilities in the "liabilities"
column of a balance sheet prepared in accordance with GAAP) incurred by
Subsidiary in the Ordinary Course of Business;
(q) none of the Companies has discharged any Encumbrance
or discharged or paid any indebtedness or other Liability, except for accounts
payable that (1) are reflected as current liabilities in the "liabilities"
column of the Unaudited Interim Balance Sheet or have been incurred by
Subsidiary since September 30, 1997 in the Ordinary Course of Business and (2)
have been discharged or paid in the Ordinary Course of Business;
(r) none of the Companies has forgiven any debt or
otherwise released or waived any right or claim;
(s) none of the Companies has changed any of its methods
of accounting or accounting practices in any respect;
(t) none of the Companies has entered into any
transaction outside the Ordinary Course of Business or taken any other action
outside the Ordinary Course of Business; and
9.
<PAGE> 15
(u) none of the Companies has agreed, committed or
offered (in writing or otherwise), or has attempted, to take any of the actions
referred to in clauses (c) through (t) above.
2.6 TITLE TO ASSETS.
(a) Each of the Companies owns, and has good, valid and
marketable title to, all assets purported to be owned by it, including: (1)
all assets reflected on the Unaudited Interim Balance Sheet (except for
inventory sold by Subsidiary since September 30, 1997 in the Ordinary Course of
Business); (2) all assets acquired by Subsidiary since September 30, 1997
(except for inventory sold by Subsidiary since September 30, 1997 in the
Ordinary Course of Business); (3) all assets referred to in the Disclosure
Schedule and all of its rights under Subsidiary Contracts; and (4) all other
assets reflected in its books and records as being owned by it. Except as set
forth in Part 2.6 of the Disclosure Schedule, all of said assets are owned by
either Subsidiary or Parent, as the case may be, free and clear of any
Encumbrances.
(b) Part 2.6 of the Disclosure Schedule identifies all
material assets that are being leased or licensed to the Companies.
2.7 BANK ACCOUNTS. Part 2.7 of the Disclosure Schedule accurately
sets forth, with respect to each account maintained by or for the benefit of
the Companies at any bank or other financial institution: (a) the name and
location of the institution at which such account is maintained; (b) the name
in which such account is maintained and the account number of such account; (c)
a description of such account and the purpose for which such account is used;
(d) the current balance in such account; (e) the rate of interest being earned
on the funds in such account; and (f) the names of all individuals authorized
to draw on or make withdrawals from such account. There are no safe deposit
boxes or similar arrangements maintained by or for the benefit of the
Companies.
2.8 RECEIVABLES; MAJOR CUSTOMERS.
(a) Part 2.8 of the Disclosure Schedule provides an
accurate and complete breakdown and aging of all accounts receivable, notes
receivable and other receivables of each of the Companies as of September 30,
1997.
(b) Except as set forth in Part 2.8 of the Disclosure
Schedule, all existing accounts receivable of each of the Companies (including
those accounts receivable reflected on the Unaudited Interim Balance Sheet that
have not yet been collected and those accounts receivable that have arisen
since September 30, 1997 and have not yet been collected) represent valid
obligations of customers of Subsidiary arising from bona fide transactions
entered into in the Ordinary Course of Business.
(c) Part 2.8 of the Disclosure Schedule accurately
identifies, and provides an accurate and complete breakdown of the revenues
received from, each customer or other Person that accounted for more than ten
percent (10%) of the consolidated gross revenues of the Companies in any of the
last three completed fiscal years or in the six-month period ended September
30, 1997. None of the Companies has received any notice or other communication
(in writing or otherwise), and has not received any other information,
indicating that any customer or other Person may cease dealing with the
Companies or may otherwise reduce the volume of business transacted by such
Person with the Companies below historical levels.
2.9 INVENTORY. All of the Companies' existing inventory
(including all inventory that is reflected on the Unaudited Interim Balance
Sheet and that has not been disposed of by the Companies since September 30,
1997) (a) is of such quality and quantity as to be usable and saleable by
Subsidiary in the Ordinary Course of Business, (b) has been priced at the lower
of cost or market value using the "last-in, first-
10.
<PAGE> 16
out" method, and (c) is free of any defect or deficiency. The inventory levels
maintained by the Companies (x) are not excessive in light of the Companies'
normal operating requirements and (y) are adequate for the conduct of the
Companies' operations in the Ordinary Course of Business.
2.10 TANGIBLE ASSETS. Each tangible asset owned or leased by the
Companies (a) is structurally sound, free of defects and deficiencies and in
good condition and repair (ordinary wear and tear excepted), (b) complies in
all respects with, and is being operated and otherwise used in full compliance
with, all applicable Legal Requirements of which each of the Companies, the
Selling Shareholders and the Principal HYP Shareholders is aware and (c) is
adequate for the uses to which it is being put. Such assets are adequate for
the conduct of the Companies' business in the manner in which such business is
currently being conducted and in the manner in which such business is proposed
to be conducted.
2.11 REAL PROPERTY. None of the Companies owns any real property
or any interest in real property, except for the leaseholds created under the
real property leases identified in Part 2.11 of the Disclosure Schedule. The
Companies enjoy peaceful and undisturbed possession of such premises.
2.12 PROPRIETARY ASSETS.
(a) Except as set forth in Part 2.12 of the Disclosure
Schedule, there is no Proprietary Asset that is owned by or licensed to the
Companies or that is otherwise used or useful in connection with the Companies'
business.
(b) Each of the Companies has taken all measures and
precautions necessary to protect the confidentiality and value of each
Proprietary Asset identified or required to be identified in Part 2.12 of the
Disclosure Schedule.
(c) None of the Companies is infringing, or has at any
time infringed or received any notice or other communication (in writing or
otherwise) of any actual, alleged, possible or potential infringement of, any
Proprietary Asset owned or used by any other Person. To the best of the
Knowledge of the Companies, the Selling Shareholders and the Principal HYP
Shareholders, no other Person is infringing, and no Proprietary Asset owned or
used by any other Person infringes or conflicts with, any Proprietary Asset
owned or used by the Companies.
11.
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(d) The Proprietary Assets identified in Part 2.12 of the
Disclosure Schedule constitute all of the Proprietary Assets necessary to
enable the Companies to conduct their business in the manner in which their
business is currently being conducted and in the manner in which their business
is proposed to be conducted.
2.13 SUBSIDIARY CONTRACTS.
(a) Part 2.13 of the Disclosure Schedule identifies and
provides an accurate and complete description of each Subsidiary Contract,
except for any Excluded Contract. Subsidiary has delivered to Purchaser and
counsel to Purchaser accurate and complete copies of all Subsidiary Contracts
identified in Part 2.13 of the Disclosure Schedule, including all amendments
thereto.
(b) Each Subsidiary Contract is valid and in full force
and effect, and is enforceable by in accordance with its terms.
(c) Except as set forth in Part 2.13 of the Disclosure
Schedule:
(1) no Person has violated or breached, or
declared or committed any default under, any Subsidiary Contract;
(2) no event has occurred, and no circumstance or
condition exists, that might (with or without notice or lapse of time) (A)
result in a violation or breach of any of the provisions of any Subsidiary
Contract, (B) give any Person the right to declare a default or exercise any
remedy under any Subsidiary Contract, (C) give any Person the right to
accelerate the maturity or performance of any Subsidiary Contract or (D) give
any Person the right to cancel, terminate or modify any Subsidiary Contract;
(3) none of the Companies has received any notice
or other communication (in writing or otherwise) regarding any actual, alleged,
possible or potential violation or breach of, or default under, any Subsidiary
Contract; and
(4) none of the Companies has waived any of its
rights under any Subsidiary Contract.
(d) To the best of the Knowledge of the Companies, the
Selling Shareholders and the Principal HYP Shareholders, each Person against
which the Companies has or may acquire any rights under any Subsidiary Contract
is solvent and is able to satisfy all of such Person's current and future
monetary obligations and other obligations and Liabilities to the Companies.
(e) Except as set forth in Part 2.13 of the Disclosure
Schedule: (1) none of the Companies has ever guaranteed or otherwise agreed to
cause, insure or become liable for, and none of the Companies has ever pledged
any of its assets to secure, the performance or payment of any obligation or
other Liability of any other Person; and (2) none of the Companies has ever
been a party to or bound by (A) any joint venture agreement, partnership
agreement, profit-sharing agreement, cost-sharing agreement, loss-sharing
agreement or similar Contract, or (B) any Contract that creates or grants to
any Person, or provides for the creation or grant of, any stock appreciation
right, phantom stock right or similar right or interest.
(f) The performance of the Subsidiary Contracts will not
result in any violation of or failure to comply with any Legal Requirement.
12.
<PAGE> 18
(g) No Person is renegotiating, or has the right to
renegotiate, any amount paid or payable to the Companies under any Contract or
any other term or provision of any Contract.
(h) The Subsidiary Contracts identified in Part 2.13 of
the Disclosure Schedule and the Excluded Contracts collectively constitute all
of the Contracts necessary to enable the Companies to conduct their business in
the manner in which their business is currently being conducted and in the
manner in which their business is proposed to be conducted.
(i) Part 2.13 of the Disclosure Schedule identifies and
provides an accurate and complete description of each material proposed
Contract as to which any bid, offer, written proposal, term sheet or similar
document has been submitted or received by the Companies.
2.14 LIABILITIES; MAJOR SUPPLIERS.
(a) None of the Companies has any Liabilities, except
for: (1) liabilities identified as such in the "liabilities" column of the
Unaudited Interim Balance Sheet; (2) accounts payable (of the type required to
be reflected as current liabilities in the "liabilities" column of a balance
sheet prepared in accordance with GAAP) incurred by Subsidiary in the Ordinary
Course of Business since September 30, 1997; and (3) obligations under the
Subsidiary Contracts listed in Part 2.13 of the Disclosure Schedule and under
Excluded Contracts.
(b) None of the Companies has paid, and none of the
Companies is or will become liable for the payment of, any fees, costs or
expenses of the type referred to in Section 11.5(a).
2.15 COMPLIANCE WITH LEGAL REQUIREMENTS.
(a) Except as set forth in Part 2.15 of the Disclosure
Schedule:
(1) each of the Companies is in full compliance
with each Legal Requirement that is applicable to it or to the conduct of its
business or the ownership or use of any of its assets;
(2) each of the Companies has at all times been
in full compliance with each Legal Requirement that is or was applicable to it
or to the conduct of its business or the ownership or use of any of its assets;
(3) no event has occurred, and no condition or
circumstance exists, that might (with or without notice or lapse of time)
constitute or result directly or indirectly in a violation by the Companies of,
or a failure on the part of the Companies to comply with, any Legal
Requirement; and
(4) none of the Companies has received, at any
time, any written notice or other communication from any Governmental Body or
any other Person regarding (A) any actual, alleged, possible or potential
violation of, or failure to comply with, any Legal Requirement or (B) any
actual, alleged, possible or potential obligation on the part of any of the
Companies to undertake, or to bear all or any portion of the cost of, any
cleanup or any remedial, corrective or response action of any nature.
(b) The Companies have delivered to Purchaser an accurate
and complete copy of each report, study, survey or other document to which the
Companies has access that addresses or otherwise relates to the compliance of
the Companies with, or the applicability to the Companies of, any Legal
Requirement.
13.
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(c) To the best of the Knowledge of the Companies, the
Selling Shareholders and the Principal HYP Shareholders, no Governmental Body
has proposed or is considering any Legal Requirement that, if adopted or
otherwise put into effect, (1) may have a material adverse effect on the
business, condition, assets, liabilities, operations, financial performance,
net income or prospects of the Companies or on the ability of the Companies,
any of the Selling Shareholders or any of the Principal HYP Shareholders to
comply with or perform any covenant or obligation under any of the
Transactional Agreements or (2) may have the effect of preventing, delaying,
making illegal or otherwise interfering with any of the Transactions.
2.16 GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth in Part 2.16 of the Disclosure
Schedule:
(1) Each of the Companies and their respective
employees is and has at all times been in substantial compliance with all of
the terms and requirements of each Governmental Authorization identified or
required to be identified in Part 2.16 of the Disclosure Schedule;
(2) To the best of the Knowledge of the
Companies, the Selling Shareholders and the Principal HYP Shareholders, no
event has occurred, and no condition or circumstance exists, that might (with
or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or
requirement of any Governmental Authorization identified or required to be
identified in Part 2.16 of the Disclosure Schedule or (B) result directly or
indirectly in the revocation, withdrawal, suspension, cancellation, termination
or modification of any Governmental Authorization identified or required to be
identified in Part 2.16 of the Disclosure Schedule;
(3) none of the Companies has ever received, and,
to the best of the Knowledge of the Companies, the Selling Shareholders and the
Principal HYP Shareholders, no employee of the Companies has ever received, any
notice or other communication (in writing or otherwise) from any Governmental
Body or any other Person regarding (A) any actual, alleged, possible or
potential violation of or failure to comply with any term or requirement of any
Governmental Authorization or (B) any actual, proposed, possible or potential
revocation, withdrawal, suspension, cancellation, termination or modification
of any Governmental Authorization; and
(4) all applications required to have been filed
for the renewal of the Governmental Authorizations required to be identified in
Part 2.16 of the Disclosure Schedule have been duly filed on a timely basis
with the appropriate Governmental Bodies, and each other notice or filing
required to have been given or made with respect to such Governmental
Authorizations has been duly given or made on a timely basis with the
appropriate Governmental Body.
(b) The Governmental Authorizations identified in Part
2.16 of the Disclosure Schedule constitute all of the principal business
licenses currently in effect.
14.
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2.17 TAX MATTERS.
(a) Each Tax required to have been paid, or claimed by
any Governmental Body to be payable, by the Companies (whether pursuant to any
Tax Return or otherwise) has been duly paid in full or on a timely basis. Any
Tax required to have been withheld or collected by the Companies has been duly
withheld and collected and (to the extent required) each such Tax has been paid
to the appropriate Governmental Body.
(b) Part 2.17 of the Disclosure Schedule accurately
identifies all Tax Returns required to be filed by or on behalf of the
Companies with any Governmental Body with respect to any taxable period ending
on or before the Closing Date ("RETURNS"). All Returns (1) have been or shall
be filed when due and (2) have been, or shall be when filed, accurately and
completely prepared in full compliance with all applicable Legal Requirements.
All amounts shown on the Returns to be due on or before the Closing Date, and
all amounts otherwise payable in connection with the Returns on or before the
Closing Date, have been or shall be paid on or before the Closing Date. The
Companies have delivered to Purchaser accurate and complete copies of all
Returns filed since January 17, 1995.
(c) The Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the dates
thereof in accordance with GAAP. The Companies shall establish, in the
Ordinary Course of Business, reserves adequate for the payment of all Taxes for
the period from September 30, 1997 through the Closing Date, and shall disclose
the dollar amount of such reserves to Purchaser on or prior to the Closing
Date.
(d) Each Return relating to income Taxes that has been
filed with respect to any period ended on or prior to January 17, 1995 has
either (1) been examined and audited by all relevant Governmental Bodies or (2)
by virtue of the expiration of the limitation period under applicable Legal
Requirements, is no longer subject to examination or audit by any Governmental
Body. Part 2.17 of the Disclosure Schedule accurately identifies each
examination or audit of any Return that has been conducted. The Companies have
delivered to Purchaser accurate and complete copies of all audit reports and
similar documents to which the Companies have access relating to Returns.
Except as set forth in Part 2.17 of the Disclosure Schedule, no extension or
waiver of the limitation period applicable to any of the Returns has been
granted (by the Companies or any other Person), and no such extension or waiver
has been requested from the Companies.
(e) Except as set forth in Part 2.17 of the Disclosure
Schedule, no claim or other Proceeding is pending or has been threatened
against or with respect to the Companies in respect of any Tax. There are no
unsatisfied Liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses) with respect to
any notice of deficiency or similar document received by the Companies.
2.18 EMPLOYEE AND LABOR MATTERS.
(a) Part 2.18 of the Disclosure Schedule (1) contains a
true and correct list of all employees (including employees who are on a leave
of absence or on layoff status) to whom each of the Companies is paying
compensation, including bonuses and incentives, at an annual rate in excess of
$100,000 for services rendered or otherwise, and in the case of salaried
employees such list identifies the current annual rate of compensation for each
employee and in the case of hourly or commission employees identifies certain
reasonable ranges of rates and the number of employees falling within each such
range; (2) lists each Current Benefit Plan in which such employees participate
or are eligible to
15.
<PAGE> 21
participate; and (3) lists any Governmental Authorization that is held by any
such employee and that relates to or is useful in connection with the
Companies' business.
(b) Part 2.18 of the Disclosure Schedule accurately
identifies each former employee of any of the Companies who is receiving or is
scheduled to receive (or whose spouse or other dependent is receiving or is
scheduled to receive) any benefits (whether from the Companies or otherwise)
relating to such former employee's employment with the Companies. Part 2.18 of
the Disclosure Schedule accurately describes such benefits.
(c) Except as set forth in Part 2.18 of the Disclosure
Schedule, none of the Companies is a party to or bound by, has ever been a
party to or bound by, or is required to be bound by, any employment agreement
or any union contract, collective bargaining agreement or similar Contract.
(d) The employment of each employee of each of the
Companies is terminable by the employer at will. Subsidiary delivered to
Purchaser and counsel for Purchaser accurate and complete copies of all
employee manuals and handbooks, disclosure materials, policy statements and
other materials relating to the employment of the current and former employees
of each of the Companies and the Joint Ventures.
(e) To the best of the Knowledge of the Companies, the
Selling Shareholders and the Principal HYP Shareholders: (1) no key employee of
the Companies intends to terminate his or her employment with the Companies;
(2) no key employee of the Companies has received an offer to join a business
that may be competitive with the Companies' business; and (3) no employee of
the Companies is a party to or is bound by any confidentiality agreement,
noncompetition agreement or other Contract that may have an adverse effect on
(A) the performance by such employee of any of his duties or responsibilities
as an employee of Subsidiary or Parent, or (B) the business or operations of
the Companies.
(f) None of the Companies is or has ever been engaged in
any unfair labor practice of any nature. There has never been any slowdown,
work stoppage, labor dispute or union organizing activity, or any similar
activity or dispute, affecting the Companies or any of their respective
employees. There is not now pending, and no Person has threatened to commence,
any such slowdown, work stoppage, labor dispute or union organizing activity or
any similar activity or dispute. No event has occurred, and no condition or
circumstance exists, that might directly or indirectly give rise to or provide
a basis for the commencement of any such slowdown, work stoppage, labor dispute
or union organizing activity or any similar activity or dispute.
2.19 BENEFIT PLANS.
(a) Part 2.19 of the Disclosure Schedule identifies and
provides an accurate and complete description of each Current Benefit Plan and
each Past Benefit Plan. None of the Companies has ever established, adopted,
maintained, sponsored, contributed to, participated in or incurred any
Liability with respect to any Employee Benefit Plan, except for the Plans
identified in Part 2.19 of the Disclosure Schedule. None of the Companies has
ever provided or made available any fringe benefit, post-retirement or
post-employment benefit or other benefit of any nature to any of its employees
except as set forth in Part 2.19 of the Disclosure Schedule.
(b) Subsidiary has delivered to Purchaser, with respect
to each Company Plan:
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<PAGE> 22
(1) an accurate and complete copy of such Company
Plan and all amendments thereto (including any amendment that is scheduled to
take effect in the future);
(2) an accurate and complete copy of each
Contract (including any trust agreement, funding agreement, service provider
agreement, insurance agreement, investment management agreement or
recordkeeping agreement) relating to such Company Plan;
(3) an accurate and complete copy of any
description, summary, notification, report or other document that has been
furnished to any employee of any of the Companies with respect to such Company
Plan;
(4) an accurate and complete copy of any form,
report, registration statement or other document that has been filed with or
submitted to any Governmental Body with respect to such Company Plan; and
(5) an accurate and complete copy of any
determination letter, notice or other document that has been issued by, or that
has been received by any of the Companies from, any Governmental Body with
respect to such Company Plan.
(c) Each Company Plan has at all times been operated and
administered in full compliance with the provisions thereof. Each contribution
or other payment that is required to have been accrued or made under or with
respect to any Company Plan has been duly accrued and made on a timely basis.
(d) Each Company Plan has at all times complied and been
operated and administered in full compliance with all applicable Legal
Requirements. None of the Companies has ever incurred any Liability to any
Governmental Body with respect to any Company Plan, and no event has occurred,
and no condition or circumstance exists, that might (with or without notice or
lapse of time) give rise directly or indirectly to any such Liability. None of
the Companies, and no Person that is or was an administrator or fiduciary of
any Company Plan (or that acts or has acted as an agent of any of the Companies
or any such administrator or fiduciary), has engaged in any transaction or has
otherwise acted or failed to act in a manner that has subjected or may subject
the Companies to any Liability for breach of any fiduciary duty or any other
duty.
(e) No inaccurate or misleading representation, statement
or other communication has been made or directed (in writing or otherwise) to
any current or former employee of the Companies (1) with respect to such
employee's participation, eligibility for benefits, vesting, benefit accrual or
coverage under any Company Plan or with respect to any other matter relating to
any Company Plan or (2) with respect to any proposal or intention on the part
of the Companies to establish or sponsor any Employee Benefit Plan or to
provide or make available any fringe benefit or other benefit of any nature.
(f) Except as set forth in Part 2.19 of the Disclosure
Schedule, none of the Companies has advised any of its employees (in writing or
otherwise) that it intends or expects to establish or sponsor any Employee
Benefit Plan or to provide or make available any fringe benefit or other
benefit of any nature in the future.
(g) Subsidiary's employees in Hong Kong are not and are
not required to be covered by any Employee Benefit Plan. The Joint Ventures'
employees in the PRC are all hired on a contractual basis and consequently
neither Subsidiary, Parent nor the Joint Ventures have any obligation for any
pension liabilities for such employees.
17.
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2.20 ENVIRONMENTAL MATTERS.
(a) None of the Companies has ever received any notice or
other communication (in writing or otherwise) from any Governmental Body or
other Person regarding any actual, alleged, possible or potential Liability
arising from or relating to the presence, generation, manufacture, production,
transportation, importation, use, treatment, refinement, processing, handling,
storage, discharge, release, emission or disposal of any Hazardous Material.
No Person has ever commenced or threatened to commence any contribution action
or other Proceeding against any of the Companies in connection with any such
actual, alleged, possible or potential Liability; and no event has occurred,
and no condition or circumstance exists, that may directly or indirectly give
rise to, or result in the Companies becoming subject to, any such Liability.
(b) Except as set forth in Part 2.20 of the Disclosure
Schedule, none of the Companies has ever generated, manufactured, produced,
transported, imported, used, treated, refined, processed, handled, stored,
discharged, released or disposed of any Hazardous Material (whether lawfully or
unlawfully). Except as set forth in Part 2.20 of the Disclosure Schedule, none
of the Companies has ever permitted (knowingly or otherwise) any Hazardous
Material to be generated, manufactured, produced, used, treated, refined,
processed, handled, stored, discharged, released or disposed of (whether
lawfully or unlawfully): (1) on or beneath the surface of any real property
that is, or that has at any time been, owned by, leased to, controlled by or
used by the Companies; (2) in or into any surface water, groundwater, soil or
air associated with or adjacent to any such real property; or (3) in or into
any well, pit, pond, lagoon, impoundment, ditch, landfill, building, structure,
facility, improvement, installation, equipment, pipe, pipeline, vehicle or
storage container that is or was located on or beneath the surface of any such
real property or that is or has at any time been owned by, leased to,
controlled by or used by any of the Companies.
(c) All property that is owned by, leased to, controlled
by or used by the Companies, and all surface water, groundwater, soil and air
associated with or adjacent to such property: (1) is in clean and healthful
condition; (2) is free of any Hazardous Material and any harmful chemical or
physical conditions; and (3) is free of any environmental contamination of any
nature.
(d) Each storage tank or other storage container that is
or has been owned by, leased to, controlled by or used by the Companies, or
that is located on or beneath the surface of any real property owned by, leased
to, controlled by or used by the Companies: (1) is in sound condition; and (2)
has been demonstrated by accepted testing methodologies to be free of any
corrosion or leaks.
2.21 SALE OF PRODUCTS; PERFORMANCE OF SERVICES.
(a) Each product that has been sold by the Companies to
any Person: (1) conformed and complied in all respects with the terms and
requirements of any applicable warranty or other Contract and with all
applicable Legal Requirements; and (2) was free of any design defects,
construction defects or other defects or deficiencies at the time of sale. All
repair services and other services that have been performed by the Companies
were performed properly and in full conformity with the terms and requirements
of all applicable warranties and other Contracts and with all applicable Legal
Requirements.
(b) None of the Companies shall incur or otherwise become
subject to any Liability arising directly or indirectly from any product
manufactured or sold, or any repair services or other services performed by,
the Companies on or at any time prior to the Closing Date.
18.
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(c) No product manufactured or sold by the Companies has
been the subject of any recall or other similar action; and no event has
occurred, and no condition or circumstance exists, that might (with or without
notice or lapse of time) directly or indirectly give rise to or serve as a
basis for any such recall or other similar action relating to any such product.
(d) Except as set forth in Part 2.21 of the Disclosure
Schedule, no customer or other Person has ever asserted or threatened to assert
any claim against the Companies (1) under or based upon any warranty provided
by or on behalf of the Companies, or (2) under or based upon any other warranty
relating to any product sold by the Companies or any services performed by the
Companies. To the best of the Knowledge of the Companies, the Selling
Shareholders and the Principal HYP Shareholders, no event has occurred, and no
condition or circumstance exists, that might (with or without notice or lapse
of time) directly or indirectly give rise to or serve as a basis for the
assertion of any such claim.
(e) Each of the Companies has at all times had in place,
an adequate and appropriate quality control system that is at least as
comprehensive and effective as the quality control systems customarily
maintained by Comparable Entities.
2.22 INSURANCE.
(a) Part 2.22 of the Disclosure Schedule accurately sets
forth, with respect to each insurance policy maintained by or at the expense
of, or for the direct or indirect benefit of, the Companies: (1) the name of
the insurance carrier that issued such policy and the policy number of such
policy; (2) whether such policy is a "claims made" or an "occurrences" policy;
(3) a description of the coverage provided by such policy and the material
terms and provisions of such policy (including all applicable coverage limits,
deductible amounts and co-insurance arrangements and any non-customary
exclusions from coverage); (4) the annual premium payable with respect to such
policy, and the cash value (if any) of such policy; and (5) a description of
any claims pending, and any claims that have been asserted in the past, with
respect to such policy.
Part 2.22 also identifies (a) each pending application for insurance
that has been submitted by or on behalf of the Companies, and (b) each
self-insurance or risk-sharing arrangement affecting the Companies or any of
their assets. Subsidiary has delivered to Purchaser accurate and complete
copies of all of the insurance policies identified in Part 2.22 of the
Disclosure Schedule (including all renewals thereof and endorsements thereto)
and all of the pending applications identified in Part 2.22 of the Disclosure
Schedule.
(b) Each of the policies identified in Part 2.22 of the
Disclosure Schedule is valid, enforceable and in full force and effect. All of
the information contained in the applications submitted in connection with said
policies was (at the times said applications were submitted) accurate and
complete, and all premiums and other amounts owing with respect to said
policies have been paid in full on a timely basis. The nature, scope and
dollar amounts of the insurance coverage provided by said policies are
sufficient to adequately insure the Companies' business, assets, operations,
key employees, services and potential liabilities; and said insurance coverage
is at least as comprehensive as the insurance coverage customarily maintained
by Comparable Entities.
(c) Except as set forth in Part 2.22 of the Disclosure
Schedule, there is no pending claim under or based upon any of the policies
identified in Part 2.22 of the Disclosure Schedule; and no event has occurred,
and no condition or circumstance exists, that might (with or without notice or
lapse of time) directly or indirectly give rise to or serve as a basis for any
such claim.
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(d) None of the Companies has received: (1) any notice
or other communication (in writing or otherwise) regarding the actual or
possible cancellation or invalidation of any of the policies identified in Part
2.22 of the Disclosure Schedule or regarding any actual or possible adjustment
in the amount of the premiums payable with respect to any of said policies; (2)
any notice or other communication (in writing or otherwise) regarding any
actual or possible refusal of coverage under, or any actual or possible
rejection of any claim under, any of the policies identified in Part 2.22 of
the Disclosure Schedule; or (3) any indication that the issuer of any of the
policies identified in Part 2.22 of the Disclosure Schedule may be unwilling or
unable to perform any of its obligations thereunder.
2.23 RELATED PARTY TRANSACTIONS. Except as set forth in Part 2.23
of the Disclosure Schedule: (a) no Related Party has, and no Related Party has
at any time since January 17, 1995 had, any direct or indirect interest of any
nature in any asset used in or otherwise relating to the business of the
Companies; (b) no Related Party is, or has at any time since January 17, 1995
been, indebted to the Companies; (c) since January 17, 1995, no Related Party
has entered into, or has had any direct or indirect financial interest in, any
Contract, transaction or business dealing of any nature involving the
Companies; (d) no Related Party is competing, or has at any time since January
17, 1995 competed, directly or indirectly, with the Companies in any market
served by the Companies; (e) no Related Party has any claim or right against
the Companies; and (f) no event has occurred, and no condition or circumstance
exists, that might (with or without notice or lapse of time) directly or
indirectly give rise to or serve as a basis for any claim or right in favor of
any Related Party against the Companies.
2.24 CERTAIN PAYMENTS, ETC. None of the Companies, and no officer,
employee, agent or other Person associated with or acting for or on behalf of
the Companies, has at any time, directly or indirectly:
(a) used any corporate funds (1) to make any unlawful
political contribution or gift or for any other unlawful purpose relating to
any political activity, (2) to make any unlawful payment to any governmental
official or employee or (3) to establish or maintain any unlawful or unrecorded
fund or account of any nature;
(b) made any false or fictitious entry, or failed to make
any entry that should have been made, in any of the books of account or other
records of the Companies;
(c) made any payoff, influence payment, bribe, rebate,
kickback or unlawful payment to any Person;
(d) made any payment (whether or not lawful) to any
Person, or provided (whether lawfully or unlawfully) any favor or anything of
value (whether in the form of property or services, or in any other form) to
any Person, for the purpose of obtaining or paying for (1) favorable treatment
in securing business or (2) any other special concession; or
(e) agreed, committed, offered or attempted to take any
of the actions described in clauses (a) through (d) above.
2.25 PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 2.25 of the Disclosure
Schedule, there is no pending Proceeding, and no Person has threatened to
commence any Proceeding: (1) that involves the Companies or that otherwise
relates to or might affect the Companies' business or any of the assets owned
or used by the Companies (whether or not the Companies is named as a party
thereto); or (2) that challenges, or
20.
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that may have the effect of preventing, delaying, making illegal or otherwise
interfering with, any of the Transactions. Except as set forth in Part 2.25 of
the Disclosure Schedule, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that might directly or indirectly give rise
to or serve as a basis for the commencement of any such Proceeding.
(b) Except as set forth in Part 2.25 of the Disclosure
Schedule, no Proceeding has ever been commenced by or against the Companies;
and no Proceeding otherwise involving or relating to the Companies has been
pending or threatened at any time.
(c) Subsidiary has delivered to Purchaser accurate and
complete copies of all pleadings, correspondence and other written materials to
which the Companies has access that relate to the Proceedings identified in
Part 2.25 of the Disclosure Schedule.
(d) There is no Order to which the Companies, or any of
the assets owned or used by the Companies, is subject; and none of the Selling
Shareholders is subject to any Order that relates to the Companies' business or
to any of the assets owned or used by the Companies.
(e) To the best of the Knowledge of the Companies, the
Selling Shareholders and the Principal HYP Shareholders, no officer or key
employee of the Companies is subject to any Order that prohibits such officer
or key employee from engaging in or continuing any conduct, activity or
practice relating to the Companies' business.
(f) To the best of the Knowledge of the Companies, the
Selling Shareholders and the Principal HYP Shareholders, there is no proposed
Order that, if issued or otherwise put into effect, (1) may have an adverse
effect on the Companies' business, condition, assets, liabilities, operations,
financial performance, net income or prospects (or on any aspect or portion
thereof) or on the ability of the Companies or any of the Selling Shareholders
or Principal HYP Shareholders to comply with or perform any covenant or
obligation under any of the Transactional Agreements, or (2) may have the
effect of preventing, delaying, making illegal or otherwise interfering with
any of the Transactions.
2.26 AUTHORITY; BINDING NATURE OF AGREEMENTS.
(a) Each of Parent and Subsidiary has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement; and the execution, delivery and performance
by each of Parent and Subsidiary of this Agreement have been duly authorized by
all necessary action on the part of each of Parent and Subsidiary and their
shareholders, board of directors and officers. This Agreement constitutes the
legal, valid and binding obligation of each of Parent and Subsidiary,
enforceable against each of Parent and Subsidiary in accordance with its terms.
(b) Each Selling Shareholder and Principal HYP
Shareholder has the absolute and unrestricted right, power and capacity to
enter into and to perform its obligations under each of the Transactional
Agreements to which such Selling Shareholder is or may become a party. This
Agreement constitutes the legal, valid and binding obligation of each of the
Selling Shareholders and Principal HYP Shareholders, enforceable against each
of them in accordance with its terms. Upon the execution of each of the other
Transactional Agreements at the Closing, each of such other Transactional
Agreements will constitute the legal, valid and binding obligation of each
Selling Shareholder and Principal HYP Shareholder who is a party thereto, and
will be enforceable against such Selling Shareholder and Principal HYP
Shareholder in accordance with its terms.
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2.27 NON-CONTRAVENTION; CONSENTS. Except as set forth in Part 2.27
of the Disclosure Schedule, neither the execution and delivery of any of the
Transactional Agreements, nor the consummation or performance of any of the
Transactions, will directly or indirectly (with or without notice or lapse of
time):
(a) contravene, conflict with or result in a violation of
(as appropriate) (1) any of the provisions of the memorandum of association,
articles of association or joint venture agreements of the Companies, or (2)
any resolution adopted by the shareholders or equityholders, board of directors
or governing board or any committee thereof of the Companies;
(b) contravene, conflict with or result in a violation
of, or give any Governmental Body or other Person the right to challenge any of
the Transactions or to exercise any remedy or obtain any relief under, any
Legal Requirement or any Order to which the Companies, any of the Selling
Shareholders or any of the Principal HYP Shareholders, or the Parent Shares or
any of the assets owned or used by the Companies, is subject;
(c) cause the Companies, Purchaser or any affiliate of
Purchaser to become subject to, or to become liable for the payment of, any
Tax;
(d) cause any of the assets owned or used by the
Companies to be reassessed or revalued by any taxing authority or other
Governmental Body;
(e) contravene, conflict with or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Companies or any of their employees or that
otherwise relates to the Companies' business or to any of the assets owned or
used by the Companies;
(f) contravene, conflict with or result in a violation or
breach of, or result in a default under, any provision of any Subsidiary
Contract;
(g) give any Person the right to (1) declare a default or
exercise any remedy under any Subsidiary Contract, (2) accelerate the maturity
or performance of any Subsidiary Contract, or (3) cancel, terminate or modify
any Subsidiary Contract;
(h) contravene, conflict with or result in a violation or
breach of or a default under any provision of, or give any Person the right to
declare a default under, any Contract to which any of the Selling Shareholders
or Principal HYP Shareholders is a party or by which any of the Selling
Shareholders or Principal HYP Shareholders is bound; or
(i) result in the imposition or creation of any
Encumbrance upon or with respect to any of the Parent Shares or any asset owned
or used by the Companies.
Except as set forth in Part 2.27 of the Disclosure Schedule, neither the
Companies nor any of the Selling Shareholders or Principal HYP Shareholders
was, is or will be required to make any filing with or give any notice to, or
to obtain any Consent from, any Person in connection with the execution and
delivery of any of the Transactional Agreements or the consummation or
performance of any of the Transactions.
2.28 BROKERS. None of the Companies nor any of the Selling
Shareholders or Principal HYP Shareholders has agreed or become obligated to
pay, or has taken any action that might result in any
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Person claiming to be entitled to receive, any brokerage commission, finder's
fee or similar commission or fee in connection with any of the Transactions.
2.29 SELLING SHAREHOLDERS AND PRINCIPAL HYP SHAREHOLDERS.
(a) Each Selling Shareholder and Principal HYP
Shareholder has the capacity and financial capability to comply with and
perform all of its covenants and obligations under each of the Transactional
Agreements to which it is or may become a party.
(b) No Selling Shareholder or Principal HYP Shareholder:
(1) has, at any time, (A) made a general
assignment for the benefit of creditors, (B) filed, or had filed against such
Selling Shareholder or Principal HYP Shareholder, any bankruptcy petition or
similar filing, (C) suffered the attachment or other judicial seizure of all or
a substantial portion of the assets of such Selling Shareholder or Principal
HYP Shareholder, (D) admitted in writing the inability to pay the debts of such
Selling Shareholder or Principal HYP Shareholder as they become due, (E) been
convicted of, or pleaded guilty to, any felony, or (F) taken or been the
subject of any action that may have an adverse effect on its ability to comply
with or perform any of its covenants or obligations under any of the
Transactional Agreements; or
(2) is subject to any Order that may have an
adverse effect on its ability to comply with or perform any of its covenants or
obligations under any of the Transactional Agreements.
(c) There is no Proceeding pending, and no Person has
threatened to commence any Proceeding, that may have an adverse effect on the
ability of any Selling Shareholder or Principal HYP Shareholder to comply with
or perform any of the covenants or obligations of such Selling Shareholder or
Principal HYP Shareholder under any of the Transactional Agreements. No event
has occurred, and no claim, dispute or other condition or circumstance exists,
that might directly or indirectly give rise to or serve as a basis for the
commencement of any such Proceeding.
2.30 FULL DISCLOSURE.
(a) None of the Transactional Agreements contains or will
contain any untrue statement of fact and none of the Transactional Agreements
omits or will omit to state any fact necessary to make any of the
representations, warranties or other statements or information contained
therein not misleading.
(b) Except as set forth in Part 2.30 of the Disclosure
Schedule, there is no fact within the Knowledge the Companies or any of the
Selling Shareholders or Principal HYP Shareholders (other than publicly known
facts relating exclusively to political or economic matters of general
applicability that will adversely affect all Comparable Entities) that (1) may
have an adverse effect on the Companies' business, condition, assets,
liabilities, operations, financial performance, net income or prospects (or on
any aspect or portion thereof) or on the ability of the Companies or any of the
Selling Shareholders or Principal HYP Shareholders to comply with or perform
any covenant or obligation under any of the Transactional Agreements, or (2)
may have the effect of preventing, delaying, making illegal or otherwise
interfering with any of the Transactions.
2.31 CHAN HOLDINGS AND CHAN ONLY REPRESENTATIONS.
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(a) Neither Chan Holdings nor Chan is a "U.S. person" (as
such term is defined in Regulation S promulgated under the Securities Act
("REGULATION S") and neither Chan Holdings nor Chan is purchasing the Purchaser
Stock for the account of any "U.S. person."
(b) Neither Chan Holdings nor Chan nor any of its
affiliates or any other person acting on its or their behalf has engaged or
will engage in any directed selling efforts with respect to the Purchaser
Stock, and all such persons have complied and will comply with the offering
restrictions of Regulation S.
(c) Each of Chan Holdings and Chan is purchasing the
Purchaser Stock pursuant to a private sale exempt from registration under the
Securities Act and understands that the Purchaser Stock has not been registered
under the Securities Act and may not be offered or sold within the United
States or to, or for the account or benefit of, U.S. persons except pursuant to
an exemption from, or in transactions not subject to, the registration
requirements of the Securities Act.
2.32 HYP AND PRINCIPAL HYP SHAREHOLDER ONLY REPRESENTATIONS.
(a) By reason of its, or of its management's, business or
financial experience, each of HYP and the Principal HYP Shareholders has the
capacity to protect its own interests in connection with the transactions
contemplated in this Agreement. Further, each of HYP and the Principal HYP
Shareholders is aware of no publication of any advertisement in connection with
the transactions contemplated in the Agreement.
(b) It is an accredited investor within the meaning of
Regulation D under the Securities Act.
(c) Each of HYP and the Principal HYP Shareholders has
received and read the Financial Statements and the Unaudited Interim Balance
Sheet and has had an opportunity to discuss Purchaser's business, management
and financial affairs with directors, officers and management of Purchaser and
has had the opportunity to review Purchaser's operations and facilities.
Purchaser has also had the opportunity to ask questions of and receive answers
from, Purchaser and its management regarding the terms and conditions of the
Purchaser Stock.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser represents and warrants, to and for the benefit of the
Selling Shareholders and Principal HYP Shareholders, as follows:
3.1 VALID ISSUANCE OF PURCHASER STOCK. The Purchaser Stock that
is being issued to the Selling Shareholders hereunder, when issued, sold, and
delivered in accordance with the terms of this Agreement for the consideration
expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable state and
Federal securities laws.
3.2 SEC FILINGS. Purchaser has delivered to the Agent (or the
Agent has otherwise obtained) a complete and accurate copy of each report,
schedule, registration statement and definitive proxy statement filed by
Purchaser with the SEC on or after March 15, 1997 (the "PURCHASER SEC
REPORTS"), which are all the forms, reports and documents required to be filed
by Purchaser with the SEC since such date. The Purchaser SEC Reports (i)
complied with the requirements of the Securities Act or the Exchange Act, as
the case may be, at and as of the times they were filed (or, if amended or
superseded
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by a filing prior to the date of this Agreement, then on the date of such
filing) and (ii) did not at and as of the time they were filed (or, if amended
or superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
3.3 ACQUISITION OF SHARES. Purchaser is not acquiring the Parent
Shares with the current intention of making a public distribution thereof.
3.4 AUTHORITY; BINDING NATURE OF AGREEMENT. Purchaser has the
absolute and unrestricted right, power and authority to enter into and, subject
to shareholder approval, perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement by Purchaser has been
duly authorized by all necessary action on the part of Purchaser and its board
of directors. This Agreement and the Escrow Agreement will constitute legal,
valid and binding obligations of Purchaser, enforceable against Purchaser in
accordance with their terms.
3.5 SECURITIES ACT. Based upon the representations and warranties
of the Selling Shareholders and the Principal HYP Shareholders contained
herein, the issuance and sale of the Purchaser Stock will not require
registration under the Securities Act.
SECTION 4. PRE-CLOSING COVENANTS OF PARENT, SUBSIDIARY, THE SELLING SHAREHOLDERS
AND THE PRINCIPAL HYP SHAREHOLDERS.
4.1 ACCESS AND INVESTIGATION. Parent, Subsidiary, the Selling
Shareholders and the Principal HYP Shareholders will ensure that, at all times
during the Pre-Closing Period:
(a) Parent and Subsidiary and their Representatives
provide Purchaser and its Representatives with free and complete access to
their Representatives, personnel and assets and to all existing books, records,
Tax Returns, work papers and other documents and information relating to the
Companies;
(b) Parent and Subsidiary and their Representatives
provide Purchaser and its Representatives with such copies of existing books,
records, Tax Returns, work papers and other documents and information relating
to the Companies as Purchaser may request in good faith; and
(c) Parent and Subsidiary and their Representatives
compile and provide Purchaser and its Representatives with such additional
financial, operating and other data and information regarding the Companies as
Purchaser may request in good faith.
4.2 OPERATION OF BUSINESS. Parent, Subsidiary, the Selling
Shareholders and the Principal HYP Shareholders will ensure that, without the
prior written consent of Purchaser, during the Pre-Closing Period:
(a) none of the Selling Shareholders or the Principal HYP
Shareholders directly or indirectly sells or otherwise transfers, or offers,
agrees or commits (in writing or otherwise) to sell or otherwise transfer, any
of the Parent Shares or shares of capital stock of HYP or any interest in or
right relating to any of the Parent Shares or shares of capital stock of HYP;
(b) none of the Selling Shareholders permits, and none of
the Selling Shareholders offers, agrees or commits (in writing or otherwise) to
permit, any of the Parent Shares to become subject,
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directly or indirectly, to any Encumbrance, other than the lockup agreement in
favor of Van Kasper & Company;
(c) each of the Companies conducts its operations
exclusively in the Ordinary Course of Business or as set forth in the Business
Plan of Subsidiary (the "BUSINESS PLAN") previously delivered to Purchaser and
in the same manner as such operations have been conducted prior to the date of
this Agreement;
(d) each of the Companies preserves intact its current
business organization, keeps available the services of its current officers and
key employees and maintains its relations and good will with all suppliers,
customers, landlords, creditors, licensors, licensees, employees and other
Persons having business relationships with each of the Companies;
(e) each of the Companies keeps in full force all
insurance policies identified in Part 2.22 of the Disclosure Schedule;
(f) the officers of each of the Companies confer
regularly with Purchaser concerning operational matters and otherwise report
regularly to Purchaser concerning the status of the Companies' business,
condition, assets, liabilities, operations, financial performance and
prospects;
(g) each of the Companies immediately notifies Purchaser
of any inquiry, proposal or offer from any Person relating to any Acquisition
Transaction;
(h) none of the Companies declares, accrues, sets aside
or pays any dividend or make any other distribution in respect of any shares of
capital stock, or repurchases, redeems or otherwise reacquires any shares of
capital stock or other securities, provided, however, that prior to the
Closing, Prior to the Closing (as defined below), Parent may redeem all or a
portion of the Parent Preferred Shares for an aggregate redemption price not to
exceed $5,000,000 (which shall only be distributed by Parent to the Selling
Shareholders or the Agent) (the "PERMITTED REDEMPTION");
(i) except as disclosed in Part 2.3 of the Disclosure
Schedule, none of the Companies sells or otherwise issues any shares of capital
stock or any other securities;
(j) none of the Companies amends its articles of
association or memorandum of association or effects or becomes a party to any
Acquisition Transaction, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(k) none of the Companies forms any subsidiary or
acquires any equity interest or other interest in any other Entity;
(l) none of the Companies makes any capital expenditure,
except for capital expenditures that are made in the Ordinary Course of
Business;
(m) none of the Companies enters into or permits any of
the assets owned or used by it to become bound by any Contract, except for any
Excluded Contract or as described in the Business Plan;
(n) none of the Companies incurs, assumes or otherwise
becomes subject to any Liability, except for current liabilities (of the type
required to be reflected in the "liabilities" column of a balance sheet
prepared in accordance with GAAP) incurred in the Ordinary Course of Business;
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(o) none of the Companies establishes or adopts any
Employee Benefit Plan, or pays any bonus or makes any profit-sharing or similar
payment to, or increases the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any of its
directors, officers or key employees, other than the adoption of an Employee
Benefit Plan similar to the Employee Benefit Plan maintained by Purchaser;
(p) none of the Companies makes any Tax election;
(q) none of the Companies commences any Proceeding except
in the Ordinary Course of Business;
(r) none of the Companies enters into any transaction or
take any other action of the type referred to in Section 2.5 hereof;
(s) none of the Companies enters into any transaction or
take any other action outside the Ordinary Course of Business;
(t) none of the Companies enters into any transaction or
take any other action that might cause or constitute a Breach of any
representation or warranty made by the Companies or any of the Selling
Shareholders or Principal HYP Shareholders in this Agreement or in the Closing
Certificate; and
(u) none of the Companies agrees, commits or offers (in
writing or otherwise), or attempts, to take any of the actions described in
clauses (i) through (v) of this Section 4.2.
4.3 FILINGS AND CONSENTS. Parent, Subsidiary, the Selling
Shareholders and the Principal HYP Shareholders will ensure that:
(a) each filing or notice required to be made or given
(pursuant to any applicable Legal Requirement, Order or Contract or otherwise)
by the Companies or any of the Selling Shareholders or Principal HYP
Shareholders in connection with the execution and delivery of any of the
Transactional Agreements or in connection with the consummation or performance
of any of the Transactions (including each of the filings and notices
identified in Part 2.28 of the Disclosure Schedule) is made or given as soon as
possible after the date of this Agreement;
(b) each Consent required to be obtained (pursuant to any
applicable Legal Requirement, Order or Contract, or otherwise) by the Companies
or any of the Selling Shareholders or Principal HYP Shareholders in connection
with the execution and delivery of any of the Transactional Agreements or in
connection with the consummation or performance of any of the Transactions
(including each of the Consents identified in Part 2.28 of the Disclosure
Schedule) is obtained as soon as possible after the date of this Agreement and
remains in full force and effect through the Closing Date;
(c) Subsidiary promptly delivers to Purchaser a copy of
each filing made, each notice given and each Consent obtained by the Companies
or any Selling Shareholder or Principal HYP Shareholder during the Pre-Closing
Period; and
(d) during the Pre-Closing Period, each of the Companies
and their Representatives cooperate with Purchaser and with Purchaser's
Representatives, and prepare and make available such documents and take such
other actions as Purchaser may request in good faith, in connection with any
filing, notice or Consent that Purchaser is required or elects to make, give or
obtain.
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4.4 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, Parent, Subsidiary,
the Selling Shareholders and the Principal HYP Shareholders will promptly
notify Purchaser in writing of:
(1) the discovery by any of them of any event,
condition, fact or circumstance that occurred or existed on or prior to the
date of this Agreement and that caused or constitutes a Breach of any
representation or warranty made by any of them in this Agreement;
(2) any event, condition, fact or circumstance
that occurs, arises or exists after the date of this Agreement and that would
cause or constitute a Breach of any representation or warranty made by any of
them in this Agreement if (A) such representation or warranty had been made as
of the time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance had
occurred, arisen or existed on or prior to the date of this Agreement;
(3) any Breach of any covenant or obligation
contained in this Agreement by any of them; and
(4) any event, condition, fact or circumstance
that may make the timely satisfaction of any of the conditions set forth in
Sections 6 or 7 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is
required to be disclosed pursuant to Section 4.4(a) requires any change in the
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming the Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then Parent, Subsidiary, the Selling Shareholders and the
Principal HYP Shareholders will promptly deliver to Purchaser an update to the
Disclosure Schedule specifying such change. No such update will be deemed to
supplement or amend the Disclosure Schedule for the purpose of (1) determining
the accuracy of any of the representations and warranties made by Parent,
Subsidiary, the Selling Shareholders and the Principal HYP Shareholders in this
Agreement or in the Closing Certificate, or (2) determining whether any of the
conditions set forth in Section 6 has been satisfied.
4.5 PAYMENT OF INDEBTEDNESS BY RELATED PARTIES. Parent,
Subsidiary, the Selling Shareholders and the Principal HYP Shareholders will
cause all indebtedness and other Liabilities of each Related Party to the
Companies (including any such indebtedness or other Liability identified in
Part 2.23 of the Disclosure Schedule) to be discharged and paid in full prior
to the Closing.
4.6 NO NEGOTIATION. Parent, Subsidiary, the Selling Shareholders
and the Principal HYP Shareholders will ensure that, during the Pre-Closing
Period, none of the Companies nor any of their Representatives directly or
indirectly: (a) solicits or encourages the initiation of any inquiry, proposal
or offer from any Person (other than Purchaser) relating to any Acquisition
Transaction; (b) participates in any discussions or negotiations with, or
provides any non-public information to, any Person (other than Purchaser)
relating to any Acquisition Transaction; or (c) considers the merits of any
unsolicited inquiry, proposal or offer from any Person (other than Purchaser)
relating to any Acquisition Transaction.
4.7 BEST EFFORTS. During the Pre-Closing Period, Parent,
Subsidiary, the Selling Shareholders and the Principal HYP Shareholders will
use their Best Efforts to cause the conditions set forth in Sections 6 and 7.3
to be satisfied on a timely basis.
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4.8 CONFIDENTIALITY. Parent, Subsidiary, the Selling Shareholders
and the Principal HYP Shareholders will ensure that, during the Pre-Closing
Period: (a) they and their Representatives keep strictly confidential the
existence and terms of this Agreement; (b) neither they nor any of their
Representatives issue or disseminate any press release or other publicity or
otherwise make any disclosure of any nature (to any suppliers, customers,
landlords, creditors or employees of the Companies or to any other Person)
regarding any of the Transactions, except to the extent that any of the
Companies is required by law to make any such disclosure regarding the
Transactions; and (c) if any of the Companies is required by law to make any
disclosure regarding the Transactions, it will advise Purchaser, at least five
(5) business days before making such disclosure, of the nature and content of
the intended disclosure.
SECTION 5. PRE-CLOSING COVENANTS OF PURCHASER.
5.1 BEST EFFORTS. During the Pre-Closing Period, Purchaser will
use its Best Efforts to cause the conditions set forth in Section 6 (so far as
applicable to Purchaser) and Section 7 to be satisfied.
SECTION 6. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION TO CLOSE.
Purchaser's obligation to acquire the Parent Shares and to take the
other actions required to be taken by Purchaser at the Closing is subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by Purchaser, in whole or in part, in
accordance with Section 11.14 hereof):
6.1 SATISFACTORY COMPLETION OF PRE-ACQUISITION REVIEW. Purchaser
will have satisfactorily completed its pre-acquisition investigation and review
of the business, condition, assets, liabilities, operations, financial
performance, net income and prospects of each of the Companies and will be
satisfied with the results of that investigation and review.
6.2 ACCURACY OF REPRESENTATIONS. All of the representations and
warranties made by Parent, Subsidiary, the Selling Shareholders and the
Principal HYP Shareholders in this Agreement (considered collectively), and
each of said representations and warranties (considered individually), will
have been accurate in all material respects as of the date of this Agreement,
and will be accurate in all material respects as of the Scheduled Closing Time
as if made at the Scheduled Closing Time, without giving effect to any update
to the Disclosure Schedule.
6.3 PERFORMANCE OF OBLIGATIONS.
(a) The Selling Shareholders will have delivered to
Purchaser share transfer forms representing the Parent Shares as required by
Section 1.3(b) hereof, and each Selling Shareholder and Principal HYP
Shareholders will have executed and delivered each of the other documents
required to be executed and delivered by it pursuant to Section 1.3(b).
(b) All of the other covenants and obligations that
Parent, Subsidiary, the Selling Shareholders and the Principal HYP Shareholders
are required to comply with or to perform at or prior to the Closing
(considered collectively), and each of said covenants and obligations
(considered individually), will have been duly complied with and performed in
all material respects.
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6.4 APPROVAL OF PURCHASER'S BOARD OF DIRECTORS AND SHAREHOLDERS;
CONSENTS.
(a) Purchaser's board of directors will have ratified the
execution of this Agreement by Purchaser and will have approved the
consummation of the Transactions.
(b) Purchaser's shareholders will have approved the
issuance of the Purchaser Stock in accordance with Hong Kong law.
(c) Each of the Consents identified in Part 2.28 of the
Disclosure Schedule will have been obtained and will be in full force and
effect.
6.5 NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the business, condition, assets, liabilities, operations,
financial performance, net income or prospects (or in any aspect or portion
thereof) of any of the Companies since the date of this Agreement.
6.6 ADDITIONAL DOCUMENTS. Purchaser will have received the
following documents:
(a) opinion letters from Benjamin Greenspan and Charles
Yeung Clement Lam & Co., dated the Closing Date, in form and substance
acceptable to Purchaser;
(b) a "fairness opinion" from Van Kasper & Company, with
an update thereto dated as of the Closing Date, in form and substance
acceptable to Purchaser;
(c) such other documents as Purchaser may request in good
faith for the purpose of (1) evidencing the accuracy of any representation or
warranty made by Parent, Subsidiary or any of the Selling Shareholders or
Principal HYP Shareholders, (2) evidencing the compliance by Parent, Subsidiary
or any of the Selling Shareholders or Principal HYP Shareholders with, or the
performance by Parent, Subsidiary or any of the Selling Shareholders or
Principal HYP Shareholders of, any covenant or obligation set forth in this
Agreement, (3) evidencing the satisfaction of any condition set forth in this
Section 6 or (4) otherwise facilitating the consummation or performance of any
of the Transactions.
6.7 NO PROCEEDINGS. Since the date of this Agreement, there will
not have been commenced or threatened against Purchaser, or against any Person
affiliated with Purchaser, any Proceeding (a) involving any challenge to, or
seeking damages or other relief in connection with, any of the Transactions or
(b) that may have the effect of preventing, delaying, making illegal or
otherwise interfering with any of the Transactions.
6.8 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. No
Person will have made or threatened any claim asserting that such Person (a)
may be the holder or the beneficial owner of, or may have the right to acquire
or to obtain beneficial ownership of, any capital stock or other securities of
the Companies, or (b) may be entitled to all or any portion of the
consideration set forth in Section 1.2.
6.9 NO PROHIBITION. Neither the consummation nor the performance
of any the Transactions will, directly or indirectly (with or without notice or
lapse of time), contravene or conflict with or result in a violation of, or
cause Purchaser or any Person affiliated with Purchaser to suffer any adverse
consequence under, (a) any applicable Legal Requirement or Order, or (b) any
Legal Requirement or Order that has been proposed by or before any Governmental
Body.
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6.10 FINANCING. Purchaser shall have raised $35,000,000 in
additional funds on terms acceptable to Purchaser so as to enable Purchaser to
pay the cash portion of the Consideration pursuant to Section 1.2 hereof.
6.11 SHAW MANAGEMENT AGREEMENT. The Management Agreement dated on
or about June 1997 between Parent and Sandra C. Shaw shall have been
terminated.
6.12 CHAN EMPLOYMENT AGREEMENT. Parent shall have entered into an
employment agreement with Chan satisfactory to Purchaser.
SECTION 7. CONDITIONS PRECEDENT TO SELLING SHAREHOLDERS' OBLIGATION TO CLOSE.
The Selling Shareholders' obligation to exchange the Parent Shares and
to take the other actions required to be taken by the Selling Shareholders at
the Closing is subject to the satisfaction, at or prior to the Closing, of each
of the following conditions (any of which may be waived by the Agent, in whole
or in part, in accordance with Section 11.14 hereof):
7.1 ACCURACY OF REPRESENTATIONS. All of the representations and
warranties made by Purchaser in this Agreement (considered collectively), and
each of said representations and warranties (considered individually), will
have been accurate in all material respects as of the date of this Agreement
and will be accurate in all material respects as of the Scheduled Closing Time
as if made at the Scheduled Closing Time.
7.2 PURCHASER'S PERFORMANCE.
(a) Purchaser will have delivered the cash portion of the
Consideration to the Agent and the Escrow Shares to the Escrow Agent.
(b) All of the other covenants and obligations that
Purchaser is required to comply with or to perform pursuant to this Agreement
at or prior to the Closing (considered collectively), and each of said
covenants and obligations (considered individually), will have been complied
with and performed in all material respects.
7.3 NO INJUNCTION. There will not be in effect any injunction
that will have been entered by a court of competent jurisdiction since the date
of this Agreement that prohibits the exchange of the Parent Shares by the
Selling Shareholders with Purchaser.
7.4 NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the business, condition, assets, liabilities, operations,
financial performance, net income or prospects (or in any aspect or portion
thereof) of any of the Companies since the date of this Agreement.
SECTION 8. TERMINATION.
8.1 TERMINATION EVENTS. This Agreement may be terminated prior to
the Closing:
(a) by Purchaser if (1) there is a material Breach of any
covenant or obligation of Parent, Subsidiary or any of the Selling Shareholders
or Principal HYP Shareholders or (2) Purchaser reasonably determines that the
timely satisfaction of any condition set forth in Section 6 has become
impossible or impractical (other than as a result of any failure on the part of
Purchaser comply with or perform its covenants and obligations under this
Agreement);
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(b) by the Agent if (1) there is a material Breach of any
covenant or obligation of Purchaser or (2) the Agent reasonably determines that
the timely satisfaction of any condition set forth in Section 7 has become
impossible or impractical or (3) the condition set forth in Section 6.10 has
not been satisfied by 5:00 p.m. (California time) on February 15, 1998 (other
than as a result of any failure on the part of Parent, Subsidiary or any of the
Selling Shareholders or Principal HYP Shareholders to comply with or perform
any covenant or obligation set forth in this Agreement);
(c) by Purchaser at or after the Scheduled Closing Time
if any condition set forth in Section 6 has not been satisfied or waived by the
Scheduled Closing Time;
(d) by the Agent at or after the Scheduled Closing Time
if any condition set forth in Section 7 has not been satisfied or waived by the
appropriate party by the Scheduled Closing Time;
(e) by Purchaser if the Closing has not taken place on or
before January 31, 1998 (other than as a result of any failure on the part of
Purchaser to comply with or perform its covenants and obligations under this
Agreement);
(f) by the Agent if the Closing has not taken place on or
before January 31, 1998 (other than as a result of the failure on the part of
Parent, Subsidiary or any of the Selling Shareholders or Principal HYP
Shareholders to comply with or perform any covenant or obligation set forth in
this Agreement); or
(g) by the mutual consent of Purchaser and the Agent.
8.2 TERMINATION PROCEDURES. If Purchaser wishes to terminate this
Agreement pursuant to Section 8.1(a), Section 8.1(c) or Section 8.1(e),
Purchaser will deliver to the Agent a written notice stating that Purchaser is
terminating this Agreement and setting forth a brief description of the basis
on which Purchaser is terminating this Agreement. If the Agent wishes to
terminate this Agreement pursuant to Section 8.1(b), Section 8.1(d) or Section
8.1(f), the Agent will deliver to Purchaser a written notice stating that the
Agent is terminating this Agreement and setting forth a brief description of
the basis on which the Agent is terminating this Agreement.
8.3 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 8.1, all further obligations of the parties under this
Agreement will terminate; provided, however, that: (a) no party will be
relieved of any obligation or other Liability arising from any Breach by such
party of any provision of this Agreement; (b) the parties will, in all events,
remain bound by and continue to be subject to the provisions set forth in
Section 11 (except for Section 11.1); and (c) Parent, Subsidiary, the Selling
Shareholders and the Principal HYP Shareholders will, in all events, remain
bound by and continue to be subject to Section 4.8.
SECTION 9. INDEMNIFICATION, ETC.
9.1 SURVIVAL OF REPRESENTATIONS AND COVENANTS.
(a) The representations, warranties, covenants and
obligations of each party will survive (without limitation): (1) the Closing
and the exchange of the Parent Shares as provided for herein; (2) any sale or
other disposition of any or all of the Parent Shares by Purchaser; and (3) any
Acquisition Transaction effected by or otherwise involving Purchaser or Parent
or Subsidiary. All of said representations, warranties, covenants and
obligations will remain in full force and effect and will survive until the
second (2nd) anniversary of the Closing Date.
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(b) The representations and warranties, covenants and
obligations of Parent, Subsidiary, the Selling Shareholders and the Principal
HYP Shareholders, and the rights and remedies that may be exercised by the
Indemnitees, will not be limited or otherwise affected by or as a result of any
information furnished to, or any investigation made by or Knowledge of, any of
the Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or
other item of information set forth in the Disclosure Schedule or in any update
to the Disclosure Schedule will be deemed to be a representation and warranty
made by Parent, Subsidiary, the Selling Shareholders and the Principal HYP
Shareholders in this Agreement.
9.2 INDEMNIFICATION BY SELLING SHAREHOLDERS AND PRINCIPAL HYP
SHAREHOLDERS.
(a) The Selling Shareholders and Principal HYP
Shareholders, jointly and severally, will hold harmless and indemnify each of
the Indemnitees from and against, and will compensate and reimburse each of the
Indemnitees for, any Damages that are directly or indirectly suffered or
incurred by any of the Indemnitees or to which any of the Indemnitees may
otherwise become subject at any time (regardless of whether or not such Damages
relate to any third-party claim) and which arise directly or indirectly from or
as a direct or indirect result of, or are directly or indirectly connected
with:
(1) any Breach of any representation or warranty
made by Parent, Subsidiary or any of the Selling Shareholders or Principal HYP
Shareholders in this Agreement (without giving effect to any update to the
Disclosure Schedule) or in the Closing Certificate;
(2) any Breach of any representation, warranty,
statement, information or provision contained in the Disclosure Schedule or in
any other document delivered or otherwise made available to Purchaser or any of
its Representatives by or on behalf of Parent, Subsidiary or any of their
Representatives;
(3) any Breach of any covenant or obligation of
Parent, Subsidiary or any of the Selling Shareholders or Principal HYP
Shareholders;
(4) any Liability to which the Companies or any
of the other Indemnitees may become subject and that arises directly or
indirectly from or relates directly or indirectly to (A) any product
manufactured or sold, or any service performed, by or on behalf of any of the
Companies on or at any time prior to the Closing Date, (B) the presence of any
undisclosed Hazardous Material at any site owned, leased, occupied or
controlled by any of the Companies on or at any time prior to the Closing Date,
or (C) the generation, manufacture, production, transportation, importation,
use, treatment, refinement, processing, handling, storage, discharge, release
or disposal of any undisclosed Hazardous Material (whether lawfully or
unlawfully) by or on behalf of any of the Companies on or at any time prior to
the Closing Date;
(5) any matter identified or referred to in Part
2.15 or Part 2.25 of the Disclosure Schedule; or
(6) any Proceeding relating directly or
indirectly to any Breach, alleged Breach, Liability or matter of the type
referred to in clause (1), (2), (3), (4) or (5) above (including any Proceeding
commenced by any Indemnitee for the purpose of enforcing any of its rights
under this Section 9).
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(b) The Selling Shareholders acknowledge and agree that,
if there is any Breach of any representation, warranty or other provision
relating to the Companies or the business, condition, assets, liabilities,
operations, financial performance, net income or prospects (or any aspect or
portion thereof of the Companies), or if the Companies becomes subject to any
Liability of the type referred to in clause (4) of Section 9.2(a), then
Purchaser itself will be deemed, by virtue of its ownership of the Companies,
to have incurred Damages as a result of such Breach or Liability. Nothing
contained in this Section 9.2(b) will have the effect of (1) limiting the
circumstances under which Purchaser may otherwise be deemed to have incurred
Damages for purposes of this Agreement, (2) limiting the other types of Damages
that Purchaser may be deemed to have incurred (whether in connection with any
such Breach or Liability or otherwise), or (3) limiting the rights of Parent or
Subsidiary or any of the other Indemnitees under this Section 9.2.
9.3 THRESHOLD.
(a) Subject to Section 9.3(b), the Selling Shareholders
and Principal HYP Shareholders will not be required to make any indemnification
payment pursuant to Section 9.2 for any Breach of any of their representations
and warranties until such time as the total amount of all Damages (including
the Damages arising from such Breach and all other Damages arising from any
other Breaches of any representations or warranties) that have been directly or
indirectly suffered or incurred by any one or more of the Indemnitees, or to
which any one or more of the Indemnitees has or have otherwise become subject,
exceeds $2,000,000 in the aggregate. At such time as the total amount of such
Damages exceeds $2,000,000 in the aggregate, the Indemnitees will be entitled
to be indemnified against the full amount of such Damages (and not merely the
portion of such Damages exceeding $2,000,000).
(b) The limitation on the Selling Shareholders' and
Principal HYP Shareholders' indemnification obligations that is set forth in
Section 9.3(a) shall not apply to any Breach of any of the Specified
Representations or any Breach of the covenants contained in Section 11.1 hereof
and any indemnification payment arising from any Breach of any of the Specified
Representations shall not apply to the calculation of the threshold amount
described in Section 9.3(a) above.
9.4 MAXIMUM LIABILITY.
(a) The total amount of the payments that any Selling
Shareholder can be required to make under or in connection with this Agreement
(including all indemnification payments required to be made to Purchaser and
all amounts payable to any counsel retained by a Selling Shareholder in
accordance with Section 9.10) shall be limited in the aggregate to the sum of
(i) the amount of the Consideration (valuing each share of Purchaser Stock at
the closing bid price of the American Depositary Shares on the most recent
trading date prior to or on the date of issuance of the Purchaser Stock) which
such Selling Shareholder receives from the exchange of his Shares hereunder and
(ii) the amount of the Permitted Redemption which such Selling Shareholder
receives, and such Selling Shareholder's cumulative liability shall in no event
exceed such amount.
(b) The aggregate total amount of the payments that all
the Principal HYP Shareholders can be required to make under or in connection
with this Agreement (including all indemnification payments required to be made
to Purchaser and all amounts payable to any counsel retained by a Principal HYP
Shareholder in accordance with Section 9.10) shall be limited in the aggregate
to the amount of HYP's maximum liability calculated in Section 9.4(a) above
multiplied by 0.965, less any amount paid by HYP pursuant to Section 9.4(a)
above, and the Principal HYP Shareholders' cumulative liability shall in no
event exceed such amount.
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9.5 RIGHT TO REQUIRE CURE OF BREACH. Subject to the threshold
amount described in Section 9.3(a), without limiting the generality of anything
contained in Section 9.2, if there is any Breach of any representation or
warranty made by Parent, Subsidiary or any of the Selling Shareholders or
Principal HYP Shareholders, then the Selling Shareholders and Principal HYP
Shareholders, jointly and severally, will be obligated to take such other
actions as Purchaser may in good faith request for the purpose of causing such
Breach to be corrected, cured and eliminated in all respects (at no cost to
Parent, Subsidiary or Purchaser).
9.6 NO CONTRIBUTION. Each Selling Shareholder and Principal HYP
Shareholders waives, and acknowledges and agrees that such Selling Shareholder
and Principal HYP Shareholders will not have and will not exercise or assert or
attempt to exercise or assert, any right of contribution or right of indemnity
or any other right or remedy against the Companies in connection with any
indemnification obligation or any other Liability to which such Selling
Shareholder and Principal HYP Shareholders may become subject under any of the
Transactional Agreements or otherwise in connection with any of the
Transactions.
9.7 INTEREST. Any party that is required to indemnify any other
Person pursuant to this Section 9 with respect to any Damages will also be
required to pay such other Person interest on the amount of such Damages (for
the period commencing as of the date on which such other Person first incurred
or otherwise became subject to such Damages and ending on the date on which the
applicable indemnification payment is made by such party) at a floating rate
one (1) percentage point above the rate of interest publicly announced by Bank
of America, N.T.&S.A., from time to time as its prime, base or reference rate.
9.8 SETOFF. Subject to the threshold amount described in Section
9.3(a), in addition to any rights of setoff or other rights that Purchaser or
any of the other Indemnitees may have at common law or otherwise, Purchaser
will have the right to set off any amount that may be owed to any Indemnitee
under this Section 9 against any amount otherwise payable by any Indemnitee to
the Agent or any of the Selling Shareholders.
9.9 NONEXCLUSIVITY OF INDEMNIFICATION REMEDIES. The
indemnification remedies and other remedies provided in this Section 9 will be
deemed to be exclusive; provided, however, such limitation shall not apply to
rights arising from Sections 4.8, 10.7, 11.1 and 11.20 hereof, and the exercise
by any Person of any of its rights under this Section 9 with respect to
Sections 4.8, 10.7, 11.1 and 11.20 hereof will not be deemed to be an election
of remedies and will not be deemed to prejudice, or to constitute or operate as
a waiver of, any other right or remedy that such Person may be entitled to
exercise (whether under this Agreement, under any other Contract, under any
statute, rule or other Legal Requirement, at common law, in equity or
otherwise).
9.10 DEFENSE OF THIRD PARTY CLAIMS. Subject to the threshold
amount described in Section 9.3(a), in the event of the assertion or
commencement by any Person of any claim or Proceeding (whether against Parent,
Subsidiary, against any other Indemnitee or against any other Person) with
respect to which any of the Selling Shareholders and the Principal HYP
Shareholders may become obligated to indemnify, hold harmless, compensate or
reimburse any Indemnitee pursuant to this Section 9, Purchaser will have the
right, at its election, to designate the Agent to assume the defense of such
claim or Proceeding at the sole expense of the Selling Shareholders and the
Principal HYP Shareholders. If Purchaser so elects to designate the Agent to
assume the defense of any such claim or Proceeding: (a) the Agent will proceed
to defend such claim or Proceeding in a diligent manner with counsel
satisfactory to Purchaser; (b) Purchaser will make available to the Agent any
non- privileged documents and materials in the possession of Purchaser that may
be necessary to the defense of such
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claim or Proceeding; (c) the Agent will keep Purchaser informed of all material
developments and events relating to such claim or Proceeding; (d) Purchaser
will have the right to participate in the defense of such claim or Proceeding;
(e) the Agent will not settle, adjust or compromise such claim or Proceeding
without the prior written consent of Purchaser; and (f) Purchaser may at any
time (notwithstanding the prior designation of the Agent to assume the defense
of such claim or Proceeding) assume the defense of such claim or Proceeding.
If Purchaser does not elect to designate the Agent to assume the defense of any
such claim or Proceeding (or if, after initially designating the Agent to
assume such defense, Purchaser elects to assume such defense), Purchaser may
proceed with the defense of such claim or Proceeding on its own. If Purchaser
so proceeds with the defense of any such claim or Proceeding on its own: (1)
all reasonable expenses relating to the defense of such claim or Proceeding
(whether or not incurred by Purchaser) will be borne and paid exclusively by
the Selling Shareholders and the Principal HYP Shareholders; (2) the Selling
Shareholders and the Principal HYP Shareholders will make available to
Purchaser any documents and materials in the possession or control of any of
the Selling Shareholders and the Principal HYP Shareholders that may be
necessary to the defense of such claim or Proceeding; (3) Purchaser will keep
the Agent informed of all material developments and events relating to such
claim or Proceeding; and (4) Purchaser will have the right to settle, adjust or
compromise such claim or Proceeding with the consent of the Agent; provided,
however, that the Agent will not unreasonably withhold such consent.
9.11 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN PURCHASER. No
Indemnitee (other than Purchaser or any successor thereto or assign thereof)
will be permitted to assert any indemnification claim or exercise any other
remedy under this Agreement unless Purchaser (or any successor thereto or
assign thereof) will have consented to the assertion of such indemnification
claim or the exercise of such other remedy.
SECTION 10. REGISTRATION RIGHTS.
10.1 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 10.1, if
Purchaser shall receive a written request from Holders of more than a majority
in interest of the Registrable Securities (the "INITIATING HOLDERS") that
Purchaser file a registration statement under the Securities Act covering the
registration of the American Depositary Shares issuable upon exchange of such
Purchaser Stock, Purchaser shall file with the SEC one or more registration
statements on Form F-3 or S-3 (together with the prospectus included therein, a
"REGISTRATION STATEMENT") pursuant to Rule 415 of the Securities Act in order
to register with the SEC the continuous resale by the Holders, from time to
time, of the American Depositary Shares through each securities exchange on
which the American Depositary Shares are then traded, or in
privately-negotiated transactions. Purchaser shall use its Best Efforts to
cause such Registration Statement to be declared effective as soon thereafter
as possible and in any event within sixty (60) days thereafter. Each Holder
agrees to furnish promptly to Purchaser in writing all information required
from time to time to be disclosed in order to make the information previously
furnished to Purchaser by such Holder not misleading.
(b) Purchaser shall pay all Registration Expenses in
connection with any registration, qualification or compliance hereunder, and
each Holder shall pay all Selling Expenses and other expenses that are not
Registration Expenses relating to the American Depositary Shares resold by such
Holder.
(c) In the case of the registration effected by Purchaser
pursuant to these registration provisions, Purchaser shall use its Best Efforts
to:
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(1) keep such registration effective until the
earlier of (A) the second anniversary of the Holders' written request for
registration, (B) such date as all of the American Depositary Shares have been
resold or (C) such time as all of the American Depositary Shares held by the
Holders can be sold (i) without restrictions pursuant to Regulation S under the
Securities Act or (ii) within a given three-month period without compliance
with the registration requirements of the Securities Act pursuant to Rule 144;
(2) prepare and file with the SEC such amendments
and supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by the
Registration Statement;
(3) furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request;
(4) cause all American Depositary Shares
registered as described herein to be listed on each securities exchange and
quoted on each quotation service on which the American Depositary Shares are
then listed or quoted;
(5) provide a transfer agent and registrar for
all American Depositary Shares registered pursuant to the Registration
Statement and a CUSIP number for all such American Depositary Shares;
(6) otherwise use its Best Efforts promptly to
comply with all applicable rules and regulations of the SEC;
(7) file the documents required of Purchaser and
otherwise use its Best Efforts promptly to obtain, if applicable, and maintain
requisite blue sky clearance in (A) all jurisdictions in which any of the
American Depositary Shares are originally sold and (B) all other states
specified in writing by a Holder, provided as to clause (B) however, that
Purchaser shall not be required to qualify to do business or consent to service
of process in any state in which it is not now so qualified or has not so
consented; and
(8) with respect to the initial filing of the
Registration Statement, as of the date of declaration of effectiveness, obtain
an opinion of counsel to Purchaser acceptable to Purchaser, addressed to each
Holder selling registrable securities pursuant to the Registration Statement.
Purchaser shall use its Best Efforts to qualify for use of Form F-3 or S-3
under the Securities Act to register the resale of the American Depositary
Shares and to maintain such qualification during the periods described in
subsection (c)(1) hereof.
(d) Purchaser shall furnish to each Holder upon request a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary in order to facilitate the public sale or other
disposition of all or any of the American Depositary Shares held by the
Purchaser.
(e) At any time Purchaser may refuse to permit a Holder
to resell any American Depositary Shares pursuant to the Registration
Statement; provided, however, Purchaser must deliver a certificate in writing
to the Holders to the effect that suspension of the sale of shares under the
Registration Statement, until such time as Purchaser can make an appropriate
filing with the SEC, is
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necessary because a sale pursuant to the Registration Statement, in its
then-current form, could constitute a violation of the Federal securities laws.
In such an event, Purchaser shall use its Best Efforts to amend the
Registration Statement if necessary and take all other actions necessary to
allow such sale under the Federal securities laws, and shall notify the Holders
promptly after it has determined that such sale has become permissible under
the Federal securities laws. Notwithstanding the foregoing, Purchaser shall
not under any circumstances be entitled to exercise its right to suspend sales
under the registration statement more than two (2) times in any twelve (12)
month period, and the period during which such Registration Statement may be
withdrawn shall not exceed sixty (60) days.
10.2 PIGGYBACK REGISTRATIONS. Purchaser shall notify all Holders
in writing at least thirty (30) days prior to the filing of any registration
statement under the Securities Act for purposes of a public offering of
securities of Purchaser (including, but not limited to, registration statements
relating to secondary offerings of securities of Purchaser, but excluding
registration statements relating to employee benefit plans or with respect to
corporate reorganizations or other transactions under Rule 145 of the
Securities Act) and will afford each such Holder an opportunity to include in
such registration statement all or part of the American Depositary Shares
issuable upon exchange of the Purchaser Stock held by such Holder. Each Holder
desiring to include in any such registration statement all or any part of such
American Depositary Shares shall, within fifteen (15) days after the
above-described notice from Purchaser, so notify Purchaser in writing. Such
notice shall state the intended method of disposition of the American
Depositary Shares by such Holder. If a Holder decides not to include all of
its American Depositary Shares in any registration statement thereafter filed
by Purchaser, such Holder shall nevertheless continue to have the right to
include any American Depositary Shares in any subsequent registration statement
or registration statements as may be filed by Purchaser with respect to
offerings of its securities, all upon the terms and conditions set forth
herein.
(a) UNDERWRITING. If the registration statement under
which Purchaser gives notice under this Section 10.2 is for an underwritten
offering, Purchaser shall so advise the Holders. In such event, the right of
any such Holder to be included in a registration pursuant to this Section 10.2
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's American Depositary Shares in the underwriting
to the extent provided herein. All Holders proposing to distribute their
American Depositary Shares through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by Purchaser. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to Purchaser; second, to the Holders on a pro rata
basis based on the total number of American Depositary Shares to be held by the
Holders; and third, to any shareholder of Purchaser (other than a Holder) on a
pro rata basis. No such reduction shall reduce the securities being offered by
Purchaser for its own account to be included in the registration and
underwriting. In no event will shares of any other selling shareholder be
included in such registration which would reduce the number of shares which may
be included by Holders without the written consent of Holders of not less than
a majority in interest of the American Depositary Shares proposed to be sold in
the offering.
(b) RIGHT TO TERMINATE REGISTRATION. Any Holder shall
have the right to terminate or withdraw any registration initiated by it under
this Section 10.2 prior to the effectiveness of such registration whether or
not any Holder has elected to include securities in such registration. The
Registration Expenses of such withdrawn registration shall be borne by
Purchaser in accordance with Section 10.3 hereof.
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10.3 EXPENSES OF REGISTRATION. Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Sections 10.1 and 10.2 herein shall be
borne by Purchaser. All Selling Expenses incurred in connection with any
registrations hereunder, shall be borne by the Holders of the securities so
registered pro rata on the basis of the number of shares so registered.
Purchaser shall not, however, be required to pay for expenses of any
registration proceeding begun pursuant to Sections 10.1 and 10.2, the request
of which has been subsequently withdrawn by the Initiating Holders unless (a)
the withdrawal is based upon material adverse information concerning Purchaser
of which the Initiating Holders were not aware at the time of such request or
(b) the holders of a majority of the American Depositary Shares agree to
forfeit their right to one requested registration pursuant to Sections 10.1 and
10.2, in which event such right shall be forfeited by all Holders). If the
Holders are required to pay the Registration Expenses, such expenses shall be
borne by the Holders of securities (including American Depositary Shares)
requesting such registration in proportion to the number of shares for which
registration was requested. If Purchaser is required to pay the Registration
Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders
shall not forfeit their rights pursuant to Section 10.1 to a demand
registration.
10.4 OBLIGATIONS OF PURCHASER. Whenever required to effect the
registration of any American Depositary Shares, Purchaser shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such American Depositary Shares and use all
reasonable efforts to cause such registration statement to become effective,
and, upon the request of the Holders of a majority of the American Depositary
Shares registered thereunder, keep such registration statement effective for up
to ninety (90) days or, if earlier, until the Holder or Holders have completed
the distribution related thereto.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of American
Depositary Shares owned by them.
(d) Use all reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that Purchaser shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter(s) of such offering.
Each Holder participating in such underwriting shall also enter into and
perform its obligations under such an agreement.
(f) Notify each Holder covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated
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therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing.
(g) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such American Depositary
Shares are delivered to the underwriters for sale, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing Purchaser for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of American Depositary Shares and (ii) a letter
dated as of such date, from the independent certified public accountants of
Purchaser, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering
and reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders requesting registration of
American Depositary Shares.
10.5 TERMINATION OF REGISTRATION RIGHTS. All registration rights
granted under this Section 10 shall terminate and be of no further force and
effect on the fourth (4th) anniversary of the Closing Date. In addition, a
Holder's registration rights shall expire if all American Depositary Shares
held by and issuable to such Holder (and its affiliates, partners and former
partners) may be sold within a given three-month period without compliance with
the registration requirements of the Securities Act pursuant to Rule 144.
10.6 DELAY OF REGISTRATION; FURNISHING INFORMATION. No Holder
shall have any right to obtain or seek an injunction restraining or otherwise
delaying any such registration as the result of any controversy that might
arise with respect to the interpretation or implementation of this Section 10.
It shall be a condition precedent to the obligations of Purchaser to take any
action pursuant to Sections 10.1 and 10.2 that the selling Holders shall
furnish to Purchaser such information regarding themselves, the American
Depositary Shares held by them and the intended method of disposition of such
securities as shall be required to effect the registration of their American
Depositary Shares.
10.7 INDEMNIFICATION. In the event any American Depositary Shares
are included in a registration statement under Sections 10.1 or 10.2:
(a) To the extent permitted by law, Purchaser will
indemnify and hold harmless each Holder, the partners, officers, directors and
legal counsel of each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "VIOLATION") by
Purchaser: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or alleged violation
by Purchaser of the Securities Act, the Exchange Act, any state securities law
or any rule or regulation promulgated under the Securities Act, the Exchange
Act or any state securities law in connection with the offering covered by such
registration statement; and Purchaser will reimburse each such Holder, partner,
officer, director, legal counsel,
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underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided however, that the indemnity
agreement contained in this Section 10.7(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of Purchaser, which consent shall
not be unreasonably withheld, nor shall Purchaser be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, legal
counsel, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if
American Depositary Shares held by such Holder is included in the securities as
to which such registration qualifications or compliance is being effected,
indemnify and hold harmless Purchaser, each of its directors, its officers, and
legal counsel and each person, if any, who controls Purchaser within the
meaning of the Securities Act, any underwriter and any other Holder selling
securities under such registration statement or any of such other Holder's
partners, directors or officers or any person who controls such Holder, against
any losses, claims, damages or liabilities (joint or several) to which
Purchaser or any such director, officer, controlling person, underwriter or
other such Holder, or partner, director, officer or controlling person of such
other Holder may become subject under the Securities Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder under an instrument duly executed by such Holder and
stated to be specifically for use in connection with such registration; and
each such Holder will reimburse any legal or other expenses reasonably incurred
by Purchaser or any such director, officer, legal counsel, controlling person,
underwriter or other Holder, or partner, officer, director, legal counsel or
controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action if it is judicially
determined that there was such a Violation; provided, however, that the
indemnity agreement contained in this Section 10.7(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall
any indemnity under this Section 10.7 exceed the proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 10.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 10.7,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 10.7, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
10.7.
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(d) If the indemnification provided for in this Section
10.7 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided, that in
no event shall any contribution by a Holder hereunder exceed the proceeds from
the offering received by such Holder.
(e) The obligations of Purchaser and Holders under this
Section 10.7 shall survive completion of any offering of American Depositary
Shares in a registration statement and the termination of this agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
10.8 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
Purchaser to register American Depositary Shares pursuant to this Section 10
may be assigned by a Holder to a transferee or assignee of American Depositary
Shares which (a) is a subsidiary, parent, general partner, limited partner or
retired partner of a Holder, (b) is a Holder's family member or trust for the
benefit of an individual Holder, or (c) acquires at least 100,000 shares of
American Depositary Shares (as adjusted for stock splits and combinations);
provided, however, (A) the transferor shall, within ten (10) days after such
transfer, furnish to Purchaser written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned and (B) such transferee shall agree to
be subject to all restrictions set forth in this Agreement.
10.9 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Section 10 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of Purchaser and the Holders of
at least a majority in interest of the Registrable Securities. Any amendment
or waiver effected in accordance with this Section 10.9 shall be binding upon
each Holder and Purchaser. By acceptance of any benefits under this Section
10, Holders of American Depositary Shares hereby agree to be bound by the
provisions hereunder.
10.10 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date
of this Agreement, Purchaser shall not, without the prior written consent of
the Holders of a majority in interest of the American Depositary Shares then
outstanding, enter into any agreement with any holder or prospective holder of
any securities of Purchaser that would grant such holder registration rights
senior to those granted to the Holders hereunder.
10.11 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that
such Holder shall not sell or otherwise transfer or dispose of any ordinary
shares (or other securities) of Purchaser held by such Holder (other than those
included in the registration) for a period specified by the representative of
the underwriters of Common Stock (or other securities) of Purchaser not to
exceed one hundred eighty (180)
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days following the effective date of a registration statement of Purchaser
filed under the Securities Act. Each Holder agrees to execute and deliver such
other agreements as may be reasonably requested by Purchaser or the underwriter
which are consistent with the foregoing or which are necessary to give further
effect thereto. The obligations described in this Section 10.11 shall not
apply to a registration relating solely to employee benefit plans on Form F-1
or Form F-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a SEC Rule 145 transaction on Form F-4 or
similar forms that may be promulgated in the future. Purchaser may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
10.12 RULE 144 REPORTING. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of American Depositary Shares to the public without
registration, Purchaser agrees to use its best efforts to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 of the Securities Act or any
similar or analogous rule promulgated under the Securities Act, at all times
after the effective date of the first registration filed by Purchaser for an
offering of its securities to the general public;
(b) File with the SEC, in a timely manner, all reports
and other documents required of Purchaser under the Exchange Act;
(c) So long as a Holder owns any American Depositary
Shares, furnish to such Holder forthwith upon request: a written statement by
Purchaser as to its compliance with the reporting requirements of said Rule 144
of the Securities Act, and of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of Purchaser; and such other reports and documents as a Holder
may reasonably request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration.
SECTION 11. MISCELLANEOUS PROVISIONS.
11.1 NONCOMPETITION; CONFIDENTIALITY. Subject to the Closing, and
as an inducement to Purchaser to execute this Agreement and complete the
transactions contemplated hereby, and in order to preserve the goodwill
associated with the business of Parent and Subsidiary being acquired pursuant
to this Agreement.
(a) COVENANT NOT TO COMPETE. For a period of two (2)
years from the Closing Date, none of the Selling Shareholders will directly or
indirectly engage in any Competitive Activities (as hereinafter defined). The
term "COMPETITIVE ACTIVITIES" as used herein shall mean:
(1) directly or indirectly engaging in,
continuing in or carrying on the business of manufacturing or selling die-cast,
injection-molded products, hand-made books, specialty packaging and other paper
products or any business similar thereto, including owning or controlling any
financial interest in any corporation, partnership, joint venture, firm or
other form of business organization which competes with or is engaged in or
carries on any aspect of such business or any business substantially similar
thereto;
(2) serving as a trustee, director, officer,
partner or employee of, or consulting with, advising or assisting in any way,
whether or not for consideration, any corporation, partnership, joint venture,
firm, proprietorship or other business organization which is now, becomes or
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may become a competitor of Purchaser in any aspect with respect to the business
which Purchaser is acquiring hereunder, including, but not limited to,
advertising or otherwise endorsing the products of any such competitor;
soliciting customers or otherwise serving as an intermediary for any such
competitor; loaning money or rendering any other form of financial assistance
to or engaging in any form of business transaction on other than an arm's
length basis with any such competitor;
(3) engaging in any practice the purpose of which
is to evade the provisions of this covenant not to compete or to commit any act
which is detrimental to the successful continuation of the business which
Purchaser is acquiring hereunder by Purchaser after the Closing or which
adversely affects such business;
provided, however, that the term "Competitive Activities" shall not
include the ownership of securities of corporations which are listed on a
national securities exchange or traded in the national over-the-counter market
in an amount which shall not exceed 5% of the outstanding shares of any such
corporation. The parties agree that the geographic scope of this covenant not
to compete shall extend throughout Mongolia, Hong Kong, China, Korea, Southeast
Asia, Malaysia, the Philippines, Australia, Japan, the United States, Mexico,
Europe and Canada. The parties agree that Purchaser may sell, assign or
otherwise transfer this covenant not to compete, in whole or in part, to any
person, corporation, firm or entity that purchases all or part of the business
being acquired by Purchaser hereunder. In the event a court of competent
jurisdiction determines that the provisions of this covenant not to compete are
excessively broad as to duration, geographical scope or activity, it is
expressly agreed that this covenant not to compete shall be construed so that
the remaining provisions shall not be affected, but shall remain in full force
and effect, and any such over broad provisions shall be deemed, without further
action on the part of any person, to be modified, amended and/or limited, but
only to the extent necessary to render the same valid and enforceable in such
jurisdiction.
(b) NON-INTERFERENCE. Each of Chan Holdings and Chan
further agrees that until three (3) years from the Closing Date, it or he will
not, without the prior written consent of Purchaser, (i) interfere with the
business of Parent, Subsidiary or Purchaser by soliciting, attempting to
solicit, inducing, or otherwise causing any employee or consultant of Parent,
Subsidiary or Purchaser to terminate his or her employment as such in order to
become an employee, consultant or independent contractor to or for any
competitor of Parent, Subsidiary or Purchaser or to or for any company with
which either of Chan Holdings or Chan is associated in any way; or (ii) induce
or attempt to induce any customers, suppliers, distributors, resellers, or
independent contractor of Parent, Subsidiary or Purchaser to terminate their
relationships with, or to take any action that would be disadvantageous to the
business of, Parent, Subsidiary or Purchaser.
(c) COVENANT OF CONFIDENTIALITY. Neither Chan Holdings
nor Chan shall at any time subsequent to the Closing, except as explicitly
requested by Purchaser, (i) use for any purpose, (ii) disclose to any person,
or (iii) keep or make copies of documents, tapes, discs or programs containing,
any confidential information concerning Parent and Subsidiary. For purposes
hereof, "CONFIDENTIAL INFORMATION" shall mean and include, without limitation,
all Trade Rights in which either Parent or Subsidiary has an interest, all
customer lists and customer information, and all other information concerning
either Parent's or Subsidiary's processes, apparatus, equipment, packaging,
products, marketing and distribution methods, not previously disclosed to the
public directly by either Parent or Subsidiary.
(d) INDEPENDENCE OF OBLIGATIONS. The covenants of Chan
Holdings and Chan set forth in this Agreement shall be construed as independent
of any other agreement or arrangement between Chan Holdings and Chan, on the
one hand, and Purchaser or any of its subsidiaries, on the other hand,
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and the existence of any claim or cause of action by Chan Holdings or Chan
against Purchaser or any of its subsidiaries shall not constitute a defense to
the enforcement of such covenants against Chan Holdings or Chan.
(e) EQUITABLE RELIEF FOR VIOLATIONS. Chan Holdings and
Chan agree that the provisions and restrictions contained in this Section 11.1
are necessary to protect the legitimate continuing interests of Purchaser in
acquiring the business and goodwill of the business through the purchase of the
Parent Shares, and that any violation or breach of these provisions will result
in irreparable injury to Purchaser for which a remedy at law would be
inadequate and that, in addition to any relief at law which may be available to
Purchaser for such violation or breach and regardless of any other provision
contained in this Agreement, Purchaser shall be entitled to injunctive and
other equitable relief as a court may grant after considering the intent of
this Section 11.1.
11.2 JOINT AND SEVERAL LIABILITY. Subject to Section 9.6 hereof:
(a) the Selling Shareholders and Principal HYP
Shareholders jointly and severally agree that they will be jointly and
severally liable with Parent and Subsidiary for the due and timely compliance
with and performance of each of the covenants and obligations of Parent and
Subsidiary set forth in this Agreement;
(b) each Selling Shareholder and Principal HYP
Shareholder agrees that such Selling Shareholder or Principal HYP Shareholder
will be jointly and severally liable with each of the other Selling
Shareholders and Principal HYP Shareholders for the due and timely compliance
with and performance of each of the covenants and obligations of such other
Selling Shareholders and Principal HYP Shareholders set forth in this
Agreement; and
(c) Each of Parent and Subsidiary agrees that, prior to
the Closing, it will be jointly and severally liable with each Selling
Shareholder for the due and timely compliance with and performance of each of
the covenants and obligations of such Selling Shareholder or Principal HYP
Shareholder set forth in this Agreement (including the indemnification
obligations (and limitations on such obligations) of such Selling Shareholder
or Principal HYP Shareholder set forth in Section 9).
11.3 AGENT.
(a) The Selling Shareholders and Principal HYP
Shareholders hereby irrevocably nominate, constitute and appoint ChinaVest
Management Limited as the agent and true and lawful attorney-in-fact of the
Selling Shareholders and Principal HYP Shareholders, with full power of
substitution, to act in the name, place and stead of the Selling Shareholders
and Principal HYP Shareholders for purposes of executing any documents and
taking any actions that the Agent may, in its sole discretion, determine to be
necessary, desirable or appropriate in connection with any of the Transactional
Agreements or any of the Transactions. ChinaVest Management Limited hereby
accepts its appointment as Agent, subject to its right to appoint a successor
Agent in its sole discretion.
(b) The Selling Shareholders and Principal HYP
Shareholders hereby grant to the Agent full authority to execute, deliver,
acknowledge, certify and file on behalf of the Selling Shareholders and
Principal HYP Shareholders (in the name of any or all of the Selling
Shareholders and Principal HYP Shareholders or otherwise) any and all documents
that the Agent may, in its sole discretion, determine to be necessary,
desirable or appropriate, in such forms and containing such provisions as the
Agent may, in its sole discretion, determine to be appropriate (including the
General Release referred to in Section 1.3(b), the Closing Certificate and any
amendment to or waiver of rights
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under any of the Transactional Agreements). Notwithstanding anything to the
contrary contained in any of the Transactional Agreements: (1) Purchaser will
be entitled to deal exclusively with the Agent on all matters relating to the
respective Transactional Agreements and the respective Transactions (including
all matters relating to any notice to, or any Consent to be given or action to
be taken by, any Selling Shareholder and Principal HYP Shareholder); and (2)
each Indemnitee will be entitled to rely conclusively (without further evidence
of any kind whatsoever) on any document executed or purported to be executed on
behalf of any Selling Shareholder and Principal HYP Shareholder by the Agent,
and on any other action taken or purported to be taken on behalf of any Selling
Shareholder and Principal HYP Shareholder by the Agent, as fully binding upon
such Selling Shareholder and Principal HYP Shareholder.
(c) The Selling Shareholders and Principal HYP
Shareholders recognize and intend that the power of attorney granted in Section
11.3(a): (1) is coupled with an interest and is irrevocable; (2) may be
delegated by the Agent; and (3) will survive the death or incapacity of each of
the Selling Shareholders.
(d) The Agent will be entitled to treat as genuine, and
as the document it purports to be, any letter, facsimile, telex or other
document that is believed by it to be genuine and to have been telexed,
telegraphed, faxed or cabled by a Selling Shareholder or to have been signed
and presented by a Selling Shareholder and Principal HYP Shareholder.
(e) If the Agent is unable to fulfill its
responsibilities hereunder, the Selling Shareholders and Principal HYP
Shareholders will, within ten days after such death or disability, appoint a
successor to the Agent and immediately thereafter notify Purchaser of the
identity of such successor. Any such successor will succeed the Agent as Agent
hereunder. If for any reason there is no Agent at any time, all references
herein to the Agent will be deemed to refer to the Selling Shareholders and
Principal HYP Shareholders.
(f) All expenses incurred by the Agent in connection with
the performance of its duties as Agent will be borne and paid by the Selling
Shareholders and Principal HYP Shareholders.
11.4 FURTHER ASSURANCES. Each party hereto will execute and cause
to be delivered to each other party hereto such instruments and other
documents, and will take such other actions, as such other party may reasonably
request (prior to, at or after the Closing) for the purpose of carrying out or
evidencing any of the Transactions.
11.5 FEES AND EXPENSES.
(a) Without limiting the generality of anything contained
in Section 11.5(b), the Selling Shareholders will bear and pay all fees, costs
and expenses (including all legal fees and expenses payable to Benjamin
Greenspan, and any local counsel retained by him that have been incurred or
that are in the future incurred by, on behalf of or for the benefit of Parent,
Subsidiary or any of the Selling Shareholders or Principal HYP Shareholders in
connection with: (1) the negotiation, preparation and review of any term sheet
or similar document relating to any of the Transactions; (2) the investigation
and review conducted by Purchaser and its Representatives with respect to the
Companies' business (and the furnishing of information to Purchaser and its
Representatives in connection with such investigation and review); (3) the
negotiation, preparation and review of this Agreement (including the Disclosure
Schedule), the other Transactional Agreements and all certificates, opinions
and other instruments and documents delivered or to be delivered in connection
with the Transactions; (4) the preparation and submission of any filing or
notice required to be made or given in connection with any of the Transactions,
and the obtaining of any Consent required to be obtained in connection with any
of the
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Transactions; and (5) the consummation and performance of the Transactions.
None of the Companies will bear or pay, and the Selling Shareholders and the
Principal HYP Shareholders will not permit the Companies to bear or pay, any
such fees, costs or expenses.
(b) Subject to the provisions of Section 9 (including the
indemnification and other obligations of the Selling Shareholders and the
Principal HYP Shareholders thereunder), Purchaser will bear and pay all fees,
costs and expenses (including the expenses of obtaining a fairness opinion from
Van Kasper & Company and all legal fees and expenses payable to Robert R.H.
Wang & Co. and Cooley Godward LLP) that have been incurred or that are in the
future incurred by or on behalf of Purchaser in connection with: (1) the
negotiation, preparation and review of any term sheet or similar document
relating to any of the Transactions; (2) the investigation and review conducted
by Purchaser and its Representatives with respect to the Companies' business;
(3) the negotiation, preparation and review of this Agreement, the other
Transactional Agreements and all certificates, opinions and other instruments
and documents delivered or to be delivered in connection with the Transactions;
and (4) the consummation and performance of the Transactions.
11.6 ATTORNEYS' FEES. If any legal action or other legal
proceeding relating to any of the Transactional Agreements or the enforcement
of any provision of any of the Transactional Agreements is brought against any
party hereto, the prevailing party will be entitled to recover reasonable
attorneys' fees, costs and disbursements (in addition to any other relief to
which the prevailing party may be entitled).
11.7 NOTICES. Any notice or other communication required or
permitted to be delivered to any party under this Agreement will be in writing
and will be deemed properly delivered, given and received when delivered (by
hand, by registered mail, by courier or express delivery service or by
telecopier) to the address or telecopier number set forth beneath the name of
such party below (or to such other address or telecopier number as such party
will have specified in a written notice given to the other parties hereto):
if to Parent or Subsidiary:
Hua Yang Printing Holdings Co. Limited
Unit B, Block 1, 25F
Tai Ping Industrial Centre
Attention: Sandra Shaw
President and Chief Executive Officer
Telephone: 852-2416-7591
Telecopier: 852-2663-9465
if to any of the Selling Shareholders or Principal HYP
Shareholders or the Agent:
c/o ChinaVest Limited
19/F, 11 Duddell Street
Central Hong Kong
Attention: Patrick L. Keen
(with a copy to: Ben Greenspan, Esq.)
Telephone: 852-2810-7081
Telecopier: 852-2845-2949
if to Purchaser:
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Zindart Limited
Flat C&D, 25th Floor, Block 1
Taiping Industrial Centre
57 Ting Kok Road
Tai Po, N.T., Hong Kong
Attention: Feather S.Y. Fok
Telephone: 852-2665-1711
Telecopier: 852-2664-7066
with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Gregory C. Smith
Telephone: 011-01-415-693-2124
Telecopier: 011-01-415-951-3699
11.8 PUBLICITY. Without limiting the generality of anything
contained in Section 4.8, on and at all times after the Closing Date: (a) no
press release or other publicity concerning any of the Transactions will be
issued or otherwise disseminated by or on behalf of Parent, Subsidiary or any
of the Selling Shareholders or Principal HYP Shareholders without the prior
approval of Purchaser, and Parent, Subsidiary, the Selling Shareholders and the
Principal HYP Shareholders will continue to keep the existence and terms of
this Agreement and the other Transactional Agreements strictly confidential;
and (b) each of Parent, Subsidiary, the Selling Shareholders and the Principal
HYP Shareholders will keep strictly confidential, and will not use or disclose
to any other Person, any non-public document or other information in its
possession that relates directly or indirectly to the business of the
Companies, Purchaser or any affiliate of Purchaser.
11.9 HEADINGS. The headings contained in this Agreement are for
convenience of reference only, will not be deemed to be a part of this
Agreement and will not be referred to in connection with the construction or
interpretation of this Agreement.
11.10 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which will constitute an original and all of which, when
taken together, will constitute one agreement.
11.11 GOVERNING LAW; VENUE.
(a) This Agreement will be construed in accordance with,
and governed in all respects by, the internal laws of Hong Kong (without giving
effect to principles of conflicts of laws).
(b) Any legal action or other legal proceeding relating
to this Agreement or the enforcement of any provision of this Agreement may be
brought or otherwise commenced in any court located in Hong Kong. Each party
to this Agreement: (1) expressly and irrevocably consents and submits to the
jurisdiction of each court located in Hong Kong in connection with any such
legal proceeding; (2) agrees that each court located in Hong Kong will be
deemed to be a convenient forum; and (3) agrees not to assert (by way of
motion, as a defense or otherwise), in any such legal proceeding commenced in
any court located in Hong Kong, any claim that such party is not subject
personally to the jurisdiction of such court, that such legal proceeding has
been brought in an inconvenient forum, that the
48.
<PAGE> 54
venue of such proceeding is improper or that this Agreement or the subject
matter of this Agreement may not be enforced in or by such court.
(c) Each Selling Shareholder and Principal HYP
Shareholder agrees that, if any Proceeding is commenced against any Indemnitee
by any Person in or before any court or other tribunal in Hong Kong, then such
Indemnitee may proceed against such Selling Shareholder or Principal HYP
Shareholder in such court or other tribunal with respect to any indemnification
claim or other claim arising directly or indirectly from or relating directly
or indirectly to such Proceeding or any of the matters alleged therein or any
of the circumstances giving rise thereto.
(d) The Selling Shareholders irrevocably constitute and
appoint the Agent as their agent to receive service of process in connection
with any legal proceeding relating to this Agreement or the enforcement of any
provision of this Agreement.
(e) The Selling Shareholders and the Principal HYP
Shareholders irrevocably waive the right to a jury trial in connection with any
legal proceeding relating to this Agreement or the enforcement of any provision
of this Agreement.
11.12 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon:
each of Parent, Subsidiary and their respective successors and assigns (if
any); the Selling Shareholders and the Principal HYP Shareholders and their
respective personal representatives, executors, administrators, estates, heirs,
successors and assigns (if any); and Purchaser and its successors and assigns
(if any). This Agreement will inure to the benefit of: each of Parent and
Subsidiary; the Selling Shareholders; the Principal HYP Shareholders;
Purchaser; the other Indemnitees (subject to Section 9.11); and the respective
successors and assigns (if any) of the foregoing. Purchaser may freely assign
any or all of its rights under this Agreement (including its indemnification
rights under Section 9), in whole or in part, to any other Person without
obtaining the consent or approval of any other party hereto or of any other
Person.
11.13 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and
remedies of the parties hereto will be cumulative (and not alternative). Each
of Parent, Subsidiary, the Selling Shareholders and the Principal HYP
Shareholders agrees that:
(a) in the event of any Breach or threatened Breach by it
of any covenant, obligation or other provision set forth in this Agreement,
Purchaser will be entitled (in addition to any other remedy that may be
available to it) to (1) a decree or order of specific performance or mandamus
to enforce the observance and performance of such covenant, obligation or other
provision, and (2) an injunction restraining such Breach or threatened Breach;
and
(b) neither Purchaser nor any other Indemnitee will be
required to provide any bond or other security in connection with any such
decree, order or injunction or in connection with any related action or
Proceeding.
11.14 WAIVER.
(a) No failure on the part of any Person to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the
part of any Person in exercising any power, right, privilege or remedy under
this Agreement, will operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy will preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.
49.
<PAGE> 55
(b) No Person will be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege or remedy under
this Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver will not be applicable
or have any effect except in the specific instance in which it is given.
11.15 AMENDMENTS. This Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Purchaser and the Agent.
11.16 SEVERABILITY. In the event that any provision of this
Agreement, or the application of any such provision to any Person or set of
circumstances, will be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to Persons or circumstances other than those as
to which it is determined to be invalid, unlawful, void or unenforceable, will
not be impaired or otherwise affected and will continue to be valid and
enforceable to the fullest extent permitted by law.
11.17 PARTIES IN INTEREST. Except for the provisions of Section 9
hereof, none of the provisions of this Agreement is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns (if any).
11.18 ENTIRE AGREEMENT. The Transactional Agreements set forth the
entire understanding of the parties relating to the subject matter thereof and
supersede all prior agreements and understandings among or between any of the
parties relating to the subject matter thereof.
11.19 DOLLARS. Whenever the symbols or words "$" or "dollar" or
"dollars" are used in this Agreement, it shall be a reference to United States
dollars.
11.20 POST-CLOSING COVENANT. Promptly following the Closing, the
parties shall cooperate to have all right, title and interest in the one
Subsidiary Ordinary Share held by Dennis Smith transferred to an executive
officer designated by Purchaser to be held in escrow for the benefit of Parent.
11.21 REPRESENTATIONS. The parties understand and acknowledge that
except as provided in Sections 4.4(b) and 6.2 hereof, references throughout
this Agreement to the representations and warranties of Subsidiary, Parent, the
Selling Shareholders and the Principal HYP Shareholders contained in Section 2
hereof shall include the information contained in the Disclosure Schedule.
11.22 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context
requires: the singular number will include the plural, and vice versa; the
masculine gender will include the feminine and neuter genders; the feminine
gender will include the masculine and neuter genders; and the neuter gender
will include the masculine and feminine genders.
(b) The parties hereto agree that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party will not be applied in the construction or interpretation of
this Agreement.
50.
<PAGE> 56
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, will not be deemed to be terms of
limitation, but rather will be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of
this Agreement and Exhibits to this Agreement.
51.
<PAGE> 57
The parties hereto have caused this Agreement to be executed and
delivered as of the date first above written.
"PURCHASER"
ZINDART LIMITED
By: Feather Fok
---------------------------------
Feather Fok
Chief Financial Officer and
Chief Operating Officer
"SUBSIDIARY"
HUA YANG PRINTING HOLDINGS CO. LIMITED
By: /s/ Sandra C. Shaw
---------------------------------
Sandra C. Shaw
---------------------------------
[Print Name and Title]
"PARENT"
HUA YANG HOLDINGS CO. LIMITED
By: /s/ Sandra C. Shaw
---------------------------------
Sandra C. Shaw
---------------------------------
[Print Name and Title]
THE "AGENT"
CHINAVEST MANAGEMENT LIMITED
By: /s/ Robert A. Theleen
---------------------------------
Robert A. Theleen
---------------------------------
[Print Name and Title]
"SELLING SHAREHOLDERS"
HYP HOLDINGS LIMITED
By: /s/ Alex Ngan
---------------------------------
Alex Ngan - Director
---------------------------------
[Print Name and Title]
S-1.
<PAGE> 58
KARL CHAN (BVI) HOLDINGS LIMITED
By: /s/ Karl Chan
---------------------------------
_________________________________
[Print Name and Title]
/s/ Karl Chan
---------------------------------
KARL CHAN
"PRINCIPAL HYP SHAREHOLDERS"
CHINAVEST IV, L.P.
By its General Partner:
CHINAVEST PARTNERS IV
By: /s/ Dennis M. Smith
----------------------------------
Dennis M. Smith, General Partner
CHINAVEST IV-A, L.P.
By its General Partner:
CHINAVEST PARTNERS IV
By: /s/ Dennis M. Smith
----------------------------------
Dennis M. Smith, General Partner
CHINAVEST IV-B, L.P.
By its General Partner:
CHINAVEST MANAGEMENT LIMITED
By: /s/ Patrick L. Keen
----------------------------------
Patrick L. Keen, Director
S-2.
<PAGE> 59
ADVENT GLOBAL GECC LIMITED PARTNERSHIP
By its General Partners:
ADVENT GLOBAL MANAGEMENT LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL LIMITED PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
ADVENT INTERNATIONAL INVESTORS II LIMITED
PARTNERSHIP
By its General Partner:
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
GLOBAL PRIVATE EQUITY II - LIMITED PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
S-3.
<PAGE> 60
GLOBAL PRIVATE EQUITY II - PGGM LIMITED
PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
ASIA/PACIFIC SPECIAL SITUATIONS FUND LIMITED
PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
ADVENT ASIA/PACIFIC FUND LIMITED
PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
S-4.
<PAGE> 61
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this EXHIBIT A):
"ACQUISITION TRANSACTION" means any transaction involving: (a) the
sale or other disposition of all or any portion of the business or assets
(other than in the Ordinary Course of Business) of the Companies; (b) the
issuance, sale or other disposition of (1) any capital stock of the Companies,
(2) any option, call, warrant or right (whether or not immediately exercisable)
to acquire any capital stock of the Companies, or (3) any security, instrument
or obligation that is or may become convertible into or exchangeable for any
capital stock of the Companies; or (c) any merger, consolidation, business
combination, share exchange, reorganization or similar transaction involving
the Companies.
"AGENT" has the meaning specified in the introductory paragraph of the
Agreement.
"AGREEMENT" means the Exchange Agreement to which this EXHIBIT A is
attached (including the Disclosure Schedule), as it may be amended from time to
time.
"AMERICAN DEPOSITARY SHARES" has the meaning specified in Section 1.5
of the Agreement.
"AUDIT" has the meaning specified in Section 1.2(c) of the Agreement.
"BEST EFFORTS" means the efforts that a prudent Person desiring to
achieve a particular result would use in order to ensure that such result is
achieved as expeditiously as possible.
"BREACH" There will be deemed to be a "Breach" of a representation,
warranty, covenant, obligation or other provision if there is or has been (a)
any material inaccuracy in or breach of, or any failure to comply with or
perform, such representation, warranty, covenant, obligation or other
provision, or (b) any substantiated claim (by any Person) or other circumstance
that is inconsistent with such representation, warranty, covenant, obligation
or other provision; and the term "Breach" will be deemed to refer to any such
inaccuracy, breach, failure, claim or circumstance.
"BUSINESS PLAN" has the meaning specified in Section 4.2(c) of the
Agreement.
"CHAN" and "CHAN HOLDINGS" has the meaning specified in the
introductory paragraph of the Agreement.
"CLOSING" has the meaning specified in Section 1.3(a) of the
Agreement.
"CLOSING CERTIFICATE" has the meaning specified in Section 1.3(b)(3)
of the Agreement.
"CLOSING DATE" has the meaning specified in Section 1.3(a) of the
Agreement.
"COMPANIES" has the meaning specified in Section 2.1(a) of the
Agreement.
"COMPANY PLAN" means any Current Benefit Plan or Past Benefit Plan.
A-1.
<PAGE> 62
"COMPARABLE ENTITIES" means Entities (other than the Companies) doing
business in Hong Kong or Southern China that are engaged in businesses similar
to the businesses of Subsidiary and/or the Joint Ventures.
"COMPETITIVE ACTIVITIES" and "CONFIDENTIAL INFORMATION" have the
meanings specified in Section 11.1 of the Agreement.
"CONSENT" means any approval, consent, ratification, permission,
waiver or authorization (including any Governmental Authorization).
"CONSIDERATION" has the meaning specified in Section 1.2 of the
Agreement.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total
interest expense of Subsidiary, plus, to the extent incurred by Subsidiary in
such period but not included in such interest expense: (i) interest expense
attributable to capitalized lease obligations; (ii) amortization of debt
discount and debt issuance cost; (iii) capitalized interest; (iv) noncash
interest expense; (v) commissions, discounts and other fees and charges with
respect to letters of credit and bankers' acceptance financing; (vi) interest
accruing on an indebtedness of any other Person to the extent that such
indebtedness is guaranteed by Subsidiary, provided that payment of such amounts
is being made to, or is sought by, the holders of such indebtedness pursuant to
such guarantee; and (vii) cash contributions to any employee stock ownership
plan or similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than Subsidiary) in
connection with indebtedness incurred by such plan or trust.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net
income (loss) of Subsidiary; provided, however, that there shall not be
included in such Consolidated Net Income: (i) any net income (loss) of any
Person acquired by Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition; (ii) any net income (loss) of
Subsidiary if Subsidiary is subject to restrictions, directly or indirectly, on
the payment of dividends or the making of distributions, directly or directly,
to any other Person, except that (A) subject to the limitations contained in
clause (iii) below, Subsidiary's equity in the net income of any such Person
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Person during
such period to Subsidiary as a dividend (subject, in the case of a dividend
that could have been made to another Person, to the limitation contained in
this clause) and (B) Subsidiary's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net Income;
(iii) any gain (but not loss) realized upon the sale or other disposition of
any asset of Subsidiary (including pursuant to any sale/leaseback transaction)
that is not sold or otherwise disposed of in the Ordinary Course of Business
and any gain (but not loss) realized upon the sale or other disposition of any
capital stock of any Person; (iv) any extraordinary gain or loss; and (v) the
cumulative effect of a change in accounting principles; provided, further, that
Consolidated Net Income shall be increased by the amount of cash actually
finally paid to Purchaser pursuant to the indemnification provisions of Section
9 of the Agreement if and only to the extent that the liability or expense
resulting in such payment reduced Consolidated Net Income during the Earn-Out
Period.
"CONTRACT" means any written, oral, implied or other agreement,
contract, understanding, arrangement, instrument, note, guaranty, indemnity,
representation, warranty, deed, assignment, power of attorney, certificate,
purchase order, work order, insurance policy, benefit plan, commitment,
covenant, assurance or undertaking of any nature.
A-2.
<PAGE> 63
"CURRENT BENEFIT PLAN" means any Employee Benefit Plan that is
currently in effect and: (a) that was established or adopted by, or is
maintained or sponsored by the Companies; (b) in which the Companies
participates; (c) with respect to which the Companies is or may be required or
permitted to make any contribution; or (d) with respect to which the Companies
is or may become subject to any Liability.
"DAMAGES" includes any loss, damage, injury, decline in value, lost
opportunity, Liability, claim, demand, settlement, judgment, award, fine,
penalty, Tax, fee (including any legal fee, expert fee, accounting fee or
advisory fee), charge, cost (including any cost of investigation) or expense of
any nature.
"DISCLOSURE SCHEDULE" means the schedule (dated as of the date of the
Agreement) delivered to Purchaser on behalf of Parent, Subsidiary, the Selling
Shareholders and the Principal HYP Shareholders and incorporated in the
Agreement by reference.
"EARN-OUT PERIOD" means the consecutive two (2) fiscal years ended
March 31, 1999.
"EARN-OUT SHARES" has the meaning specified in Section 1.2(c) of the
Agreement.
"EMPLOYEE BENEFIT PLAN" shall have the meaning specified in Section
3(3) of ERISA.
"ENCUMBRANCE" means any lien, pledge, hypothecation, charge, mortgage,
security interest, encumbrance, equity, trust, equitable interest, claim,
preference, right of possession, lease, tenancy, license, encroachment,
covenant, infringement, interference, Order, proxy, option, right of first
refusal, preemptive right, community property interest, legend, defect,
impediment, exception, reservation, limitation, impairment, imperfection of
title, condition or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or
other asset, any restriction on the receipt of any income derived from any
asset, any restriction on the use of any asset and any restriction on the
possession, exercise or transfer of any other attribute of ownership of any
asset).
"ENTITY" means any corporation (including any non-profit corporation),
general partnership, limited partnership, limited liability partnership, joint
venture, estate, trust, cooperative, foundation, society, political party,
union, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization or entity.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ESCROW AGREEMENT" has the meaning specified in Section 1.2(b) of the
Agreement.
"ESCROW SHARES" has the meaning specified in Section 1.2(b) of the
Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED CONTRACT" means any Subsidiary Contract that: (a) any of
the Companies have entered into in the Ordinary Course of Business; (b) has a
term of less than 90 days or may be terminated by any of the Companies (without
penalty) within 90 days after the delivery of a termination notice by any of
the Companies; or (c) does not contemplate or involve the payment of cash or
other consideration in an amount or having a value in excess of $100,000.
A-3.
<PAGE> 64
"FINANCIAL STATEMENTS" has the meaning specified in Section 2.4(a) of
the Agreement.
"FORM F-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by Purchaser with
the SEC.
"GAAP" means generally accepted accounting principles used in the
United States, applied on a basis consistent with the basis on which the
Financial Statements were prepared.
"GOVERNMENTAL AUTHORIZATION" means any: (a) permit, license,
certificate, franchise, concession, approval, consent, ratification,
permission, clearance, confirmation, endorsement, waiver, certification,
designation, rating, registration, qualification or authorization that is, has
been issued, granted, given or otherwise made available by or under the
authority of any Governmental Body or pursuant to any Legal Requirement; or (b)
right under any Contract with any Governmental Body.
"GOVERNMENTAL BODY" means any: (a) nation, principality,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) local, municipal, foreign or other government;
(c) governmental or quasi-governmental authority of any nature (including any
governmental division, subdivision, department, agency, bureau, branch, office,
commission, council, board, instrumentality, officer, official, representative,
organization, unit, body or Entity and any court or other tribunal); (d)
multi-national organization or body; or (e) individual, Entity or body
exercising, or entitled to exercise, any executive, legislative, judicial,
administrative, regulatory, police, military or taxing authority or power of
any nature.
"HAZARDOUS MATERIAL" includes: (a) any petroleum, waste oil, crude
oil, asbestos, urea formaldehyde or polychlorinated biphenyl; (b) any waste,
gas or other substance or material that is explosive or radioactive; (c) any
"hazardous substance," "pollutant," "contaminant," "hazardous waste,"
"regulated substance," "hazardous chemical" or "toxic chemical" as designated,
listed or defined (whether expressly or by reference) in any statute,
regulation or other Legal Requirement; (d) any other substance or material
(regardless of physical form) or form of energy that is subject to any Legal
Requirement which regulates or establishes standards of conduct in connection
with, or which otherwise relates to, the protection of human health, plant
life, animal life, natural resources, property or the enjoyment of life or
property from the presence in the environment of any solid, liquid, gas, odor,
noise or form of energy; and (e) any compound, mixture, solution, product or
other substance or material that contains any substance or material referred to
in clause (a), (b), (c) or (d) above.
"HOLDER" means any holder of Purchaser Stock or American Depositary
Shares.
"HYP" has the meaning specified in the introductory paragraph of the
Agreement.
"INDEMNITEES" means the following Persons: (a) Purchaser; (b) the
Companies; (c) the respective Representatives of the Persons referred to in
clauses (a) and (b) above; and (d) the respective successors and assigns of the
Persons referred to in clauses (a), (b) and (c) above; provided, however, that
the Selling Shareholders and Principal HYP Shareholders will not be deemed to
be "Indemnitees."
"JOINT VENTURE" and "JOINT VENTURES" means either or both of Shenzhen
Huaxuan Printing Product Co., Ltd., a contractual joint venture formed under
the laws of the PRC, and Guangzhou Jin Yi Advertising Company Limited, a
contractual joint venture formed under the laws of the PRC.
A-4.
<PAGE> 65
"KNOWLEDGE" An individual will be deemed to have "Knowledge" of a
particular fact or other matter if: (a) such individual is actually aware of
such fact or other matter; or (b) a prudent individual could be expected to
discover or otherwise become aware of such fact or other matter in the Ordinary
Course of Business. Each of Parent, Subsidiary, Selling Shareholders or
Principal HYP Shareholders will be deemed to have "Knowledge" of a particular
fact or other matter if any of its executive officers, key employees or other
Representatives has Knowledge of such fact or other matter.
"LEGAL REQUIREMENT" means any written local, municipal, foreign or
other law, statute, legislation, constitution, principle of common law,
resolution, ordinance, code, edict, decree, proclamation, treaty, convention,
rule, regulation, ruling, directive, pronouncement, requirement, specification,
determination, decision, opinion or interpretation that is, has been issued,
enacted, adopted, passed, approved, promulgated, made, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
"LIABILITY" means any debt, obligation, duty or liability of any
nature (including any unknown, undisclosed, unmatured, unaccrued, unasserted,
contingent, indirect, conditional, implied, derivative, joint, several or
secondary liability), regardless of whether such debt, obligation, duty or
liability would be required to be disclosed on a balance sheet prepared in
accordance with generally accepted accounting principles and regardless of
whether such debt, obligation, duty or liability is immediately due and
payable.
"ORDER" means any: (a) order, judgment, injunction, edict, decree,
ruling, pronouncement, determination, decision, opinion, verdict, sentence,
subpoena, writ or award that is, has been or may in the future be issued, made,
entered, rendered or otherwise put into effect by or under the authority of any
court, administrative agency or other Governmental Body or any arbitrator or
arbitration panel; or (b) Contract with any Governmental Body that is, has been
or may in the future be entered into in connection with any Proceeding.
"ORDINARY COURSE OF BUSINESS" An action taken by or on behalf of the
Companies will not be deemed to have been taken in the "Ordinary Course of
Business" unless: (a) such action is consistent with its past practices (if
such type of action has been taken in the past) and is similar in nature and
magnitude to actions customarily taken by it; (b) such action is taken in
accordance with sound and prudent business practices in Hong Kong or Southern
China; and (c) such action is not required to be authorized by its shareholders
and does not require any other separate or special authorization of any nature.
"PARENT" has the meaning specified in the introductory paragraph of
the Agreement.
"PARENT ORDINARY SHARES," "PARENT PREFERRED SHARES" and "PARENT
SHARES" have the meanings specified in the recitals to the Agreement.
"PAST BENEFIT PLAN" means any Employee Benefit Plan (other than a
Current Benefit Plan): (a) that has at any time been established, adopted,
maintained or sponsored by the Companies; (b) in which the Companies has ever
participated; (c) with respect to which the Companies has ever made, or has
ever been required or permitted to make, any contribution; or (d) with respect
to which the Companies has ever been subject to any Liability.
"PERMITTED REDEMPTION" has the meaning specified in Section 4.2(i) of
the Agreement.
A-5.
<PAGE> 66
"PERSON" means any individual, Entity or Governmental Body.
"PRC" means the People's Republic of China.
"PRE-CLOSING PERIOD" means the period commencing as of the date of the
Agreement and ending on the Closing Date.
"PRINCIPAL HYP SHAREHOLDERS" has the meaning specified in the
introductory paragraph of the Agreement.
"PROCEEDING" means any action, suit, litigation, arbitration,
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding and any informal proceeding), prosecution, contest,
hearing, inquiry, inquest, audit, examination or investigation that is, has
been or may in the future be commenced, brought, conducted or heard by or
before, or that otherwise has involved or may involve, any Governmental Body or
any arbitrator or arbitration panel.
"PROPRIETARY ASSET" means any patent, patent application, trademark
(whether registered or unregistered and whether or not relating to a published
work), trademark application, trade name, fictitious business name, service
mark (whether registered or unregistered), service mark application, copyright
(whether registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, franchise, system, computer software,
invention, design, blueprint, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset.
"PRO RATA SHARE" means for each Selling Shareholder the number of
shares or amount of cash, as appropriate, multiplied by the following figures:
(i) for HYP, 0.742; (ii) for Chan Holdings, 0.247; and (iii) for Chan, 0.011.
"PURCHASER" has the meaning specified in the introductory paragraph of
the Agreement.
"PURCHASER SEC REPORTS" has the meaning specified in Section 3.2 of
the Agreement.
"PURCHASER STOCK" has the meaning specified in Section 1.2 of the
Agreement.
"REGISTRABLE SECURITIES" includes the ordinary shares (or American
Depositary Shares convertible therefrom) issued pursuant to the Agreement to a
Holder (or qualified transferee) other than registrable securities that: (i)
were issued under the Agreement pursuant to Regulation S; (ii) were registered
and sold pursuant to a registration statement under the Securities Act; or
(iii) may be sold within a given three-month period without compliance with the
registration requirements of the Securities Act pursuant to Rule 144.
"REGISTRATION EXPENSES" means all expenses, except for Selling
Expenses, incurred by Purchaser in complying with the registration provisions
contained in the Agreement, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for Purchaser, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration.
"REGISTRATION STATEMENT" has the meaning specified in Section 10.1(a)
of the Agreement.
"REGULATION S" has the meaning specified in Section 2.31(a) of the
Agreement.
A-6.
<PAGE> 67
"RELATED PARTY" means: (a) each of the Selling Shareholders and
Principal HP Shareholders; (b) each individual who is, or who has at any time
been, an officer of the Companies; (c) each member of the family of each of the
individuals referred to in clauses (a) and (b) above; and (d) any Entity (other
than the Companies) in which any one of the individuals referred to in clauses
(a), (b) and (c) above holds (or in which more than one of such individuals
collectively hold), beneficially or otherwise, a material voting, proprietary
or equity interest.
"REPRESENTATIVES" means officers, directors, employees, agents,
attorneys, accountants, advisors and representatives. All Related Parties will
be deemed to be "Representatives" of the Companies.
"RETURNS" has the meaning specified in Section 2.17(b) of the
Agreement.
"SCHEDULED CLOSING TIME" has the meaning specified in Section 1.3(a)
of the Agreement.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING EXPENSES" means selling commissions, underwriting fees and
stock transfer taxes applicable to the American Depositary Shares and all fees
and disbursements of counsel for any Holder.
"SELLING SHAREHOLDERS" has the meaning specified in the introductory
paragraph of the Agreement.
SPECIFIED REPRESENTATIONS. "Specified Representations" shall mean the
representations and warranties set forth in Sections 2.1 (except 2.1(c)), 2.3,
2.4, 2.7, 2.11, 2.12(c), 2.17, 2.19 and 2.23 of the Agreement.
"SUBSIDIARY" has the meaning specified in the introductory paragraph
of the Agreement.
"SUBSIDIARY CONTRACT" means any Contract: (a) to which any of the
Companies is a party; (b) by which the Companies or any of their assets is or
may become bound or under which the Companies has, or may become subject to,
any obligation; or (c) under which any of the Companies has or may acquire any
right or interest.
"SUBSIDIARY EBITDA" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense; (ii) Consolidated Interest
Expense; (iii) depreciation expense; (iv) amortization expense; and (v) any
non-cash expense in connection with the transactions contemplated by the
Agreement or any restructuring in connection with such transactions
contemplated at the time of such transactions (excluding any such expense that
(x) requires any accrual of a cash reserve or (y) represents an accrual of, or
reserve for, anticipated cash payments in any future period), in each case for
such period. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization of, Subsidiary
shall be added to Consolidated Net Income to compute Subsidiary EBITDA only to
the extent (and in the same proportion) that the net income of such Person was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to
Subsidiary by such Person without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Person.
A-7.
<PAGE> 68
"SUBSIDIARY ORDINARY SHARES" has the meaning specified in the recitals
to the Agreement.
"TAX" means any tax (including any income tax, franchise tax, capital
gains tax, estimated tax, gross receipts tax, value-added tax, surtax, excise
tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax,
business tax, occupation tax, inventory tax, occupancy tax, withholding tax or
payroll tax), levy, assessment, tariff, impost, imposition, toll, duty
(including any customs duty), deficiency or fee, and any related charge or
amount (including any fine, penalty or interest), that is, has been or may in
the future be (a) imposed, assessed or collected by or under the authority of
any Governmental Body, or (b) payable pursuant to any tax-sharing agreement or
similar Contract.
"TAX RETURN" means any return (including any information return),
report, statement, declaration, estimate, schedule, notice, notification, form,
election, certificate or other document or information that is, has been or may
in the future be filed with or submitted to, or required to be filed with or
submitted to, any Governmental Body in connection with the determination,
assessment, collection or payment of any Tax or in connection with the
administration, implementation or enforcement of or compliance with any Legal
Requirement relating to any Tax.
"TRADE RIGHTS" shall mean and include: (i) all United States, state
and foreign trademark rights, business identifiers, trade dress, service marks,
trade names, and brand names, including all claims for infringement, and all
registrations thereof and applications therefor and all goodwill associated
with the foregoing accruing from the dates of first use thereof; (ii) all
United States and foreign copyrights, copyright registrations and copyright
applications, including all claims for infringement, and all other rights
associated with the foregoing and the underlying works of authorship; (iii) all
United States and foreign patents and patent applications, including all claims
for infringement and all international proprietary rights associated therewith;
(iv) all contracts or agreements granting any right, title, license or
privilege under the intellectual property rights of any third party; and (v)
all inventions, mask works and mask work registrations, know-how, discoveries,
improvements, designs, trade secrets, shop and royalty rights, employee
covenants and agreements respecting intellectual property and non-competition
and all other types of intellectual property.
"TRANSACTIONAL AGREEMENTS" means: (a) the Agreement; (b) the General
Release; (c) the Escrow Agreement; and (d) the Closing Certificate.
"TRANSACTIONS" means (a) the execution and delivery of the respective
Transactional Agreements, and (b) all of the transactions contemplated by the
respective Transactional Agreements, including: (1) the sale of the Parent
Shares by the Selling Shareholders to Purchaser in accordance with the
Agreement; and (2) the performance by the parties of their respective
obligations under the Transactional Agreements and the exercise by the parties
of their respective rights under the Transactional Agreements.
"UNAUDITED INTERIM BALANCE SHEET" has the meaning specified in Section
2.4(a)(2) of the Agreement.
"VIOLATION" has the meaning specified in Section 10.7(a) of the
Agreement.
A-8.
<PAGE> 69
ESCROW AGREEMENT
THIS ESCROW AGREEMENT(this "AGREEMENT") is dated as of ____________,
1998 by and among ZINDART LIMITED, a Hong Kong corporation ("PURCHASER"), HUA
YANG HOLDINGS CO. LIMITED, a Cayman Islands corporation ("PARENT"), HUA YANG
PRINTING HOLDINGS CO. LIMITED, a Hong Kong corporation ("SUBSIDIARY"), HYP
HOLDINGS LIMITED, a Cayman Islands corporation ("HYP"), KARL CHAN (BVI)
HOLDINGS LIMITED, a British Virgin Islands corporation ("CHAN HOLDINGS"), KARL
CHAN, an individual ("CHAN") (HYP, Chan Holdings and Chan are sometimes
hereinafter collectively referred to as the "SELLING SHAREHOLDERS"), CHINAVEST
MANAGEMENT LIMITED (the "AGENT"), and ROBERT W.H. WANG & CO. (including any
successor or assign, the "ESCROW AGENT").
RECITALS
A. Pursuant to that certain Exchange Agreement dated the date
hereof (the "EXCHANGE AGREEMENT") between the parties hereto, the Selling
Shareholders are effecting an exchange of all the issued and outstanding
ordinary shares of Parent to Purchaser for the consideration, and on the terms
and subject to the conditions, set forth in the Exchange Agreement.
B. A condition precedent to the consummation of the Exchange
Agreement is the execution and delivery of this Agreement by the parties
hereto. Certain capitalized terms used in this Agreement are defined in the
Exchange Agreement.
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and intending to be legally bound hereby, the parties hereto agree
as follows.
1. ESTABLISHMENT OF ESCROW ACCOUNTS.
1.1 INDEMNIFICATION ESCROW. At the Closing (as defined in the
Exchange Agreement), Purchaser shall reserve for the ultimate benefit of the
Selling Shareholders 666,667 shares of Purchaser Stock (the "INDEMNIFICATION
ESCROW SHARES") by depositing with the Escrow Agent completed but unexecuted
share certificates in the names of The Bank of New York (as depositary) to hold
the same for each Selling Shareholder in the amounts designated in writing by
the Selling Shareholders as provided for in this Section 1.1 (the
"INDEMNIFICATION ESCROW"). The Escrow Agent shall hold the Indemnification
Escrow Shares until 5:00 p.m. (Pacific Standard Time) on that date (or the
first succeeding business day thereafter) which is one hundred eighty (180)
days after the Closing Date (the "CUT-OFF DATE") for the purpose of securing
any claim(s) (a "CLAIM") for indemnity made by Purchaser pursuant to Section 9
of the Exchange Agreement (subject to the threshold amount specified in Section
9.3 thereof). In the event that Purchaser makes one or more Claims by the
Cut-Off Date, Purchaser shall deliver written notice of the Claim (a "NOTICE")
to the Escrow Agent and the Agent, and the Retained Indemnification Escrow
Shares shall continue
1.
<PAGE> 70
to be held in the Indemnification Escrow which shall be extended after the
Cut-Off Date until such time as the Claim(s) is/are finally resolved. Any
Indemnification Escrow Shares, if any, in excess of the Retained
Indemnification Escrow Shares, shall be delivered by the Escrow Agent to the
Bank of New York or the Selling Shareholders (or any designee thereof), as
directed by the Selling Shareholders. As used herein, "RETAINED
INDEMNIFICATION ESCROW SHARES" shall mean that number of Indemnification Escrow
Shares equal to the aggregate dollar amount of the Claim(s) specified in any
Notice(s) delivered by Purchaser prior to the Cut-Off Date, as valued by the
following sentence. Each Indemnification Escrow Share shall be valued at the
closing bid price of the American Depositary Shares of Purchaser on the most
recent trading date prior to or on the Cut-Off Date. In the event that no
Notice is delivered by Purchaser to the Escrow Agent by the Cut-Off Date, the
Indemnification Escrow Shares shall be surrendered promptly thereafter (by
utilizing a nationally recognized overnight courier) by the Escrow Agent to the
Agent on behalf of all Selling Shareholders or to the Bank of New York, as
directed by the Selling Shareholders.
1.2 TRANSFERABILITY. The interests of the Selling Shareholders in
the Purchaser Stock held pursuant to this Agreement shall not be assignable or
transferable, other than by operation of law (except that HYP may distribute
its Purchaser Stock to its shareholders). No transfer of any of such interests
by operation of law shall be recognized or given effect until Purchaser shall
have received written notice of such transfer.
1.3 FRACTIONAL SHARES. No fractional shares of Purchaser Stock
shall be retained in escrow hereunder or released pursuant to this Agreement.
1.4 LEGENDS. The Escrow Agent agrees that upon the written
request of Purchaser, it shall add (or allow the Company or the Company's
transfer agent to add) to the certificates representing Purchaser Stock held
pursuant hereto any additional legend(s) required to be printed on such
certificates by the terms of the Exchange Agreement.
1.5 RECEIPT BY ESCROW AGENT. The Escrow Agent acknowledges
receipt from Purchaser of completed but not executed certificates representing
the Indemnification Escrow Shares. The Escrow Agent accepts appointment
hereunder and agrees to hold and distribute the Indemnification Escrow Shares
in accordance herewith.
2. TERMINATION. This Agreement shall terminate upon the earlier of: (a)
that date that the Escrow Agent no longer holds any Purchaser Stock; or (b) the
written agreement of all parties hereto.
3. PAYMENT OF ESCROW AGENT'S FEES AND EXPENSES
The fee of the Escrow Agent for its activities pursuant to this
Agreement shall be HK$10,000, plus reasonable expenses, which fee shall be paid
by Purchaser upon the execution of this Agreement. If, due to disputes or
other reasons, the services of the Escrow Agent become materially greater than
originally contemplated under the terms of this
2.
<PAGE> 71
Agreement, the Escrow Agent shall be entitled to charge additional reasonable
fees for such additional services, which shall be paid by Purchaser.
4. REPRESENTATIONS AND WARRANTIES.
Each party hereto hereby makes the following representations and
warranties in respect of itself to every other party hereto, each of which is
true and correct on the date hereof, shall remain true and correct to and
including the Closing Date, shall be unaffected by any investigation heretofore
or hereafter made by any other party hereto, or any knowledge of any other
party and shall survive the Closing.
4.1 CORPORATE. It is an entity duly organized, validly existing
and in good standing under the laws of the state of its organization. It has
all requisite corporate power to enter into this Agreement and the other
documents and instruments to be executed and delivered by it and to carry out
the transactions contemplated hereby and thereby.
4.2 AUTHORITY. The execution and delivery of this Agreement and
the other documents and instruments to be executed and delivered by it pursuant
hereto and the consummation of the transactions contemplated hereby and thereby
have been duly authorized. No other corporate act or proceeding on the part of
it or its shareholders or partners is necessary to authorize this Agreement or
the other documents and instruments to be executed and delivered by it pursuant
hereto or the consummation of the transactions contemplated hereby and thereby.
This Agreement constitutes, and when executed and delivered, the other
documents and instruments to be executed and delivered by it pursuant hereto
will constitute, valid and binding agreements of it, enforceable in accordance
with their respective terms, except as such may be limited by bankruptcy,
insolvency, reorganization or other laws affecting creditors' rights generally,
and by general equitable principles.
5. RIGHTS AND OBLIGATIONS OF ESCROW AGENT
5.1 SUCCESSOR ESCROW AGENT. The Escrow Agent may resign as Escrow
Agent at any time by notice to Purchaser and the Agent (a "RESIGNATION
NOTICE"). Upon receipt of a Resignation Notice, the Agent and Purchaser shall
appoint a successor Escrow Agent, which shall be a law firm, banking
corporation or trust company located in Hong Kong. Upon receipt of notice of
appointment from the Agent and Purchaser, the Escrow Agent shall promptly
deliver certificates representing any Purchaser Stock held by it to such
successor. In the event the Agent and Purchaser do not agree upon a successor
and deliver written notice thereof to the Escrow Agent within sixty (60) days
following delivery of a Resignation Notice, any court located in Hong Kong
shall appoint a successor in accordance with the above-mentioned guidelines,
and the Escrow Agent shall promptly deliver certificates representing any
Purchaser Stock held by it to such successor.
5.2 INDEMNIFICATION. Except for Purchaser's obligation to pay the
fees and expenses described in Section 3 hereof, the parties hereto, jointly
and severally, hereby agree to indemnify and hold Escrow Agent harmless from
and against any and all losses, claims,
3.
<PAGE> 72
damages, actions, suits or other charges incurred by or assessed against the
Escrow Agent in the performance of its duties hereunder, except to the extent
resulting from its own negligence or misconduct.
5.3 LIMITATION OF LIABILITY. The Escrow Agent shall not incur any
liability to anyone for damages, losses or expenses with respect to (a) any
action taken or omitted in good faith upon advice of the Escrow Agent's counsel
given with respect to any questions relating to the Escrow Agent's duties and
responsibilities hereunder, or (b) any action taken or omitted in reliance upon
any instrument (including, without limitation, any Notice provided for herein)
which the Escrow Agent shall in good faith believe to be genuine, to have been
signed or presented by a proper person or persons and to conform with the
provisions hereof. Furthermore, in the event the Escrow Agent shall be
uncertain as to its rights or obligations hereunder, or in the event the Escrow
Agent shall receive any communication from the Agent or Purchaser with respect
to any Purchaser Stock which, in the reasonable opinion of the Escrow Agent, is
in conflict with any of the provisions of this Agreement, the Escrow Agent
shall be entitled to refrain from taking any action until it shall be directed
otherwise in writing by the Agent and Purchaser or by order of a court of
competent jurisdiction.
5.4 CONTROVERSIES. If any controversy arises between the parties
to this Agreement, or with any other party, concerning the subject matter of
this Agreement, its terms or conditions, the Escrow Agent will not be required
to determine the controversy or to take any action regarding it. The Escrow
Agent may hold all documents and funds and may wait for settlement of any such
controversy pursuant to Section 9 of the Exchange Agreement hereof or by final
appropriate legal proceedings or other means as, in the Escrow Agent's
reasonable discretion, the Escrow Agent may require, despite what may be set
forth elsewhere in this Agreement. In such event, the Escrow Agent will not be
liable for interest or damage.
5.4.1 NO INTEREST. Notwithstanding any provision to the
contrary contained in any other agreement between or among any of the parties
hereto, the Escrow Agent shall have no interest in the Purchaser Stock.
5.4.2 NO IMPLIED OBLIGATIONS. This Agreement sets forth
the exclusive obligations of the Escrow Agent with respect to any and all
matters pertinent hereto, and no implied duties or obligations of the Escrow
Agent shall be read into this Agreement.
6. RESOLUTION OF DISPUTES.
6.1 GOVERNING LAW; VENUE.
6.1.1 This Agreement will be construed in accordance with,
and governed in all respects by, the internal laws of Hong Kong (without giving
effect to principles of conflicts of laws).
4.
<PAGE> 73
6.1.2 Any legal action or other legal proceeding relating
to this Agreement or the enforcement of any provision of this Agreement may be
brought or otherwise commenced in any court located in Hong Kong. Each party
to this Agreement: (a) expressly and irrevocably consents and submits to the
non-exclusive jurisdiction of each court located in Hong Kong in connection
with any such legal proceeding; (b) agrees that each court located in Hong Kong
will be deemed to be a convenient forum; and (c) agrees not to assert (by way
of motion, as a defense or otherwise), in any such legal proceeding commenced
in any court located in Hong Kong, any claim that such party is not subject
personally to the jurisdiction of such court, that such legal proceeding has
been brought in an inconvenient forum, that the venue of such proceeding is
improper or that this Agreement or the subject matter of this Agreement may not
be enforced in or by such court.
6.1.3 The Selling Shareholders irrevocably constitute and
appoint the Agent as their agent to receive service of process in connection
with any legal proceeding relating to this Agreement or the enforcement of any
provision of this Agreement.
6.1.4 The Selling Shareholders irrevocably waive the right
to a jury trial in connection with any legal proceeding relating to this
Agreement or the enforcement of any provision of this Agreement.
6.2 CONFIDENTIALITY. All proceedings under this Section 6, and
all evidence given or discovered pursuant hereto, shall be maintained in
confidence by all parties.
6.3 CONTINUED PERFORMANCE. The fact that the dispute resolution
procedures specified in this Section 6 shall have been or may be invoked shall
not excuse any party from performing its obligations under this Agreement and
during the pendency of any such procedure all parties shall continue to perform
their respective obligations in good faith.
6.4 EXPENSES. The parties agree that the prevailing party in any
action brought with respect to or to enforce any right or remedy under this
Agreement shall be entitled to recover from the other party or parties all
reasonable costs and expenses of any nature whatsoever incurred by the
prevailing party in connection with such action, including without limitation
attorneys' fees.
7. MISCELLANEOUS.
7.1 CONFIRMATION OF APPOINTMENT. The Selling Shareholders confirm
the appointment and authority of the Agent as set forth in Section 11.2 of the
Exchange Agreement with respect to all matters relating to this Agreement. Any
successor to the Agent who is appointed in accordance with the provisions of
Section 11.2 of the Exchange Agreement shall be deemed to be the "Agent" for
purposes of this Agreement. Any document executed or action taken by the Agent
shall be binding upon all of the Selling Shareholders.
7.2 ASSIGNMENT; PARTIES IN INTEREST. Except as expressly provided
herein, the rights and obligations of a party hereunder may not be assigned,
transferred or encumbered
5.
<PAGE> 74
without the prior written consent of the other parties. This Agreement shall
be binding upon, inure to the benefit of, and be enforceable by the respective
successors and permitted assigns of the parties hereto. Nothing contained
herein shall be deemed to confer upon any other person any right or remedy
under or by reason of this Agreement.
7.3 AMENDMENT AND MODIFICATION. This Agreement may not be
amended, modified or supplemented without the prior written consent of all
parties hereto.
7.4 WAIVER. No failure on the part of any person to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the
part of any person in exercising any power, right, privilege or remedy under
this Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. No person shall be deemed to have waived
any claim arising out of this Agreement, or any power, right, privilege or
remedy under this Agreement, unless the waiver of such claim, power, right,
privilege or remedy is expressly set forth in a written instrument duly
executed and delivered on behalf of such person; and any such waiver shall not
be applicable or have any effect except in the specific instance in which it is
given.
7.5 SEVERABILITY. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as
to which it is determined to be invalid, unlawful, void or unenforceable, shall
not be impaired or otherwise affected and shall continue to be valid and
enforceable to the fullest extent permitted by law.
7.6 NOTICE. All notices, requests, demands and other
communications hereunder shall be given in writing and shall be: (a)
personally delivered; (b) sent by telecopier, facsimile transmission or other
electronic means of transmitting written documents; or (c) sent to the parties
at their respective addresses indicated in the Exchange Agreement (or, with
respect to the Escrow Agent, to the address indicated on the signature page
hereto), by registered or certified international courier service. If
personally delivered, such communication shall be deemed delivered upon actual
receipt; if electronically transmitted pursuant to this section, such
communication shall be deemed delivered the next business day after
transmission (and sender shall bear the burden of proof of delivery); if sent
by overnight courier pursuant to this section, such communication shall be
deemed delivered upon receipt. Any party to this Agreement may change its
address for the purposes of this Agreement by giving notice thereof to each
other party hereto.
7.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.
<PAGE> 75
7.8 FURTHER DOCUMENTS. The parties hereto each agree to execute
all other documents and to take such other action or corporate proceedings as
may be necessary or desirable to carry out the terms hereof.
7.9 SURVIVAL. All provisions of this Agreement shall survive the
Closing.
7.10 ENTIRE AGREEMENT. This Agreement, the Exchange Agreement and
the Exhibits thereto set forth the entire understanding of the parties relating
to the subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof.
7.11 CONSTRUCTION.
7.11.1 For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
7.11.2 The parties hereto agree that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not be applied in the construction or interpretation of
this Agreement.
7.11.3 As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
7.11.4 Except as otherwise indicated, all references in this
Agreement to "Sections" are intended to refer to sections of this Agreement.
7.11.5 The headings in this Agreement are inserted for
convenience only and shall not constitute a part hereof.
7.12 CONSENT. The parties hereto acknowledge that Robert W.H. Wang
& Co. acts as counsel to Purchaser and each consent to its appointment as the
Escrow Agent hereunder.
7.
<PAGE> 76
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
"PURCHASER"
ZINDART LIMITED
By: /s/ Feather Fok
----------------------------
Feather Fok
Chief Financial Officer and
Chief Operating Officer
"PARENT"
HUA YANG HOLDINGS CO. LIMITED
By: /s/ Sandra C. Shaw
----------------------------
_____________________________
[Print Name and Title]
"SUBSIDIARY"
HUA YANG PRINTING HOLDINGS CO.
LIMITED
By: /s/ Sandra C. Shaw
----------------------------
____________________________
[Print Name and Title]
"SELLING SHAREHOLDERS"
HYP HOLDINGS LIMITED
By: /s/ Alex Ngan
----------------------------
Alex Ngan - Director
----------------------------
[Print Name and Title]
S-1.
<PAGE> 77
KARL CHAN (BVI) HOLDINGS LIMITED
By: /s/ Karl Chan
-----------------------------
_____________________________
[Print Name and Title]
/s/ Karl Chan
-----------------------------------
KARL CHAN
THE "AGENT"
CHINAVEST MANAGEMENT LIMITED
By: /s/ Robert Theleen
-----------------------------
_____________________________
[Print Name and Title]
THE "ESCROW AGENT"
ROBERT W.H. WANG & CO.
By: /s/ Richard Bowry
-----------------------------
_____________________________
[Print Name and Title]
Address:
8th & 18th Floors
Nine Queen's Road Central
Hong Kong
Attention: Richard Bowry
Telephone: 011-852-2843-7426
Telecopier: 011-852-2845-2504
S-2.
<PAGE> 78
GENERAL RELEASE
THIS GENERAL RELEASE ("General Release") is being executed and
delivered as of ______________, 1998, on behalf of the parties identified on
the signature pages hereto (all of whom are referred to collectively as the
"RELEASORS," and each of whom is referred to individually as a "RELEASOR") to
and in favor of, and for the benefit of, ZINDART LIMITED, a Hong Kong
corporation ("PURCHASER"), HUA YANG HOLDINGS CO. LIMITED, a Cayman Islands
corporation ("PARENT"), HUA YANG PRINTING HOLDINGS CO. LIMITED, a Hong Kong
corporation ("SUBSIDIARY"), and the other Releasees (as defined in Section 2).
RECITALS
A. Contemporaneously with the execution and delivery of this
General Release, certain of the Releasors are selling their shares of the
capital stock of Parent to Purchaser pursuant to an Exchange Agreement dated as
of ___________, 1998 (the "EXCHANGE AGREEMENT").
B. Purchaser has required, as a condition to consummating the
transactions contemplated by the Exchange Agreement, that the Releasors execute
and deliver this General Release.
AGREEMENT
In order to induce Purchaser to consummate the transactions
contemplated by the Exchange Agreement, and for other valuable consideration
(the receipt and sufficiency of which are hereby acknowledged by the
Releasors), the Releasors hereby covenant and agree as follows:
1. RELEASE. Each Releasor, for himself and for each of
such Releasor's Associated Parties (as defined in Section 2), hereby generally,
irrevocably, unconditionally and completely releases and forever discharges
each of the Releasees (as defined in Section 2) from, and hereby irrevocably,
unconditionally and completely waives and relinquishes, each of the Released
Claims (as defined in Section 2).
2. DEFINITIONS.
(a) The term "ASSOCIATED PARTIES," when used herein with
respect to a Releasor, shall mean and include: (i) such Releasor's
predecessors, successors, executors, administrators, heirs and estate; (ii)
such Releasor's past, present and future assigns, agents and representatives;
(iii) each entity that such Releasor has the power to bind (by such Releasor's
acts or signature) or over which such Releasor directly or indirectly exercises
control; and (iv) each entity of which such Releasor owns, directly or
indirectly, at least 50% of the outstanding equity, beneficial, proprietary,
ownership or voting interests.
(b) The term "RELEASEES" shall mean and include: (i)
Purchaser; (ii) Parent; (iii) Subsidiary; (iv) each of the direct and indirect
subsidiaries of Parent and Subsidiary; (v) each
1.
<PAGE> 79
other affiliate of Parent and Subsidiary; and (vi) the successors and past,
present and future assigns, directors, officers, employees, agents, attorneys
and representatives of the respective entities identified or otherwise referred
to in clauses "(i)" through "(v)" of this sentence, other than the Releasors.
(c) The term "CLAIMS" shall mean and include all past,
present and future disputes, claims, controversies, demands, rights,
obligations, liabilities, actions and causes of action of every kind and
nature, including: (i) any unknown, unsuspected or undisclosed claim; (ii) any
claim or right that may be asserted or exercised by a Releasor in such
Releasor's capacity as a stockholder, director, officer or employee of Parent
or Subsidiary or in any other capacity; and (iii) any claim, right or cause of
action based upon any breach of any express, implied, oral or written contract
or agreement.
(d) The term "RELEASED CLAIMS" shall mean and include
each and every Claim that (i) any Releasor or any Associated Party of any
Releasor may have had in the past, may now have or may have in the future
against any of the Releasees, and (ii) has arisen or arises directly or
indirectly out of, or relates directly or indirectly to, any circumstance,
agreement, activity, action, omission, event or matter occurring or existing on
or prior to the date of this General Release (excluding only such Releasor's
rights, if any, under the Exchange Agreement).
3. REPRESENTATIONS AND WARRANTIES. Each Releasor represents and
warrants that:
(a) such Releasor has not assigned, transferred, conveyed
or otherwise disposed of any Claim against any of the Releasees, or any direct
or indirect interest in any such Claim, in whole or in part;
(b) to the best of such Releasor's knowledge, no other
person or entity has any interest in any of the Released Claims;
(c) no Associated Party of such Releasor has or had any
Claim against any of the Releasees;
(d) no Associated Party of such Releasor will in the
future have any Claim against any Releasee that arises directly or indirectly
from or relates directly or indirectly to any circumstance, agreement,
activity, action, omission, event or matter occurring or existing on or before
the date of this General Release;
(e) this General Release has been duly and validly
executed and delivered by such Releasor;
(f) this General Release is a valid and binding
obligation of such Releasor and such Releasor's Associated Parties, and is
enforceable against such Releasor and each of such Releasor's Associated
Parties in accordance with its terms;
2.
<PAGE> 80
(g) there is no action, suit, proceeding, dispute,
litigation, claim, complaint or investigation by or before any court, tribunal,
governmental body, governmental agency or arbitrator pending or, to the best of
the knowledge of such Releasor, threatened against such Releasor or any of such
Releasor's Associated Parties that challenges or would challenge the execution
and delivery of this General Release or the taking of any of the actions
required to be taken by such Releasor under this General Release;
(h) neither the execution and delivery of this General
Release nor the performance hereof will (i) result in any violation or breach
of any agreement or other instrument to which such Releasor or any of such
Releasor's Associated Parties is a party or by which such Releasor or any of
such Releasor's Associated Parties is bound, or (ii) result in a violation or
any law, rule, regulation, treaty, ruling, directive, order, arbitration award,
judgment or decree to which such Releasor or any of such Releasor's Associated
Parties is subject; and
(i) no authorization, instruction, consent or approval of
any person or entity is required to be obtained by such Releasor or any of such
Releasor's Associated Parties in connection with the execution and delivery of
this General Release or the performance hereof.
4. INDEMNIFICATION. Without in any way limiting any of the
rights or remedies otherwise available to any Releasee, each Releasor shall
indemnify and hold harmless each Releasee against and from any loss, damage,
injury, harm, detriment, lost opportunity, liability, exposure, claim, demand,
settlement, judgment, award, fine, penalty, tax, fee, charge or expense
(including attorneys' fees) that is directly or indirectly suffered or incurred
at any time by such Releasee, or to which such Releasee otherwise becomes
subject at any time, and that arises directly or indirectly out of or by virtue
of, or relates directly or indirectly to, (a) any failure on the part of such
Releasor to observe, perform or abide by, or any other breach of, any
restriction, covenant, obligation, representation, warranty or other provision
contained herein, or (b) the assertion or purported assertion of any of the
Released Claims by such Releasor or any of such Releasor's Associated Parties.
5. MISCELLANEOUS.
(a) This General Release sets forth the entire
understanding of the parties relating to the subject matter hereof and
supersedes all prior agreements and understandings among or between any of the
Releasors and Releasees relating to the subject matter hereof.
(b) If any provision of this General Release or any part
of any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (i) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (ii) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (iii)
such invalidity or enforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other
3.
<PAGE> 81
provision of this General Release. If any provision of this General Release or
any part of such provision is held to be unenforceable against any Releasor,
then the unenforceability of such provision or part thereof against such
Releasor shall not affect the enforceability thereof against any other
Releasor. Each provision of this General Release is separable from every other
provision of this General Release, and each part of each provision of this
General Release is separable from every other part of such provision.
(c) This General Release shall be construed in accordance
with, and governed in all respects by, the laws of Hong Kong (without giving
effect to principles of conflicts of laws).
(d) Any legal action or other legal proceeding relating
to this General Release or the enforcement of any provision of this General
Release may be brought or otherwise commenced by any Releasee in any court
located in Hong Kong. Each Releasor: (i) expressly and irrevocably consents
and submits to the jurisdiction of each court located in Hong Kong in
connection with any such legal proceeding; (ii) agrees that each court located
in Hong Kong shall be deemed to be a convenient forum; and (iii) agrees not to
assert (by way of motion, as a defense or otherwise), in any such legal
proceeding commenced in any court located in Hong Kong, any claim that such
Releasor is not subject personally to the jurisdiction of such court, that such
legal proceeding has been brought in an inconvenient forum, that the venue of
such proceeding is improper or that this General Release or the subject matter
of this General Release may not be enforced in or by such court. Nothing
contained in this General Release shall be deemed to limit or otherwise affect
the right of any Releasee (1) to commence any legal proceeding or to otherwise
proceed against any of the Releasors or any other person or entity in any other
forum or jurisdiction, or (2) to raise this General Release as a defense in any
legal proceeding in any other forum or jurisdiction.
(e) This General Release may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
(f) Each Releasor shall execute and/or cause to be
delivered to each Releasee such instruments and other documents, and shall take
such other actions, as such Releasee may reasonably request for the purpose of
carrying out or evidencing any of the actions contemplated by this General
Release.
(g) If any legal action or other legal proceeding
relating to this General Release or the enforcement of any provision hereof is
brought by any Releasor or Releasee, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements to the extent
actually incurred (in addition to any other relief to which the prevailing
party may be entitled).
(h) This General Release shall be effective with respect
to, and shall be binding upon and enforceable against, each Releasor who
executes this General Release, regardless of whether any of the other Releasors
executes this General Release.
4.
<PAGE> 82
(i) Whenever required by the context, the singular number
shall include the plural, and vice versa; the masculine gender shall include
the feminine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(j) Any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be applied
in the construction or interpretation of this General Release.
(k) As used in this General Release, the words "include"
and "including," and variations thereof, shall not be deemed to be terms of
limitation, and shall be deemed to be followed by the words "without
limitation."
5.
<PAGE> 83
IN WITNESS WHEREOF, the Releasors have caused this General
Release to be executed as of the date first above written.
RELEASORS:
HYP HOLDINGS LIMITED
By: /s/ Alex Ngan
----------------------------------
_________________________________
[Print Name and Title]
KARL CHAN (BVI) HOLDINGS LIMITED
By: /s/ Karl Chan
---------------------------------
---------------------------------
[Print Name and Title]
/s/ Karl Chan
------------------------------------------
KARL CHAN
CHINAVEST IV, L.P.
By its General Partner:
CHINAVEST PARTNERS IV
By: /s/ Dennis M. Smith
--------------------------------
Dennis M. Smith, General Partner
CHINAVEST IV-A, L.P.
By its General Partner:
CHINAVEST PARTNERS IV
By: /s/ Dennis M. Smith
--------------------------------
Dennis M. Smith, General Partner
S-1.
<PAGE> 84
CHINAVEST IV-B, L.P.
By its General Partner:
CHINAVEST MANAGEMENT LIMITED
By: /s/ Patrick L. Keen
--------------------------------
Patrick L. Keen, Director
ADVENT GLOBAL GECC LIMITED PARTNERSHIP
By its General Partners:
ADVENT GLOBAL MANAGEMENT LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
ADVENT INTERNATIONAL INVESTORS II LIMITED
PARTNERSHIP
By its General Partner:
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
S-2.
<PAGE> 85
GLOBAL PRIVATE EQUITY II - LIMITED PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
GLOBAL PRIVATE EQUITY II - PGGM LIMITED
PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
ASIA/PACIFIC SPECIAL SITUATIONS FUND LIMITED
PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
S-3.
<PAGE> 86
ADVENT ASIA/PACIFIC FUND LIMITED
PARTNERSHIP
By its General Partners:
ADVENT INTERNATIONAL LIMITED
PARTNERSHIP
ADVENT INTERNATIONAL CORPORATION
By: /s/ Tan Keng Boon
---------------------------------
Tan Keng Boon
Chief Executive, Asia/Pacific
---------------------------------
[Print Name and Title]
S-4.
<PAGE> 1
EXHIBIT 5.1
February 9, 1998
Zindart Limited
Flat C & D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road
Tai Po, N.T.
Hong Kong
Re: LEGAL OPINION
Ladies and Gentlemen:
We have acted as Hong Kong counsel for Zindart Limited, a limited liability
company incorporated under the Companies Ordinance of Hong Kong (the "Company"),
in connection with the preparation and filing with the Securities and Exchange
Commission (the "Commission") of the Company's registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
offering of up to 3,450,000 American Depositary Shares (the "ADSs") of the
Company, each representing One Ordinary Share, par value of US $0.065 per share
(the "Shares"). Of the 3,450,000 ADS's subject to the offer, 1,000,000 ADSs are
being sold by the Company ("New Shares"), 2,000,000 ADS's are being sold by
existing shareholders ("Sale Shares") and 450,000 ADS's are the subject of an
over-allotment option exercisable by the Underwriters (the "Over-Allotment
Shares").
We have reviewed the originals or copies, certified or otherwise identified to
our satisfaction, of such instruments and other documents, and we have made such
investigations of law as we have deemed appropriate as a basis for the opinion
expressed below. In particular, we have examined a copy of the minutes of an
extraordinary general meeting held on 31st December 1997 whereby, inter alia,
the shareholders of the Company resolved to authorize the directors of the
Company to issue additional shares of the Company (the "Shareholders'
Resolution").
Based upon the foregoing, and subject to further qualifications set forth below,
we are of the opinion that:
1. the Sale Shares comprise authorized share capital of the Company and are
legally issued, fully paid and non-assessable.
2. the New Shares and Over Allotment Shares comprise authorized share
capital of the Company, which the directors have authority to issue. When
such shares have been issued by the Company and duly delivered to and
paid for by the purchasers thereof, such shares will be legally issued,
fully paid and non-assessable.
1.
<PAGE> 2
3. the statements under the headings "Risk Factors - Risks Relating to the
Company -Taxation," "Taxation - Hong Kong Taxation," "Description of
Shares," and "Certain Foreign Issuer Considerations" are accurate and
fair. The statements under the heading "Taxation - Hong Kong Taxation"
are incorporated and adopted herein as our opinion.
This opinion is confined to and given on the basis of the laws of Hong Kong in
force at and as interpreted at the date of this opinion, and we express no
opinion in respect of those matters governed by or constructed in accordance
with the laws of any jurisdiction other than Hong Kong.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and opinion expressed under
the headings "Enforceability of Civil Liabilities," "Taxation," "Legal Matters"
and elsewhere as it appears in the Prospectus, without thereby admitting that we
are "experts" under the Securities Act or the rules and regulations of the
Commission thereunder for purposes of any part of the Registration Statement.
Yours faithfully,
/s/ ROBERT W. H. WANG & CO.
- -----------------------------
Robert W. H. Wang & Co.
2.
<PAGE> 1
EXHIBIT 8.1
[COOLEY GODWARD LLP LETTERHEAD]
February 13, 1998
Zindart Limited
Flat C&D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road
Tai Po, N.T.
Hong Kong
Ladies and Gentlemen:
We have acted as special United States counsel to Zindart Limited, a Hong Kong
corporation (the "Company"), in connection with the filing of a Registration
Statement on Form F-1 (the "Registration Statement") with the Securities and
Exchange Commission covering the sale of up to 3,000,000 American Depositary
Shares ("ADSs") representing 3,000,000 of the Company's Ordinary Shares (the
"Shares").
At your request, we have reviewed the discussions entitled "Taxation--United
States Federal Income Taxation" and "Taxation--Special United States Federal
Income Tax Considerations" contained in the Registration Statement and are of
the opinion that, subject to the qualifications and limitations contained
therein, such information fairly presents the current United States federal
income tax law applicable to the Company and the material United States federal
tax consequences to a United States person of the purchase, ownership and
disposition of the ADS and the Shares and insofar as it relates to statements of
law or legal conclusions is correct in all material respects.
We consent to the reference to our firm under the caption "Taxation--United
States Federal Income Taxation" and to the filing of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
Cooley Godward LLP
/s/ William Morrow
- -------------------
William Morrow
SCP/kmp
<PAGE> 1
EXHIBIT 10.2
AGREEMENT
No. 91 Dongguan (97)
In Dongguan on 18th August 1997
For the purposes of developing friendly trade of both parties, DONGGUAN
FOREIGN PROCESSING AND ASSEMBLY SERVICE COMPANY in conjunction with DONGGUAN
HENGLI INDUSTRY DEVELOPMENT COMPANY ("Party A") and ZINDART LIMITED ("Party B")
upon the basis of equality and mutual benefits, for the business of work of die
cast plastic toys processing, both parties after negotiation agree unanimously
in Dongguan on 18th August 1997 as follows:
1. RESPONSIBILITIES OF BOTH PARTIES
Party B shall be responsible for the provision of the facilities, without
charge, for the processing work (see the list for details). They shall be
delivered to the factory of Party A in different deliveries from August 1997.
The total value of the facility is HK$26,141,900. The rights of the facilities
provided without charge belong to Party B.
Party B shall provide all the raw materials, supplement and packaging
materials without charge. Party A shall provide corresponding factory,
electricity and labour for the processing work for Party B within the period of
this Agreement. Party A shall receive a processing fee or rent for the factory,
land's use right fee and management fee. All the products are exported to
Party B.
After the facilities are delivered to the factory of Party A, Party B
shall send technicians to the factory of Party A so as to assist in installment
and guide in technology. The wages, travelling expenses, telephone expenses,
electricity used and expenses for food and living are the responsibilities of
Party B. Party A provides support.
2. TOTAL VALUE OF PROCESSING FEE
Total value of processing fee is HK$1,500,000.00 for the first year.
Total value of the processing fee from the second year shall be increased based
on the first year fee. The rate of increment for each year shall not be less
than 10%.
3. CALCULATION OF PROCESSING FEE
(1) The processing fee shall be fixed upon the principles of mutual
benefits, and after friendly negotiations between both parties, the price shall
be fixed specifically according to the sample and after the examination of
products at the time of signing of the production contract. During the period of
testing products, Party B shall be responsible to pay to each person HK$600.00
per month (first group 50 people, afterwards 50 people). After the expiration of
the period of testing products, it shall be calculated according to the numbers
of the workers in the factory, the processing fee for each person shall not be
less than HK$800.00 per month (26 working days, 8 hours per day).
1.
<PAGE> 2
(2) Party A is responsible for the provisions of the factory and the
premises. Area of the factory is [/]sqm, the rental of the factory is [/]sqm per
month; area of the premises is [/]sqm, the usage fee for the premises is [/]sqm
per month. The rental of the factory and the usage fee for the premises shall be
paid by Party B and included in the processing fee. Taxation for the rental of
the factory is borne by Party A. Management fee for the workers: HK$[/] per
person per month. This is to be paid by the Party B and included in the
processing fee.
(3) The rental of the factory, land's use right fee, management fee for
the workers as above shall be increased by not lower than [/]% per year from the
second year.
4. SOCIETY BASIC FACILITY FEE
For enterprises who employ workers from outside of China, they shall pay
to the local labour department the Social Basic Facility Fee.
5. RESPONSIBILITIES OF QUALITY, PERIOD OF TESTING PRODUCTS AND RATE OF
DEFECTIVE PRODUCTS
Party B shall be responsible for sending people to the factory of Party A
to test the quality of the products. Party B shall be responsible for defective
products resulting from poor quality of the raw materials or fault in the guide
to technology. Party B shall be responsible for the wages of the workers who
need to repair defects.
From the effective date of the Agreement, the period for testing products
is 3 months. The rate of wastage and the rate of defective products within the
period of testing products shall be reported. The rate of the wastage and the
rate of defective products after the expiration of the period shall be
negotiated by both parties.
6. SUPPLY OF MATERIALS AND THE DATE OF DELIVERY
Party B guarantees according to the quantities of processing work
stipulated in this Agreement, to provide sufficient quantity of raw materials
and supplements and packaging materials each month so the factory of Party A can
produce normally. Party B shall deliver the raw materials and supplements to the
factory of Party A 10 days before the production of each batch of products. In
order that the business of Party B can be developed normally, the factory of
Party A shall according to the specific date of delivery upon the negotiation of
both parties, deliver the goods on time, according to the samples and the
quantities. Specific matters are enacted in the specific contract.
7. METHOD OF PAYMENTS
The method of payment of the processing fee: both parties agree to adopt
advance payment and settlement later, settlement monthly. Party B shall remit
payment via The Bank of China in Hong Kong to Party A. If it is not remitted on
time, Party B shall according to the interest rate of the bank in Hong Kong at
the time compensate Party A. Where it is necessary, Party A shall have the
rights to stop delivery.
2.
<PAGE> 3
8. DELIVERY
Import and export of the raw materials and supplements and the finished
products shall be via Shenzhen Wong Gang Kou An (or Wenjindu, Shatoujiao,
Taiping Kouan). Party B shall be responsible for the delivery expenses as
necessary for the round trips from Hong Kong to the factory of Party A.
According to the quantities of the delivery of Party B, Party A will assist
Party B to transport with one truck of 1.3 tons.
9. INSURANCE
(d) Party B shall be responsible for the purchase of comprehensive
insurance for the delivery of raw materials and supplements and the packaging
materials and the import and export of finished products; Party B shall be
responsible for the purchase of fire insurance for the production facilities and
the raw materials, supplements, packaging materials within the factory, products
in process and finished products. The above insurance fee shall be borne by
Party B and Party B shall enter into an insurance contract with Dongguan
Insurance Company.
(e) Both parties agree that all the workers and staff shall join the
social labour insurance and according to the ratio of the wages pay the
insurance premium.
10. PAYMENT OF TAXATION
Both parties agree and guarantee to pay taxation according to the law.
11. FORCE MAJEURE
In the event of war or serious natural disasters or force majeure as
agreed by both parties which result in one party being unable to perform this
Agreement, for that party, it shall notify the other party of the incident, and
negotiate with the other party to extend the period of the performance of the
Agreement. Any loss arising from such event to the other party will not be
compensated.
12. ARBITRATION
During the term of this Agreement, if any dispute arises, both parties
shall enter into friendly negotiations in order to resolve the dispute. If the
dispute is not resolved, it shall be submitted to the China International
Economic and Trade Arbitration Commission whose decision shall be final and
binding on both parties. The arbitration expenses shall be borne by the losing
party.
13. EFFECTIVE PERIOD OF THE AGREEMENT AND OTHERS
This Agreement will become effective after it has been approved by the
relevant departments. The term of the Agreement is three years from the
effective date. If it is to be extended or terminated, it shall be discussed in
friendly negotiation between both parties to agree on the terms 6 months ahead
of the expiry date of the Contract.
3.
<PAGE> 4
If there are matters not stipulated in this Agreement, after negotiation
between the parties, it can be amended or supplemented at any time which shall
be approved by the original approval organization. If either party does not
agree or if it is not so approved, the matter will be ineffective.
This Agreement has four counterparts. Party A has two sets. Agent of
business has one set. Party B has one set. They all have the same effectiveness.
(1) Party B shall be responsible for the payment of harbour fee
calculated according to 0.005% of the processing fee. Party A shall list the fee
on invoices.
(2) When the enterprise is recruiting workers, arranging their work, the
facilities of the factory etc., it shall perform according to the Labour,
Safety, Sanitation, Management Rules and PRC Fire Fighting Rules in order to
protect the legal right of the labour, it shall provide to the labour the
working place and facilities of living according to the requirement of labour
safety and sanitation which shall protect the health of the labour.
(3) Any one of the following situations shall be deemed the termination
of the Agreement by one party:
(1) Party B does not deliver the facilities for production within
half a year from the effective date of this Agreement;
(2) No extension procedures have been dealt with after half a
year from the expiration of this Agreement.
Relating to the importation of equipment under this Agreement, if the
Agreement is terminated by one party, it shall be reported and referred to
Customs.
PARTY A: PARTY B:
DONGGUAN FOREIGN PROCESSING
AND ASSEMBLY SERVICE COMPANY
in conjunction with DONGGUAN HENGLI
INDUSTRY DEVELOPMENT COMPANY ZINDART LIMITED
Address: Address:
_________________________________ ________________________________________
_________________________________ ________________________________________
_________________________________ ________________________________________
Telephone No.:___________________ Telephone No.___________________________
Representative: Representative:
_________________________________ ________________________________________
4.
<PAGE> 1
EXHIBIT 10.3
SINO-FOREIGN COOPERATION CONTRACT
SHENZHEN HUA XUAN PRINTING PRODUCT CO. LTD.
1. GENERAL PRINCIPLES
People's Republic of China, Shenzhen City, Boan District, Xixian Town
Goshu Economic Development Company and Hong Kong Hua Yang Printing
Group Company Limited, according to the PRC Sino-Foreign Joint Venture
Enterprise Law and other laws, regulations of China and relevant rules
and regulations of Shenzhen Special Zone, based on the principles of
equity and upon friendly negotiations, agree to enter into this
Contract for conducting a sino-foreign cooperation company in the
People's Republic of China, Guangdong Province, Shenzhen Economic
Special Zone.
2. THE PARTIES
(1) PARTIES TO THIS CONTRACT:
(PRC) Shenzhen City, Boan District, Xixian Town Goshu
Economic Development Company ("Party A"), registered in
Shenzhen China having its registered address at Shenzhen
City Xixian Town Goshu.
Legal Representative: Jiang Yong Xuan
Position: General Manager
Nationality: Chinese
(Hong Kong) Hue Yang Printing Holdings Company Limited
("Party B"), registered in Hong Kong having its registered
address at 10th Floor, Block A, Kong Nam Industrial
Building, 603-609 Castle Peak Road, Tsuen Wan, New
Territories, Hong Kong.
Legal Representative: Wu Hoi Lam
Position: Director
Nationality: Australian
3. INCORPORATION OF COOPERATION COMPANY
(2) Both Parties A & B agree to incorporate a sino-foreign
cooperation enterprise (the "Cooperation Company"):
Name of the sino-foreign cooperation enterprise to be
incorporated by both Parties A and B:
1.
<PAGE> 2
Shenzhen Hua Xuan Printing Product Company Limited
Registered address of the Cooperation Company; Shenzhen
City, Boan District, Xixian Town Goshu Economic Development
Company Limited.
(3) The incorporation of the Cooperation Company is approved by
the government of China and it has the qualifications of a
PRC legal person. All of its activities must comply with the
laws and regulations of the PRC, and the legal rights and
responsibilities of the Cooperation Company are protected by
Chinese law.
(4) The Cooperation Company is a limited liability company. The
parties to the Contract agree to the conditions of the
incorporation of the Cooperation Company, the distribution
of profits, the share of risks and losses, the manner
of management and business and the distribution of the
assets at the time of termination of the Cooperation
Company.
4. SCOPE OF BUSINESS AND SCALE
(5) Scope of business of the Cooperation Company: production of
printing products and die cast plastic toys.
(6) Scale of production of the Cooperation Company; products
with a value of twenty million per year.
5. TOTAL INVESTMENT, AUTHORIZED CAPITAL AND CONDITIONS OF COOPERATION
COMPANY:
(7) Total investment of the Cooperation Company; RMB20,000,000;
Authorized capital; RMB20,000,000;
(8) The parties shall provide the following to Cooperation
Company: Party A: provision of the factories, dormitories
and warehouses as stated in Schedule 1, Total area is
23031.94 sqm (the "Estate").
Party B; injection of RMB20,000,000 as registered capital in
the following format as its contribution of capital:
Cash: 4,000,000
Machinery: 16,000,000 (as confirmed by the examination
conducted by the China Commercial Examination Department).
Party B shall inject the capital in foreign exchange
according to the mid-price of the RMB and foreign
exchange issued by the Bank of China on the payment day.
2.
<PAGE> 3
(9) Installment or supply of the capital and conditions
of the Cooperation Company. First stage: Party A injects the
Estate, Party B injects 50% of the cash and facilities
within 3 months after the issue of the business license of
the Cooperation Company.
Second stage: Party B: 50% of cash and facilities within one
year after the issue of the business license of the
Cooperation Company,
Within 30 days of the injection of capital and the
fulfillment of the conditions of Cooperation Company by both
parties, the facts shall be examined and certified by
accountants registered in China and an examination report
shall be issued. A certification of the contribution of
capital shall be issued by the Cooperation Company according
thereto (or upon production of evidence of the conditions of
Cooperation Company).
(10) If either party of the Cooperation Company needs to transfer
any or all of its rights or obligations, it only becomes
effective once the capital has been totally contributed or
the conditions of the Cooperation Company have been
fulfilled, and also it is resolved by the board of
directors, and within one month after approval by the
original approving department, and the procedures of the
change has been dealt with in the Industrial and Commercial
Administration Management Department. No party of the
Cooperation Company can pledge whole or part of its rights
or responsibilities to a third party without the approval of
the other party to the Cooperation Company.
Unless it is agreed in writing by the other party, a party
can only transfer its whole or part of its rights or
responsibilities of the Cooperation Company to the other
party to the Cooperation Company.
Transfers will be ineffective if it is in breach of the
above stipulations.,
6. PARTIES OF COOPERATION COMPANY AND THEIR RESPONSIBILITIES
(11) The parties of the Cooperation Company shall comply with
the following matters for itself:
Responsibilities of Party A: Responsible for dealing with
the land use rights, realty and estate license of the
Estate, and responsible for dealing with the relevant
procedures legally and responsible for paying all expenses;
Dealing with the matters of application for the
incorporation of the Cooperation Company;
Registration : dealing with the procedures of the Estate and
building facilities;
3.
<PAGE> 4
organizing design, constructions of the Estate and its other
constructions and facilities;
According to the stipulations of Clause 8, supply the
referred to matters to the Cooperation Company;
Assisting in dealing with the importation custom procedures
of the machinery, facilities and raw materials for the
production of the Cooperation Company;
Assisting in buying or renting facilities, raw materials,
office facilities, transportation, communication facilities
of the Cooperation Company in China;
Responsible for the expenses and taxation of the renovation,
management fee, estate duty, land use tax etc. of the
Estate;
Assisting in confirmation of the conditions of the water
supply, electricity supply, transportation, etc.;
Assisting in the recruitment of management offices,
technicians, workers and other staff of the Cooperation
Company;
Assisting in dealing with the relevant procedures of the
foreign staff working in the Special Zone; responsible in
dealing with other matters entrusted by the Cooperation
Company.
Responsibility of Party B:
According to the stipulation of Clause 8, the referred to
matters to the Cooperation Company:
Assisting in dealing with the relevant matters of purchasing
machinery and facilities, raw materials etc. in the
international market for the Cooperation Company;
Assisting in the recruitment of technicians and examination
staff for installment of facilities, testing and production
of the Cooperation Company;
Assisting in training of the technicians and workers of
Cooperation Company;
Responsible for stabilizing processing products up to
quality within the period fixed according to the ability
of design,
4.
<PAGE> 5
Responsible for dealing with other matters as entrusted by
the Cooperation Company.
7. TECHNOLOGY, FACILITIES. RAW MATERIALS
(12) Facilities needed in the Cooperation Company can be
purchased in National market; the price of such cannot be
higher than the price level of comparable items within the
same period of time.
(13) The facilities purchased in the international market by the
Cooperation Company according to the laws of China for the
examinations of import and export as stipulated, shall be
produced for examination by the China Commercial Products
Examination Department.
(14) The original raw materials can be purchased in or outside
China by the Cooperation Company, the price of such has to
be approved by the board of directors.
8. SALES OF THE PRODUCT
(15) Ratio of sales of the products of the Cooperation Company is
as follows:
Export Sale: 85%,
Local Sale : 15%.
(16) Export sale of the Cooperation Company shall be the
responsibility of Party B, local sale shall be the
responsibility of Party A.
(17) Sales prices of the Cooperation Company shall be fixed by
the board of directors according to the price level both in
and outside China, and be adjusted if necessary.
9. DISTRIBUTION OF PROFITS AND SHARE OF RISKS AND LOSS
(18) The Cooperation Company after paying tax and withdrawing
money for different funds, distribution of profits shall be
made as follows: For the first year, Cooperation Company
pays to Party A a fixed amount of RMR2,76 million from the
issuance of the business license of the Cooperation Company
which shall be paid to Party A in monthly installments every
month in advance. Party B guarantees the Cooperation Company
will pay to Party A on time. From second year, it is to be
increased 5% every year, If the Cooperation Company suffers
a loss or the profits for distribution are not sufficient,
then Party B shall be responsible to pay the full amount.
After Party A receives its distribution every year from the
Cooperation Company, the balance shall belong to Party B.
5.
<PAGE> 6
(19) With respect to the profits to be distributed to the foreign
party of the Cooperation Company after performing the
responsibilities as stipulated under the law and Contract
and the capital to be distributed at the termination of the
Cooperation Company, the money can be remitted outside China
according to the law.
The salaries and other legal incomes of the foreign staff of
the Cooperation Company, after paying the personal tax
according to the law, can be remitted outside China.
(20) Losses of the Cooperation Company shall be the
responsibility of Party B itself.
10. BOARD OF DIRECTORS AND THE ORGANIZATION OF THE MANAGEMENT OF BUSINESS,
(21) The Cooperation Company has a board of directors. The date
of the issuance of the business license of the Cooperation
Company is the formation data of the board of directors.
(22) The board of directors consists of five directors, Party A
appoints one director; Party B appoints four directors;
Chairman of the board of directors is appointed by Party B.
The vice chairman is appointed by Party A. Term of the
directors and chairman is four years. Their appointment can
be extended by further appointment by the Party who
appoints them.
(23) The board of directors is the highest authority organization
of the Cooperation Company. It decides all the important
matters of the Cooperation Company. The important matters
are stated in Schedule 2 which can only be finalized after
they have been approved by the board of directors
unanimously. For other matters, they shall only be effective
if they are approved by more than half of the directors.
(24) The chairman is the legal representative of the Cooperation
Company. If the chairman cannot perform his
responsibilities, he can authorize the vice chairman or
other directors as his representative.
(25) Meetings of the board of directors should be at least once a
year, the meeting shall be called and chaired by the
chairman. The chairman can call extraordinary meetings after
they are proposed by at least a third of the directors.
Minutes of the meeting shall be signed by the directors who
attend as confirmation and kept in files.
(26) The quorum of the meeting of board of directors shall be
two-third of the directors. If a director cannot attend the
meeting, he can appoint a person
6.
<PAGE> 7
under a power of attorney to represent him to vote. If the
director cannot attend a meeting of the board of directors,
but does not appoint a proxy, he shall be deemed to have
waived his rights.
(27) Meetings of board of directors shall normally be held at
the registered address of the Cooperation Company,
(28) A director shall be responsible for the economic
consequences and the corresponding legal consequences for
his own graft or the dereliction of duty which result in an
economic loss to the Cooperation Company.
(29) The Cooperation Company shall establish a business
management department at its registered address which is
responsible for the daily work of the Cooperation Company.
The business management department shall have one general
manager and two deputy managers. They shall be recruited
and appointed by the board of directors. The members of the
board of directors can also be the general manager or the
deputy general managers. The general manager is responsible
to the board of directors.
(30) The general manager and deputy managers must be full time
staff of the Cooperation Company at its registered address,
and they cannot be the general manager or deputy managers
of other economic organizations. They cannot join other
economic organizations which are the competitors of the
Cooperation Company.
(31) The deputy manager shall assist the general manager. When
the general manager deals with important questions, he
shall discuss with the deputy general managers. When they
cannot agree, it shall be decided by the chairman of the
board of directors.
(32) If any general manager, deputy managers and other senior
management staff is in dereliction of his duty, after being
so resolved by the board of directors, his employment
Contract can be terminated, If there is economic loss to
the Cooperation Company, they shall be responsible for the
economic loss in accordance with his legal
responsibilities. If the general manager, deputy managers
and other senior staff resign from their position, their
resignations shall be submitted 60 days in advance to the
board of directors in writing.
(33) The recruitment, termination, remuneration, benefits,
protection of labor, insurance of labor, reward and
punishment shall be formulated through the board of
directors of the Cooperation Company according to the
relevant law, regulations of PRC, Shenzhen Economic Zone.
7.
<PAGE> 8
(34) Recruitment and salaries, social insurance, welfare,
expenses of business trips of senior management staff of the
Cooperation Company shall be discussed and decided by the
board of directors.
11. TAXATION, AUDIT, FINANCIAL BUSINESS, STATISTICS AND ENVIRONMENTAL
ISSUES
(35) According to the relevant PRC laws the Cooperation Company
shall pay appropriate taxation.
(36) According to relevant PRC law and regulations of taxation
the staff and the workers of the Cooperation Company shall
pay personal tax.
(37) According to relevant PRC law the Cooperation Company shall
withdraw reserved funds, funds of development of the
Cooperation Company, welfare of the staff and workers
incentive funds, the ratio of the withdrawal of each year
shall be decided and discussed by the board of directors
according to the business situation of the Cooperation
Company.
(38) The Cooperation Company shall establish an accounting
department at its registered address, comprising accounting
staff, preparing accounting books, and formulating
accounting system of the Cooperation Company.
The accounting system of the Cooperation Company shall be
reported to the financial, taxation departments, and the
Cooperation Company shall accept the supervision of the
financial, taxation, audit department; either party has the
right to employ its accountant at its own expense for the
examination of the Cooperation Company's accounting books.
(39) The Cooperation Company shall open a foreign exchange
account at a national bank foreign exchange organization
which permits the business of foreign exchange. Matters of
foreign exchange of the Cooperation Company shall be dealt
with according to the relevant foreign exchange management
regulations of China.
(40) The Cooperation Company can obtain loans from financial
organizations in or outside China. The conditions of the
loans and their guarantee shall be borne by the party who
borrows the loans.
(41) According to the relevant regulations of China, the
Cooperation Company shall report to the relevant departments
its monthly, seasonal, annual accounting reports and
statistics reports.
(42) According to PRC environmental protection law the
Cooperation Company shall be responsible for the duties of
the protection of environment, and to undertake the
prevention steps of the pollution of the environment.
8.
<PAGE> 9
12. INSURANCE
(43) The different types of insurance of the Cooperation Company
shall be purchased at the insurance organizations within
China. The types of the insurance, the purchase of the
insurance, their duration etc. shall be decided by the board
of directors of the Cooperation Company according to the
relevant stipulations of China.
13. CHANGE AND TERMINATION OF CONTRACT
(44) Within the duration of the Cooperation Company, the parties
shall negotiate and agree to the important changes to the
contract of the Cooperation Company which shall be signed by
both parties in writing, and reported to the original
approval organization for its approval, and shall become
effective after the procedures of registration have been
dealt with through the Industrial and Commercial
Administration and Management Department.
(45) If the Contract of the Cooperation Company cannot be
performed because of force majeure or continuing loss or
insufficiency of business of the Cooperation Company, after
it has been resolved unanimously by the board of directors
and has reported to the original approval organization for
its approval, the Contract of the Cooperation Company can be
terminated ahead of the expiry date of the Contract, and it
shall be reported to the Industrial and Commercial
Administration Management Department for the cancellation of
the Cooperation Company.
(46) If either party of the Cooperation Company becomes bankrupt
or is wound up, then after it has been resolved unanimously
by the board of directors of the Cooperation Company, it
shall be reported to the original approval organization for
its approval. The Cooperation Company Contract can be
terminated ahead of the expiry date of the Contract.
(47) In the event of earthquake, typhoon, flood, fire, war and
other unforeseen circumstances and other force majeure which
cannot be prevented or avoided as to its occurrence and its
consequences which directly affect the performance of this
Contract or the terms hereof cannot be performed on time,
the party who encounters the above force majeure shall
immediately notify the other party by telex, and shall
within 15 days produce the full information relating to the
force majeure upon which the Contract of the Cooperation
Company cannot be performed and the valid documents
certifying the necessary delay of the performance. These
documents shall be issued by the notary public office in the
district in which such event occurred. Depending on the
extent to which this Contract is affected by such events,
both parties shall negotiate and decide whether to
terminate the Contract, or to exempt part of the
responsibilities of the Contract or to extend the time
of performance thereof.
9.
<PAGE> 10
(48) Where one party does not perform its responsibilities as
stipulated under the Contract of the Cooperation Company, or
is seriously in breach of the terms of the Contract of the
Cooperation Company which results in the inability of the
business of the Cooperation Company or it is not possible
for the Cooperation Company to achieve its business aim,
that party shall be deemed in breach of the Contract. The
affected party shall have the right to ask for compensation
from the party in breach, and shall have the right to report
to the approval organization for its approval of the
termination of this Contract ahead of the expiry date of the
Contract.
14. RESPONSIBILITIES OF IN BREACH OF CONTRACT
(49) Where one party does not according to Part 5 of this
Contract perform the responsibilities of paying its
investment contributions or supply the referred to matters
to the Cooperation Company on time, from the date of
any such defaults, the party in breach shall pay an amount
equivalent to 0.5% of the authorized capital to the other
party each month. If it is still not performed after six
months, apart from the accumulated amount of 3%. The other
party has the right to report for termination of the
Contract of the Cooperation Company according to Clause 48
of this Contract, and shall have the right to request the
party in breach to compensate for its economic loss.
(50) In the event of any default of one party which has the
result that this Contract cannot be performed or cannot be
performed in full, such breach shall be the responsibility
of the party in default. If it is a default by both parties,
the parties shall be responsible for the breach individually
according to the actual situation.
15. TRADE UNION
(51) The Cooperation Company shall establish a trade union
according to the law for the development of a trade union
for the protection of the legal rights of the staff and the
workers.
The Cooperation Company shall supply to the trade union the
essential terms for its activities.
16. DURATION OF THE CONTRACT
(52) The duration of the Contract is 15 years calculated from the
date of the issuance of the business license of the
Cooperation Company.
When it is agreed by both parties and is resolved
unanimously by the board of directors of the Cooperation
Company, the Contract can be
10.
<PAGE> 11
extended by applying to the original approval organization
six months before its expiration.
17. HANDLING OF THE ASSETS
(53) When the Contract is expired or it is terminated ahead of
the expiry date of the Contract, the Cooperation Company
shall liquidate the assets, creditors' rights, and
creditors' responsibilities according to legal procedures.
(54) At the time of the expiration of the Contract or the
termination of the Contract ahead of schedule, the assets,
the creditors' rights and liabilities of the Cooperation
Company shall belong to and be shared according to the
following formats:
The Estate still belongs to Party A. Party B shall be
responsible for the creditors' rights, liabilities of the
Cooperation Company within the scope of contribution of its
authorized capital. After it is fully repaid, other assets
(including machinery and facilities) shall belong to Party
B. Party A shall not be responsible for any creditors' right
or liabilities of the Cooperation Company.
18. EQUITABLE LAW
(55) This Contract is protected by PRC law.
19. RESOLUTION OF DISPUTE
(56) When there is any dispute relating to the performance of
this Contract between the parties, it shall be resolved by
negotiation or mediation. If it is not resolved through
negotiation or mediation, it shall be submitted to the China
international Economic and Trade Arbitration Commission
(Shenzhen Branch) for arbitration and resolution. The
arbitral award is final and binding on both parties and
shall be performed by each party according to the award. The
arbitration fee shall be borne by the losing party.
(57) During the process of arbitration, this Contract shall
continue to perform apart from that part in dispute and
being arbitrated.
20. EFFECTIVE OF CONTRACT AND OTHERS
(58) According to the principles of this contract, the attached
documents, hall include:
11.
<PAGE> 12
Articles of association of the Cooperation Company which
constitutes part of this Contract. If there is any conflict
with the above attached documents to this Contract, this
Contract shall prevail.
(b) This Contract and its attached documents shall be reported
to the approval organizations for its approval and shall
become effective from the date of the approval.
(c) If the parties communicate by telex or facsimile for those
matters relating to the responsibilities and the rights of
one party, they shall be notified to the other party by
post. The legal addresses of the parties set forth in this
Contract shall be their corresponding addresses.
(d) This Contract is signed by the legal representatives of the
parties in Shenzhen PRC on 28th May 1995.
Party A: Legal Representative:
Legal Representative:
Party B: Hua Yang Printing Holdings Co, Ltd.
Legal Representative:
28th May 1995
12.
<PAGE> 13
SCHEDULE 1
<TABLE>
<CAPTION>
HOUSING/ESTATE USAGE AREA
- -------------- ----- ----
<S> <C> <C>
No. 6 Baoan County Xixian town Factory 5160.90 sqm
Gushu Village
Zhuao Factory
No. 13 Baoan County Xixian town Factory 1854.44 sqm
Gushu Village
Factory
No. 22 Baoan County Xixian town Factory 6750.00 sqm
Gushu Village
Factory
No. 12 Baoan County Xixian town Dormitory 1188.00 sqm
Gushu Village
Dormitory
No. 39 Baoan County Xixian town Dormitory 3250.80 sqm
Gushu Village
Dormitory
Baoan County Xixian town Warehouse 4827.80 sqm
Gushu Village
Gaohui Manufacturing factory
------------------------
Total area: 23031.94 sqm
</TABLE>
1.
<PAGE> 14
SCHEDULE 2
Matters below shall be resolved unanimously by the board of directors;
1. Enactment and amendment of the articles of association of the
Cooperation Company;
2. Termination or dissolution of the Cooperation Company;
3. Increase or transfer of the authorized capital of the Cooperation
Company;
4. Merger of the Cooperation Company with other economic organizations.
1.
<PAGE> 1
EXHIBIT 10.4
October 4, 1997
Zindart Ltd.
Flat C & D, 25/F
Block, 1, Taiping Industrial Centre
No. 57 Ting Kok Road
Tai Po
New Territories
ATTENTION: MS. VICKIE SO
FINANCIAL CONTROLLER
Dear Sirs:
BANKING FACILITIES: ZINDART LTD.
We refer to our letter dated May 9, 1997 setting out the facilities made
available to your company (the "Company").
Following our recent discussions, we are pleased to confirm that the terms of
the facilities will be varied as follows:
DOCUMENTATION
The following documentation will no longer be required:
o A signed original copy of the Company's quarterly management
accounts within 90 days after the end of the relevant
accounting period.
UNDERTAKINGS
The following undertakings from the Company will no longer be required:
o Maintain its net worth at not less than HKD90,000,000.
o Rank all banks pari-passu within 3 months subsequent to IPO.
o Restrict dividend payout ratio to a maximum of 50%.
An arrangement fee of HKD60,000 will be payable upon our receipt of your
acceptance of this letter.
<PAGE> 2
Zindart Ltd.
October 4, 1997
Page Two
The variations set out above will take effect when we have received:
o The enclosed copy of this letter signed by a director on
behalf of the Company.
Please sign the enclosed copy of this letter and return it to the Bank's Credit
Operations at its Kowloon Main office, 9th Floor, Miramar Tower, 1-23 Kimberley
Road, Kowloon, for the attention of Ms. Lilian Ku within one month after the
date of this letter, after which this offer of variations will lapse. When the
variations take effect, this letter will amend the terms of the existing
facility letter which the Bank has issued to the Company, as set out above. In
all other respects, the terms of the existing facility letter will remain in
full force and effect. This letter will be governed by Hong Kong law.
If you have any queries, please contact your Senior Relationship manager Mr.
Christopher Chang, whose telephone number is 2310-3828.
We are pleased to be of service to you and take this opportunity to thank you
again for your custom.
Yours faithfully,
For and on behalf of STANDARD CHARTERED BANK
/s/ SOPHIA LAU
- -----------------------------------
Sophia Lau
Senior Credit Documentation Manager
SL/LK/bn
Agreed.
For and on behalf of ZINDART LTD.
/s/ Illegible
- -----------------------------------
Director
<PAGE> 3
EXHIBIT 10.4
May 12, 1997
Zindart Ltd.
Flat C & D, 25/F
Block 1, Taiping Industrial Centre
No. 57 Ting Kok Road
Tai Po
New Territories
ATTENTION: MS. VICKIE SO
FINANCIAL CONTROLLER
Dear Sirs:
BANKING FACILITIES: ZINDART LTD.
We are pleased to confirm that the Bank is willing to make available to your
company (the "Company") the following working capital facilities up to the
amounts indicated.
1. CURRENT ACCOUNT OVERDRAFT - HKD5,000,000.
NOTE: This facility is only available up to May 31, 1997.
2. MONEY MARKET RATE BASED ADVANCES - HKD10,000,000.
Advances may be drawn in multiples of HKD500,000 for periods of 1, 2 or 3
months. Interest will be payable at the maturity of each advance. The applicable
rate of interest will be HIBOR plus 3.25% per annum. Every advance shall be
repaid on maturity and may be reborrowed. Prepayment is subject to penalty.
3. TRADE FINANCE GROUP 1 - HKD50,000,000.
4. TRADE FINANCE GROUP 2 - HKD40,000,000.
5. TRADE FINANCE GROUP 3 - HKD40,000,000.
The above Trade Finance Groups 1, 2 and 3 are complementary and the combined
outstandings are not to exceed HKD50,000,000. Similarly the combined
outstandings of Trade Finance Groups 2 and 3 are not to exceed HKD40,000,000.
For product availability, please see the attachment to this letter.
<PAGE> 4
Zindart Ltd.
May 12, 1997
Page Two
Prior evidence of insurance is required for all "free on board" and "cost and
freight" shipments under import letters of credit.
Combined usance and loan period of any one transaction under import facilities
is not to exceed 120 days.
Usance period of expert facilities is not to exceed 150 days.
Packing credits allowed with maximum 100% advance against valid export letters
of credit for up to 160 days or the expiry date of the related L/C, whichever is
earlier.
Export invoice discounting allowed with maximum 100% advance against
presentation of certified true copies of the Company's commercial invoices for
up to 30 days after the credit terms of the invoices with overall tenors at
maximum 150 days. The commercial invoices are to show that the proceeds were
assigned to the Bank and buyers are instructed to pay direct into the Company's
No. 2 charged account maintained with the Bank.
Purchase of cheques are also allowed.
The Company undertakes not to accept any amendments to the master L/Cs without
the prior written consent of the Bank.
INTEREST, COMMISSIONS AND FEES
Unless otherwise specified, interest on all sums advanced will be payable
monthly in arrears at Prime plus 1.5% per annum. A default rate of Prime plus 8%
per annum will apply to amounts not paid when due or in excess of agreed
facility amounts. "Prime" means the rate which we announce or apply from time to
time as our prime rate for lending Hong Kong Dollars. Commissions will be
charged at our standard rates. Trade Finance Facilities will be financed at
Prime plus 0.5% per annum. All past due bills shall bear interest at 5% per
annum above the rates charged on your regular bills outstandings.
An arrangement fee of HKD5,000 will be payable upon our receipt of your
acceptance of this letter. A handling fee in an amount to be mutually agreed
will be payable on each anniversary of the date of this letter if the facilities
are continuing. The fees will be debited to your current account.
You will reimburse the Bank for all legal fees and other expenses incurred in
arranging the above facilities.
AVAILABILITY AND REPAYMENT
<PAGE> 5
Zindart Ltd.
May 12, 1997
Page Three
The above facilities are subject to the Bank's periodic review, and it is
expressly agreed that they will at all times be available at the sole discretion
of the Bank. Notwithstanding any other provisions contained in this letter or in
any other document, the Bank will at all times have the right to require
immediate payment and/or cash collateralisation of all or part of any sums
actually or contingently owing to it.
DOCUMENTATION
Before the above facilities may be used, the enclosed copy of this letter must
be signed by the Company and returned to us together with a certified copy of
appropriate authorising board resolutions.
The following documentation are held/will also be required:
o General Customer Agreement executed by the Company.
o A signed original copy of the Company's audited financial
statements within 9 months after its financial year end. A
signed original copy of the Company's quarterly management
accounts within 90 days after the end of the relevant
accounting period. Such other information as the Bank may
request from time to time.
UNDERTAKINGS
The Company undertakes to the Bank that it will:
o Maintain its net worth at not less than HKD90,000,000.
o Not mortgage, pledge or otherwise encumber any of its assets
without the prior written consent of the Bank.
o Rank all banks pari-passu within 3 months subsequent to IPO.
o Restrict dividend payout ratio to a maximum of 50%.
o Immediately inform the Bank of any change of the Company's
directors or beneficial shareholders or amendment of its
memorandum or articles of association.
Please sign the enclosed copy of this letter and return it to the Bank's Credit
Operations at its Kowloon Main Office, 9th Floor, Miramar Tower, 1-23 Kimberley
Road, Tsimshatsui, Kowloon, for the attention of Ms. Rowena Ng, within one month
after the date of this letter, after which
<PAGE> 6
Zindart Ltd.
May 12, 1997
Page Four
this offer will lapse. When accepted, this letter will supersede any previous
facility letter which the Bank has issued to the Company. This letter will be
governed by Hong Kong law.
We enclose a set of documents which should also be completed and returned to the
Bank at the above mentioned address. If you have any queries regarding the
completion of the required documents, please contact Ms. Rowena Ng whose
telephone number if 2378-6265. With regard to queries on banking arrangements,
you can contact your Senior Relationship Manager Mr. Christopher Chang, whose
telephone number is 2310-3828.
We are pleased to be of service to you and take this opportunity to thank you
again for your custom.
Yours faithfully,
For and on behalf of STANDARD CHARTERED BANK
_____________________________________
Josephine To
Senior Credit Documentation Manager
JT/RN/bn
Agreed.
For and on behalf of ZINDART LTD.
_____________________________________
<PAGE> 7
ZINDART LTD.
ATTACHMENT REGARDING TRADE FINANCE PRODUCTS
This attachment forms an integral part of our banking facility letter dated May
12, 1997.
You may use any product or aggregate of products in any one group up to the
limit shown in the attached banking facility letter.
TRADE FINANCE GROUP 1
o Discrepant Credit Bills Negotiated - with recourse
o Purchase of Documents Against Payment Bills of Exchange
o Purchase of documents Against Acceptance Bills of Exchange
with ECIC cover
o Back to Back Letters of Credit
o Import Letters of Credit - sight and usance
- secured by goods
o Loans Against Import
TRADE FINANCE GROUP 2
o Purchase of Documents Against Acceptance Bills of Exchange
without ECIC cover
o Quasi Back to Back Letters of Credit - unsecured by goods
o Import Letters of Credit - sight and usance
- unsecured by goods
o Shipping Guarantees
TRADE FINANCE GROUP 3
o Pre-shipment Loan - i.e., Packing Credit
o Acceptance of draft under Import Letters of Credit
o Release of Documents Against Acceptance or Trust Receipt
o Loans Against Trust Receipt
o Post Import Loans
o Export Invoice Discounting
<PAGE> 1
EXHIBIT 10.5
[HONG KONG BANK LETTERHEAD]
January 22, 1998 CONFIDENTIAL
Zindart Ltd.
Flat D 25/F Block 1
Tai Ping Industrial Centre
Lot No. 1637 Ting Kok Road
Tai Po
New Territories
Attn: Ms. Feather Fok
Dear Madam:
RE: BANKING FACILITIES
A/C NO. 004-121141-001
With reference to our recent discussion, we are pleased to advise that we have
reviewed your banking facilities and offer a renewal within the following
revised limits. These facilities are subject to review at any time and, in any
event by January 19, 1999, and also subject to our overriding right of
withdrawal and repayment on demand, including the right to call for cash cover
on demand for prospective and contingent liabilities.
<TABLE>
<CAPTION>
NEW PREVIOUSLY
<S> <C> <C>
OVERDRAFT (A/C 004-121141-001) @ @
Interest on the overdraft facility will
continue to be charged on daily balances at
1.5% (previously 0.75%) over our best lending
rate, (currently 10.25% per annum, but
subject to fluctuation at our discretion) and
payable monthly in arrears to the debit of
your current account.
Please note that the approval of any
overdraft in excess of the above stated
credit limit is subject to the sole
discretion of the Bank. In the event of an
overlimit, the excess amount will be charged
at our prevailing interest rate calculated on
a daily basis.
</TABLE>
<PAGE> 2
Zindart Ltd. CONFIDENTIAL
January 22, 1998
Page Two
<TABLE>
<CAPTION>
NEW PREVIOUSLY
<S> <C> <C>
IMPORT/EXPORT FACILITIES HKD20,000,000.-@*) HKD20,000,000.-@*
Documentary credits with import finance up to
90 days (less any usance/credit periods
granted by your suppliers) and/or D/P bills
purchased on approved drawees
WITHIN WHICH (HKD20,000,000.-@*) (HKD20,000,000.-@*)
Goods under your control and/or Trust
Receipts and/or D/A bills purchased up to 90
days on approved drawees.
Interest on your HKD import loans will
continue to be charged on a daily basis at
0.5% over our best landing rate, (currently
10.25% per annum, but subject to fluctuation
at our discretion) and payable monthly in
arrears to the debit of your current account.
</TABLE>
@ within Import/Export (Trust Receipt/DA) line, HKD10,000,000.-
(HKD10,000,000.-) is switchable to Overdraft facility.
* A sub-limit of HKD5,000,000.- for Clean Import Loan against valid sales
invoices and shipping/title documents from regular unrelated suppliers.
We are also pleased to confirm the following preferential commission structure
will continue to be available on your import transactions:
<TABLE>
<CAPTION>
DC OPENING COMMISSION
COMMISSION IN LIEU OF EXCHANGE
<S> <C> <C>
First USD50,000 1/4% 1/4%
USD 50,000.1- to USD500,000.- 1/8% 1/8%
Balance In Excess 1/16% 1/16%
</TABLE>
LEASING FACILITY
The following lease facilities will continue subject to the Terms and Conditions
provided for in the Lease Agreement.
<PAGE> 3
Zindart Ltd. CONFIDENTIAL
January 22, 1998
Page Three
<TABLE>
<CAPTION>
ACCOUNT NO DATE DRAWDOWN SCHEDULE CURRENT BALANCE
<S> <C> <C>
004-121141-244 27 December 1995 USD69,431.96
004-121141-245 27 December 1995 USD277,741.84
</TABLE>
<TABLE>
<CAPTION>
NEW PREVIOUSLY
<S> <C> <C>
SIBOR LEASING LINE NIL HKD10,000,000
(not yet effected)
COMPANY CARD
ok Siu Yung Feather HKD150,000.- HKD150,000.-
Sun Kai Dah George HKD100,000.- HKD100,000.-
CORPORATE CARD HKD180,000.- HKD150,000.-
To issue credit cards to your executives
applied by your company
GUARANTEES
Issued in favour of:-
China Light & Power Co. Ltd. HKD36,700.- HKD36,700.-
China Light & Power Co. Ltd. HKD4,700.- HKD4,700.-
</TABLE>
Commission on the guarantee will continue to be charged at 1.5% per annum or
minimum HKD500.- in advance to the debit of your current account.
ACCRUAL OF INTEREST AND OTHER SUMS
Please note that interest and other sums expressed to be chargeable or payable
on a periodic basis will nonetheless accrue from day to day and amounts so
accrued may be demanded at any time.
As security, we continue to hold:-
1) A Letter of Undertaking dated 26 May 1997, together with a certified
copy of Board Resolution dated 16 May 1997 from Zindart Ltd. undertake
to submit quarterly management accounts within 3 months after
corresponding closing date.
2) A Letter of Undertaking dated 26 May 1997, together with a certified
copy of Board Resolution dated 16 May 1997 from Zindart Ltd. undertake
to inform us any major change of shareholding structure of the company
in future.
<PAGE> 4
Zindart Ltd. CONFIDENTIAL
January 22, 1998
Page Four
Please note that review fee of HKD25,000.- will be charged to the debit of your
current account upon receipt of your acceptance to these facilities.
Please arrange for the authorized signatories of your company, in accordance
with the terms of the mandate given to the bank, to sign and return to us the
duplicate copy of this letter to signify your understanding and acceptance of
the terms and conditions under which these facilities are granted.
These facilities will remain open for acceptance until the close of business on
12 February 1998 and if not accepted by that date will be deemed to have lapsed.
We look forward to be of continued assistance.
Yours faithfully,
/s/ CAROL K.Y. L. LUI
Carol K.Y. L. Lui
Senior Corporate Relationship Manager
CKYLL:DP
<PAGE> 1
EXHIBIT 10.7
FIRST AMENDMENT TO
AGREEMENT REGARDING FUTURE SHARE DISTRIBUTIONS
THIS FIRST AMENDMENT TO AGREEMENT REGARDING FUTURE SHARE
DISTRIBUTIONS (the "Amendment") is made and entered into as of this ____ day of
________, 1998, by and among VAN KASPER & COMPANY ("VK"), ZINDART LIMITED
("Zindart"), ZIC HOLDINGS LIMITED, ("ZICHL"), ERTL (HONG KONG) LIMITED ("ERTL")
and LONGVEST MANAGEMENT LIMITED.
RECITALS
A. VK, ZINDART PTE LIMITED, a Singapore corporation (the
"Shareholder"), and Zindart are parties to an Agreement Regarding Future Share
Distributions dated January 1997 (the "Agreement"), which Agreement pertains to
the distribution of certain securities of Zindart (the "Securities");
B. Pursuant to Section 3 of the Agreement, the Shareholder
agreed, among other things, to transfer Securities only in a private transaction
not involving any public offering in which each transferee agrees in writing for
the benefit of VK that such transferee's future transfers of such Securities
shall be subject to the Agreement;
C. At the time of the execution of the Agreement, Ertl,
ZICHL and Longvest were the owners of 100% of the issued and outstanding
securities of the Shareholder; and
D. In January , 1998, the Shareholder began to wind up
and dissolve, and the Securities were distributed to Ertl, ZICHL and Longvest in
proportion to their holdings in the Shareholder.
THE PARTIES AGREE AS FOLLOWS:
1. Amendment to Add New Parties.
The Agreement is hereby amended to provide that Ertl, ZICHL and
Longvest, effective as of the date of distribution of the Securities to them,
will become parties to the Agreement and will be subject to all rights and
obligations which pursuant to the terms of the Agreement were applicable to the
Shareholder.
<PAGE> 2
2. Agreement in Full Force and Effect Pursuant to its Terms.
Subject to the amendment provided for in Section 1 hereof, the
Agreement shall remain in full force and effect and all other provisions of the
Agreement shall be enorceable against the parties to this Amendment.
3. Miscellaneous.
3.1. Governing Law. This Amendment shall be governed by
the laws of the State of California applicable to contracts between California
residents and wholly to be performed in California.
3.2 Consent to Jurisdiction. Ertl, ZICHL, Longvest and
Zindart each hereby agree that any action brought with respect to the Agreement
as amended hereby can be brought in the United States District Court for the
Northern District of California or the Superior Court of the State of California
in San Francisco, California, and Ertl, ZICHL and Longvest and Zindart each
hereby consent to the jurisdiction of such courts.
3.3 Notices. All notices and other communications which
are given pursuant to this Agreement shall be in writing and shall be sent by
express mail or other overnight delivery service or transmitted by facsimile
addressed as follows:
If to VK: Van Kasper & Company
Facsimile: (415) 954-8309
If to Zindart: Zindart Limited
Facsimile: (011-852) 2845-2504
If to Ertl: Ertl (Hong Kong) Limited, Attention: George A. Volanakis
Facsimile: (319) 875-8263
If to ZICHL: ZIC Holdings Limited, Attention: Dennis Smith c/o ChinaVest
Facsimile: (011-852) 2845-2949
If to Longvest: Longvest Management Limited
Facsimile:
3.5 Entire Agreement. This Amendment, together with the
Agreement, as amended hereby, and the Lock-up Agreements dated December 22,
1997, December 31, 1997 and December 1997, respectively, between each of Ertl,
ZICHL and Longvest and Van Kasper, represents the entire agreement of the
parties with respect to the subject matter hereof and supersede all prior and
contemporaneous discussions, correspondence, understandings and agreements among
the parties.
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
LONGVEST MANAGEMENT LIMITED ZIC HOLDINGS LIMITED
By:_____________________________ By:____________________________
Its: ___________________________ Its:___________________________
ZINDART LIMITED ERTL (HONG KONG) LIMITED
By:_____________________________ By:____________________________
Its: ___________________________ Its:___________________________
VAN KASPER & COMPANY
By:_____________________________
Its:____________________________
<PAGE> 1
EXHIBIT 10.10
DATED 1998
-----------------------
ZINDART LIMITED
AS BORROWER
CREDIT SUISSE FIRST BOSTON, HONG KONG BRANCH
STANDARD CHARTERED BANK
AS ARRANGERS
THE BANKS AND OTHER FINANCIAL INSTITUTIONS
NAMED HEREIN AS LENDERS
CREDIT SUISSE FIRST BOSTON, SINGAPORE BRANCH
AS AGENT
-------------------------------------
US$30,000,000
REVOLVING CREDIT FACILITY
-------------------------------------
BAKER & Mc. KENZIE
14TH FLOOR, HUTCHISON HOUSE
HONG KONG
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Number Clause Heading Page
- ------ -------------- ----
<S> <C>
1. Interpretation.........................................................1
2. The Facility...........................................................5
3. Conditions Precedent...................................................6
4. Advances, Repayments and Cancellation..................................7
5. Interest..............................................................10
6. Market Disruption.....................................................10
7. Change of Law or Circumstances........................................11
8. Taxes and Other Deductions............................................12
9. Fees and Expenses.....................................................12
10. Payments and Evidence of Debt.........................................14
11. Representations and Warranties........................................15
12. Undertakings..........................................................17
13. Events of Default.....................................................21
14. Default Interest......................................................23
15. Indemnities, Set-Off and Pro Rata Sharing.............................24
16. The Lenders, the Agent and the Arrangers..............................26
17. Amendment.............................................................31
18. Waiver and Severability...............................................31
19. Miscellaneous.........................................................31
20. Assignment, Novation and Lending Offices..............................32
21. Notices...............................................................34
22. Governing Law and Jurisdiction........................................35
Schedules
Schedule 1 The Lenders..................................................37
Schedule 2 Form of Novation Certificate.................................38
Schedule 3 Financial Definitions........................................41
EXECUTION......................................................................44
Appendices
Appendix 1 Form of Notice of Drawing..........................1-1
Appendix 2 Form of Charge over Account........................2-1
Appendix 3 Form of Share Mortgage.............................3-1
</TABLE>
<PAGE> 3
THIS AGREEMENT is made on the_________________________day of________________1998
BETWEEN:
(1) ZINDART LIMITED, a company incorporated under the laws of Hong Kong
having its registered office at Flat C & D, 25th Floor, Block 1, Tai
Ping Industrial Centre, 57 Ting Kok Road, Tai Po, New Territories, Hong
Kong as borrower (the "BORROWER");
(2) CREDIT SUISSE FIRST BOSTON, HONG KONG BRANCH and STANDARD CHARTERED
BANK as arrangers (in such capacity, each an "ARRANGER" and together
the "ARRANGERS");
(3) THE BANKS AND OTHER FINANCIAL INSTITUTIONS listed in Schedule 1 as
lenders; and
(4) CREDIT SUISSE FIRST BOSTON, SINGAPORE BRANCH as agent (in such
capacity, the "AGENT").
IT IS HEREBY AGREED as follows:
1. INTERPRETATION
1.1 Definitions. In this Agreement, unless the context requires otherwise:
"ACQUISITION" means the acquisition by the Borrower of the entire
issued share capital of Hua Yang as more particularly set out in the
Exchange Agreement;
"ADVANCE" means each lending of a portion of the Commitments pursuant
to Clause 4 or, as the context may require, the principal amount
advanced to the Borrower on each such occasion;
"ASSIGNEE" means any person to which an assignment of all or part of
the rights of any Lender has taken effect in accordance with Clause
20.3;
"AVAILABILITY PERIOD" means the period commencing on the date of this
Agreement and ending on the earlier of (i) the Final Maturity Date and
(ii) the date on which the Facility is cancelled or terminated under
the provisions of this Agreement;
"BANKING DAY" means a day (excluding Saturday) on which banks are open
for business in Hong Kong and Singapore and, if on that day a payment
is to be made under this Agreement, in New York City;
"CHARGE" means:
(a) any mortgage, charge, pledge, lien, encumbrance, hypothecation
or other security interest or security arrangement of any
kind;
1
<PAGE> 4
(b) any arrangement whereby any rights are subordinated to any
rights of any third party; and
(c) any contractual right of set-off;
"CHARGE OVER ACCOUNT" means the charge over account executed or to be
executed by the Borrower in the form, or substantially in the form, of
Appendix 2;
"CHARGED ACCOUNT" means the Dollar denominated account opened or to be
opened by the Borrower with the Agent more particularly described in
the Charge over Account;
"COMMITMENT" means, in relation to each Lender, the principal amount
set opposite that Lender's name in Schedule 1 or, as the case may be,
in any Novation Certificate, in each case as reduced by any
cancellation under the provisions of this Agreement, being the maximum
amount which that Lender is committed to make available under the
Facility at any one time;
"DOLLARS" and "US$" mean the lawful currency for the time being of the
United States of America;
"ELIGIBLE TRANSFEREE" means a bank, deposit taking company or other
financial institution duly authorised to carry on its business and to
participate in the Facility;
"EVENT OF DEFAULT" means any event or circumstance specified as such in
Clause 13 or in any Security Document; and "PROSPECTIVE EVENT OF
DEFAULT" means any event or circumstance which with the giving of
notice and/or the passage of time and/or the making of any relevant
determination and/or the forming of any necessary opinion would be an
Event of Default;
"EXCHANGE AGREEMENT" means the sale and purchase agreement dated on or
about 11 February 1998 and made between the Borrower as purchaser, Hua
Yang, Hua Yang Printing Holdings Co. Limited, the shareholders of Hua
Yang, the principal shareholders of HYP Holdings Limited and Chinavest
Management Limited in relation to the Acquisition;
"FACILITY" means the revolving credit facility to be made available
under this Agreement;
"FINAL MATURITY DATE" means the date falling sixty (60) months after
the date of this Agreement;
"FIRST OPTION DATE" means the date falling three (3) years from the
date of this Agreement, subject to adjustment in accordance with Clause
10.5;
"HUA YANG" means Hua Yang Holdings Co. Limited, a company incorporated
under the laws of the Cayman Islands;
"INTEREST PAYMENT DATE" means, in relation to each Advance, the last
day of the Interest Period applicable to such Advance;
2
<PAGE> 5
"INTEREST PERIOD" means, in relation to each Advance, the interest
period ascertained in accordance with Clause 5;
"LENDERS" means the banks and financial institutions listed in Schedule
1 as Lenders and each Assignee and Transferee;
"LENDING OFFICE" means, in relation to each Lender, its office at the
address specified in Schedule 1 or such other office as may be selected
by it from time to time pursuant to Clause 20.11;
"LIBOR" means, in relation to any relevant sum and any relevant period:
(a) the rate shown on the Telerate Monitor Screen as being the
rate per annum at which Dollar deposits are offered for a
period equal or comparable to such period at or about 11:00
a.m. (London time) on the second London Banking Day before the
first day of such period; for this purpose "TELERATE MONITOR
SCREEN" means the display designated as page "3750" on the
Telerate Monitor system or such other page as may replace page
"3750" on that system for the purpose of displaying offered
rates for Dollar deposits; or
(b) if at or about such time on the relevant day no such rate
appears on the Telerate Monitor Screen, the rate determined by
the Agent to be the arithmetic mean (rounded up if necessary
to the nearest integral multiple of 1/16%) of the respective
rates notified to the Agent by each Reference Bank as being
the rate per annum at which Dollar deposits in an amount
comparable to such sum are offered to that Reference Bank for
such period by prime banks in the London interbank market at
or about 11:00 a.m. (London time) on the second London Banking
Day before the first day of such period PROVIDED that if any
Reference Bank does not notify such a rate to the Agent for
any relevant period LIBOR for such period shall be determined
on the basis of the rates notified by the other Reference
Banks, subject as provided in Clause 6;
"LONDON BANKING DAY" means a day on which Dollar deposits may be dealt
in on the London interbank market;
"MAJORITY LENDERS" means at any time Lenders whose aggregate
Participations in the outstanding Advances exceed sixty-six and
two-thirds per cent (66 2/3%) of the outstanding Advances or, if no
Advance is then outstanding, whose aggregate Commitments exceed
sixty-six and two-thirds per cent (66 2/3%) of all the Commitments;
"MARGIN" means two per cent (2%);
"NOTICE OF DRAWING" means a notice in the form set out in Appendix 1;
"NOVATION CERTIFICATE" means a certificate substantially in the form of
Schedule 2;
"PARTICIPATION" means in relation to each Lender, in respect of any
amount owing to the Lenders hereunder, the proportion of such amount
which is owing to that Lender and, in
3
<PAGE> 6
respect of a proposed Advance, the proportion of that Advance which is
to be made available by that Lender and "PARTICIPATION IN THE FACILITY"
shall be construed accordingly;
"REFERENCE BANKS" means the principal London offices of Barclays Bank
PLC, The Chase Manhattan Bank, Credit Suisse First Boston and Standard
Chartered Bank or any substitute reference bank(s) appointed pursuant
to Clause 20.12;
"SECOND OPTION DATE" means the date falling four (4) years from the
date of this Agreement, subject to adjustment in accordance with Clause
10.5;
"SECURITY DOCUMENTS" means the Charge over Account, the Share Mortgage
and any other document executed from time to time by whatever person as
a further guarantee of or security for all or any part of the
Borrower's obligations under this Agreement;
"SECURITY PARTY" means, where the context permits, any person other
than the Borrower which has provided or subsequently provides a
guarantee of or security for all or any part of the Borrower's
obligations under this Agreement;
"SHARE MORTGAGE" means the share mortgage executed or to be executed by
the Borrower in the form, or substantially in the form, set out in
Appendix 3;
"SUBSIDIARY" in relation to any company means any other company or
other entity directly or indirectly under the control of the
first-mentioned company; for this purpose "CONTROL" means ownership of
more than fifty per cent (50%) of the voting share capital or
equivalent right of ownership of such company or entity, or power to
direct its policies and management whether by contract or otherwise and
"HOLDING COMPANY" in relation to any company means the company of which
such last-mentioned company is a subsidiary;
"TRANSFEREE" means an Eligible Transferee to which all or any part of a
Lender's rights, benefits and/or obligations under this Agreement have
been transferred pursuant to Clause 20.4.
1.2 Construction. In this Agreement, unless the context requires otherwise,
any reference to:
an "authorisation" includes any approvals, consents, licences, permits,
franchises, permissions, registrations, resolutions, directions,
declarations and exemptions;
"including" or "includes" means including or includes without
limitation;
"indebtedness" includes any obligation of any person for the payment or
repayment of money, whether present or future, actual or contingent,
including but not limited to, any such obligation:
(a) under or in respect of any acceptance, bill, bond, debenture,
note or similar instrument;
4
<PAGE> 7
(b) under or in respect of any guarantee, indemnity,
counter-security or other assurance against financial loss;
(c) in respect of the purchase, hire or lease of any asset or
service; or
(d) in respect of any indebtedness of any other person whether or
not secured by or benefiting from a Charge on any property or
asset of such person;
"law" and/or "regulation" includes any constitutional provisions,
treaties, conventions, statutes, acts, laws, decrees, ordinances,
subsidiary and subordinate legislation, orders, rules and regulations
having the force of law and rules of civil and common law and equity;
an "order" includes any judgment, injunction, decree, determination or
award of any court, arbitration or administrative tribunal;
a "person" includes any individual, company, body corporate or
unincorporate or other juridical person, partnership, firm, joint
venture or trust or any federation, state or subdivision thereof or any
government or agency of any thereof;
"tax" includes any tax, levy, duty, charge, impost, fee, deduction or
withholding of any nature now or hereafter imposed, levied, collected,
withheld or assessed by any taxing or other authority and includes any
interest, penalty or other charge payable or claimed in respect thereof
and "taxation" shall be construed accordingly.
1.3 Successors and Assigns. The expressions "BORROWER", "ARRANGERS",
"LENDERS" and "AGENT" shall, where the context permits, include their
respective successors and permitted assigns and any persons deriving
title under them.
1.4 Miscellaneous. In this Agreement, unless the context requires
otherwise, references to statutory provisions shall be construed as
references to those provisions as replaced, amended, modified or
re-enacted from time to time; words importing the singular include the
plural and vice versa and words importing a gender include every
gender; references to this Agreement or any Security Document shall be
construed as references to such document as the same may be amended,
supplemented or novated from time to time; unless otherwise stated,
references to Clauses, Schedules and Appendices are to clauses of and
schedules and appendices to this Agreement and references to this
Agreement include its Schedules and Appendices. Clause headings are
inserted for reference only and shall be ignored in construing this
Agreement.
2. THE FACILITY
2.1 Amount and Participations. Subject to the provisions of this Agreement:
(a) the aggregate principal amount of the Facility available to
the Borrower is thirty million Dollars (US$30,000,000).
(b) each Lender will participate in each Advance in the proportion
which its undrawn Commitment bears to the undrawn amount of
the Facility immediately before that Advance is made.
5
<PAGE> 8
2.2 Purpose. The proceeds of the Facility shall be used exclusively for the
purpose of partially financing the Acquisition and for the Borrower's
general working capital requirements. Neither the Agent nor any Lender
shall have any responsibility to see to the application of the proceeds
by the Borrower.
2.3 Lenders' Several Liability. The rights and obligations of the Lenders
hereunder are several and accordingly:
(a) the amount at any time owing by the Borrower hereunder to each
Lender or the Agent shall be a separate and independent debt
and each Lender and the Agent shall, subject to the terms of
this Agreement and the related security documents, be entitled
to protect and enforce its respective rights arising out of
this Agreement;
(b) the failure of any Lender to perform its obligations hereunder
shall not relieve any other Lender, the Agent or the Borrower
of any of its respective obligations, nor shall any Lender or
the Agent be responsible for the obligations of any other
Lender.
3. CONDITIONS PRECEDENT
3.1 Conditions. The Lenders shall not be obliged to make any Advance to the
Borrower unless the Agent shall have received:
Loan Agreement
(a) this Agreement duly executed by all the parties;
Corporate Documents
(b) in relation to the Borrower, certified true copies of:
(i) its certificate of incorporation, memorandum and
articles of association and all other constitutional
documents;
(ii) its current business registration certificate and all
other necessary authorisations for the operation of
its business;
(iii) a list of its directors and officers with their
specimen signatures;
(iv) resolutions of its board of directors approving the
borrowing and the giving of security on the terms of
this Agreement and the Security Documents to which it
is a party and authorising a person or persons to
execute this Agreement, the relevant Security
Documents, all Notices of Drawing and any other
notices or documents required in connection herewith
or therewith, and the specimen signature(s) of such
person(s);
6
<PAGE> 9
Security Documents
(c) the Charge over Account duly executed by the Borrower;
Miscellaneous
(d) a certified true copy of the executed Exchange Agreement, the
economic terms of which have not been materially amended from
those contained in the draft delivered to the Lenders on 7
February 1998;
(e) evidence satisfactory to the Agent that the Charged Account
has been or will be opened;
(f) evidence that all authorisations have been obtained and that
all necessary filings, registrations and other formalities
have been or will be completed in order to ensure that this
Agreement and the Security Documents are valid and
enforceable;
(g) legal opinions covering such matters of English, Hong Kong,
Cayman Islands and other laws relevant to this transaction as
the Agent may request;
(h) written confirmation of acceptance of appointment from each
agent for service of process named in Clause 22.3 and in each
Security Document;
(i) such other documents relating to any of the matters
contemplated herein as the Agent may reasonably request.
3.2 Agent's Approval. All the documents and evidence referred to in Clause
3.1 shall be in form and substance reasonably satisfactory to the Agent
and shall be supplied in such number of copies or counterparts as the
Agent may require. Copies required to be certified shall be certified
in a manner reasonably satisfactory to the Agent by a director or
responsible officer of the Borrower or other party concerned.
3.3 Notice. Upon receipt of all the documents and evidence referred to in
Clause 3.1, the Agent shall give notice of that fact to the Borrower
and the Lenders.
4. ADVANCES, REPAYMENTS AND CANCELLATION
4.1 Availability. Subject to Clause 4.2 and the other terms and conditions
of this Agreement, the Borrower may request the making of an Advance on
any Banking Day during the Availability Period, PROVIDED that:
(a) the amount of each Advance shall be at least five million
Dollars (US$5,000,000) and an integral multiple of one million
Dollars (US$1,000,000); and
(b) the aggregate principal amount of all Advances outstanding at
any one time shall not exceed the aggregate principal amount
available under the Facility at such time. If the Borrower has
given a notice of cancellation pursuant to Clause 4.7, the
Borrower may not draw an Advance if it would result in such an
excess on the date on which the cancellation is to take
effect.
7
<PAGE> 10
4.2 Conditions of Drawing. The making of each Advance is also subject to
the conditions that:
(a) the requirements of Clause 3 shall have been satisfied before
the first Notice of Drawing is given or such later time as the
Agent may agree;
(b) the Agent shall have received not later than 12:00 noon
(Singapore time) on the fifth (5th) Banking Day before the
date on which the Advance is to be made a duly completed and
signed original Notice of Drawing;
(c) in the case of the first Advance, the Agent shall have
received:
(i) the Share Mortgage duly executed by the Borrower and
all other documents required pursuant thereto;
(ii) written confirmations of acceptance of appointment
from each agent for service of process named in the
Share Mortgage;
(iii) evidence satisfactory to the Agent that the Borrower
has deposited the Escrow Shares (being 666,667
ordinary shares of the Borrower and as such term is
defined in the Exchange Agreement) in accordance with
clause 1.2 of the Exchange Agreement, such Escrow
Shares constituting a portion of the 1,000,000
ordinary shares in the Borrower required to be issued
by the Borrower upon the terms and conditions of the
Exchange Agreement;
(iv) evidence satisfactory to the Agent that the
completion of the Acquisition will occur before or
contemporaneously with the making of the first
Advance;
(d) no Event of Default or prospective Event of Default shall have
occurred (or would be likely to occur as a result of the
Advance being made) and all representations and warranties
made by the Borrower in or in connection with this Agreement
shall be true and correct in all material respects as at the
date such Advance is to be made with reference to the facts
and circumstances then subsisting; and
(e) not later than 11:00 a.m. (Singapore time) on the date on
which the Advance is to be made, the Agent shall have received
and found satisfactory such additional information, legal
opinions and documents relating to the Borrower or any
Security Party or this Agreement or any Security Document as
the Agent may reasonably require as a result of circumstances
arising or becoming known to the Agent or the Lenders since
the date of the previous Advance or, if no previous Advance
has been made, the date of this Agreement.
4.3 Notification. The Agent shall promptly notify the Lenders of each
Notice of Drawing whereupon each Lender shall, subject to the
provisions of this Agreement, make available to the Borrower its
Participation in the Advance in accordance with Clause 10.1.
4.4 Notice of Drawing Irrevocable. A Notice of Drawing once given shall be
irrevocable and the Borrower shall be bound to draw an Advance in
accordance therewith, except as
8
<PAGE> 11
otherwise provided in this Agreement. If for any reason an Advance is
not made in accordance with a Notice of Drawing, the Borrower shall on
demand pay to the Agent for the account of each Lender such amount (if
any) as such Lender may certify to be necessary to compensate it for
any loss or expense incurred in liquidating or redeploying funds
arranged for the purpose of the proposed Advance or in terminating any
such arrangement or any hedging arrangement in respect of this
Agreement.
4.5 Repayments. The Borrower shall repay each Advance in full on the
Interest Payment Date applicable to that Advance. Any amount so repaid
shall, subject to the terms of this Agreement, be available for further
Advances. All Advances and all accrued interest and other monies
outstanding in connection with the Facility shall be repaid not later
than the Final Maturity Date. The Borrower may not prepay any Advance
or any part thereof except on the last day of any Interest Period and
in accordance with the express terms of this Agreement.
4.6 Renewals. If on any Interest Payment Date an Advance is to be repaid
and a new Advance made, then no actual payments by the Borrower or the
Lenders shall be required hereunder to the extent of the amount which
is to be repaid and re-advanced.
4.7 Lenders' Put Option - First Option Date. Subject to giving the Borrower
(through the Agent) written notice of its intention to exercise its
option ninety (90) days prior to the First Option Date, each Lender may
elect to cancel its Participation in the Facility on and with effect
from the First Option Date and the Borrower shall pay to the Agent for
the account of the relevant Lender of all of its Participation in any
outstanding Advances on the First Option Date together with all other
amounts then due and payable to such Lender under this Agreement. On
the First Option Date, the Commitment of each such Lender shall be
cancelled and the Facility shall be permanently reduced accordingly.
The Borrower shall pay to the Agent for the pro rata account of each
Lender which does not exercise its put option under this Clause 4.7 a
put option waiver fee equal to one quarter of one per cent (0.25%) flat
of the Participation of each such Lender on the First Option Date. The
Borrower may not request the making of any further Advances after any
notice has been issued by any Lender in exercise of its rights under
this Clause.
4.8 Lenders' Put Option - Second Option Date. Subject to giving the
Borrower (through the Agent) written notice of its intention to
exercise its option ninety (90) days prior to the Second Option Date,
each Lender may elect to cancel its Participation in the Facility on
and with effect from the Second Option Date and the Borrower shall pay
to the Agent for the account of the relevant Lender of all of its
Participation in any outstanding Advances on the Second Option Date
together with all other amounts then due and payable to such Lender
under this Agreement. On the Second Option Date, the Commitment of each
such Lender shall be cancelled and the Facility shall be permanently
reduced accordingly. The Borrower shall pay to the Agent for the pro
rata account of each Lender which does not exercise its put option
under this Clause 4.8 a put option waiver fee equal to one quarter of
one per cent (0.25%) flat of the Participation of each such Lender on
the Second Option Date. The Borrower may not request the making of any
further Advances after any notice has been issued by any Lender in
exercise of its rights under this Clause.
4.9 Voluntary Cancellation. The Borrower may cancel all or any part of the
undrawn Facility by giving to the Agent not less than ninety (90) days'
prior written notice, PROVIDED that the amount of any partial
cancellation shall be at least five million Dollars
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(US$5,000,000) and an integral multiple of one million Dollars
(US$1,000,000). Once given, any such notice of cancellation shall be
irrevocable. Amounts cancelled shall not be available for further
Advances. Any partial cancellation pursuant to this Clause shall reduce
the Commitment of each Lender pro rata.
5. INTEREST
5.1 Interest. The Borrower shall pay interest on each Advance in accordance
with the following provisions.
5.2 Interest Periods. The Interest Period for each Advance shall commence
on the date on which that Advance is made and end on the date three (3)
months thereafter, PROVIDED that:
(a) any Interest Period which would otherwise end on a non-Banking
Day shall instead end on the next following Banking Day or, if
that Banking Day is in another calendar month, on the
immediately preceding Banking Day;
(b) any Interest Period which commences on the last Banking Day of
a calendar month or on a day for which there is no numerically
corresponding day in the calendar month three (3) months
thereafter shall, subject to paragraph (c), instead end on the
last Banking Day of such later calendar month; and
(c) any Interest Period which would otherwise extend beyond the
First Option Date, the Second Option Date or the Final
Maturity Date shall instead end on that date.
5.3 Rate and Calculation. The rate of interest applicable to each Advance
shall be the rate per annum determined by the Agent to be the aggregate
of LIBOR for the applicable Interest Period and the Margin. Interest
shall accrue from day to day, shall be calculated on the basis of the
actual number of days elapsed and a 360 day year, including the first
day of the applicable Interest Period but excluding the last, and shall
be paid in arrears on the applicable Interest Payment Date. The Agent
shall notify the Borrower and the Lenders of each interest rate
determined under this Clause.
6. MARKET DISRUPTION
6.1 Market Disruption. If in relation to any proposed Advance:
(a) the Agent reasonably determines (which determination shall be
conclusive and binding) that by reason of circumstances
affecting the London interbank market generally, adequate and
fair means do not exist for ascertaining LIBOR for the
relevant Interest Period; or
(b) no rate appears on the Telerate Monitor Screen and less than
two (2) Reference Banks notify the Agent of a rate for the
purpose of determining LIBOR for that Interest Period; or
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(c) the Majority Lenders notify the Agent that deposits in Dollars
in the required amount for the relevant Interest Period are
not available to them in the London interbank market or that
the rate shown on the Telerate Monitor Screen or the average
of the rates notified by the Reference Banks does not
adequately reflect the cost to those Lenders of obtaining
funds for that Interest Period,
the Agent shall promptly notify the Borrower and the Lenders
accordingly, and the proposed Advance shall not be made until an
alternative basis as mentioned below is agreed.
6.2 Alternative Basis by Agreement. Immediately following such
notification, the Borrower and the Agent, in consultation with the
Lenders, shall negotiate in good faith with a view to agreeing upon an
alternative basis for funding the proposed Advance and, if relevant,
any subsequent Advances and determining the applicable interest rate.
If an alternative basis is agreed in writing within a period of thirty
(30) days after such notification or such longer period for discussion
as the Borrower and the Agent may agree, the alternative basis shall
take effect in accordance with its terms. If an alternative basis is
not so agreed, the Facility shall terminate and the Borrower shall
repay all Advances then outstanding on the applicable Interest Payment
Date for each such Advance and together with each such repayment the
Borrower shall pay all interest and other sums accrued in respect of
such Advance.
7. CHANGE OF LAW OR CIRCUMSTANCES
7.1 Unlawfulness. If it becomes unlawful for any Lender to give effect to
its obligations hereunder, such Lender shall through the Agent so
notify the Borrower, whereupon such Lender's obligation to make
available or maintain its Participation in any Advances shall cease.
The Borrower shall forthwith after such notification, or such longer
period as such Lender may certify as being permitted by the relevant
law, prepay such Lender's Participation in all outstanding Advances in
full together with such Lender's proportion of interest and commitment
fee accrued up to the date of prepayment and any other monies owing
hereunder to such Lender.
7.2 Increased Cost. If a Lender determines that any change in any
applicable law or regulation or in the interpretation or application
thereof or compliance by such Lender with any applicable direction,
request or requirement (whether or not having the force of law) of any
competent governmental or other authority does or will:
(a) subject such Lender to any tax or other payment with reference
to sums payable by the Borrower under this Agreement (except
(i) tax on such Lender's overall net income in the
jurisdiction of its principal office or Lending Office or such
other jurisdiction where its overall net income would
ordinarily (but for its entering into of this Agreement) be
taxed or (ii) as referred to in Clause 8); or
(b) impose on such Lender any other condition the effect of which
is to (i) increase the cost to such Lender of participating in
the Facility or (ii) reduce the amount of any payment
receivable by, or the effective return to, such Lender in
respect of the Facility or (iii) impose a cost on such Lender
resulting from its Participation in the Facility,
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such Lender may through the Agent so notify the Borrower, and the
Borrower shall from time to time upon demand (whether or not such
Lender's Participation in any Advances has been repaid) pay to the
Agent for the account of such Lender such amounts as such Lender may
certify to be necessary to compensate it for such tax, payment,
increased cost or reduction (each an "INCREASED COST"). Where such
increased cost arises from circumstances contemplated above which
affect the Lender's business generally or the manner in which or extent
to which the Lender allocates capital resources, the Lender shall be
entitled to such increased cost as it determines is fairly allocable to
its Participation in the Facility. So long as the circumstances giving
rise to such increased cost continue, the Borrower may, by giving the
Agent not less than thirty (30) days' prior written notice (which shall
be irrevocable), cancel all (but not only part of) such Lender's
Commitment and, after such notice takes effect, such Lender shall not
participate in future Advances.
8. TAXES AND OTHER DEDUCTIONS
8.1 No Deductions or Withholdings. All sums payable by the Borrower under
this Agreement shall be paid in full without set-off or counterclaim or
any restriction or condition and free and clear of any tax or other
deductions or withholdings of any nature. If the Borrower or any other
person is required by any law or regulation to make any deduction or
withholding (on account of tax or otherwise) from any payment for the
account of any Lender, the Agent, or any Arranger, the Borrower shall,
together with such payment, pay such additional amount as will ensure
that such Lender, the Agent, or such Arranger receives (free and clear
of any tax or other deductions or withholdings) the full amount which
it would have received if no such deduction or withholding had been
required. The Borrower shall promptly forward to the Agent copies of
official receipts or other evidence showing that the full amount of any
such deduction or withholding has been paid over to the relevant
taxation or other authority.
8.2 Advance Notification. If at any time the Borrower becomes aware that
any such deduction, withholding or payment contemplated by Clause 8.1
is or will be required, it shall immediately notify the Agent and
supply all available details thereof.
9. FEES AND EXPENSES
9.1 Commitment Fee. The Borrower shall pay to the Agent for the pro rata
account of the Lenders a commitment fee on the daily undrawn balance of
the Facility during the period from and including the date of this
Agreement up to and including the last day of the Availability Period
as follows:
(a) if the average daily undrawn balance of the Facility during
the preceding three (3) month period (as determined by the
Agent) was an amount that is less than thirty-three and
one-third per cent (33 1/3%) of the total Commitments of all
Lenders under the Facility, commitment fee in respect of such
period shall be payable at the rate of zero point five zero
per cent (0.50%) per annum calculated on the daily undrawn
balance of the Facility during that period;
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<PAGE> 15
(b) if the average daily undrawn balance of the Facility during
the preceding three (3) month period (as determined by the
Agent) was an amount equal to or greater than thirty-three and
one-third per cent (33 1/3%) but less than sixty-six and
two-thirds per cent (66 2/3%) of the total Commitments of all
Lenders under the Facility, commitment fee in respect of such
period shall be payable at the rate of zero point six five per
cent (0.65%) per annum calculated on the daily undrawn balance
of the Facility during that period;
(c) if the average daily undrawn balance of the Facility during
the preceding three (3) month period (as determined by the
Agent) was an amount equal to or greater than sixty-six and
two-thirds per cent (66 2/3%) of the total Commitments of all
Lenders under the Facility, commitment fee in respect of such
period shall be payable at the rate of zero point eight five
per cent (0.85%) per annum calculated on the daily undrawn
balance of the Facility during that period.
The commitment fee shall, in each case, be calculated on the basis of
the actual number of days elapsed and a 360 day year and shall accrue
from day to day and be paid in arrears at the end of each successive
period of three (3) months from the date of this Agreement and on the
last day of the Availability Period.
9.2 Agency Fee. The Borrower shall pay to the Agent for its own account an
agency fee in accordance with a letter of even date herewith addressed
by the Agent to and accepted by the Borrower in accordance with the
terms stated therein.
9.3 Up-front Fee. The Borrower shall pay to the Agent for the account of
the Arrangers and the Lenders in the respective proportions agreed by
them an up-front fee in accordance with a letter of even date herewith
addressed by the Agent to and accepted by the Borrower in accordance
with the terms stated therein.
9.4 Expenses. The Borrower shall forthwith on demand and whether or not any
Advance is made pay to or reimburse each of the Lenders, the Agent, and
the Arrangers for its own account for all costs, charges and expenses
(including legal and other fees on a full indemnity basis and printing,
translation, communication, advertisement, travel and all other
out-of-pocket expenses) reasonably incurred by it in connection with
the negotiation, syndication, preparation, execution and (where
relevant) registration of this Agreement, the Security Documents and
any other documentation required hereunder or thereunder and the
arrangement of the Facility and any amendment hereto or to any Security
Document and any inspection, calculation, approval, consent or waiver
to be conducted, made or given by the Agent or the Lenders in respect
of this Agreement or any Security Document.
9.5 Enforcement Costs. The Borrower shall from time to time forthwith on
demand pay to or reimburse each of the Lenders, the Agent, and the
Arrangers for all costs, charges and expenses (including legal and
other fees on a full indemnity basis and all other out-of-pocket
expenses) incurred by it in exercising any of its rights or powers
under this Agreement or any Security Document or in suing for or
seeking to recover any sums due under this Agreement or any Security
Document or otherwise preserving or enforcing its rights under this
Agreement or any Security Document or in defending any claims brought
against it in respect of this Agreement or any Security Document or in
releasing or re-assigning any Security Document.
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<PAGE> 16
9.6 Taxes. The Borrower shall pay all present and future stamp and other
like duties and taxes and all notarial, registration, recording and
other like fees which may be payable in respect of this Agreement or
any Security Document and shall indemnify the Lenders and the Agent
against all liabilities, costs and expenses which may result from any
default by the Borrower in paying such duties, taxes or fees.
10. PAYMENTS AND EVIDENCE OF DEBT
10.1 Advances. Amounts to be advanced by the Lenders to the Borrower under
this Agreement shall be made available to the Agent not later than
10:00 a.m. (New York time) on the date on which such Advance is to be
made in same day funds settled through the New York Clearing House
Interbank Payments System (or in such other funds as may then be
customary for the settlement in Dollars of transactions of this nature)
to account no. 1707201, CHIPS UID 090624, SWIFT Code: CRESUS 33 with
Credit Suisse First Boston, New York for the account of Credit Suisse
First Boston, Singapore Branch (Reference: Zindart Ltd.) (or to such
other account in New York City as the Agent may designate). The Agent
shall make available to the Borrower the amounts received by it by
payment to such account in New York City as the Borrower shall have
previously agreed with the Agent.
10.2 Payments by Borrower. All payments by the Borrower under this Agreement
shall be made to the Agent not later than 10:00 a.m. (New York time) on
the relevant due date in same day funds settled through the New York
Clearing House Interbank Payments System (or in such other funds as may
then be customary for the settlement in Dollars of transactions of this
nature) to account no. 1707201, CHIPS UID 090624, SWIFT Code: CRESUS 33
with Credit Suisse First Boston, New York for the account of Credit
Suisse First Boston, Singapore Branch (Reference: Zindart Ltd.) (or to
such other account in New York City as the Agent may designate), in
each case under telex advice to the Agent. The Agent shall forthwith
distribute to each Lender its due proportion (if any) of the amounts
received by it in like funds as are received by the Agent and to such
account in New York City as such Lender shall have previously notified
to the Agent.
10.3 Allocation of Receipts. If any amount received by the Agent is less
than the full amount due, the Agent in consultation with the Lenders
shall have the right to allocate the amount received towards principal,
interest and/or other sums owing hereunder as it considers appropriate.
10.4 Refunds. If the Agent distributes to a Lender an amount which the Agent
has not (but should have) received from the Borrower, such Lender shall
on request promptly refund such amount to the Agent together with
interest thereon for the relevant period at the rate per annum
certified by the Agent to represent the cost to it of funding such
amount for such period. If the Agent distributes to a Lender an amount
which is required to be repaid to the Borrower, such Lender shall on
request promptly refund such amount to the Agent together with such
interest thereon (if any) as is required to be paid to the Borrower. If
the Agent makes an amount available to the Borrower which the Agent has
not (but should have) received from a Lender, the Borrower shall on
request promptly refund such amount to the Agent together with interest
thereon at the rate referred to above plus the Margin.
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10.5 Banking Days. If any sum would otherwise become due for payment on a
non-Banking Day that sum shall become due on the next following Banking
Day and interest shall be adjusted accordingly, except that if any
repayment under Clause 4 would then become due in another calendar
month such repayment shall become due on the immediately preceding
Banking Day.
10.6 Evidence of Debt. The Agent shall maintain on its books in accordance
with its usual practice a set of accounts recording the amounts from
time to time owing by the Borrower hereunder. In any legal proceeding
and otherwise for the purposes of this Agreement the entries made in
such accounts shall, in the absence of manifest error, be conclusive
and binding on the Borrower as to the existence and amounts of the
obligations of the Borrower recorded therein.
10.7 Certificate Conclusive and Binding. Where any provision of this
Agreement provides that a Lender or the Agent may certify or determine
an amount or rate payable by the Borrower, a certificate by such Lender
or the Agent as to such amount or rate shall be conclusive and binding
on the Borrower in the absence of manifest error.
11. REPRESENTATIONS AND WARRANTIES
11.1 Representations and Warranties. The Borrower represents and warrants to
each of the Lenders, the Agent, and the Arrangers that:
(a) the Borrower is a company duly incorporated with limited
liability and validly existing under the laws of Hong Kong,
and has full power, authority and legal right to own its
property and assets and to carry on its business;
(b) the Borrower has full power, authority and legal right to
enter into and engage in the transactions contemplated by this
Agreement and the Security Documents to which it is a party
and has taken or obtained all necessary corporate and other
action and consents to authorise the execution and performance
of this Agreement and the Security Documents to which it is a
party;
(c) this Agreement constitutes and the Security Documents to which
the Borrower is a party when executed and delivered will
constitute legal, valid and binding obligations of the
Borrower enforceable in accordance with their terms;
(d) neither the execution of this Agreement and the Security
Documents to which the Borrower is a party nor the performance
by the Borrower of any of its obligations or the exercise of
any of its rights hereunder or thereunder will conflict with
or result in a breach of any law, regulation, judgment, order,
authorisation, agreement or obligation applicable to it or
cause any limitation placed on it or the powers of its
directors to be exceeded or result in the creation of or
oblige the Borrower to create a Charge in respect of any of
its property or assets except in favour of the Agent under or
pursuant to any Security Document to which the Borrower is a
party;
(e) all authorisations required from any governmental or other
authority or from any shareholders or creditors of the
Borrower for or in connection with the execution,
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<PAGE> 18
validity and performance of this Agreement and the Security
Documents to which it is a party have been obtained and are in
full force and effect or, by the date on which the first
Notice of Drawing is given, will have been obtained and be in
full force and effect and there has been no default under the
conditions of any of the same;
(f) except for the filing of the Charge over Account and the Share
Mortgage with the Hong Kong Companies Registry, it is not
necessary in order to ensure the validity, enforceability,
priority or admissibility in evidence in proceedings of this
Agreement or any of the Security Documents in Hong Kong or any
other relevant jurisdiction that it or any other document be
filed or registered with any authority in Hong Kong, England
or elsewhere or that any tax be paid in respect thereof;
(g) no litigation, arbitration or administrative proceeding is
currently taking place or pending or threatened against the
Borrower or its assets or revenues;
(h) the Borrower is not in default under any law, regulation,
judgment, order, authorisation, agreement or obligation
applicable to it or its assets or revenues, the consequences
of which default could materially and adversely affect its
business or financial condition or its ability to perform its
obligations under this Agreement or any of the Security
Documents to which it is a party and no Event of Default or
prospective Event of Default has occurred;
(i) no Charge exists over all or any part of the property, assets
or revenues of the Borrower except as created by the Security
Documents or liens arising by operation of law in the ordinary
course of business or as disclosed in writing to the Agent
prior to the date of this Agreement or as otherwise permitted
under this Agreement;
(j) the most recent audited financial statements of the Borrower
for the time being (including the audited profit and loss
account and balance sheet) were prepared in accordance with
applicable laws and regulations of Hong Kong and generally
accepted accounting principles and policies consistently
applied and show a true and fair view of the financial
position of the Borrower as at the end of, and the results of
its operations for, the financial period to which they relate
and, as at the end of such period the Borrower did not have
any significant liabilities (contingent or otherwise) or any
unrealised or anticipated losses which are not disclosed by or
reserved against in, such financial statements, and there has
been no material adverse change in the business or financial
condition of the Borrower since the date of such financial
statements;
(k) the information contained in the information memorandum dated
December 1997 circulated at the Borrower's request to each of
the Lenders is true and accurate in all respects and all
forecasts and projections contained therein were arrived at
after due and careful consideration on the part of the
Borrower and were, in its considered opinion, fair and
reasonable when made; the Borrower is not aware of any fact
which has not been disclosed in writing to the Agent which
might have a material effect on any such information,
forecasts or projections or which might affect the willingness
of the Lenders to lend upon the terms of this Agreement;
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<PAGE> 19
(l) no outstanding loans or advances have been made to the
Borrower by any of its shareholders except loans and advances
in respect of which the relevant shareholders' rights have
been subordinated and assigned to the Lenders in accordance
with Clause 12.2(h);
(m) the Borrower is generally subject to civil and commercial law
and to legal proceedings and neither the Borrower nor any of
its assets or revenues is entitled to any immunity or
privilege (sovereign or otherwise) from any set-off, judgment,
execution, attachment or other legal process.
11.2 Continuing Representation and Warranty. The Borrower also represents
and warrants to and undertakes with the Lenders, the Agent, and the
Arrangers that the foregoing representations and warranties will be
true and accurate throughout the continuance of this Agreement with
reference to the facts and circumstances subsisting from time to time.
11.3 Acknowledgement of Reliance. The Borrower acknowledges that each of the
Lenders, the Agent, and the Arrangers has entered into this Agreement
in reliance upon the representations and warranties contained in this
Clause.
12. UNDERTAKINGS
12.1 Affirmative Undertakings. The Borrower undertakes and agrees with each
of the Lenders, the Agent, and the Arrangers that until the Final
Maturity Date and/or so long as any sum remains owing hereunder the
Borrower will, unless the Majority Lenders otherwise agree in writing:
(a) supply to the Agent in sufficient number for each Lender:
(i) as soon as they are available, but in any event
within one hundred and eighty (180) days after the
end of each financial year of the Borrower, copies of
its financial statements in respect of such financial
year (including a profit and loss account and balance
sheet) prepared on a consolidated basis and audited
and certified without qualification by an
internationally recognised firm of independent
accountants acceptable to the Agent;
(ii) as soon as they are available, but in any event
within ninety (90) days after the end of each half of
each financial year of the Borrower, copies of its
unaudited financial statements (including a profit
and loss account and balance sheet) prepared on a
consolidated basis and on a basis consistent with the
audited financial statements of the Borrower together
with a certificate signed by the principal financial
officer of the Borrower to the effect that such
financial statements are true in all respects and
present fairly the financial position of the Borrower
as at the end of, and the results of its operations
for, such half-year period;
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(iii) as soon as they are available, but in any event
within forty-five (45) days after the end of each
quarter of each financial year of the Borrower and
Hua Yang, copies of each such company's unaudited
financial statements (including a profit and loss
account and balance sheet) prepared, in the case of
the Borrower, on a consolidated basis and in each
case on a basis consistent with the audited financial
statements of the relevant company together with a
certificate signed by the relevant company's
principal financial officer to the effect that such
financial statements are true in all respects and
present fairly the financial position of such company
as at the end of, and the results of its operations
for, such quarter-year period;
(iv) within thirty (30) days of each date for the
provision of the accounts referred to in (i) and (ii)
above, a certificate signed by one of the directors
of the Borrower certifying that there did not exist
any Event of Default or prospective Event of Default
as at the end of such half year (or if an Event of
Default or prospective Event of Default did exist
specifying the same). Each such certificate shall be
accompanied by a certificate from, in the case of the
certificate accompanying the accounts referred to in
(i) above, the auditors of the Borrower and, in the
case of the certificate accompanying the accounts
referred to in (ii) above, the chief financial
officer of the Borrower certifying whether or not the
financial undertakings referred to in Clause 12.3 had
been complied with throughout such half-year;
(v) at the time of issue, copies of all statements and
circulars to the shareholders or to any class of
creditors of the Borrower;
(vi) promptly on request, such additional financial or
other information (including, but not limited to,
cash flows and profit and loss projections) relating
to the Borrower and any Security Party as the Agent
may from time to time request;
(vii) promptly on request, and in any event upon the
determination of the Group EBITDA (as defined in the
Exchange Agreement), evidence satisfactory to the
Agent that, pursuant to clause 1.2(c) of the Exchange
Agreement, the Earn-Out Shares (being up to 333,333
ordinary shares in the Borrower, as defined in clause
1.2(c) of the Exchange Agreement) have been issued
and delivered by the Borrower to the Selling
Shareholders (as defined in the Exchange Agreement)
or the issuance and delivery of such Earn-Out Shares
by the Borrower are not required;
(b) keep proper records and books of account in respect of its
business and permit the Agent and/or any professional
consultants appointed by the Agent at all reasonable times to
inspect and examine the records and books of account of the
Borrower;
(c) promptly inform the Agent of:
(i) the occurrence of any Event of Default or prospective
Event of Default;
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(ii) any litigation, arbitration or administrative
proceeding as referred to in Clause 11.1(g);
(d) maintain its corporate existence and conduct its business in a
proper and efficient manner and in compliance with all laws,
regulations, authorisations, agreements and obligations
applicable to it (including compliance by the Borrower and its
shareholders with all relevant listing rules and regulations
applicable to it and/or them from time to time in connection
with the listing of shares in the Borrower on The NASDAQ Stock
Market) and pay all taxes imposed on it when due unless such
taxes are being contested in good faith;
(e) remain at all times after the Acquisition the beneficial owner
(direct or indirect) of the entire issued share capital of Hua
Yang and retain control (direct or indirect) over the
appointment of, and control over voting by, the board of
directors of Hua Yang;
(f) remain at all times the beneficial owner (direct or indirect)
of the entire issued share capital of Hua Yang Printing
Holdings Company Limited and retain control (direct or
indirect) over the appointment of, and control over voting by,
the board of directors of such company;
(g) procure that no amendment or supplement is made to the
memorandum or articles of association of the Borrower without
the prior written consent of the Agent acting on the
instructions of the Majority Lenders;
(h) maintain in full force and effect all such authorisations as
are referred to in Clause 11.1(e), and take immediate steps to
obtain and thereafter maintain in full force and effect any
other authorisations which may become necessary or advisable
for the purposes stated therein and comply with all conditions
attached to all authorisations obtained;
(i) ensure that its obligations under this Agreement at all times
rank at least pari passu with all unsecured and unsubordinated
obligations of the Borrower;
(j) use the Facility exclusively for the purposes specified in
Clause 2.2; and
(k) punctually pay all sums due from it and otherwise comply with
its obligations under this Agreement and all the Security
Documents to which it is a party.
12.2 Negative Undertakings. The Borrower undertakes and agrees with each of
the Lenders, the Agent, and the Arrangers that until the Final Maturity
Date and/or so long as any sum remains owing hereunder the Borrower
will not, unless the Majority Lenders otherwise agree in writing:
(a) merge or consolidate with any other entity or take any step
with a view to dissolution, liquidation or winding-up;
(b) purchase or redeem any of its issued shares or reduce its
share capital or make a distribution of assets or other
capital distribution to its shareholders or make a
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repayment in respect of any loans or other indebtedness owing
to any of its shareholders;
(c) declare or pay any dividend or make any other income
distribution to its shareholders in excess of forty per cent
(40%) of the amount of its net profit available for
distribution in the relevant financial year of the Borrower;
(d) establish or acquire any further Subsidiary or invest in any
other entity or provide financing to any person except by way
of trade credit in the ordinary course of its business;
(e) materially change the nature of its business, sell, transfer
or otherwise assign, deal with or dispose of all or any part
of its business or (except for good consideration in the
ordinary course of its business) its assets or revenues,
whether by a single transaction or by a number of transactions
whether related or not;
(f) make or grant any loan or advance or guarantee or in any other
manner be or become directly or indirectly or contingently
liable for any indebtedness or other obligation of any other
person, except as may be necessary in the ordinary course of
its business;
(g) create or attempt or agree to create or permit to arise or
exist, or permit any of its Subsidiaries to create or attempt
or agree to create or permit to arise or exist, any Charge
over all or any part of its respective property, assets or
revenues except (i) in the case of the Borrower, any Charge
created under the Security Documents or (ii) any possessory
lien arising by operation of law in the ordinary course of its
business and not in connection with the borrowing or raising
of money or credit;
(h) borrow or raise money or credit from any shareholder in the
Borrower except where the rights of the relevant
shareholder(s) under any relevant shareholder loan(s) are
first subordinated to the rights of, and assigned to, the
Lenders under this Agreement in such manner as may be
satisfactory to the Agent;
(i) except in the ordinary course of its business, (i) incur any
other indebtedness without the prior written consent of the
Agent, or (ii) permit to subsist any account or financial
facilities with any other bank or financial institution or
(iii) deposit any monies or open any accounts other than the
Charged Account with any person other than the Lenders; or
(j) enter into any agreement or obligation which might materially
and adversely affect its financial or other condition.
12.3 Financial Undertakings. The Borrower undertakes with each of the
Lenders, the Agent, and the Arrangers that until the Final Maturity
Date and/or so long as any sum remains owing hereunder the Borrower
will, unless the Majority Lenders otherwise agree in writing, ensure
that:
(a) its Consolidated Net Worth will be:
(i) at 31 March 1998 not less than thirty million Dollars
(US$30,000,000);
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(ii) at 31 March 1999 not less than forty-three million
Dollars (US$43,000,000);
(iii) at 31 March 2000 and at all times thereafter not less
than sixty million Dollars (US$60,000,000);
(b) the ratio of its Consolidated Total Liabilities to its
Consolidated Net Worth, expressed as a percentage, will be:
(i) at all times during the financial year ending 31
March 1998 less than one hundred and seventy-five per
cent (175%);
(ii) at all times during the financial year ending 31
March 1999 less than one hundred and twenty-five per
cent (125%);
(iii) at all times during the financial year ending 31
March 2000 and at all times thereafter less than
seventy-five per cent (75%);
(c) the ratio of its Consolidated Total Interest Bearing
Liabilities to its Consolidated Net Worth, expressed as a
percentage, will be:
(i) at all times during the financial year ending 31
March 1998 less than one hundred per cent (100%);
(ii) at all times after 31 March 1998 less than fifty per
cent (50%);
(d) the ratio of its Consolidated EBITDA to Consolidated Interest
Expenses, expressed as a percentage, will be at all times not
less than five hundred per cent (500%).
Terms defined in Schedule 3 shall have the same meanings when used in
this Clause 12.3.
13. EVENTS OF DEFAULT
13.1 Events of Default. Each of the following events and circumstances shall
be an Event of Default:
(a) the Borrower fails to pay any sum payable under this Agreement
or any Security Document to which it is a party when due or
otherwise in accordance with the provisions hereof or thereof;
(b) the Borrower or any Security Party fails duly and punctually
to perform or comply with any of its respective obligations or
undertakings hereunder or under any Security Document to which
it is a party and, in respect only of a failure which in the
reasonable opinion of the Agent is capable of remedy and which
is not a failure to pay money, does not remedy such failure to
the Agent's satisfaction within seven (7) calendar days (or
such longer period as the Agent may approve) after receipt of
written notice from the Agent requiring it to do so;
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(c) any representation or warranty made or deemed to be made by
the Borrower or any Security Party in or in connection with
this Agreement or any Security Document proves to have been
incorrect or misleading in any material respect;
(d) the Borrower defaults or receives notice of default under any
agreement or obligation relating to borrowing or any
indebtedness of the Borrower becomes payable or capable of
being declared payable before its stated maturity or is not
paid when due or any Charge, guarantee or other security now
or hereafter created by the Borrower becomes enforceable;
(e) any of the authorisations referred to in Clause 11.1(e) is not
granted or ceases to be in full force and effect or is
modified in a manner which, is reasonably likely to materially
and adversely affect the operations, business or financial
condition of the Borrower or the ability of the Borrower to
perform its obligations under this Agreement or any Security
Document to which it is a party, or if any law, regulation,
judgment or order (or the repeal or modification of any of the
foregoing) suspends, varies, terminates or excuses performance
by the Borrower of any of its obligations under this Agreement
or any Security Document to which it is a party or purports to
do any of the same;
(f) a creditor takes possession of all or any part of the business
or assets of the Borrower or any execution or other legal
process is enforced against the business or any asset of the
Borrower and is not discharged within five (5) calendar days;
(g) a petition is presented or a proceeding is commenced or an
order is made or an effective resolution is passed for the
winding-up, insolvency, administration, reorganisation,
reconstruction, dissolution or bankruptcy of the Borrower or
for the appointment of a liquidator, receiver, administrator,
trustee or similar officer of the Borrower or of all or any
part of its business or assets;
(h) the Borrower stops or suspends payments to its creditors
generally or is unable or admits its inability to pay its
debts as they fall due or seeks to enter into any composition
or other arrangement with its creditors or is declared or
becomes bankrupt or insolvent;
(i) any event occurs which in the reasonable opinion of the Agent
appears to have an effect analogous to any of the matters set
out in paragraphs (f), (g) and (h) above in any jurisdiction
in which the Borrower is incorporated or carries on business;
(j) the Borrower ceases or threatens to cease to carry on its
business or any substantial part thereof or changes or
threatens to change the nature or scope of its business or the
Borrower disposes of or threatens to dispose of or any
governmental or other authority expropriates or threatens to
expropriate all or any substantial part of its business or
assets;
(k) any event which has an effect equivalent or similar to any of
the events described in any of the above paragraphs occurs,
mutatis mutandis, in relation to any Subsidiary of the
Borrower or its Holding Company or any Security Party or if
any such person (being an individual) commits an act of
bankruptcy, dies or becomes of unsound mind;
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(l) this Agreement or any Security Document or any provision
hereof or thereof ceases for any reason to be in full force
and effect or is terminated or jeopardised or becomes invalid
or unenforceable or if there is any dispute regarding validity
or enforceability of the same or if there is any purported
termination or repudiation of the same or it becomes
impossible or unlawful for the Borrower or any other party
thereto to perform any of its respective obligations hereunder
or thereunder or for any Lender or the Agent to exercise all
or any of its rights, powers and remedies hereunder or
thereunder or any undertaking in Clause 12.1 is not
enforceable as such and the Borrower fails to do, or fails to
refrain from doing, the activity which it purported to
undertake to do or, as the case may be, not to do;
(m) shares in the Borrower cease to be listed on The Nasdaq Stock
Market or trading in such shares on The Nasdaq Stock Market is
suspended for a period of, in each case, seven (7) or more
consecutive trading days;
(n) there is any dispute between the Borrower and/or any of the
other parties to the Exchange Agreement affecting the ability
of the Borrower to acquire beneficial and legal ownership of
the Parent Shares (as defined in the Exchange Agreement);
(o) any situation occurs which in the opinion of the Majority
Lenders gives reasonable grounds to believe that a material
adverse change in the business or financial condition or
prospects of the Borrower or any Subsidiary of the Borrower or
any Security Party has occurred or that the ability of the
Borrower or any Security Party to perform its respective
obligations hereunder or under any Security Document to which
it is a party has been or will be materially and adversely
affected.
13.2 Declarations. If an Event of Default has occurred the Agent may, and
upon written request by the Majority Lenders shall:
(a) declare all outstanding Advances, accrued interest and all
other sums payable hereunder to be, whereupon they shall
become, immediately due and payable without further demand,
notice or other legal formality of any kind; and/or
(b) declare the Facility terminated whereupon the obligation of
the Lenders to make further Advances hereunder shall
immediately cease.
14. DEFAULT INTEREST
14.1 Rate of Default Interest. If the Borrower fails to pay any sum payable
under this Agreement when due, the following provisions shall apply:
(a) Normal Default Interest. Subject as provided in Clause
14.1(b), the Borrower shall pay interest on such sum from and
including the due date to the date of actual payment (after as
well as before judgment) at the rate per annum determined by
the Agent to be the aggregate of:
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(i) two per cent (2%);
(ii) the Margin; and
(iii) LIBOR (as determined by the Agent on such date or
dates on or after the due date for payment as the
Agent may select) calculated with reference to such
periods and such amounts as the Agent considers
appropriate or, if any of the circumstances described
in Clause 6.1 applies, the rate from time to time
certified by each respective Lender or the Agent (as
the case may be) to be the rate representing the cost
to it of funding the unpaid sum by whatever means it
considers to be appropriate.
The Agent shall notify the Borrower and the Lenders of the
duration of each such funding period and each interest rate
determined under this Clause.
(b) Modification for Advances. Where the unpaid sum is of
principal which became due and payable on a date during, but
not the last day of, the Interest Period relating thereto and
none of the circumstances described in Clause 6.1 apply in
relation to such Interest Period, the first period selected by
the Agent under Clause 14.1(a) in respect of such amount shall
equal the unexpired portion of the Interest Period and, for
the duration of such period, there shall be substituted for
the rate specified in Clause 14.1(a) the rate of two per cent
(2%) above the rate calculated in accordance with Clause 5.3
(including the Margin) and applicable to the unpaid amount
immediately before it fell due.
14.2 Calculation of Default Interest. Interest at the rate or rates
determined from time to time as aforesaid shall accrue from day to day,
shall be calculated on the basis of the actual number of days elapsed
and a 360 day year, shall be compounded at the end of each successive
funding period considered appropriate by the Agent for the purposes of
Clause 14.1 and shall be payable from time to time on demand.
15. INDEMNITIES, SET-OFF AND PRO RATA SHARING
15.1 General Indemnity. The Borrower shall indemnify each Lender, the Agent,
and each Arranger against all losses, liabilities, damages, costs and
expenses (including loss of profit) which such Lender, the Agent, or
such Arranger may incur as a consequence of any Event of Default or any
other breach by the Borrower of any of its obligations under this
Agreement or any failure to borrow in accordance with a Notice of
Drawing or as a result of any Advance or any part thereof being repaid
for any reason other than on the Interest Payment Date applicable to
that Advance or otherwise in connection with this Agreement (including
any loss or expense incurred in liquidating or redeploying funds
acquired or arranged for the purposes of a proposed Advance or to
maintain such Lender's Participation in any Advances or any unpaid sum
or in terminating any such arrangement or any hedging arrangement in
respect of this Agreement and any interest or fees incurred in funding
any unpaid sum, but taking into account any interest paid by the
Borrower in respect of such unpaid sum under Clause 14).
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15.2 Currency Indemnity. Dollars shall be the currency of account and of
payment in respect of sums payable under this Agreement. If an amount
is received in another currency, pursuant to a judgment or order or in
the liquidation of the Borrower or otherwise, the Borrower's
obligations under this Agreement shall be discharged only to the extent
that the Lenders, or the Agent, or the Arrangers (as the case may be)
may purchase Dollars with such other currency in accordance with normal
banking procedures upon receipt of such amount. If the amount in
Dollars which may be so purchased, after deducting any costs of
exchange and any other related costs, is less than the relevant sum
payable under this Agreement, the Borrower shall indemnify the Lenders,
the Agent, or the Arrangers against the shortfall. This indemnity shall
be an obligation of the Borrower independent of and in addition to its
other obligations under this Agreement and shall take effect
notwithstanding any time or other concession granted to the Borrower or
any judgment or order being obtained or the filing of any claim in the
liquidation, dissolution or bankruptcy (or analogous process) of the
Borrower.
15.3 Set-Off. If an Event of Default has occurred each Lender and the Agent
shall have the right, without notice to the Borrower or any other
person, to set off and apply any credit balance on any account (whether
subject to notice or not and whether matured or not and in whatever
currency) of the Borrower with such Lender or the Agent (as the case
may be), and any other indebtedness owing by such Lender or the Agent
(as the case may be) to the Borrower, against the liabilities of the
Borrower under this Agreement, and each Lender and the Agent is
authorised to purchase with the monies standing to the credit of any
such account such other currencies as may be necessary for this
purpose. Each Lender shall forthwith notify the Agent of the exercise
of any right under this Clause. This Clause shall not affect any
general or banker's lien, right of set-off or other right to which any
Lender or the Agent may be entitled.
15.4 Pro Rata Sharing. If at any time any Lender receives any amount from
the Borrower or otherwise in respect of sums due from the Borrower
hereunder (other than through the Agent pursuant to Clause 10.2 or from
an Assignee, Transferee or participant) whether by way of voluntary or
involuntary payment, set-off or otherwise, it will promptly pay to the
Agent the amount so received for distribution to the Lenders pro rata
in accordance with their respective Participations in such amount. The
Agent shall treat such amount as if it were a payment by the Borrower
directly to the Agent on account of sums due from the Borrower
hereunder so that, as between the Borrower and the Lender who
originally received the amount, the amount shall not be treated as
having been paid and such Lender shall retain all its rights against
the Borrower or otherwise with respect to such amount (except to the
extent of any sum received by it from such distribution by the Agent).
Notwithstanding the foregoing provisions of this Clause:
(i) no Lender shall be required to share any amount which
it has received as a result of any legal proceedings
commenced against the Borrower to recover sums owing
to it under this Agreement with any other Lender
which has a legal right to but does not join in such
legal proceedings after having been given reasonable
opportunity so to do and which does not commence and
diligently pursue a separate action to enforce its
rights against the Borrower; and
(ii) if any Lender is required to repay to the Borrower
any part of an amount originally received by it from
the Borrower and shared pursuant to this
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Clause, the other Lenders shall make funds available
to enable the Agent to reimburse such Lender for the
amount required to be repaid (less the appropriate
portion of any sum which such Lender has received by
way of distribution from the Agent in respect of such
amount).
15.5 No Charge. Clause 15.4 shall not constitute and shall not be construed
as constituting a Charge by any Lender over all or any part of any sum
received or recovered by it in the manner set out in Clause 15.4.
16. THE LENDERS, THE AGENT AND THE ARRANGERS
16.1 Appointment. Each Lender hereby appoints the Agent to act as its agent
in relation to the administration of the Facility and as its agent and
trustee in relation to the Security Documents and authorises the Agent
to enter into the Security Documents on its behalf and to take such
action on its behalf and to exercise and enforce such rights, powers
and discretions as are expressly or by implication delegated to the
Agent by the terms of this Agreement and the Security Documents and
such rights, powers and discretions as are reasonably incidental
thereto.
16.2 Nature of Duties. The duties and functions of the Agent shall be of an
administrative nature only. The Agent shall not be deemed to be a
trustee of any Lender except as specified in this Agreement and the
Security Documents and shall not be deemed to be an agent or trustee of
the Borrower for any purpose except as specified in Clause 20.5. The
Agent shall have no duties or obligations except those expressly set
out in this Agreement and the Security Documents.
16.3 Specific Duties. The Agent shall:
(a) promptly account to each Lender for its due proportion of all
payments received by the Agent from the Borrower or otherwise
in connection with the Facility;
(b) promptly inform each Lender of:
(i) the contents of any document which the Agent receives
in respect of the Facility and which it considers to
be material; and
(ii) any material Event of Default of which an officer of
the Agent acting in respect of this Agreement and in
his capacity as such has actual knowledge;
(c) except as otherwise provided in this Agreement, take or
refrain from taking any action in accordance with any lawful
and proper instructions given to it by the Majority Lenders,
and any such instructions shall be binding on all the Lenders;
(d) consult with the Lenders to the extent practicable before
making any declaration or demand under Clause 13.2 or
effecting any amendment or waiver under Clause 17.
16.4 Rights and Powers. The Agent may:
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(a) perform any of its duties and functions through its directors,
officers, employees or agents;
(b) engage and pay for the advice or services of lawyers,
accountants or other professional advisers or experts as the
Agent may consider necessary or desirable and rely and act
upon such advice;
(c) refrain from exercising any of its rights, powers and
discretions unless and until instructed to do so, and as to
the manner of doing so, by the Majority Lenders, and refrain
from acting upon any instructions to take enforcement action
until it has been indemnified or secured to its satisfaction
against any liabilities, costs and expenses which it may
incur;
(d) refrain from taking any action which in its opinion would or
might contravene any law or regulation or render it liable to
any person, and do all things which in its opinion may be
necessary in order to comply with any law or regulation;
(e) assume that no Event of Default or prospective Event of
Default has occurred and that no party is in breach of its
obligations under this Agreement or any Security Document
unless the Agent receives specific written notice to the
contrary; and
(f) rely upon any communication or document which it believes to
be genuine and, as to any matters of fact which can reasonably
be expected to be within the knowledge of any other party to
this Agreement or any Security Document, rely upon a
certificate signed by or on behalf of that party.
16.5 No Liability to Lenders. The Agent shall have no liability or
obligation to any Lender:
(a) as a result of any failure or delay by the Borrower or any
other party in performing its respective obligations under
this Agreement or any Security Document;
(b) for the authorisation, execution, legality, validity,
enforceability, effectiveness, genuineness or sufficiency of
this Agreement, any Security Document or any other document
relevant to this transaction or for the collectability of any
sum payable under this Agreement or any Security Document;
(c) for:
(i) the accuracy or completeness of the information
memorandum referred to in Clause 11.1(1);
(ii) the accuracy or completeness of any other information
supplied by any person at any time whether or not
such information was or is circulated by the Agent;
(iii) the accuracy of any representation, warranty or
statement (whether written or oral) made in or at any
time in connection with this Agreement or any
Security Document;
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(d) to take any steps to ascertain whether an Event of Default or
prospective Event of Default has occurred or whether the
Borrower or any other party is otherwise in breach of any of
its respective obligations under this Agreement or any
Security Document;
(e) to provide any credit or other information relating to the
Borrower or any Security Party or otherwise relating to the
Facility, except as expressly stated in this Agreement;
(f) to account for any sum received by the Agent (other than for
the account of the Lenders) by way of fees or reimbursement of
expenses in connection with this Agreement or for any benefit
received by it arising out of any present or future banking or
other relationship with the Borrower or any Security Party or
any person connected with the Borrower or any Security Party;
(g) as a result of any act or omission by the Agent or any
director, officer, employee or agent of the Agent in
connection with the Facility, except in the case of the
Agent's gross negligence or wilful misconduct.
Each Lender agrees that it will not seek to make any claim against any
director, officer, employee or agent of the Agent in respect of any of
the matters described in this Clause 16.5.
16.6 No Liability to Borrower. The Agent shall have no liability or
obligation to the Borrower as a result of any failure or delay by any
Lender or any other party in performing its respective obligations
under this Agreement or any Security Document.
16.7 Indemnity. The Lenders shall indemnify the Agent upon demand from and
against all claims, actions, liabilities, damages, penalties, losses,
costs and expenses (including legal fees) which the Agent may incur in
any way relating to or arising out of this Agreement or any Security
Document or any action taken or omitted to be taken by the Agent in
seeking to protect, exercise or enforce the rights of the Lenders and
the Agent or otherwise in connection with the Facility, unless and to
the extent that any of the foregoing results directly from the Agent's
gross negligence or wilful misconduct. The Lenders shall be severally
liable under the foregoing indemnity in proportion to their respective
Participations in the Loan or, if no Advance has yet been made, in
proportion to their respective Commitments, in each case calculated at
the time of the Agent's demand, or, if the Loan has been fully repaid,
in proportion to their respective Participations in the Loan
immediately before such repayment.
16.8 Acknowledgement by Lenders. Each Lender acknowledges to and agrees with
the Agent that:
(a) it has itself been and will continue to be solely responsible
for making its own independent analysis of and investigations
into the status, creditworthiness, prospects, business,
operations, assets and condition of the Borrower each Security
Party and any other person referred to herein and for making
its own decisions as to the entering into or the taking or not
taking of any action in connection with this transaction;
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(b) it has not relied upon any representation or statement made by
the Agent as being an inducement to enter into this Agreement.
16.9 Certifications by Agent. Where any provision of this Agreement or any
Security Document provides that the Agent may certify or determine an
amount or rate payable by the Lenders or any of them, a certificate by
the Agent as to such amount or rate shall be conclusive and binding on
each such Lender in the absence of manifest error.
16.10 No Restriction of Business. The Agent shall have the same rights and
powers in its capacity as a Lender as any other Lender and may exercise
such rights and powers as if it was not acting as an agent and trustee
in relation to this Agreement and the Security Documents. The Agent may
engage in any other business with the Borrower or any Security Party or
any person connected with the Borrower or any Security Party and may
treat as confidential any information which it receives in connection
with such other business.
16.11 Resignation of Agent. The Agent may resign at any time by giving not
less than thirty (30) days' prior written notice to the Lenders and the
Borrower. The Majority Lenders, on behalf of the Lenders, shall have
the right to appoint a successor Agent, but if they do not do so within
the period of such notice the retiring Agent may appoint a successor
Agent from among the Lenders without the consent of the Borrower, or
otherwise with the Borrower's consent, such consent not to be
unreasonably withheld. The Agent's resignation shall not take effect
until a successor Agent has been appointed. Upon such appointment the
successor Agent shall succeed to and become vested with all the rights,
powers, discretions and duties of the retiring Agent and the retiring
Agent shall be discharged from any further duties and obligations
hereunder. The parties to this Agreement agree to execute whatever
documents may be necessary to effect such a change of Agent. After any
retiring Agent's resignation the provisions of this Clause 16 shall
continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as the Agent.
16.12 Security Documents. The following provisions shall apply to the Agent
in its capacity as trustee in relation to any of the Security
Documents:
(a) the Agent:
(i) may accept without enquiry or objection such title as
the Borrower or the relevant Security Party may have
to any assets which are subject to any of the
Security Documents and shall not be liable for any
lack of or defect in such title, whether apparent or
not and whether capable of remedy or not;
(ii) shall not be liable for any omission or delay in
giving notice to any third party, or effecting any
filing or registration, or obtaining any
authorisation, or otherwise perfecting the security
constituted by any of the Security Documents;
(iii) shall not be obliged to hold any title or other
documents relating to the assets charged under any of
the Security Documents in its own possession or to
take any steps to protect or preserve such documents,
and may
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permit the relevant Security Party to retain such
documents in its possession if it is reasonable in
the circumstances;
(b) unless provided otherwise in any Security Document, monies
which are received by the Agent and held by it as trustee in
relation to any of the Security Documents may be invested in
the name of or under the control of the Agent in any
investment authorised by English law for the investment of
trust money by trustees or in any other investments which may
be selected by the Agent, and if not otherwise invested such
monies may be placed on deposit in the name of or under the
control of the Agent at such bank or institution (including
the Agent) and upon such terms as the Agent may reasonably
think fit;
(c) each Lender, and each Arranger authorises the Agent (by itself
or by such person(s) as it may nominate) to execute and
enforce the Security Documents as trustee, as agent or as
otherwise provided, and confirms that the Agent shall have an
independent right to release from any Security Document any
asset permitted to be disposed of under this Agreement;
(d) the Agent may appoint any person established or resident in
any jurisdiction (whether a trust corporation or not) to act
as a trustee or agent, either separately or jointly with the
Agent, in relation to any of the Security Documents if the
Agent considers that such an appointment is necessary or
desirable for the purpose of conforming with any legal
requirement in any relevant jurisdiction or otherwise for the
purpose of holding, administering, protecting or enforcing any
of the Security Documents, and any such trustee or agent shall
have such powers and discretions (not exceeding those
conferred on the Agent) and such obligations as shall be
conferred or imposed on it by the Agent;
(e) Clauses 16.4 to 16.11 shall also apply to the Agent in its
capacity as trustee in relation to any of the Security
Documents.
16.13 Arrangers. The Arrangers in their capacities as such shall have no
duties or obligations under or in connection with this Agreement or the
Security Documents. Clauses 16.5, 16.6 and 16.8 shall apply for the
benefit of the Arrangers as if references therein to the Agent were
references to each of them.
16.14 No Partnership. Nothing contained or implied in this Agreement shall
constitute or be deemed to constitute a partnership between any of the
parties to this Agreement.
17. AMENDMENT
Any amendment or waiver of any provision of this Agreement and any
waiver of any default under this Agreement shall only be effective if
made in writing and signed by or on behalf of the party against whom
the amendment or waiver is asserted. For these purposes, any amendment
or waiver which is made in writing by the Agent at the direction of the
Majority Lenders shall be binding on all Lenders, except that the
written approval of the Lender against which an amendment or waiver is
asserted is required where that amendment or waiver relates to:
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<PAGE> 33
(a) an increase of the Facility or of any Lender's Commitment or
the length of the Availability Period or the amount or
currency of or the due date for any payment of principal or
interest on any Advance;
(b) a reduction in the rate or rates of interest or any commitment
or other fees or other amounts payable to the Lenders
hereunder;
(c) any voluntary or mandatory prepayment;
(d) any amendment of the definition of "Majority Lenders" or of
the provisions of this Clause; or
(e) the provision of any guarantee of or security for the
Borrower's obligations under this Agreement or the release or
amendment of any Security Document or any security created
thereby.
Any amendment affecting the rights of the Agent shall also require the
consent of the Agent.
18. WAIVER AND SEVERABILITY
Time is of the essence of this Agreement but no failure or delay by the
Agent, any Lender, or any Arranger in exercising any right, power or
remedy hereunder shall impair such right, power or remedy or operate as
a waiver thereof, nor shall any single or partial exercise of the same
preclude any further exercise thereof or the exercise of any other
right, power or remedy. The rights, powers and remedies herein provided
are cumulative and do not exclude any other rights, powers and remedies
provided by law. If at any time any provision of this Agreement is or
becomes illegal, invalid or unenforceable in any respect under the law
of any jurisdiction, the legality, validity and enforceability of such
provision under the law of any other jurisdiction, and of the remaining
provisions of this Agreement, shall not be affected or impaired
thereby.
19. MISCELLANEOUS
19.1 Execution. This Agreement shall become effective as of the date hereof.
19.2 Entire Agreement. This Agreement and the documents referred to herein
constitute the entire obligation of the Lenders, the Agent, and the
Arrangers and supersede any previous expressions of intent or
understandings in respect of this transaction.
19.3 Publicity. No announcement or other publicity in connection with this
Agreement or relating in any way to the Facility shall be made or
arranged except with the Agent's prior written consent.
19.4 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts which
when taken together shall be deemed to constitute one agreement.
31
<PAGE> 34
20. ASSIGNMENT, NOVATON AND LENDING OFFICES
20.1 The Borrower. The Borrower shall not assign or transfer all or any part
of its rights or obligations under this Agreement.
20.2 Assignment and Novation. A Lender may:
(a) assign all or any part of its rights under this Agreement in
accordance with Clause 20.3; or
(b) transfer by novation all or a portion of its rights, benefits
and obligations under this Agreement in accordance with Clause
20.4,
(any such assignment or transfer by novation being referred to in this
Clause 20 as a "TRANSFER"). The Borrower shall execute and do all such
documents, acts and things as the Agent may reasonably require for
perfecting and completing any such transfer.
20.3 Assignment by Lenders. Any Lender may at any time without the consent
of any person assign all or any of its rights under this Agreement and
the corresponding benefit of any of the Security Documents to any other
person PROVIDED that:
(a) any transfer of rights together with a novation of obligations
to the same person may only be made in accordance with the
novation procedure set out in Clause 20.4; and
(b) no such assignment shall take effect until the proposed
assignee has (i) agreed with the Agent and the other Lenders
that it shall be under the same obligations towards each of
them as it would have been under if it had been a party hereto
as a Lender, (ii) paid the Agent for its own account a fee of
one thousand Dollars (US$1,000) and (iii) paid all sums which
have been demanded under Clause 20.7.
20.4 Novation by Lenders. Any Lender may at any time transfer by novation
all or part of its rights, benefits and/or obligations under or arising
out of this Agreement and the corresponding benefit of the Security
Documents to an Eligible Transferee. Such transfer shall be effected
by:
(i) the Eligible Transferee delivering a completed original
Novation Certificate duly executed by such Lender and the
intended Transferee to the Agent (for this purpose only, for
itself and as agent for and on behalf of the Borrower and the
other Lenders) together with a fee for the account of the
Agent of one thousand Dollars (US$1,000); and
(ii) the Agent executing such Novation Certificate to acknowledge
receipt thereof.
Upon delivery and execution of a Novation Certificate in accordance
with the above conditions, all parties to this Agreement agree that, on
the later of the date specified as the Transfer Date in such Novation
Certificate and the fifth (5th) Banking Day following the date of
receipt thereof by the Agent (unless the Agent agrees a shorter
period):
32
<PAGE> 35
(a) to the extent only that in such Novation Certificate the
Lender which is party thereto seeks to transfer its rights
and/or its obligations under this Agreement and the Security
Documents, the Borrower and such Lender shall each be released
from further obligations to the other hereunder and their
respective rights against the other shall be cancelled (such
rights and obligations being referred to in this Clause 20.4
as "DISCHARGED RIGHTS AND OBLIGATIONS");
(b) the Borrower and the Transferee which is party to such
Novation Certificate shall each assume obligations towards the
other and/or acquire rights against the other which differ
from such discharged rights and obligations only insofar as
the Borrower and such Transferee have assumed and/or acquired
the same in place of the Borrower and such Lender; and
(c) the Agent, such Transferee and the other Lenders shall acquire
the same rights and assume the same obligations between
themselves as they would have acquired and assumed had such
Transferee been an original party hereto as a Lender with the
rights and obligations acquired or assumed by it as a result
of such transfer.
20.5 Authority. Each of the Borrower and the other Lenders hereby
irrevocably authorises the Agent without further reference to it to
acknowledge receipt of each Novation Certificate delivered to it in
accordance with Clause 20.4 by its execution thereof. Upon receipt of
any Novation Certificate, the Agent shall send a copy thereof to the
Borrower but the Borrower agrees that failure to do so shall not
invalidate any transfer. The Agent shall incur no liability to the
Borrower or any Lender by virtue of its acting in accordance with the
provisions of this Clause.
20.6 Reliance. The Agent and the Borrower may rely on and act in accordance
with any Novation Certificate which has been delivered to and accepted
by the Agent in accordance with Clause 20.4 and which appears to be
complete and regular on its face. Neither of them shall incur any
liability to any party by so doing and the Agent shall not be obliged
to check or enquire whether a purported Transferee is an Eligible
Transferee PROVIDED that if it has actual notice that any proposed
Transferee is not an Eligible Transferee, the Agent is hereby
authorised (but not obliged) to refuse to accept the relevant Novation
Certificate.
20.7 Reimbursement of Agent. Any Lender seeking to effect any transfer under
this Clause 20 shall reimburse the Agent on demand for all costs,
charges and expenses (including legal fees on a full indemnity basis)
reasonably incurred in connection therewith.
20.8 Payments. The Agent shall distribute payments received by it in
relation to all or any part of a share of Commitment or Participation
to the Lender indicated in the records of the Agent as being so
entitled on that date PROVIDED that the Agent is authorised to
distribute payments to be made on the date on which any transfer
becomes effective pursuant to any part of this Clause to the Lender so
entitled immediately before such transfer took place regardless of the
period to which such sums relate.
20.9 Participations. A Lender may at any time grant one or more
participations in its rights and/or obligations under this Agreement
and the Security Documents but no other party hereto shall be concerned
in any way with any participation so granted.
33
<PAGE> 36
20.10 Disclosure. A Lender may disclose to (i) any Assignee, Transferee or
participant or potential Assignee, Transferee or participant, (ii) the
Holding Company of such Lender or (iii) any Subsidiary of such Lender
or of its Holding Company on a confidential basis such information
about the Borrower as such Lender shall consider appropriate. Any
Lender and any person to whom disclosure has been made pursuant to this
Clause may also make such disclosures as may be required by any
applicable law of England, Hong Kong or elsewhere.
20.11 Lending Offices. Each Lender shall act initially through its Lending
Office specified in Schedule 1 and may act subsequently through any of
its other offices as selected by it from time to time. A Lender shall
promptly notify the Agent of any change of its Lending Office.
20.12 Reference Banks. The Agent shall, on the written instructions of the
Majority Lenders, replace any Reference Bank at any time with such
other bank as the Majority Lenders shall designate and the Agent shall
give notice of any such replacement to the Borrower and the Lenders.
21. NOTICES
21.1 Delivery. Each notice, demand or other communication to be given or
made under this Agreement shall be in writing and delivered or sent to
the relevant party at its address or telex number or fax number set out
below (or such other address or telex number or fax number as the
addressee has by five (5) days' prior written notice specified to the
other parties):
To the Borrower: Zindart Limited
Flat C & D, 25th Floor, Block 1
Tai Ping Industrial Centre
57 Ting Kok Road
Tai Po
New Territories
Hong Kong
Fax Number : (852) 2664 7066
Attention : Feather Fok
To the Agent: Credit Suisse First Boston, Singapore Branch
80 Raffles Place #48-01
UOB Plaza 1
Singapore 048624
Fax Number : (65) 531 2709
Attention : Credit Operations
and to the Lenders at their respective Lending Offices.
34
<PAGE> 37
21.2 Deemed Delivery. Any notice, demand or other communication so addressed
to the relevant party shall be deemed to have been delivered (a) if
given or made by letter, when actually delivered to the relevant
address, (b) if given or made by telex, when despatched with confirmed
answerback and (c) if given or made by fax, when despatched, Provided
that, if such day is not a working day in the place to which it is
sent, such notice, demand or other communication shall be deemed
delivered on the next following working day at such place.
21.3 Agent. All communications between the Lenders and the Borrower in
relation to this Agreement shall be made through the Agent.
21.4 Language. Each notice, demand or other communication hereunder and any
other documents required to be delivered hereunder shall be either in
English or accompanied by a certified translation thereof into the
English language.
22. GOVERNING LAW AND JURISDICTION
22.1 Law. This Agreement and the rights and obligations of the parties
hereunder shall be governed by and construed in accordance with the
laws of England.
22.2 Jurisdiction. The Borrower irrevocably agrees for the benefit of the
Agent and each of the Lenders that any legal action or proceeding
arising out of or relating to this Agreement may be brought in the
courts of England and irrevocably submits to the non-exclusive
jurisdiction of such courts.
22.3 Process Agent. The Borrower irrevocably appoints Pritchard Englefield
of 14 New Street, London EC2M 4TR, England as its agent to receive and
acknowledge on its behalf service of any writ, summons, order, judgment
or other notice of legal process in England. If for any reason the
agent named above (or its successor) no longer serves as agent of the
Borrower for this purpose, the Borrower shall promptly appoint a
successor agent satisfactory to the Agent and notify the Agent thereof
PROVIDED that until the Agent receives such notification, it shall be
entitled to treat the agent named above (or its said successor) as the
agent of the Borrower for the purposes of this Clause. The Borrower
agrees that any such legal process shall be sufficiently served on it
if delivered to such agent for service at its address for the time
being in England whether or not such agent gives notice thereof to the
Borrower.
22.4 No Limitation on Right of Action. Nothing herein shall limit the right
of the Agent and the Lenders to commence any legal action against the
Borrower and/or its property in any other jurisdiction or to serve
process in any manner permitted by law, and the taking of proceedings
in any jurisdiction shall not preclude the taking of proceedings in any
other jurisdiction whether concurrently or not.
22.5 Waiver; Final Judgment Conclusive. The Borrower irrevocably and
unconditionally waives any objection which it may now or hereafter have
to the choice of England as the venue of any legal action arising out
of or relating to this Agreement and agrees not to claim that any court
thereof is not a convenient or appropriate forum. The Borrower also
agrees that a final judgment against it in any such legal action shall
be final and conclusive and may be enforced in any other jurisdiction,
and that a certified or otherwise
35
<PAGE> 38
duly authenticated copy of the judgment shall be conclusive evidence of
the fact and amount of its indebtedness.
22.6 Waiver of Immunity. The Borrower irrevocably and unconditionally waives
any immunity to which it or its property may at any time be or become
entitled, whether characterised as sovereign immunity or otherwise,
from any set-off or legal action in England or elsewhere, including
immunity from service of process, immunity from jurisdiction of any
court or tribunal, and immunity of any of its property from attachment
prior to judgment or from execution of a judgment.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto on the
date stated at the beginning of this Agreement.
36
<PAGE> 39
SCHEDULE 1
The Lenders
<TABLE>
<CAPTION>
Name and Lending Office Commitment
- ----------------------- ----------
<S> <C>
Credit Suisse First Boston US$22,500,000
Labuan Branch
Main Office Tower
Level 10(B)
Financial Park Labuan
87000 Labuan F.T.
Malaysia
Fax No: (60) 8742 5381
Attention: Ms. Jane Lee
Standard Chartered Bank US$7,500,000
16/F, Miramar Tower
1-23 Kimberley Road
Tsimshatsui, Kowloon
Hong Kong
Telex No.: 73230
Fax No: (852) 2371 2963 / 2785 2327
Attention: Mr. Chris Chang/Ms. Carol Chan
</TABLE>
37
<PAGE> 40
SCHEDULE 2
Form of Novation Certificate
TO: Credit Suisse First Boston, Singapore Branch as agent for itself and on
behalf of the Lenders and the Borrower each as defined below and as
agent and trustee under the Security Documents
NOVATION CERTIFICATE
Relating to the agreement (the "LOAN AGREEMENT") dated 1998 whereby a loan
facility was made available to Zindart Limited (the "BORROWER") by the Lenders
(as therein defined) on whose behalf Credit Suisse First Boston, Singapore
Branch (the "AGENT") acted as agent in connection therewith. Terms defined in
the Loan Agreement shall have the same meanings when used herein.
1. [ ] (the "TRANSFEROR") confirms the accuracy of the summary of its
Participation in the Facility set out in the Schedule below and
requests [ ] (the "TRANSFEREE") to accept and procure the transfer to
the Transferee of [the whole] / [[ ] per cent] of its Commitment and/or
its Participation in the outstanding Advances and the corresponding
benefit of the Security Documents by countersigning and delivering this
Novation Certificate to the Agent at its address for the service of
notices specified in the Loan Agreement.
2. The Transferee hereby requests the Agent to accept this Novation
Certificate as being delivered to the Agent pursuant to Clause 20.4 of
the Loan Agreement so as to take effect in accordance with the terms
thereof on [ ] 19 (the "TRANSFER DATE") or on such later date as may be
determined in accordance with the terms of Clause 20.4 and confirms and
agrees as contemplated by such Clause.
3. The Transferee hereby:
(a) undertakes with the Transferor and each of the other parties
to the Loan Agreement that it will perform in accordance with
their terms all those obligations which by the terms of the
Loan Agreement and any Security Document are expressed to be
assumed by it after receipt of this Novation Certificate by
the Agent and satisfaction of the conditions (if any) subject
to which this Novation Certificate is expressed to take
effect;
(b) appoints the Agent to act as its agent as provided in the Loan
Agreement and as its agent and trustee as provided in the
Security Documents;
(c) expressly agrees to all the terms of the Loan Agreement and
the Security Documents.
38
<PAGE> 41
4. The Transferee warrants that it has received copies of the Loan
Agreement and each of the Security Documents together with such other
information as it has required in connection with this transaction and
that it has not relied and will not hereafter rely on the Transferor,
the Agent or any Lender to check or enquire on its behalf into the
legality, validity, effectiveness, adequacy, accuracy or completeness
of any such document or information and further agrees that it has not
relied and will not rely on the Transferor, the Agent or any Lender to
assess or keep under review on its behalf the financial condition,
creditworthiness, condition, affairs, status or nature of the Borrower
or any other party to any Security Document.
5. Neither the Transferor nor the Agent (either on its own behalf or on
behalf of any Lender or other person) makes any representation or
warranty or assumes any responsibility with respect to the legality,
validity, effectiveness, adequacy or enforceability of the Loan
Agreement, the Security Documents or any document relating thereto or
assumes any responsibility for the financial condition of the Borrower,
any Security Party or any other party or for the performance and
observance by the Borrower or any other party of any of its obligations
under the Loan Agreement, the Security Documents or any document
relating thereto and any and all such conditions and warranties,
whether express or implied by law or otherwise, are hereby excluded.
6. By its execution of this Novation Certificate, the Transferee hereby
represents to the Transferor and each of the other parties to the Loan
Agreement and the Security Documents that:
(a) it is an Eligible Transferee; and
(b) it is duly incorporated, validly existing, has full power,
authority and legal right to enter into the transactions
contemplated by, and perform the obligations assumed pursuant
to, this Novation Certificate and the Loan Agreement and the
Security Documents and has taken all necessary action to
authorise execution of this Novation Certificate.
7. The Transferor hereby gives notice that nothing herein or in the Loan
Agreement or in any Security Document (or any document relating
thereto) shall oblige the Transferor to:
(a) accept a re-transfer from the Transferee of the whole or any
part of its rights, benefits and/or obligations under the Loan
Agreement or any Security Document hereby transferred; or
(b) support any losses directly or indirectly sustained or
incurred by the Transferee (i) by reason of the
non-performance by the Borrower or any other party to the Loan
Agreement, any Security Document or any document relating
thereto of its obligations under any such document or (ii)
otherwise.
The Transferee hereby acknowledges the absence of any such obligation
as is referred to in (a) or (b) above.
8. This Novation Certificate and the rights and obligations of the parties
hereto shall be governed by and construed in accordance with the laws
of England.
39
<PAGE> 42
THE SCHEDULE
TRANSFEROR'S PARTICIPATION IN THE FACILITY
<TABLE>
<CAPTION>
COMMITMENT PARTICIPATION IN ADVANCES
<S> <C>
</TABLE>
AMOUNT TO BE TRANSFERRED
<TABLE>
<CAPTION>
COMMITMENT PARTICIPATION
<S> <C>
% %
Amount: Amount:
US$ US$
</TABLE>
[Transferor] [Transferee]
By: By:
Date________________________ Date:____________________
Address:
Tel:
Fax:
Telex:
Bank account(s)
for payments:
Receipt acknowledged.
Agent
By:
Date:____________________
o This Novation Certificate is not a security and is of no value to any
person other than the Transferor, the Transferee and the Borrower.
40
<PAGE> 43
SCHEDULE 3
Financial Definitions
For the purposes of Clause 12.3, unless the context otherwise requires:
"CONSOLIDATED BORROWINGS" means, in relation to the Borrower and its
Subsidiaries on a consolidated basis, indebtedness incurred in respect of (i)
money borrowed or raised, (ii) any bond, note, loan stock, debenture or similar
instrument or commercial paper, (iii) rental payments under leases (whether in
respect of land, machinery, equipment or otherwise) entered into primarily as a
method of raising finance or of financing the acquisition of the asset leased,
(iv) Consolidated Contingent Liabilities, (v) deferred payments for assets or
services acquired, (vi) guarantees, bonds, standby letters of credit or other
instruments issued in connection with the performance of contracts or (vii)
guarantees or other assurances against financial loss in respect of Consolidated
Borrowings of any other person (but otherwise falling within the above);
"CONSOLIDATED CONTINGENT LIABILITIES" means in respect of the Borrower and its
Subsidiaries on a consolidated basis, the total contingent liabilities of the
Borrower and its Subsidiaries, at any time, calculated in accordance with
accounting practices generally applied in Hong Kong, but shall, in any event, be
deemed to include the amount of all liabilities of third parties guaranteed or
secured by or the subject of an indemnity or other right or recourse against the
Borrower or any of its Subsidiaries;
"CONSOLIDATED EBITDA" means, in relation to the Borrower and its Subsidiaries on
a consolidated basis in respect of any financial year, earnings before
Consolidated Interest Expenses, taxation, depreciation and amortisation,
determined by reference to the then latest consolidated accounts of the Borrower
supplied to the Agent pursuant to Clause 12.1(a);
"CONSOLIDATED INTEREST EXPENSES" means, in relation to the Borrower and its
Subsidiaries on a consolidated basis for any financial year, the aggregate
amount of all interest (including any interest which may have been capitalised),
fees and commissions accrued (whether or not paid) during such financial year on
all Consolidated Borrowings.
"CONSOLIDATED NET WORTH" means, in relation to the Borrower and its Subsidiaries
on a consolidated basis, the aggregate of:
(i) the amount paid up or credited as paid up on the issued share capital
of the Borrower;
(ii) the amounts standing to the credit of the consolidated capital and
revenue reserves of the Borrower and its Subsidiaries including but not
limited to any share premium account, capital redemption reserve fund,
property revaluation reserve (where the revaluation in question is in
accordance with a report of a professional valuer which valuer has been
approved by the Agent) and profit and loss account;
all as shown by the then latest audited consolidated balance sheet of the
Borrower as supplied to the Agent pursuant to Clause 12.1(a), but after:
41
<PAGE> 44
(A) deducting therefrom such part of the amount standing to the credit of
the said reserves as is, in the opinion of its auditors attributable to
the amounts by which the book values of any assets of the Borrower and
its Subsidiaries are written up after the date hereof (other than in
the case of a revaluation of any real property as aforesaid) or, in the
case of a Subsidiary incorporated after the date of this Agreement,
after the date on which it became or becomes a Subsidiary and so that
for the purposes of the foregoing provisions any increase in the book
value of any assets resulting from their transfer by the Borrower or
any of its Subsidiaries, to another member of the same group of
companies shall be deemed to result from a writing up of the book value
of such assets;
(B) making such adjustments as may be appropriate to reflect any variation
in the amount of such paid-up share capital or the amounts standing to
the credit of such reserves (other than profit and loss account) which
shall have occurred since the date of the said latest audited
consolidated balance sheet of the Borrower or which would result from
any transaction for the purpose of which the Consolidated Net Worth is
being computed or any transaction to be carried out contemporaneously
therewith and so that for this purpose if the Borrower proposes to
issue or has issued shares for cash and the issue has been underwritten
by a financial institution or financial institutions satisfactory to
the Agent then such shares shall be deemed to have been issued and the
amount (including any premium) of the subscription moneys payable in
respect thereof (not being moneys payable later than four (4) months
after the date of allotment) shall be deemed to have been paid up at
the date on which the issue of such shares was underwritten and such
underwriting became unconditional;
(C) deducting therefrom, to the extent included in such reserves and if not
otherwise deducted, any amount attributable to the interests of the
Borrower and its Subsidiaries, in a company outside such group of
companies insofar as the same exceeds the cost of such interests;
(D) making such adjustments as may be necessary to take account of any
variation in interests in any company within the same group of
companies, as appropriate, which shall have occurred since the date of
the latest audited financial statements of the Borrower or which would
result from any transaction for the purpose of which the Consolidated
Net Worth is being computed or any transaction to be carried out
contemporaneously therewith;
(E) making such other adjustments (if any) as the auditors of the Borrower
consider appropriate (including proper adjustments to take account of
any minority or other interests in any Subsidiary or a variation to the
provisions set out in paragraph (E) above if consistent with the
existing accounting policies and procedures of the Borrower);
(F) deducting therefrom any liability in respect of the principal amount of
any subordinated indebtedness of the Borrower and its Subsidiaries;
(G) deducting therefrom (if not otherwise deducted) any amounts
attributable to intangible assets, including goodwill, distribution
rights and intellectual property, and the amount of any debit balance
on profit and loss account.
"CONSOLIDATED TOTAL INTEREST BEARING LIABILITIES" means, in relation to the
Borrower and its Subsidiaries on a consolidated basis, indebtedness incurred in
respect of (i) money borrowed or
42
<PAGE> 45
raised, (ii) any bond, note, loan stock, debenture or similar interest-bearing
instrument or commercial paper or (iii) Consolidated Contingent Liabilities;
"CONSOLIDATED TOTAL LIABILITIES" means, in relation to the Borrower and its
Subsidiaries on a consolidated basis, its total consolidated liabilities
calculated in accordance with accounting principles generally accepted in Hong
Kong but shall, insofar as not otherwise taken into account, be deemed to
include the following (calculated on a consolidated basis):
(i) any liability of the Borrower and its Subsidiaries in respect of
Consolidated Borrowings;
(ii) all actual liabilities of whatsoever nature of the Borrower and its
Subsidiaries (including, without limitation, any premium mandatorily
payable on redemption of any indebtedness) and all liabilities in the
form of guarantees of any other person to the extent that such
liabilities are required to be disclosed under generally accepted
accounting principles;
(iii) any indebtedness of the Borrower and its Subsidiaries owed to other
members of the same group of companies;
Provided that no liability shall be included in the calculation of Consolidated
Total Liabilities more than once.
43
<PAGE> 46
THE BORROWER
SIGNED for and on behalf of )
ZINDART LIMITED )
by )
THE ARRANGERS
SIGNED for and on behalf of )
CREDIT SUISSE FIRST BOSTON, )
HONG KONG BRANCH )
by )
SIGNED for and on behalf of )
STANDARD CHARTERED BANK )
by )
THE LENDERS
SIGNED for and on behalf of )
CREDIT SUISSE FIRST BOSTON, )
LABUAN BRANCH )
by )
SIGNED for and on behalf of )
STANDARD CHARTERED BANK )
by )
44
<PAGE> 47
THE AGENT
SIGNED for and on behalf of )
CREDIT SUISSE FIRST BOSTON, )
SINGAPORE BRANCH )
by )
45
<PAGE> 48
APPENDIX 1
Form of Notice of Drawing
From: Zindart Limited
To: Credit Suisse First Boston, Singapore Branch
_____________________________1998
Dear Sirs,
US$30,000,000 REVOLVING CREDIT FACILITY:
FACILITY AGREEMENT DATED [ ] 1998
We refer to the above Facility Agreement, and hereby give notice that we wish to
draw an Advance under the Facility ________ on 199 in the amount of US$_____.
The proceeds of the Advance should be disbursed in accordance with clause 10.1
of the Facility Agreement.
The proceeds of the Advance are to be used exclusively for the purposes
specified in the Facility Agreement.
We confirm that:
(a) the representations and warranties set out in clause 11.1 of the
Facility Agreement, repeated with reference to the facts and
circumstances subsisting at the date of this notice, remain true and
correct; and
(b) no Event of Default or prospective Event of Default has occurred which
remains unwaived or unremedied or would result from the making of the
Advance.
Terms defined in the Facility Agreement have the same meanings when used in this
notice.
For and on behalf of
Zindart Limited
___________________________
1-1
<PAGE> 49
APPENDIX 2
FORM OF CHARGE OVER ACCOUNT
DATED 1998
----------------------------
ZINDART LIMITED
AS BORROWER
- AND -
CREDIT SUISSE FIRST BOSTON, SINGAPORE BRANCH
ON ITS OWN BEHALF AND AS AGENT AND TRUSTEE
FOR THE LENDERS REFERRED TO HEREIN
-------------------
CHARGE OVER ACCOUNT
-------------------
BAKER & Mc. KENZIE
14TH FLOOR, HUTCHISON HOUSE
HONG KONG
2-i
<PAGE> 50
CONTENTS
<TABLE>
<CAPTION>
Number Clause Heading Page
- ------ -------------- ----
<S> <C>
1. Interpretation........................................................1
2. Charge................................................................2
3. Continuing Security...................................................3
4. Representations and Warranties........................................3
5. Undertakings..........................................................3
6. Enforcement...........................................................4
7. Taxes and Other Deductions............................................4
8. Costs, Charges and Expenses...........................................5
9. Borrower's Liability..................................................5
10. Indemnity.............................................................5
11. Further Assurance.....................................................6
12. Power of Attorney.....................................................6
13. Suspense Account......................................................6
14. Waiver and Severability...............................................7
15. Miscellaneous.........................................................7
16. Assignment............................................................8
17. Notices...............................................................8
18. Governing Law and Jurisdiction........................................9
Schedule The Charged Account.........................................11
EXECUTION.....................................................................12
</TABLE>
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<PAGE> 51
THIS DEED is made on the day of 1998
------------------- --------------------------
BETWEEN:
(1) ZINDART LIMITED, a company incorporated under the laws of Hong Kong
having its registered office at Flat C & D, 25th Floor, Block 1, Tai
Ping Industrial Centre, 57 Ting Kok Road, Tai Po, New Territories, Hong
Kong (the "BORROWER"); and
(2) CREDIT SUISSE FIRST BOSTON, SINGAPORE BRANCH on its own behalf and as
agent and trustee for the Lenders (as defined below) from time to time
(in such capacity, the "AGENT").
WHEREAS:
(A) By a loan agreement (the "LOAN AGREEMENT") dated ______________________
1998 made between (1) the Borrower, (2) Credit Suisse First Boston,
Hong Kong Branch and Standard Chartered Bank as arrangers (the
"ARRANGERS"), (3) the banks and other financial institutions defined
therein as lenders (the "LENDERS") and (4) the Agent, the Lenders have
agreed to make available to the Borrower a loan facility of up to
US$30,000,000 (the "FACILITY") upon the terms set out therein.
(B) The Agent is acting as agent for the Lenders and the Arrangers pursuant
to the Loan Agreement and as agent and trustee for the Lenders and the
Arrangers pursuant to this Deed.
(C) It is a condition precedent to the Lenders making the Facility
available to the Borrower that the Borrower enters into this Deed.
NOW THIS DEED WITNESSES AS FOLLOWS:
1. INTERPRETATION
1.1 Definitions and Construction. In this Deed, unless the context requires
otherwise:
(a) terms and expressions defined in or construed for the purposes
of the Loan Agreement shall have the same meanings or be
construed in the same manner when used in this Deed;
(b) the expression "AGENT" shall mean the Agent acting on its own
behalf and as agent and trustee for the Lenders and the
expression "LENDERS" shall have the meaning ascribed to it in
the Loan Agreement and shall include the Arrangers in their
respective capacities as such;
(c) the expression "CHARGE" shall include any right of set-off;
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<PAGE> 52
(d) "CHARGED ACCOUNT" means the Dollar denominated account of the
Borrower with the Agent more particularly described in
Schedule 1 and all sums now or hereafter deposited in such
account and all additions to or renewals or replacements
thereof (in whatever currency) and all interest or other sums
which may accrue from time to time thereon;
(e) "SECURED INDEBTEDNESS" means all and any sums (whether
principal, interest, fees or otherwise) which are or at any
time may become payable by the Borrower under the Loan
Agreement or any Security Document to which it is a party and
all other monies hereby secured.
1.2 Trust. All rights, benefits and interests granted to or conferred upon
the Agent pursuant to Clause 2.1 and all other rights, powers and
discretions granted to or conferred upon the Agent under this Deed
shall be held by the Agent on trust for the benefit of itself as Agent
and as Lender and the other Lenders from time to time. The trust
constituted by this Clause shall come into existence on the date of
this Deed and shall last for so long as any part of the Secured
Indebtedness remains unpaid or the performance of any obligation under
the Loan Agreement or this Deed or any other Security Document has not
been performed in full PROVIDED that, for the purposes of the rule
against perpetuities, the perpetuity period applicable to the trust
constituted under this Clause and dispositions made or to be made
pursuant to this Deed and this trust, is hereby specified as a period
of EIGHTY (80) YEARS LESS ONE (1) DAY from the date of this Deed.
1.3 Successors and Assigns. The expressions "BORROWER", "AGENT" and
"LENDERS" shall where the context permits include their respective
successors and permitted assigns and any persons deriving title under
them.
1.4 Miscellaneous. In this Deed, unless the context requires otherwise,
references to statutory provisions shall be construed as references to
those provisions as replaced, amended, modified or re-enacted from time
to time; words importing the singular include the plural and vice versa
and words importing a gender include every gender; references to this
Deed or the Loan Agreement or any other Security Document shall be
construed as references to such document as the same may be amended or
supplemented or novated from time to time; unless otherwise stated,
references to Clauses and the Schedule are to clauses of and the
schedule to this Deed and references to this Deed include its Schedule.
Clause headings are inserted for reference only and shall be ignored in
construing this Deed.
2. CHARGE
2.1 Charge and Assignment. In consideration of the Facility being made
available by the Lenders to the Borrower upon the terms and conditions
of the Loan Agreement, the Borrower with full title guarantee charges
to the Agent by way of first fixed charge and assigns to the Agent
absolutely by way of mortgage the Charged Account and all its right,
title, interest and benefit therein and thereto as a continuing
security for the due and punctual payment of the Secured Indebtedness
and the due and punctual
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<PAGE> 53
performance and observance by the Borrower of all other obligations of
the Borrower contained in the Loan Agreement or any Security Document
to which it is a party.
2.2 Discharge. Upon payment in full of all the Secured Indebtedness to the
satisfaction of the Agent and cancellation of the Facility, the Agent
shall, at the request and cost of the Borrower, and in such form as the
Agent shall approve, discharge the security created by this Deed.
3. CONTINUING SECURITY
This Deed shall be a continuing security and shall remain in full force
and effect until the Secured Indebtedness has been paid in full,
notwithstanding the insolvency or liquidation or any incapacity or
change in the constitution or status of the Borrower or any other
person or any intermediate settlement of account or other matter
whatsoever. This Deed is in addition to, and independent of, any
Charge, guarantee or other security or right or remedy now or at any
time hereafter held by or available to the Agent or any Lender.
4. REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties. The Borrower represents and warrants to
the Agent that:
(a) the Charged Account is beneficially owned by the Borrower free
from any Charge except as created under or pursuant to this
Deed;
(b) the particulars of the Charged Account set out in the Schedule
are accurate.
4.2 Continuing Representation and Warranty. The Borrower also represents
and warrants to and undertakes with the Agent that the foregoing
representations and warranties will be true and accurate throughout the
continuance of this Deed with reference to the facts and circumstances
subsisting from time to time.
5. UNDERTAKINGS
The Borrower undertakes and agrees with the Agent throughout the
continuance of this Deed and until the Final Maturity Date and/or so
long as the Secured Indebtedness or any part thereof remains owing that
the Borrower will, unless the Agent otherwise agrees in writing:
(a) promptly deliver to the Agent all deposit receipts or other
evidence as to the amounts from time to time deposited in the
Charged Account and copies of all statements showing the
balance from time to time in the Charged Account;
(b) not withdraw or attempt or be entitled to withdraw all or any
part of the monies in the Charged Account except for the
exclusive purpose of meeting payments of interest due to the
Lenders under the Loan Agreement and/or
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<PAGE> 54
meeting payments of principal required to be made in
connection with any cancellation of the Facility under clauses
4.7, 4.8 or 4.9 of the Loan Agreement;
(c) not create or attempt or agree to create or permit to arise or
exist any Charge over all or any part of the Charged Account
or any interest therein or otherwise assign, deal with or
dispose of all or any part of the Charged Account (except
under or pursuant to this Deed);
(d) not do or cause or permit to be done anything which may in any
way depreciate, jeopardise or otherwise prejudice the value of
the Agent's security hereunder.
6. ENFORCEMENT
6.1 Events of Default. For the purposes of this Clause, each of the
following events and circumstances shall be an Event of Default:
(a) any event or circumstance which would constitute an Event of
Default as that term is defined in the Loan Agreement;
(b) if the Borrower purports or attempts to create any Charge over
all or any part of the Charged Account or any third party
asserts a claim in respect thereof.
6.2 Enforcement of Security. Upon the occurrence of an Event of Default,
the Agent may, at any time or times thereafter and without further
notice or restriction, withdraw, transfer or otherwise dispose of all
or any part of the monies in the Charged Account in or towards the
payment or discharge of the Secured Indebtedness in such manner as the
Agent may think fit and, for this purpose, the Agent may, at the
expense of the Borrower, convert all or any part of such monies into
other currencies. The above provisions apply notwithstanding any other
terms upon which such monies may have been deposited or that any such
monies may have been deposited for a fixed period or be subject to a
period of notice and that the fixed period or period of notice may not
have expired or that notice or sufficient notice may not have been
given.
7. TAXES AND OTHER DEDUCTIONS
All sums payable by the Borrower under this Deed shall be paid in full
without set-off or counterclaim or any restriction or condition and
free and clear of any tax or other deductions or withholdings of any
nature. If the Borrower or any other person is required by any law or
regulation to make any deduction or withholding (on account of tax or
otherwise) from any payment for the account of any Lender or the Agent,
the Borrower shall, together with such payment, pay such additional
amount as will ensure that such Lender or the Agent receives (free and
clear of any tax or other deductions or withholdings) the full amount
which it would have received if no such deduction or withholding had
been required. The Borrower shall promptly forward to the Agent copies
of official receipts or other evidence showing that the full amount of
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<PAGE> 55
any such deduction or withholding has been paid over to the relevant
taxation or other authority.
8. COSTS, CHARGES AND EXPENSES
The Borrower shall from time to time forthwith on demand pay to or
reimburse the Agent and the Lenders for:
(a) all costs, charges and expenses (including legal and other
fees on a full indemnity basis and all other out-of-pocket
expenses) incurred by the Agent or any Lender in connection
with the preparation, execution and registration of this Deed,
any other documents required in connection herewith and any
amendment to or extension of, or the giving of any consent or
waiver in connection with, this Deed;
(b) all costs, charges and expenses (including legal and other
fees on a full indemnity basis and all other out-of-pocket
expenses) incurred by the Agent or any Lender in exercising
any of its or their rights or powers hereunder or in suing for
or seeking to recover any sums due hereunder or otherwise
preserving or enforcing its or their rights hereunder or in
defending any claims brought against it or them in respect of
this Deed or in releasing or re-assigning this Deed upon
payment of all monies hereby secured,
and, until payment of the same in full, all such costs, charges and
expenses shall be secured by this Deed.
9. BORROWER'S LIABILITY
Notwithstanding anything herein contained or implied to the contrary,
the Borrower shall remain liable to perform all the obligations assumed
by it in relation to the Charged Account and the Agent and the Lenders
shall not be under any obligation in any manner to perform or fulfil
any obligation of the Borrower in respect of the Charged Account or to
make any payment thereunder.
10. INDEMNITY
10.1 General Indemnity. The Borrower shall indemnify the Agent and each
Lender against all losses, liabilities, damages, costs and expenses
incurred by it or them in the execution or performance of the terms and
conditions hereof and against all actions, proceedings, claims,
demands, costs, charges and expenses which may be incurred, sustained
or arise in respect of the non-performance or non-observance of any of
the undertakings and agreements on the part of the Borrower herein
contained or in respect of any matter or thing done or omitted relating
in any way whatsoever to the Charged Account.
2-5
<PAGE> 56
10.2 Payment and Security. The Agent may retain and pay out of any money in
the Agent's hands all sums necessary to effect the indemnity contained
in this Clause and all sums payable by the Borrower under this Clause
shall form part of the monies hereby secured.
11. FURTHER ASSURANCE
11.1 Further Assurance. The Borrower shall at any time and from time to time
(whether before or after the security hereby created shall have become
enforceable) execute such further legal or other mortgages, charges or
assignments and do all such transfers, assurances, acts and things as
the Agent may reasonably require over or in respect of the Charged
Account to secure all monies, obligations and liabilities hereby
covenanted to be paid or hereby secured or for the purposes of
perfecting and completing any assignment of the Agent's rights,
benefits or obligations hereunder and the Borrower shall also give all
notices, orders and directions which the Agent may reasonably require.
11.2 Enforcement of Agent's Rights. The Borrower will do or permit to be
done everything which the Agent may from time to time reasonably
require to be done for the purpose of enforcing the Agent's rights
hereunder and will allow the name of the Borrower to be used as and
when necessary for that purpose.
12. POWER OF ATTORNEY
The Borrower irrevocably appoints the Agent by way of security to be
its attorney (with full power of substitution) and in its name or
otherwise on its behalf and as its act and deed to sign, seal, execute,
deliver, perfect and do all deeds, instruments, acts and things which
may be required or which the Agent shall reasonably think proper or
expedient for carrying out any obligations imposed on the Borrower
hereunder or for exercising any of the powers hereby conferred or for
giving to the Agent the full benefit of this security and so that the
appointment hereby made shall operate to confer on the Agent authority
to do on behalf of the Borrower anything which it can lawfully do by an
attorney. The Borrower ratifies and confirms and agrees to ratify and
confirm any deed, instrument, act or thing which such attorney or
substitute may execute or do.
13. SUSPENSE ACCOUNT
The Agent may place and keep any monies received by virtue of this Deed
(whether before or after the insolvency or liquidation of the Borrower)
to the credit of a suspense account for so long as the Agent may think
fit in order to preserve the rights of the Agent or any Lender to sue
or prove for the whole amount of its claims against the Borrower or any
other person.
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<PAGE> 57
14. WAIVER AND SEVERABILITY
No failure or delay by the Agent in exercising any right, power or
remedy hereunder shall impair such right, power or remedy or operate as
a waiver thereof, nor shall any single or partial exercise of the same
preclude any further exercise thereof or the exercise of any other
right, power or remedy. The rights, powers and remedies herein provided
are cumulative and do not exclude any other rights, powers and remedies
provided by law. If at any time any provision of this Deed is or
becomes illegal, invalid or unenforceable in any respect under the law
of any jurisdiction, the legality, validity and enforceability of such
provision under the law of any other jurisdiction, and of the remaining
provisions of this Deed, shall not be affected or impaired thereby.
15. MISCELLANEOUS
15.1 Continuing Obligations. The liabilities and obligations of the Borrower
under this Deed shall remain in force notwithstanding any act,
omission, event or circumstance whatsoever, until full, proper and
valid payment of the Secured Indebtedness.
15.2 Protective Clauses. Without limiting Clause 15.1, neither the liability
of the Borrower nor the validity or enforceability of this Deed shall
be prejudiced, affected or discharged by:
(a) any other Charge, guarantee or other security or right or
remedy being or becoming held by or available to the Agent or
any Lender or by any of the same being or becoming wholly or
partly void, voidable, unenforceable or impaired or by the
Agent or any Lender at any time releasing, refraining from
enforcing, varying or in any other way dealing with any of the
same or any power, right or remedy the Agent or any Lender may
now or hereafter have from or against the Borrower or any
other person or the granting of any time or indulgence to the
Borrower or any other person;
(b) any variation or modification of the Loan Agreement, any of
the Security Documents or any other document referred to
therein;
(c) the invalidity or unenforceability of any obligation or
liability of the Borrower under the Loan Agreement or any of
the Security Documents to which it is a party;
(d) any invalidity or irregularity in the execution of this Deed
or the Loan Agreement or any of the other Security Documents
or any deficiency in the powers of the Borrower to enter into
or perform any of its obligations hereunder or under the Loan
Agreement or any of the other Security Documents to which it
is a party; or
(e) any act, omission, event or circumstance which would or may
but for this provision operate to prejudice, affect or
discharge this Deed or the liability of the Borrower
hereunder.
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<PAGE> 58
15.3 Unrestricted Right of Enforcement. This Deed may be enforced without
the Agent or any Lender first having recourse to any other security or
rights or taking any other steps or proceedings against the Borrower or
any other person or may be enforced for any balance due after resorting
to any one or more other means of obtaining payment or discharge of the
monies, obligations and liabilities hereby secured.
15.4 Discharges and Releases. Notwithstanding any discharge, release or
settlement from time to time between the Agent or any Lender and the
Borrower, if any security, disposition or payment granted or made to
the Agent or any Lender in respect of the Secured Indebtedness by the
Borrower or any other person is avoided or set aside or ordered to be
surrendered, paid away, refunded or reduced by virtue of any provision,
law or enactment relating to bankruptcy, insolvency, liquidation,
winding-up, composition or arrangement for the time being in force or
for any other reason, the Agent shall be entitled hereafter to enforce
this Deed as if no such discharge, release or settlement had occurred.
15.5 Amendment. Any amendment or waiver of any provision of this Deed and
any waiver of any default under this Deed shall only be effective if
made in writing and signed by the Agent.
15.6 Counterparts. This Deed may be executed in any number of counterparts
and by the different parties to this Deed on separate counterparts,
each of which when executed and delivered shall be an original but all
the counterparts shall together constitute one and the same instrument.
16. ASSIGNMENT
16.1 The Borrower. The Borrower shall not assign any of its rights
hereunder.
16.2 The Lenders. The Lenders may assign or grant participations in all or
any part of their rights under this Deed in accordance with the
provisions of clause 20 of the Loan Agreement.
17. NOTICES
17.1 Delivery. Each notice, demand or other communication to be given or
made under this Deed shall be in writing and delivered or sent to the
relevant party at its address or telex number or fax number set out
below (or such other address or telex number or fax number as the
addressee has by five (5) days' prior written notice specified to the
other party):
2-8
<PAGE> 59
To the Borrower: Zindart Limited
Flat C & D, 25th Floor, Block 1
Tai Ping Industrial Centre
57 Ting Kok Road
New Territories
Hong Kong
Fax Number : (852) 2664 7066
Attention : Feather Fok
To the Agent: Credit Suisse First Boston, Singapore Branch
80 Raffles Place #48-01
UOB Plaza 1
Singapore 048624
Fax Number : (65) 531 2709
Attention : Credit Operations
17.2 Deemed Delivery. Any notice, demand or other communication so addressed
to the relevant party shall be deemed to have been delivered (a) if
given or made by letter, when actually delivered to the relevant
address, (b) if given or made by telex, when despatched with confirmed
answerback and (c) if given or made by fax, when despatched.
18. GOVERNING LAW AND JURISDICTION
18.1 Law. This Deed and the rights and obligations of the parties hereunder
shall be governed by and construed in accordance with the laws of
England.
18.2 Jurisdiction. The Borrower agrees that any legal action or proceeding
arising out of or relating to this Deed may be brought in the courts of
England and irrevocably submits to the non-exclusive jurisdiction of
such courts.
Process Agent. The Borrower irrevocably appoints Pritchard Englefield
of 14 New Street, London EC2M 4TR, England as its agent to receive and
acknowledge on its behalf service of any writ, summons, order, judgment
or other notice of legal process in England. If for any reason the
agent named above (or its successor) no longer serves as agent of the
Borrower for this purpose, the Borrower shall promptly appoint a
successor agent satisfactory to the Agent and notify the Agent thereof
provided that until the Agent receives such notification, it shall be
entitled to treat the agent named above (or its said successor) as the
agent of the Borrower for the purposes of this Clause. The Borrower
agrees that any such legal process shall be sufficiently served on it
if delivered to such agent for service at its address for the time
being in England whether or not such agent gives notice thereof to the
Borrower.
18.3 No Limitation on Right of Action. Nothing herein shall limit the right
of the Agent and the Lenders to commence any legal action against the
Borrower and/or its
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<PAGE> 60
property in any other jurisdiction or to serve process in any manner
permitted by law, and the taking of proceedings in any jurisdiction
shall not preclude the taking of proceedings in any other jurisdiction
whether concurrently or not.
18.4 Waiver; Final Judgment Conclusive. The Borrower irrevocably and
unconditionally waives any objection which it may now or hereafter have
to the choice of Borrower as the venue of any legal action arising out
of or relating to this Deed. The Borrower also agrees that a final
judgment against it in any such legal action shall be final and
conclusive and may be enforced in any other jurisdiction, and that a
certified or otherwise duly authenticated copy of the judgment shall be
conclusive evidence of the fact and amount of its indebtedness.
18.5 Waiver of Immunity. The Borrower irrevocably waives any immunity to
which it or its property may at any time be or become entitled, whether
characterised as sovereign immunity or otherwise, from any set-off or
legal action in England or elsewhere, including immunity from service
of process, immunity from jurisdiction of any court or tribunal, and
immunity of any of its property from attachment prior to judgment or
from execution of a judgment.
IN WITNESS whereof this Deed has been executed by the parties hereto and is
intended to be and is hereby delivered on the day and year first above written.
2-10
<PAGE> 61
SCHEDULE
The Charged Account
The account of Zindart Limited (account no. A 0102112.01.USD) with Credit Suisse
First Boston, Singapore Branch.
2-11
<PAGE> 62
THE BORROWER
THE COMMON SEAL of )
ZINDART LIMITED )
was affixed to this Deed )
in the presence of )
THE AGENT
SIGNED for and on behalf of )
CREDIT SUISSE FIRST BOSTON, )
SINGAPORE BRANCH )
by )
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<PAGE> 63
APPENDIX 3
FORM OF SHARE MORTGAGE
DATED 1998
--------------------------
ZINDART LIMITED
AS BORROWER
- AND -
CREDIT SUISSE FIRST BOSTON, SINGAPORE BRANCH
ON ITS OWN BEHALF AND AS AGENT AND TRUSTEE
FOR THE LENDERS REFERRED TO HEREIN
-------------------------------------------
SHARE MORTGAGE
INCORPORATING AN ASSIGNMENT OF INDEBTEDNESS
-------------------------------------------
BAKER & Mc. KENZIE
14TH FLOOR, HUTCHISON HOUSE
HONG KONG
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<PAGE> 64
CONTENTS
<TABLE>
<CAPTION>
Number Clause Heading Page
- ------ -------------- ----
<S> <C>
1. Interpretation.........................................................1
2. Mortgage of Shares.....................................................3
3. Assignment of Indebtedness.............................................4
4. Discharge..............................................................4
5. Continuing Security....................................................4
6. Representations and Warranties.........................................4
7. Undertakings...........................................................5
8. Power of Sale..........................................................6
9. Dividends, Assigned Monies and Voting Rights...........................7
10. Taxes and Other Deductions.............................................7
11. Costs, Charges and Expenses............................................8
12. Indemnity..............................................................8
13. Further Assurance......................................................9
14. Power of Attorney......................................................9
15. Suspense Account......................................................10
16. Waiver and Severability...............................................10
17. Miscellaneous.........................................................10
18. Assignment............................................................11
19. Notices...............................................................11
20. Governing Law and Jurisdiction........................................12
Schedules
- ---------
Schedule 1 Form of Letter of Resignation......................................14
Schedule 2 Form of Notice and Acknowledgment (Shares).........................15
Schedule 3 Form of Notice and Acknowledgment (Assigned Monies)................17
EXECUTION......................................................................19
</TABLE>
3-ii
<PAGE> 65
THIS DEED is made on the day of 1998
---------------------- --------------------------
BETWEEN:
(1) ZINDART LIMITED, a company incorporated under the laws of Hong Kong
having its registered office at Flat C & D, 25th Floor, Block 1, Tai
Ping Industrial Centre, 57 Ting Kok Road, Tai Po, New Territories, Hong
Kong (the "BORROWER"); and
(2) CREDIT SUISSE FIRST BOSTON, SINGAPORE BRANCH on its own behalf and as
agent and trustee for the Lenders (as defined below) from time to time
(in such capacity, the "AGENT").
WHEREAS:
(A) By a loan agreement (the "LOAN AGREEMENT") dated ______________________
1998 made between (1) the Borrower, (2) Credit Suisse First Boston,
Hong Kong Branch and Standard Chartered Bank as arrangers (the
"ARRANGERS"), (3) the banks and other financial institutions defined
therein as lenders (the "LENDERS") and (4) the Agent, the Lenders have
agreed to make available to the Borrower a loan facility of up to
US$30,000,000 (the "FACILITY") upon the terms set out therein.
(B) The Agent is acting as agent for the Lenders and the Arrangers pursuant
to the Loan Agreement and as agent and trustee for the Lenders and the
Arrangers pursuant to this Deed.
(C) It is a condition precedent to the Lenders making the Facility
available to the Borrower that the Borrower enters into this Deed.
NOW THIS DEED WITNESSES as follows:
1. INTERPRETATION
1.1 Definitions and Construction. In this Deed, unless the context requires
otherwise:
(a) terms and expressions defined in or construed for the purposes
of the Loan Agreement shall have the same meanings or be
construed in the same manner when used in this Deed;
(b) the expression "AGENT" shall mean the Agent acting on its own
behalf and as agent and trustee for the Lenders and the
expression "LENDERS" shall have the meaning ascribed to it in
the Loan Agreement and shall include the Arrangers in their
respective capacities as such;
(c) "ASSIGNED MONIES" means all indebtedness now or at any time
hereafter owing by the Company to the Borrower;
3-1
<PAGE> 66
(d) "COMPANY" means Hua Yang Holdings Co. Limited;
(e) "DIVIDENDS" means all dividends, interest and other sums which
are or may become payable to the Borrower or its nominee in
its capacity as holder of the Shares and includes:
(i) the right to receive any and all such sums and all
claims in respect of any default in paying such sums;
and
(ii) all forms of remittance of such sums and any bank or
other account to which such sums may be paid or
credited;
(f) "SECURED INDEBTEDNESS" means all and any sums (whether
principal, interest, fees or otherwise) which are or at any
time may become payable by the Borrower under the Loan
Agreement or any Security Document to which it is a party and
all other monies hereby secured;
(g) "SHARES" means all those ordinary shares of HK$0.10 each and
all those preferred shares of HK$0.01 each constituting the
entire issued share capital of the Company and, where the
context permits, includes the Dividends and those stocks,
shares, rights, monies and other property referred to in
Clause 2.4.
1.2 Trust. All rights, benefits and interests granted to or conferred upon
the Agent pursuant to Clause 2.1 and all other rights, powers and
discretions granted to or conferred upon the Agent under this Deed
shall be held by the Agent on trust for the benefit of itself as Agent
and as Lender and the other Lenders from time to time. The trust
constituted by this Clause shall come into existence on the date of
this Deed and shall last for so long as any part of the Secured
Indebtedness remains unpaid or the performance of any obligation under
the Loan Agreement or this Deed or any other Security Document has not
been performed in full PROVIDED that, for the purposes of the rule
against perpetuities, the perpetuity period applicable to the trust
constituted under this Clause and dispositions made or to be made
pursuant to this Deed and this trust, is hereby specified as a period
of EIGHTY (80) YEARS LESS ONE (1) DAY from the date of this Deed.
1.3 Successors and Assigns. The expressions "BORROWER", "AGENT" and
"LENDERS" shall where the context permits include their respective
successors and permitted assigns and any persons deriving title under
them.
1.4 Miscellaneous. In this Deed, unless the context requires otherwise,
references to statutory provisions shall be construed as references to
those provisions as replaced, amended, modified or re-enacted from time
to time; words importing the singular include the plural and vice versa
and words importing a gender include every gender; references to this
Deed or the Loan Agreement or any other Security Document shall be
construed as references to such document as the same may be amended or
supplemented or novated from time to time; unless otherwise stated,
references to Clauses and Schedules are to clauses of and schedules to
this Deed and references to this Deed include its Schedules. Clause
headings are inserted for reference only and shall be ignored in
construing this Deed.
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2. MORTGAGE OF SHARES
2.1 Mortgage. In consideration of the Lenders agreeing to make the Facility
available to the Borrower upon the terms and conditions of the Loan
Agreement, the Borrower with full title guarantee mortgages, charges
and assigns by way of first legal mortgage the Shares to the Agent as a
continuing security for the due and punctual payment of the Secured
Indebtedness and the due and punctual performance and observance by the
Borrower of all other obligations of the Borrower contained in the Loan
Agreement or any Security Document to which it is a party.
2.2 Deposit of Documents and Notice to Nominee. For the purpose of enabling
the Agent to exercise its rights under this Deed, the Borrower
undertakes forthwith upon the execution of this Deed:
(a) to deposit, or procure that there be deposited with the Agent:
(i) the certificates in respect of the Shares together
with instruments of transfer and contract notes in
respect thereof, duly executed in blank; and
(ii) signed undated letters of resignation from each
director of the Company in the form set out in
Schedule 1;
(b) to give notice of this Deed to each person holding any of the
Shares as the Borrower's nominee and to procure that each such
person executes and delivers to the Agent an acknowledgement,
such notice and acknowledgement to be in the form set out in
Schedule 2.
2.3 Registration in Name of Agent. The Borrower agrees that at any time
after the date hereof the Agent may, at the cost of the Borrower,
register the Shares in the name of the Agent or its nominee.
2.4 Dividends and Accretions. This Deed shall extend to and include all
Dividends and all stocks, shares (and the Dividends in respect
thereof), rights, monies or other property accruing or offered at any
time by way of redemption, substitution, bonus, preference, option or
otherwise to or in respect of any of the Shares and all allotments,
accretions, offers, rights, benefits and advantages whatsoever at any
time accruing, made, offered or arising in respect of any of the same
and all further shares in the capital of the Company issued subsequent
hereto. If the Borrower shall acquire any such other stocks or shares
as aforesaid, it shall forthwith deliver or procure that there be
delivered to the Agent the certificates in respect thereof together
with instruments of transfer and contract notes in respect thereof duly
executed in blank to enable the same to be registered in the name of
the Agent or its nominee.
2.5 No Liability for Calls. Nothing in this Deed shall be construed as
placing on the Agent or any Lender any liability whatsoever in respect
of any calls, instalments or other payments relating to any of the
Shares or any rights, shares or other securities accruing, offered or
arising as aforesaid, and the Borrower shall indemnify the Agent and
each Lender in respect of all calls, instalments or other payments
relating to any
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of the Shares and to any rights, shares and other securities accruing,
offered or arising as aforesaid in respect of any of the Shares.
3. ASSIGNMENT OF INDEBTEDNESS
3.1 Assignment. In consideration as aforesaid, the Borrower with full title
guarantee assigns to the Agent absolutely all the Borrower's right,
title, interest and benefit in and to the Assigned Monies as a
continuing security for the due and punctual payment of the Secured
Indebtedness and the due and punctual performance and observance by the
Borrower of all other obligations of the Borrower contained in the Loan
Agreement or any Security Document to which it is a party.
3.2 Notice to Company. The Borrower undertakes forthwith upon the execution
of this Deed to give notice of this Deed to and obtain an
acknowledgement from the Company in the form set out in Schedule 3.
3.3 Borrower to Remain Liable in Relation to Assigned Monies.
Notwithstanding the assignment herein contained, the Borrower shall
remain liable to observe and perform all the obligations assumed by it
in relation to the Assigned Monies. Neither the Agent nor the Lenders
shall not be under any obligation to make any enquiry as to the nature
or sufficiency of any payment received by any of them in respect of the
Assigned Monies or to make any claim or take any other action to
collect any Assigned Monies or to enforce any rights or benefits hereby
assigned.
4. DISCHARGE
Upon payment in full of all the Secured Indebtedness to the
satisfaction of the Agent and cancellation of the Facility, the Agent
shall, at the request and cost of the Borrower, and in such form as the
Agent shall approve, discharge the security created by this Deed.
5. CONTINUING SECURITY
This Deed shall be a continuing security and shall remain in full force
and effect until the Secured Indebtedness has been paid in full,
notwithstanding the insolvency or liquidation or any incapacity or
change in the constitution or status of the Borrower or any other
person or any intermediate settlement of account or other matter
whatsoever. This Deed is in addition to, and independent of, any
Charge, guarantee or other security or right or remedy now or at any
time hereafter held by or available to the Agent or any Lender.
6. REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties. The Borrower represents and warrants to
the Agent that:
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(a) the particulars of the Shares set out in Clause 1.1(g) are
accurate and the Shares described therein constitute the
entire issued share capital of the Company at the date hereof
and all the Shares have been validly issued and are fully paid
up;
(b) subject to this Deed, the Borrower is the sole beneficial
owner of the Shares and the Assigned Monies and is the legal
owner of all such Shares and the Borrower has good and
marketable title thereto;
(c) no Charge exists over all or any part of the Shares or the
Assigned Monies (except as created under or pursuant to this
Deed);
(d) the Borrower has not granted in favour of any other person any
interest in or any option or other rights in respect of any of
the Shares;
(e) the Company has not issued or resolved or agreed to issue or
granted any option or other right to acquire any additional
shares to any person;
(f) there are no duplicate copies of the certificates in respect
of the Shares or other certificates representing the Shares.
6.2 Continuing Representation and Warranty. The Borrower also represents
and warrants to and undertakes with the Agent that the foregoing
representations and warranties will be true and accurate throughout the
continuance of this Deed with reference to the facts and circumstances
subsisting from time to time.
7. UNDERTAKINGS
The Borrower undertakes and agrees with the Agent throughout the
continuance of this Deed and until the Final Maturity and/or so long as
the Secured Indebtedness or any part thereof remains owing that the
Borrower will, unless the Agent otherwise agrees in writing:
(a) not create or attempt or agree to create or permit to arise or
exist any Charge over all or any part of the Shares or the
Assigned Monies or any interest therein or otherwise assign,
deal with or dispose of all or any part of the Shares or the
Assigned Monies (except under or pursuant to this Deed);
(b) not grant in favour of any other person any interest in or any
option or other rights in respect of any of the Shares;
(c) ensure that no person holding any of the Shares as its nominee
for the time being does any of the acts prohibited in
paragraphs (a) and (b) above;
(d) procure that the Company shall not issue or resolve or agree
to issue or grant any option or other right to acquire shares
to any person other than the Borrower (and subject always to
this Deed);
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(e) at all times remain the beneficial owner of the Shares and the
Assigned Monies;
(f) procure that no amendment or supplement is made to the
memorandum or articles of association of the Company without
the prior written consent of the Agent;
(g) immediately upon the appointment of any new director of the
Company, deposit or procure that there be deposited with the
Agent a signed undated letter of resignation by such director
in the form set out in Schedule 1;
(h) punctually pay all calls or other payments due in respect of
all or any part of the Shares;
(i) do or permit to be done every act or thing which the Agent may
from time to time require for the purpose of enforcing the
rights of the Agent hereunder;
(j) procure that all Dividends and all monies which it may receive
in respect of the Assigned Monies are paid directly and
forthwith into the Charged Account;
(k) not waive, release, compromise or vary the liability of the
Company in relation to the Assigned Monies or do or omit to do
any act or thing whereby the recovery in full of any monies
payable in respect thereof may be prejudiced or affected;
(l) not do or cause or permit to be done anything which may in any
material way depreciate, jeopardise or otherwise prejudice the
value of the Agent's security hereunder.
8. POWER OF SALE
8.1 Enforceability. Upon the occurrence of an Event of Default, the Agent
or its nominee may, without further notice or authority, sell or
dispose of all or any part of the Shares or the Assigned Monies and may
apply all or any part of the Assigned Monies or the proceeds of any
such sale or disposition in or towards the discharge of the costs
thereby incurred and of the Secured Indebtedness in such manner as it
in its absolute discretion thinks fit.
8.2 Sale of Shares. The Agent shall be entitled to exercise such power of
sale in such manner and at such time or times following an Event of
Default and for such consideration (whether payable immediately or by
instalments) as it shall in its reasonable discretion think fit
(whether by private sale, public auction or otherwise) and so that the
Shares (or any relevant part thereof) may be sold (i) subject to any
conditions which the Agent may think fit to impose, (ii) to any person
(including any person connected with the Borrower, the Company, the
Arrangers, the Agent or the Lenders) and (iii) at any price which the
Agent, in its absolute discretion, considers to be the best obtainable
in the circumstances taking into account the nature of the Company as a
private company.
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8.3 Realisation of Assigned Monies. The Agent may exercise all the rights
and powers provided for in Clause 8.2 in relation to a sale of the
Shares in connection with the sale, disposition or realisation of the
Assigned Monies.
8.4 Dividends. At any time after the power of sale has arisen, any
Dividends which have been or may be received or receivable by the Agent
or any nominee of the Agent may be applied by the Agent as though they
were proceeds of sale hereunder and any Dividends which may be received
or receivable by the Borrower shall be paid forthwith upon receipt to
the Agent and may be applied by the Agent as though they were proceeds
of sale hereunder.
8.5 Purchaser Not Bound to Enquire. The Agent is authorised to give a good
discharge for any moneys received by it pursuant to the exercise of its
power of sale and a purchaser shall not be bound to enquire whether the
power of sale has arisen as herein provided nor be concerned with the
manner of application of the proceeds of sale.
8.6 No Liability for Losses. The Borrower shall not have any claim against
the Agent or its nominee or any Lender in respect of any loss arising
out of any such sale or any postponement thereof howsoever caused and
whether or not a better price could or might have been obtained upon
the sale of the Shares or the Assigned Monies or any of them by
deferring or advancing the date of such sale or otherwise howsoever.
8.7 Waiver of pre-emption Rights. The Borrower waives any right it may have
under the articles of association of the Company or otherwise to
purchase the Shares or any of them in the event that they are sold or
otherwise disposed of pursuant to the power of sale contained in this
Clause.
9. DIVIDENDS, ASSIGNED MONIES AND VOTING RIGHTS
9.1 Dividends, Assigned Monies and Voting Rights. If the Shares or any of
them are registered in the name of the Agent or its nominee, the Agent
shall have complete discretion to retain the Dividends and Assigned
Monies received by the Agent and to exercise or abstain from exercising
all voting and other rights and powers attaching to the Shares as the
Agent in its absolute discretion thinks fit without being liable for
any losses which the Borrower may suffer as a result thereof.
9.2 Authority to Sign Proxies. The Borrower irrevocably authorises the
Agent to sign on its behalf and on behalf of each person holding any of
the Shares as the nominee of the Borrower any proxies or other
documents which the Agent may require to enable the Agent to exercise
such voting and other rights and powers attaching to the Shares.
10. TAXES AND OTHER DEDUCTIONS
All sums payable by the Borrower under this Deed shall be paid in full
without set-off or counterclaim or any restriction or condition and
free and clear of any tax or other deductions or withholdings of any
nature. If the Borrower or any other person is required by any law or
regulation to make any deduction or withholding (on account of tax or
otherwise) from any payment for the account of any Lender or the Agent,
the Borrower shall, together with such payment, pay such additional
amount as will
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ensure that such Lender or the Agent receives (free and clear of any
tax or other deductions or withholdings) the full amount which it would
have received if no such deduction or withholding had been required.
The Borrower shall promptly forward to the Agent copies of official
receipts or other evidence showing that the full amount of any such
deduction or withholding has been paid over to the relevant taxation or
other authority.
11. COSTS, CHARGES AND EXPENSES
The Borrower shall from time to time forthwith on demand pay to or
reimburse the Agent and the Lenders for:
(a) all costs, charges and expenses (including legal and other
fees on a full indemnity basis and all other out-of-pocket
expenses) reasonably incurred by the Agent or any Lender in
connection with the preparation, execution and registration of
this Deed, any other documents required in connection herewith
and any amendment to or extension of, or the giving of any
consent or waiver in connection with, this Deed; and
(b) all costs, charges and expenses (including legal and other
fees on a full indemnity basis and all other out-of-pocket
expenses) incurred by the Agent or any Lender in exercising
any of its or their rights or powers hereunder or in suing for
or seeking to recover any sums due hereunder or otherwise
preserving or enforcing its or their rights hereunder or in
defending any claims brought against it or them in respect of
this Deed or in releasing or re-assigning this Deed upon
payment of all monies hereby secured,
and, until payment of the same in full, all such costs, charges and
expenses shall be secured by this Deed.
12. INDEMNITY
12.1 General Indemnity. The Borrower shall indemnify the Agent and each
Lender against all losses, liabilities, damages, costs and expenses
incurred by it or them in the execution or performance of the terms and
conditions hereof and against all actions, proceedings, claims,
demands, costs, charges and expenses which may be incurred, sustained
or arise in respect of the non-performance or non-observance of any of
the undertakings and agreements on the part of the Borrower herein
contained or in respect of any matter or thing done or omitted relating
in any way whatsoever to the Shares unless and to the extent that any
of the foregoing results directly from the Agent's or any Lender's
gross negligence or wilful misconduct.
12.2 Payment and Security. The Agent may retain and pay out of any money in
the Agent's hands all sums necessary to effect the indemnity contained
in this Clause and all sums payable by the Borrower under this Clause
shall form part of the monies hereby secured.
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13. FURTHER ASSURANCE
13.1 Further Assurance. The Borrower shall at any time and from time to time
(whether before or after the security hereby created shall have become
enforceable) execute such further legal or other mortgages, charges or
assignments and do all such transfers, assurances, acts and things as
the Agent may reasonably require over or in respect of the Shares or
the Assigned Monies to secure all monies, obligations and liabilities
hereby covenanted to be paid or hereby secured or for the purposes of
perfecting and completing any assignment of the Agent's rights,
benefits or obligations hereunder and the Borrower shall also give all
notices, orders and directions which the Agent may reasonably require.
13.2 Agreement to Execute Further Documents. Without limiting the foregoing,
the Borrower agrees from time to time to execute and sign or to procure
that the person for the time being holding any of the Shares as the
Borrower's nominee executes and signs all transfers, powers of
attorney, proxies and other documents which the Agent may require for
perfecting the Agent's title to any of the Shares or for vesting or
enabling it to vest the same in itself, its nominee or in any purchaser
including, without limitation, procuring to be duly passed such
resolutions by the directors of the Company and such resolutions by the
Borrower or the person holding any of the Shares as the Borrower's
nominee in an extraordinary general meeting of the Company as the Agent
shall require for the purposes of approving and passing for
registration any transfers of any of the Shares, altering the Company's
memorandum or articles of association, removing any directors of the
Company, appointing new directors of the Company nominated by the Agent
or for such other purposes as the Agent shall from time to time
require.
13.3 Enforcement of Agent's Rights. The Borrower will do or permit to be
done everything which the Agent may from time to time reasonably
require to be done for the purpose of enforcing the Agent's rights
hereunder and will allow the name of the Borrower to be used as and
when reasonably required by the Agent for that purpose.
14. POWER OF ATTORNEY
The Borrower irrevocably appoints the Agent by way of security to be
its attorney (with full power of substitution) and in its name or
otherwise on its behalf and as its act and deed to sign, seal, execute,
deliver, perfect and do all deeds, instruments, acts and things which
may be required or which the Agent shall reasonably think proper or
expedient for carrying out any obligations imposed on the Borrower
hereunder or for exercising any of the powers hereby conferred or for
giving to the Agent the full benefit of this security and so that the
appointment hereby made shall operate to confer on the Agent authority
to do on behalf of the Borrower anything which it can lawfully do by an
attorney. The Borrower ratifies and confirms and agrees to ratify and
confirm any deed, instrument, act or thing which such attorney or
substitute may execute or do.
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15. SUSPENSE ACCOUNT
The Agent may place and keep any monies received by virtue of this Deed
(whether before or after the insolvency or liquidation of the Borrower)
to the credit of a suspense account for so long as the Agent may think
fit in order to preserve the rights of the Agent or any Lender to sue
or prove for the whole amount of its claims against the Borrower or any
other person.
16. WAIVER AND SEVERABILITY
No failure or delay by the Agent in exercising any right, power or
remedy hereunder shall impair such right, power or remedy or operate as
a waiver thereof, nor shall any single or partial exercise of the same
preclude any further exercise thereof or the exercise of any other
right, power or remedy. The rights, powers and remedies herein provided
are cumulative and do not exclude any other rights, powers and remedies
provided by law. If at any time any provision of this Deed is or
becomes illegal, invalid or unenforceable in any respect under the law
of any jurisdiction, the legality, validity and enforceability of such
provision under the law of any other jurisdiction, and of the remaining
provisions of this Deed, shall not be affected or impaired thereby.
17. MISCELLANEOUS
17.1 Continuing Obligations. The liabilities and obligations of the Borrower
under this Deed shall remain in force notwithstanding any act,
omission, event or circumstance whatsoever, until full, proper and
valid payment of the Secured Indebtedness.
17.2 Protective Clauses. Without limiting Clause 15.1, neither the liability
of the Borrower nor the validity or enforceability of this Deed shall
be prejudiced, affected or discharged by:
(a) any other Charge, guarantee or other security or right or
remedy being or becoming held by or available to the Agent or
any Lender or by any of the same being or becoming wholly or
partly void, voidable, unenforceable or impaired or by the
Agent or any Lender at any time releasing, refraining from
enforcing, varying or in any other way dealing with any of the
same or any power, right or remedy the Agent or any Lender may
now or hereafter have from or against the Borrower or any
other person or the granting of any time or indulgence to the
Borrower or any other person;
(b) any variation or modification of the Loan Agreement, any of
the Security Documents or any other document referred to
therein;
(c) the invalidity or unenforceability of any obligation or
liability of the Borrower under the Loan Agreement or any of
the Security Documents to which it is a party;
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(d) any invalidity or irregularity in the execution of this Deed
or the Loan Agreement or any of the other Security Documents
or any deficiency in the powers of the Borrower to enter into
or perform any of its obligations hereunder or under the Loan
Agreement or any of the other Security Documents to which it
is a party; or
(e) any act, omission, event or circumstance which would or may
but for this provision operate to prejudice, affect or
discharge this Deed or the liability of the Borrower
hereunder.
17.3 Unrestricted Right of Enforcement. This Deed may be enforced without
the Agent or any Lender first having recourse to any other security or
rights or taking any other steps or proceedings against the Borrower or
any other person or may be enforced for any balance due after resorting
to any one or more other means of obtaining payment or discharge of the
monies, obligations and liabilities hereby secured.
17.4 Discharges and Releases. Notwithstanding any discharge, release or
settlement from time to time between the Agent or any Lender and the
Borrower, if any security, disposition or payment granted or made to
the Agent or any Lender in respect of the Secured Indebtedness by the
Borrower or any other person is avoided or set aside or ordered to be
surrendered, paid away, refunded or reduced by virtue of any provision,
law or enactment relating to bankruptcy, insolvency, liquidation,
winding-up, composition or arrangement for the time being in force or
for any other reason, the Agent shall be entitled hereafter to enforce
this Deed as if no such discharge, release or settlement had occurred.
17.5 Amendment. Any amendment or waiver of any provision of this Deed and
any waiver of any default under this Deed shall only be effective if
made in writing and signed by the Agent.
17.6 Counterparts. This Deed may be executed in any number of counterparts
and by the different parties to this Deed on separate counterparts,
each of which when executed and delivered shall be an original but all
the counterparts shall together constitute one and the same instrument.
18. ASSIGNMENT
18.1 The Borrower. The Borrower shall not assign any of its rights
hereunder.
18.2 The Lenders. The Lenders may assign or grant participations in all or
any part of their rights under this Deed in accordance with the
provisions of clause 20 of the Loan Agreement.
19. NOTICES
19.1 Delivery. Each notice, demand or other communication to be given or
made under this Deed shall be in writing and delivered or sent to the
relevant party at its address or telex number or fax number set out
below (or such other address or telex number or
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fax number as the addressee has by five (5) days' prior written notice
specified to the other party):
To the Borrower: Zindart Limited
Flat C & D, 25th Floor, Block 1
Tai Ping Industrial Centre
57 Ting Kok Road
New Territories
Hong Kong
Fax Number : (852) 2664 7066
Attention : Feather Fok
To the Agent: Credit Suisse First Boston, Singapore Branch
80 Raffles Place #48-01
UOB Plaza 1
Singapore 048624
Fax Number : (65) 531 2709
Attention: : Credit Operations
19.2 Deemed Delivery. Any notice, demand or other communication so addressed
to the relevant party shall be deemed to have been delivered (a) if
given or made by letter, when actually delivered to the relevant
address, (b) if given or made by telex, when despatched with confirmed
answerback and (c) if given or made by fax, when despatched.
20. GOVERNING LAW AND JURISDICTION
20.1 Law. This Deed and the rights and obligations of the parties hereunder
shall be governed by and construed in accordance with the laws of
England.
20.2 Jurisdiction. The Borrower agrees that any legal action or proceeding
arising out of or relating to this Deed may be brought in the courts of
England and irrevocably submits to the non-exclusive jurisdiction of
such courts.
20.3 Process Agent. The Borrower irrevocably appoints Pritchard Englefield
of 14 New Street, London EC2M 4TR, England as its agent to receive and
acknowledge on its behalf service of any writ, summons, order, judgment
or other notice of legal process in England. If for any reason the
agent named above (or its successor) no longer serves as agent of the
Borrower for this purpose, the Borrower shall promptly appoint a
successor agent satisfactory to the Agent and notify the Agent thereof
provided that until the Agent receives such notification, it shall be
entitled to treat the agent named above (or its said successor) as the
agent of the Borrower for the purposes of this Clause. The Borrower
agrees that any such legal process shall be sufficiently served on it
if delivered to such agent for service at its address for the time
being in England whether or not such agent gives notice thereof to the
Borrower.
20.4 No Limitation on Right of Action. Nothing herein shall limit the right
of the Agent and the Lenders to commence any legal action against the
Borrower and/or its
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property in any other jurisdiction or to serve process in any manner
permitted by law, and the taking of proceedings in any jurisdiction
shall not preclude the taking of proceedings in any other jurisdiction
whether concurrently or not.
20.5 Waiver; Final Judgment Conclusive. The Borrower irrevocably and
unconditionally waives any objection which it may now or hereafter have
to the choice of England as the venue of any legal action arising out
of or relating to this Deed. The Borrower also agrees that a final
judgment against it in any such legal action shall be final and
conclusive and may be enforced in any other jurisdiction, and that a
certified or otherwise duly authenticated copy of the judgment shall be
conclusive evidence of the fact and amount of its indebtedness.
20.6 Waiver of Immunity. The Borrower irrevocably waives any immunity to
which it or its property may at any time be or become entitled, whether
characterised as sovereign immunity or otherwise, from any set-off or
legal action in England or elsewhere, including immunity from service
of process, immunity from jurisdiction of any court or tribunal, and
immunity of any of its property from attachment prior to judgment or
from execution of a judgment.
IN WITNESS whereof this Deed has been executed by the parties hereto and is
intended to be and is hereby delivered on the day and year first above written.
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SCHEDULE 1
Form of Letter of Resignation
To: The Board of Directors of
Hua Yang Holdings Company Limited (the "COMPANY")
I, , hereby resign my position as a director of the Company
with effect from____________________ 199 and waive all claims to fees or
compensation in connection with my resignation.
Dated this day of 199
SIGNED, SEALED AND DELIVERED )
[as a Deed] by [ )
] )
in the presence of: )
[ON DUPLICATE]
I certify that the original of this notice was posted to the registered office
of the Company on _______________ 199 .
______________________________
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SCHEDULE 2
Form of Notice and Acknowledgement (Shares)
To: [REGISTERED HOLDER(S)]
____________________ 199
Dear Sirs,
Re Hua Yang Holdings Company Limited (the "COMPANY")
We give you notice that by a share mortgage dated ____________________ 1998 we
have agreed to mortgage the entire issued share capital of the Company (the
"SHARES") of which we are the sole beneficial owner to Credit Suisse First
Boston, Singapore Branch (the "AGENT"). A copy of the share mortgage is attached
to this notice.
We instruct you forthwith to deposit with the Agent the certificates in respect
of the Share(s) of which you are the registered holder(s) and to execute and
deliver to the Agent such instruments of transfer, contract notes and other
documents in respect of the Share(s), including a power of attorney to sell,
transfer or otherwise dispose of the same, in such form as the Agent may at any
time and from time to time require.
These instructions shall be irrevocable until such time as you receive written
notice from the Agent stating that its mortgage over the Shares has been
released or otherwise discharged.
Please acknowledge these instructions by executing and delivering to the Agent
the attached acknowledgement.
Yours faithfully,
For and on behalf of
Zindart Limited
_____________________________
Name:
Title:
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[ON DUPLICATE]
Acknowledgement
To: Credit Suisse First Boston, Singapore Branch
____________________ 199
Dear Sirs,
Re Hua Yang Holdings Company Limited (the "COMPANY")
I/We acknowledge receipt of the attached notice from Zindart Limited (the
"BORROWER").
I/We [jointly and severally]:
1. warrant that I/we are the registered holder(s) of a total of [ ]
[ordinary] share(s) of [US]$[ ] each in the Company;
2. confirm that I/we hold such Share(s) as nominee(s) on trust for the
Borrower and that I/we shall hereafter hold such Share(s) on behalf of
yourselves as mortgagee in accordance with the terms of the notice and
share mortgage;
3. grant you a power of attorney in the terms of clause 12 of the share
mortgage as if references therein to the Borrower were references to
me/us and undertake to grant you such further powers of attorney in
such form as you may at any time and from time to time require; and
4. waive any right I/we may have under the articles of association of the
Company or otherwise to purchase the Shares or any of them in the event
that they are sold or otherwise disposed of pursuant to the power of
sale contained in clause 6 of the share mortgage.
EITHER
[SIGNED, SEALED AND DELIVERED )
[as a Deed] by [ )
] )
in the presence of: )]
OR
[THE COMMON SEAL of )
[ )
] )
was [hereunto] affixed [to )
this Deed] in the presence of )]
3-16
<PAGE> 81
SCHEDULE 3
Form of Notice and Acknowledgment (Assigned Monies)
To: Hua Yang Holdings Company Limited
____________________ 1998
Dear Sirs,
We give you notice that by a share mortgage dated ____________________ 1998 we
have, inter alia, assigned to Credit Suisse First Boston, Singapore Branch (the
"AGENT") all our right, title, interest and benefit in and to all indebtedness
now or at any time hereafter owing by you to us (the "ASSIGNED MONIES"). A copy
of the share mortgage is attached to this notice.
We authorise and instruct you to pay all sums which become due in respect of the
Assigned Monies to account no. A 0102112.01.USD with the Agent or as the Agent
may direct.
These instructions shall not be revoked or varied without the prior written
consent of the Agent.
Please acknowledge these instructions by signing as indicated and returning to
the Agent the enclosed duplicate of this notice.
Yours faithfully,
For and on behalf of
Zindart Limited
_____________________________
Name:
Title:
3-17
<PAGE> 82
[ON DUPLICATE]
To: Credit Suisse First Boston, Singapore Branch
We acknowledge receipt of the above notice and confirm that we will comply with
the terms thereof.
We agree that we will neither claim to set off to your prejudice any Assigned
Monies against any claim we may have against Zindart Limited howsoever arising
nor exercise or attempt to exercise any right of set-off or consolidation or
combination of accounts or similar right in respect of or in relation to the
Assigned Monies.
Dated: ____________________ 1998
For and on behalf of
Hua Yang Holdings Company Limited
____________________________________
3-18
<PAGE> 83
THE BORROWER
THE COMMON SEAL of )
ZINDART LIMITED )
was affixed to this Deed )
in the presence of )
THE AGENT
SIGNED FOR and on behalf of )
CREDIT SUISSE FIRST BOSTON, )
SINGAPORE BRANCH )
by )
3-19
<PAGE> 1
EXHIBIT 10.17
MANAGEMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Employment" or "this Agreement") is
made and entered into as of the 31st day of January, 1998, by and between Hua
Yang Holdings Co., Ltd., a Cayman Islands company (hereinafter the "Company",
and together with its subsidiaries and affiliates, "the Hua Yang Group") and
Chan Kok Wai, a natural person and residing at 14/A Repulse Bay Road, Repulse
Bay, Hong Kong (hereinafter the "Executive").
R E C I T A L S
WHEREAS, the Company desires to retain the services of the Executive as
a co-managing director to manage the business of the Hua Yang Group;
WHEREAS, the Executive desires to perform such services for the Hua
Yang Group as provided herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
1. TERM OF EMPLOYMENT. Unless otherwise terminated pursuant to Paragraph
6 of this Agreement, the Company shall employ the Executive and the Executive
shall serve the Company as its co-managing director for one (1) year from
January 31, 1998 to January 31, 1999 (the "Term"). After the expiration of the
Term, this Agreement shall automatically renew for six (6) month periods until
either the Company or the Executive elect not to renew this Agreement by
providing the other party notice not less than ninety (90) days prior to the
expiration of any renewal period or, in the case of the Company, three months'
salary in lieu of notice.
2. POSITION. As co-managing director (see Paragraph 5 below), you will be
responsible for the overall strategic direction of the Hua Yang Group and will
report to the Board of Directors of the Company and Board of Directors of any
company that may hold the shares of the Company from time to time.
3. SALARY AND BONUS. In consideration of the services to be performed by
the Executive during his employment with the Company, the Company shall pay the
Executive an annual salary during the Term of HK$1,000,000 (the "Salary"),
payable in 12 equal monthly installments payable in arrears on the last day of
each calendar month. The Executive shall be eligible for an annual incentive
bonus in the sole discretion of the Board or the Compensation Committee. The
term "Compensation Committee" means a committee appointed by the Board of
Directors of the Company with responsibility for setting performance objectives
for the Hua Yang Group, the Executive and other executives, and the details of
any option and other
<PAGE> 2
incentive programs. Unless additional compensation is otherwise fixed by the
Board or the Compensation Committee, in its sole discretion, the Executive
shall not be entitled to any other salary or fee, whether as an employee,
director or otherwise, for service to multiple companies in the Hua Yang Group.
Taxes, if any, on the Executive's compensation are to be paid by the Executive.
Salary and, to the extent earned, bonus, are inclusive of all perquisites, such
as housing, education, home leave and other expenses.
4. EXPENSES. The Company shall reimburse the Executive for expenses
reasonably incurred by the Executive in connection with the performance of the
services delegated to the Executive upon and subject to submission of vouchers
or other appropriate and legally-acceptable documentation reasonably acceptable
to the Company.
5. RESPONSIBILITIES. The Executive acknowledges that it is the goal of
the shareholders to build the Hua Yang Group's operational and financial
performance. In striving for this goal, it is the Executive's responsibility to
ensure that the activities of the Hua Yang Group are executed in such a manner
as to conform to the standards of integrity and conduct which are applicable to
U.S. businesses conducting business overseas. It is expected that the time spent
working on behalf of the Company will be flexible and not daily, but that he be
available at all times to assist and advise the Company on matters requested by
management or the Board.
6. TERMINATION. During the Term:
(a) The Company may terminate this Agreement forthwith:
(i) if the Board reasonably and fairly determines that (1)
the Executive has been grossly negligent in his duties relating to the Hua Yang
Group or (2) has engaged in any willful misconduct in the discharge of his
duties on behalf of the Hua Yang Group or (3) has misrepresented the financial
performance of the Hua Yang Group; or
(ii) if the Executive shall at any time become or be unable
to properly perform his duties hereunder by reason of death, ill health,
accident or otherwise for a period of periods aggregating at least sixty (60)
days in any period of twelve consecutive calendar months; or
(iii) if the Company is generally unable to pay its debts as
they become due, or petitions or applies for the appointment of a trustee or
other custodian, liquidator or receiver for it, or commences or has commenced
against it any case or other proceeding relating to it under the Bankruptcy
Ordinance; or
(iv) be acceptance of the voluntarily termination of his
employment with the Company by the Executive.
(b) Upon termination of this Agreement, however occurring:
<PAGE> 3
(a) The Executive shall promptly return and deliver to the
Company all documents and records in his possession, custody or control which
in any way relate to the business of the Company. The Executive shall not be
entitled to retain copies, whether written or in electronic media form.
(b) The Executive shall immediately resign all positions
held, whether as a member of the Board or otherwise on and as of the date
specified in the notice of termination.
7. CONFIDENTIALITY AND NON-COMPETITION.
(a) NON-COMPETITION. During the term hereof, any extension
hereof and for the period of one year after termination of employment the
Executive will not in any country or place where the Company's business is
being carried on as of the date of termination, either on his own account or in
conjunction with or on behalf of any person, firm or company, carry on or be
engaged, concerned or interested directly or indirectly whether as shareholder,
director, employee, partner, agent or otherwise in carrying on any business in
competition with the Company's business (other than as a holder of not more
than five per cent (5%) of the issued shares or debentures of any company
listed on any recognized stock exchange).
(b) NON-SOLICITATION OF CUSTOMERS. During the term hereof,
any extension hereof and for the period of one year after termination of
employment the Executive will not either on his own account or in
conjunction with or on behalf of any other person, firm or company solicit or
entice away the customer of any person, firm, company or organization who shall
at any time within 1 year prior to the date of the termination of employment
have been a customer, client, identified prospective customer or client,
representative, agent or correspondent of the Company (including its
subsidiaries and affiliates) in connection with the Company's business or in
the habit of dealing with the Company (including its subsidiaries and
affiliates) in connection with the Company's business or enter into any
contract with or accept any business from any such person, firm, company or
organization in any way in the same or similar line of business to the
Company's business (including that of its subsidiaries and affiliates).
(c) NON-SOLICITATION OF EMPLOYEES. During the term hereof,
any extension hereof and for the period of one year after termination of
employment the Executive will not either on his own account or in conjunction
with or on behalf of any other person, firm or company employ, solicit or
entice away or attempt to employ, solicit or entice away any person who shall
at any time within 1 year prior to the date of the termination of employment
have been an employee of the Company (including its subsidiaries and
affiliates) in connection with their respective business, whether or not such
person would commit a breach of contract by reason of leaving such employment.
(d) NON-DISCLOSURE. The executive will not during the term
of this Agreement, any extension hereof and at any time before and after
termination of employment make use of or disclose or divulge to any third party
any information relating to the
<PAGE> 4
Company's business other than any information properly available to the public
or disclosed or divulged pursuant to an order of a court of competent
jurisdiction.
(e) PRIOR APPROVAL FOR OTHER ENGAGEMENT. During his employment
with the Company, the Executive will not in any country or place, either on his
own account or in conjunction with or on behalf of any person, firm or company,
actively carry on or be engaged, concerned or interested, directly or
indirectly whether as a shareholder, director, employee, partner, agent or
otherwise in carrying on any business (whether or not in competition with the
Company) without the prior written approval of the Board of the Company;
provided that this limitation shall not apply to (i) activities conducted on a
passive basis that are not competitive with the Company's business; and (ii)
duties of a non-substantial nature (in terms of demands on the Executive's time
or attention) which do not detract, in the reasonable opinion of the Board, from
the Executive's services to the Company.
(f) SEPARATE OBLIGATIONS. Each and every obligation under this
Paragraph shall be treated as a separate obligation and shall be severally
enforceable as such and in the event of any obligation or obligations being or
becoming unenforceable in whole or in part such parts as are unenforceable
shall be deleted from this Paragraph and any such deletion shall not affect the
enforceability of all such parts of this Paragraph as remain not so deleted.
(g) REASONABLENESS OF RESTRICTIONS; INVALIDITY. While the
restrictions contained in this Paragraph are considered by the parties to be
reasonable in all the circumstances it is recognized that restrictions of the
nature in question may fail for technical reasons unforeseen and accordingly it
is hereby agreed and declared that if any of such restrictions shall be
adjudged to be void as going beyond what is reasonable in all the circumstances
for the protection of the interests of the Company's business but would be
valid if part of the wording thereof were deleted or the periods thereof
reduced or the range of activities or area dealt with thereby reduced in scope
the said restriction shall apply with such modifications as may be necessary to
make it valid and effective.
(h) WAIVER. The Company may, in its sole and absolute discretion,
waive or give its conditional consent to any of the terms set forth in
paragraphs (a) through (e) above.
9. INVENTIONS, IMPROVEMENTS, OWNERSHIP OF INTELLECTUAL PROPERTY. All
inventions, improvements on inventions, or intellectual property of any kind
created by or in concert with the Executive during the term of his employment
(including any extensions thereof) shall be deemed to be for the benefit of the
Company. The Executive, in consideration of his employment hereunder, hereby
irrevocably assigns all right, title and interest in and to any such
intellectual property to the Company. The Executive agrees to execute such
documents and instruments from time to time as may be reasonably required to
vest such rights in the Company.
<PAGE> 5
10. NOTICES. Any notice or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been duly given on the date of
delivery if delivered personally or seven (7) days after the date of mailing, if
mailed, by first class mail, postage prepaid, certified, registered or by
courier and addressed to the party to be given notice, as follows or to such
other address as may be notified in writing to the Company:
If to the Company: c/o Ben Greenspan
Law Offices
160 Sansome Street, 18th Floor
San Francisco, CA 94104
If to Executive: Chan Kok Wai
14/A Repulse Bay Road
Repulse Bay
Hong Kong
11. ENTIRE AGREEMENT. This agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof. No amendment or modification
hereof shall be valid or binding unless made in writing and signed by the party
against whom enforcement thereof is sought.
12. ASSIGNMENT. Neither this Agreement nor the right to receive payments
hereunder may be assigned by the Executive. This Agreement shall be binding
upon the Executive and upon the Company, and upon their respective successors
and assigns.
13. WAIVERS. No course of dealing nor any delay on the part of the Company in
exercising any rights hereunder shall operate as a waive of any such rights. No
waiver of any default or breach of this Agreement shall be deemed a continuing
waiver or a waiver of any other breach or default.
14. SEVERABILITY. If any clause, paragraph, section or part of this Agreement
shall be held or declared to be void, invalid, illegal or unenforceable for any
reason by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.
15. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each
of which shall constitute an original, and all of which taken together shall
constitute one and the same agreement.
16. GOVERNING LAW; VENUE AND MODE OF DISPUTE RESOLUTION; FEES. The parties
hereby agree that disputes arising out of this Agreement shall be resolved by
binding arbitration in Hong Kong under the laws of Hong Kong, provided either
party hereto shall be entitled to seek equitable relief in the appropriate case
in the courts of Hong Kong. The prevailing party in any proceeding shall be
entitled to its attorney's fees and costs.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
duly executed on the day and year first above written.
Hua Yang Holdings Co. Ltd. The Executive
/s/ Sandra C. Shaw /s/ Chan Kok Wai
- -------------------------- --------------------------
By: Sandra C. Shaw Chan Kok Wai
Its: CEO
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF ZINDART LIMITED
1. Hua Yang Holdings Co. Limited, a Cayman Islands Corporation.
2. Luen Tat Mould Manufacturing Limited, a British Virgin Islands
Corporation.
3. Onchart Industrial Limited, a Hong Kong Corporation.
4. Onchart Industrial Limited, a British Virgin Islands Corporation.
5. Dongguan Xinda Giftware Company Limited, a Joint Venture in the
People's Republic of China.
6. Guangzhou Zindart (Xin Xing) (Giftware) Company Limited, a Joint
Venture in the People's Republic of China.
7. Shenzhen Huaxuan Printing Product Co., Ltd., a Joint Venture in the
People's Republic of China.
8. Guangzhou Jin Yi Advertising Company Ltd., a Joint Venture in the
People's Republic of China.
9. Hua Yang Printing Holdings Co. Limited, a Hong Kong Corporation.
10. Wealthy Holdings Limited, a British Virgin Islands Corporation.
1.
<PAGE> 1
EXHIBIT 23.1
February 12, 1998
The Directors
Zindart Limited
Flat C & D, 25/F.
Tai Ping Industrial Centre - Block 1
57 Ting Kok Road
Tai Po
New Territories
Hong Kong
Dear Sirs,
As independent public accountants, we hereby consent to the use of our reports,
and to all reference to our Firm included in or made a part of this
Registration Statement on Form F-1.
Very truly yours,
/s/ Arthur Andersen & Co.
<PAGE> 1
EXHIBIT 23.3
[COOLEY GODWARD LLP LETTERHEAD]
February 9, 1998
Zindart Limited
Flat C&D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road
Tai Po, N.T., Hong Kong
Ladies and Gentlemen:
We hereby consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus included in the Registration Statement filed on Form F-1 with
the Securities and Exchange Commission for the issuance and sale of up to
3,450,000 American Depositary Shares by Zindart Limited.
Sincerely,
Cooley Godward LLP
/s/ Gregory C. Smith
Gregory C. Smith
