<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998
REGISTRATION NO. 333-8134
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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 INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION 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>
<S> <C>
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 MARCH 10, 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 March 9, 1998, the last reported sale price of
the ADSs was $13.25 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 34.4% 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.
<TABLE>
<S> <C> <C> <C> <C>
=================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING 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 a Selling Shareholder have granted to the Underwriters a
30-day option 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.
MARCH , 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. 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 feet of
production and production support space as well as 385,000 square feet of
dormitory space that can
5
<PAGE> 6
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <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 $ 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
<PAGE> 8
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31, 1997
--------- -----------------------------------
PRO FORMA
PRO AS
ACTUAL ACTUAL FORMA ADJUSTED(3)
--------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and bank deposits...................................... $12,531 $13,194 $ 8,802 $ 10,031
Working capital............................................. 18,207 21,084 30,195 31,424
Property, machinery, equipment and capital leases, net...... 11,746 19,831 29,310 29,310
Total assets................................................ 45,611 59,030 97,136 98,365
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 49,621
</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 $13.25 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
<PAGE> 9
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
9
<PAGE> 10
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 and financial control systems, as well as a
significant increase in the Company's manufacturing, quality
10
<PAGE> 11
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 while the land use rights and
leasehold improvements related to Hua Yang's facility are owned by Hua Yang's
PRC joint venture partners.
11
<PAGE> 12
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 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
12
<PAGE> 13
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 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
13
<PAGE> 14
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. Funds controlled by ChinaVest Ltd.
("ChinaVest") currently beneficially own or control 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 34.4% of the outstanding Shares (approximately 32.8% if
the Over-allotment Option is exercised in full). 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 10.8%. 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 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
14
<PAGE> 15
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, 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
15
<PAGE> 16
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 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
16
<PAGE> 17
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 predecessor
governments, which obligations remain in default, and expropriated assets
without compensation. Accordingly, an investment in the Company involves a risk
of total loss.
17
<PAGE> 18
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 attached 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 a purchase transaction.
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 $11,229,000 at an assumed public offering
price of $13.25 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 March 9, 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 $13.25 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 34,058
Reorganization adjustment(3).............................. -- (8,316) (8,316)
Retained earnings......................................... 23,839 23,335 23,335
------- ------- -------
Total shareholders' equity........................ 38,379 38,392 49,621
------- ------- -------
Total capitalization.............................. $41,034 $71,814 $73,043
======= ======= =======
</TABLE>
- ---------------
(1) As adjusted to reflect the sale of 1,000,000 ADSs by the Company at an
assumed public offering price of $13.25 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
34
<PAGE> 35
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
35
<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%.
36
<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.
37
<PAGE> 38
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
38
<PAGE> 39
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."
39
<PAGE> 40
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.
40
<PAGE> 41
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.
41
<PAGE> 42
- 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. 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 1/64 scale model
replicas are highly detailed, requiring 40 to 60 imprints per car body. Sales to
Mattel(R) constituted a
42
<PAGE> 43
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 are die-cut to shape with a drop-out window often included. PVC
sheets, which also are cut to shape and often
43
<PAGE> 44
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.
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
44
<PAGE> 45
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."
45
<PAGE> 46
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.
46
<PAGE> 47
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."
47
<PAGE> 48
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
48
<PAGE> 49
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
49
<PAGE> 50
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 served as President and Chief Executive
Officer of Ertl from 1993 until his resignation on February 27, 1998. 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.
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
50
<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 of 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 September 30, 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.
51
<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 05/15/07 222,955 355,018
Feather S. Y. Fok 5,000 4.4% $9.13 05/15/07 74,318 118,339
Andrew C. H. Mok 2,500 2.2% $9.13 05/15/07 37,159 59,170
Tony D. H. Lai 10,000 8.8% $9.13 05/15/07 148,637 236,679
C. W. Ng 5,000 4.4% $9.13 05/15/07 74,318 118,339
</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.
52
<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 1,188,889 2,611,111 51.4% 31.1%
ChinaVest IV Funds(4)(5)................. 2,856,487 -- 2,050,032 38.6% 24.4%
Robert A. Theleen(4)
Alexander M. K. Ngan(4)
Advent Funds(5)(6)....................... 941,867 -- 709,095 12.7% 8.4%
Longvest Management Limited(5)(7)........ 700,000 311,111 388,889 9.5% 4.6%
Heartland Advisors, Inc.(8).............. 797,500 -- 797,500 10.8% 9.5%
Ertl (Hong Kong) Limited(9).............. 500,000 500,000 -- 6.8% *
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 * *
George B. Volonakis...................... -- -- -- * *
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).... 3,572,487 -- 2,530,476 48.0% 30.1%
</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
(1,770,746 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 2,890,594 Shares after the Offering (representing 55.1% and
34.4%, 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 ZICHL,
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 ZICHL prior to the Offering
(511,228 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 February 13, 1998.
(9) George B. Volanakis, a Director of the Company, resigned as President and
Chief Executive Officer of Ertl effective February 27, 1998. 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.
The Company and Longvest Management Limited have granted to the
Underwriters a 30-day option to purchase up to a total of 450,000 ADSs
representing 450,000 additional Shares solely for the purpose of covering
over-allotments, if any. If the Over-allotment Option is exercised in full, the
Company will issue an additional 403,333 Shares and Longvest Management Limited
will sell an additional 46,667 Shares.
ChinaVest currently owns or controls 55.1% of the outstanding Shares.
Following this Offering, ChinaVest will own or control approximately 34.4% of
the outstanding Shares (approximately 32.8% if the Over-allotment Option is
exercised in full). 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.
54
<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. Prior to this Offering, Ertl beneficially owned 6.8% of the
Company's Shares and had, until Mr. Volanakis' resignation, 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 ZICHL, 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 Agree-
55
<PAGE> 56
ments." In addition, the shareholders of Hua Yang have agreed to pay Sandra
Shaw, an executive officer of 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.
57
<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.
58
<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.
59
<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.
60
<PAGE> 61
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
61
<PAGE> 62
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
62
<PAGE> 63
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
63
<PAGE> 64
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
64
<PAGE> 65
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.
65
<PAGE> 66
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.
66
<PAGE> 67
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, if held by
persons not affiliated with the Company, 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. Those shares held by affiliates of the
Company may be sold in compliance with the notice, volume and other 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.
67
<PAGE> 68
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-
68
<PAGE> 69
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 person), annuities, and gains from
assets that produce passive income. The Company anticipates that, under
69
<PAGE> 70
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 Investors own in
the aggregate (or are deemed to own after application of complex attribution
rules), more
70
<PAGE> 71
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:
71
<PAGE> 72
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
72
<PAGE> 73
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."
73
<PAGE> 74
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 a Selling Shareholder 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
74
<PAGE> 75
(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 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
75
<PAGE> 76
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.
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.
76
<PAGE> 77
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> 78
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> 79
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> 80
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>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------ -------------------------
NOTE 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> 81
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> 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) (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> 83
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> 84
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.
ZPL initiated a voluntary liquidation in December 1997 and distributed its
entire interest in 5,000,000 shares of common stock of the Company to its
shareholders in February 1998. The Company is now 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> 85
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> 86
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 TO
NAME INCORPORATION 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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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 September 30, 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
F-18
<PAGE> 95
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. INCOME TAXES -- (CONTINUED)
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.
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
YEAR ENDED MARCH 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 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>
F-19
<PAGE> 96
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. DIVIDENDS
Dividends comprised:
<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>
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.
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,
F-20
<PAGE> 97
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS -- (CONTINUED)
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>
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> 98
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> 99
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> 100
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 the Company.
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.
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.
F-24
<PAGE> 101
ZINDART LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. OPERATING RISK -- (CONTINUED)
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.
d. Dependence on a limited number of suppliers
The Group purchases raw materials from a limited number of suppliers.
Concentration on the Group's suppliers for the years ended March 31, 1995, 1996
and 1997 and the nine months ended December 31, 1996 and 1997 is 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>
Purchases from five largest
suppliers........................ 23% 25% 22% 21% 25%
== == == == ==
</TABLE>
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> 102
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> 103
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> 104
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> 105
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> 106
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> 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) (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> 108
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>
COMMON STOCK PREFERRED STOCK
------------------ ------------------ ADDITIONAL CUMULATIVE
NUMBER OF NUMBER OF PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS
--------- ------ --------- ------ ---------- -------- -----------
'000 $'000 '000 $'000 $'000 $'000 $'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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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>
NINE MONTHS ENDED
PERIOD/YEAR ENDED MARCH 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> 117
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> 118
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> 119
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 NINE MONTHS 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 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 NINE MONTHS 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)..................... 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> 120
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
d. Dependence on a limited number of suppliers
The Group purchases raw materials from a limited number of suppliers.
Concentration on the Group's suppliers for the years ended March 31, 1995, 1996
and 1997 and the nine months ended December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------- --------------------------
1995 1996 1997 1996 1997
---- ---- ---- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Purchases from five largest suppliers.... 24% 43% 49% 45% 50%
=== === === == ==
</TABLE>
F-44
<PAGE> 121
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. Cash paid for interest is as follows:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------------------
1995 1996 1997 1996 1997
----- ----- ----- ----------- -----------
$'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
<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 NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------------------
1995 1996 1997 1996 1997
----- ----- ----- ----------- -----------
$'000 $'000
$'000 $'000 $'000 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Issuance of common stock and
preferred stock for acquisition of
business (NOTE 1).................. 9,108 -- -- -- --
===== === === === ===
</TABLE>
d. Supplemental disclosure of investing activities:
<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>
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>
F-45
<PAGE> 122
HUA YANG HOLDINGS CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of
operations:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED NINE MONTHS 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................... 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> 123
LOGO
<PAGE> 124
LOGO
<PAGE> 125
======================================================
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......................... 76
Experts............................... 76
Additional Information................ 76
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> 126
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> 127
<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> 128
<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> 129
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> 130
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. 3 to its
Registration Statement on Form F-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hong Kong, on March 10, 1998.
ZINDART LIMITED
By: /s/ GEORGE K.D. SUN
--------------------------------------
George K.D. Sun
Chief Executive Officer
II-5
<PAGE> 131
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: March 10, 1998
- ------------------------------------------------ and Director
George K.D. Sun
/s/ FEATHER S.Y. FOK Chief Operating Officer, Date: March 10, 1998
- ------------------------------------------------ Chief Financial Officer
Feather S.Y. Fok and Director (Principal
Financial Officer)
/s/ VICKIE W.K. SO* Financial Controller Date: March 10, 1998
- ------------------------------------------------ (Principal Accounting
Vickie W.K. So Officer)
/s/ ROBERT A. THELEEN* Chairman of the Board Date: March 10, 1998
- ------------------------------------------------
Robert A. Theleen
/s/ ALEXANDER M.K. NGAN* Director Date: March 10, 1998
- ------------------------------------------------
Alexander M.K. Ngan
/s/ GEORGE VOLANAKIS* Director Date: March 10, 1998
- ------------------------------------------------
George Volanakis
/s/ JAMES E. GILLERAN* Director Date: March 10, 1998
- ------------------------------------------------
James E. Gilleran
/s/ LEO PAUL KOULOS* Director Date: March 10, 1998
- ------------------------------------------------
Leo Paul Koulos
/s/ STANLEY WANG* Director Date: March 10, 1998
- ------------------------------------------------
Stanley Wang
/s/ BANK OF NEW YORK* Authorized U.S. Date: March 10, 1998
- ------------------------------------------------ Representative
Bank of New York
*By: /s/ GEORGE K.D. SUN *By: /s/ FEATHER S.Y. FOK
--------------------------------------- ---------------------------------------
George K.D. Sun Feather S.Y. Fok
Attorney-in-Fact Attorney-in-Fact
</TABLE>
II-6
<PAGE> 132
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> 133
<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 1.1
Zindart Limited
(a Hong Kong corporation)
3,000,000 American Depositary Shares
Representing 3,000,000 Ordinary Shares(1)
UNDERWRITING AGREEMENT
March __, 1998
VAN KASPER & COMPANY
GERARD KLAUER MATTISON & CO., INC.
As Representatives of the several
Underwriters named on Schedule I
c/o Van Kasper & Company
600 California Street, Suite 1700
San Francisco, California 94108
Ladies and Gentlemen:
Zindart Limited, a corporation formed under the laws of Hong Kong (the
"Company"), and the selling shareholders listed on Schedule I hereto (the
"Selling Shareholders") propose to issue and sell to the several Underwriters
named on Schedule II hereto (the "Underwriters") 3,000,000 American Depositary
Shares (the "Firm Shares") representing 3,000,000 of the Company's Ordinary
Shares (the "Firm Ordinary Shares"), of which 1,000,000 American Depositary
Shares representing 1,000,000 of the Company's Ordinary Shares are to be sold by
the Company, and 2,000,000 American Depositary Shares representing 2,000,000 of
the Company's Ordinary Shares are to be sold by the Selling Shareholders; the
number of American Depositary Shares to be sold by each Selling Shareholder is
shown on Schedule I. In addition, the Company and the Selling Shareholders also
propose to grant to the Underwriters an option to purchase up to an additional
450,000 American Depositary Shares representing 450,000 Ordinary Shares on the
terms and for the purposes set forth in Section 3(b) (the "Option Shares"). The
Company has granted the Underwriters the option to purchase 403,333 of the
Option Shares; the Selling Shareholders have granted to the Underwriters the
right to purchase the number of Option Shares set forth on Schedule I. The
Shares and any Option Shares
- --------------------
(1) Plus an option to purchase from the Company and the Selling
Shareholders up to 450,000 additional American Depositary Shares representing
450,000 Ordinary Shares solely to cover over-allotments, if any.
<PAGE> 2
purchased pursuant to this Agreement are referred to collectively in this
Agreement as the "Securities." Van Kasper & Company and Gerard Klauer Mattison &
Co., Inc. are acting as representatives of the several Underwriters and in that
capacity are referred to in this Agreement as the "Representatives." The Selling
Shareholders have executed Custody Agreements and Powers of Attorney, the forms
of which have been previously delivered to the Representatives, pursuant to
which the Selling Shareholders have placed the Selling Shareholder Shares in
custody with the Company and agreed to take certain other actions with respect
thereto and hereto.
The Company hereby confirms its agreements with the several Underwriters
as set forth below.
1. Representations and Warranties of the Company. The Company hereby
represents and warrants to and agrees with each Underwriter as follows:
(a) A Registration Statement (Registration No. 333-8134) on Form
F-1 under the Securities Act of 1933, as amended (the "Securities Act"),
including such amendments to such registration statement as may have been
required to the date of this Agreement, relating to the Securities has been
prepared by the Company under and in conformity with the provisions of the
Securities Act, the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration statement, as it
may have been amended, has been declared by the Commission to be effective under
the Securities Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment has been
filed, in such registration statement), with such changes or insertions as are
required by Rule 430A of the Rules and Regulations or permitted by Rule 424(b)
of the Rules and Regulations, and as has been provided to and approved by the
Representatives prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Securities Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representative prior to the
execution of this Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, including all financial schedules
and exhibits thereto and including any information omitted therefrom pursuant to
Rule 430A of the Rules and Regulations and included in the Prospectus (defined
below), in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the Rules and Regulations with respect to the
Securities (a "Rule 462(b) Registration Statement"), and, in the event of any
amendment thereto after the effective date of such registration statement (the
"Effective Date"), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including
2
<PAGE> 3
any 462(b) Registration Statement); the term "Preliminary Prospectus" means each
prospectus subject to completion filed with such registration statement or any
amendment thereto (including the prospectus subject to completion, if any,
included in the Registration Statement or any amendment thereto at the time it
was or is declared effective); the term "Prospectus" means:
(A) the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Securities Act; or
(B) if no prospectus is required to be filed pursuant
to Rule 424(b) under the Securities Act, the prospectus included in the
Registration Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for "use in connection with the offering of the Securities" differs
from the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such
revised prospectus from and after the time it is first provided to the
Underwriters for such use.
(b) No order suspending the effectiveness of the Registration
Statement or preventing or suspending the issue of any Preliminary Prospectus or
the Prospectus has been issued and no proceedings for that purpose are pending
or, to the knowledge of the Company, threatened or contemplated by the
Commission; no order suspending the sale of the Securities in any jurisdiction
has been issued and no proceedings for that purpose are pending or, to the
knowledge of the Company, threatened or contemplated, and any request of the
Commission for additional information (to be included in the Registration
Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been
complied with or otherwise appropriately addressed. For the purposes of this
Agreement, a proceeding is "pending" if written notice thereof has been served
upon the Company or any of the Subsidiaries (as defined below), or if any
officer, director, employee or counsel of the Company or any of the Subsidiaries
has actual knowledge thereof.
(c) When the Preliminary Prospectus was filed with the Commission
it (i) contained all statements required to be contained therein and complied in
all respects with the requirements of the Securities Act, the Rules and
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder (the "Exchange
Act Rules and Regulations") and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement or any amendment thereto
3
<PAGE> 4
was or is declared effective, it (i) contained or will contain all statements
required to be contained therein and complied or will comply in all respects
with the requirements of the Securities Act, the Rules and Regulations, the
Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective) and at all times subsequent thereto up to and
including the Closing Date (defined below) and any date on which Option Shares
are to be purchased, the Prospectus, as amended or supplemented at any such
time, (i) contained or will contain all statements required to be contained
therein and complied or will comply in all respects with the requirements of the
Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act
Rules and Regulations and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (c) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(d) The subsidiaries (each, a "Subsidiary" and collectively the
"Subsidiaries") of the Company and the jurisdiction of incorporation of each
Subsidiary is listed on Exhibit A hereto. As used in this Agreement, the word
"subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity of which the Company directly or indirectly
owns 50 percent or more of the equity or that the Company directly or indirectly
controls. The Company has no subsidiaries other than the Subsidiaries listed on
Exhibit A to this Agreement, and except as set forth on such Exhibit, the
Company owns 100 percent of the issued and outstanding stock of each of the
Subsidiaries. Exhibit B hereto lists each entity in which the Company or any
Subsidiary holds an equity interest that is not otherwise disclosed on Exhibit
A, whether as a shareholder, partner, member, joint venturer or otherwise.
Except as set forth on Exhibit A or Exhibit B, neither the Company nor any
Subsidiary has any equity interest in any person.
(e) The Company and each of its Subsidiaries has been duly
incorporated or organized and is validly existing as a corporation or other
legal entity in good standing under the laws of the jurisdiction of its
incorporation or organization, has full power (corporate and other) and
authority to own or lease its properties and conduct
4
<PAGE> 5
its business as described in the Registration Statement and the Prospectus and
as currently being conducted and proposed to be conducted by it and is duly
qualified as a foreign corporation and in good standing in all jurisdictions in
which the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary (except where the
failure to be so qualified would not have a material effect on the business,
properties, condition (financial or otherwise), results of operations or
prospects of the Company and its Subsidiaries, taken as a whole (a "Material
Adverse Effect")). The Company and each of its Subsidiaries is in possession of
and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from federal, state, local, foreign and other
governmental or regulatory authorities necessary or desirable for the conduct of
its business, all of which are valid and in full force and effect (except where
the failure to possess, maintain or operate in compliance with any such
authorization, license, certificate, consent, order or permit would not or could
not reasonably be expected to have a Material Adverse Effect). Each Chinese
contractual joint venture in which the Company is involved is operating in
compliance with the terms of its joint venture agreement (except where the
failure to comply would not or could not reasonably be expected to have a
Material Adverse Effect).
(f) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
material loss or interference with the business of the Company or any Subsidiary
from fire, explosion, flood, earthquake or other calamity, whether or not
covered by insurance, or from any court or governmental action, order or decree,
or any changes in the capital stock or long-term debt of the Company or any
Subsidiary, or any dividend or distribution of any kind declared, paid or made
on the capital stock or registered capital of the Company or any Subsidiary, or
any material change, or a development known to the Company that might cause or
result in a material change, in or affecting the business, properties, condition
(financial or otherwise), results of operation or prospects of the Company and
its Subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, in each case other than as may be set forth in
the Registration Statement and the Prospectus, and since such dates, except in
the ordinary course of business, neither the Company nor any Subsidiary has
entered into any material transaction not described in the Registration
Statement and the Prospectus.
(g) There is no agreement, contract, license, lease or other
document required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All contracts described in the Prospectus,
if any, are in full force and effect on the date hereof, and none of the
Company, its Subsidiaries or any other party thereto is in breach of or default
under any such contract (except where such breach or default would not or could
not reasonably be expected to have a Material Adverse Effect).
5
<PAGE> 6
(h) The authorized and outstanding capital stock of the Company
is set forth in the Prospectus as of the dates set forth therein, and the
description of the Ordinary Shares and of the Securities therein conforms with
and accurately describes in all material respects the rights set forth in the
instruments defining the same. Except as set forth in the Prospectus, the
Securities and the Ordinary Shares represented by the Securities have been duly
and validly authorized and, when issued and delivered against payment therefor
as provided herein, will be duly and validly issued, fully paid and
nonassessable, and the issuance of the Ordinary Shares and the Securities is not
subject to any preemptive or similar rights.
(i) All of the outstanding Ordinary Shares of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all applicable securities laws and were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities of the Company. The description of the
Company's stock option, stock bonus and other stock plans or arrangements and
the options or other rights granted or exercised thereunder set forth in the
Prospectus accurately and fairly present in all material respects the
information presented with respect to such plans, arrangements, options and
rights. Other than this Agreement and the options to purchase Ordinary Shares
described in the Prospectus, there are no options, warrants or other rights
outstanding to subscribe for or purchase any shares of the Company's capital
stock other than options and other equity incentives that are granted in the
ordinary course pursuant to the equity incentive plan described in the
Prospectus. There are no preemptive rights, rights of first refusal, or other
similar restrictions applicable to any of the Securities to be sold by the
Company or, to the Company's knowledge, the Selling Shareholders.
(j) Except as set forth in the Prospectus, all of the stock or
registered capital in the Subsidiaries owned by the Company as set forth on
Exhibit A is owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest of any type, kind or nature.
All of the outstanding stock or registered capital of each of the Subsidiaries
has been duly authorized and validly issued and is fully paid and nonassessable,
has been issued in compliance with all applicable laws, including securities
laws, and was not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities of such Subsidiary. There
are no options, warrants or other rights outstanding to subscribe for or
purchase any shares of the capital stock or registered capital of any Subsidiary
and no Subsidiary is subject to any obligation, commitment, plan, arrangement or
court or administrative order with respect to same. There are no preemptive
rights applicable to any shares of capital stock or registered capital of the
Subsidiaries.
(k) This Agreement has been duly authorized, executed and
delivered by, and constitutes the valid and binding obligation of the Company,
enforceable against
6
<PAGE> 7
the Company in accordance with its terms, except as enforceability may be
limited by general equitable principles, specific performance, bankruptcy,
insolvency, reorganization, moratorium and laws affecting creditors' rights
generally, and except as rights to indemnification hereunder may be limited by
applicable federal or state securities laws. Other than the registration rights
described in the Prospectus, there are no rights for or relating to the
registration of any capital stock of the Company. The filing of the Registration
Statement does not give rise to any rights, other than those which have been
waived in writing, for or relating to the registration of any capital stock of
the Company.
(l) Neither the Company nor any of its Subsidiaries is, or with
the giving of notice or lapse of time or both would be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
completion of the transactions contemplated by this Agreement result in a
violation of or constitute a breach of or a default (including without
limitation with the giving of notice, the passage of time or otherwise) under,
the Memorandum of Association, Articles of Association or other governing
documents of the Company or such Subsidiary or any obligation, agreement,
covenant or condition contained in any bond, debenture, note or other evidence
of indebtedness or in any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or other agreement or instrument to
which the Company or any Subsidiary is a party or by which any properties of the
Company or any Subsidiary may be bound or affected. The Company has not incurred
any liability, direct or indirect, for any finders' or similar fees payable on
behalf of the Company or the Underwriters in connection with the public offering
of the Securities. The performance by the Company of its obligations under this
Agreement will not violate any law, ordinance, rule or regulation, or any order,
writ, injunction, judgment or decree of any governmental agency or body or of
any court having jurisdiction over the Company or any Subsidiary or any
properties of the Company or any Subsidiary, or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company or any Subsidiary. Except for permits and similar authorizations
required under the Securities Act, the Exchange Act or under other securities or
Blue Sky laws of certain jurisdictions and for such permits and authorizations
that have been obtained, no consent, approval, authorization or order of any
court, governmental agency or body, financial institution or any other person is
required in connection with the completion of the transactions contemplated by
this Agreement.
(m) Except as described in the Prospectus, the Company and each
Subsidiary owns, or has valid rights to use, all items of real and personal
property which are material to the business of the Company or such Subsidiary
(including, without limitation, all real property on which the Company's
manufacturing facilities are located)
7
<PAGE> 8
free and clear of all liens, encumbrances and claims that would or could
reasonably be expected to result in a Material Adverse Effect.
(n) The Company or the appropriate Subsidiary, as the case may
be, owns or possesses adequate rights to use all patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights (collectively, "Intellectual Property") described or referred to in
the Registration Statement and the Prospectus as owned by or used by the Company
or such Subsidiary, or which are necessary for the conduct of the business of
the Company or such Subsidiary as described in the Registration Statement and
the Prospectus; and neither the Company nor any Subsidiary has received any
notice of infringement of or conflict with asserted rights of others with
respect to any Intellectual Property which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would or could reasonably
be expected to have a Material Adverse Effect. Except as described in the
Registration Statement and the Prospectus, and except for any agreements with
its customers entered into in the ordinary course of business granting the
Company or a Subsidiary the right to manufacture copyrighted or trademarked
materials, neither the Company nor any Subsidiary is a party to any material
options, licenses, or agreements of any kind relating to Intellectual Property
or that grant rights to any other party to manufacture, license, produce,
assemble, market or sell the products of the Company or any Subsidiary, nor is
the Company or any Subsidiary bound by or a party to any material options,
licenses, or agreements of any kind with respect to the Intellectual Property of
any other party.
(o) There is no litigation or governmental proceeding to which
the Company or any Subsidiary is a party or to which any property of the Company
or any Subsidiary is subject which is pending or, to the knowledge of the
Company, is threatened or contemplated against the Company or any Subsidiary
that might have a material effect on the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company or
any Subsidiary, that might prevent consummation of the transactions contemplated
by this Agreement or that are required to be disclosed in the Registration
Statement or Prospectus and are not so disclosed.
(p) None of the Company or any Subsidiary is in violation of, or
has received any notice or claim from any governmental agency or third party
that any of them is in violation of, any law, order, ordinance, rule or
regulation, or any order, writ, injunction, judgment or decree of any agency or
body or of any court, to which it or its properties (whether owned or leased)
may be subject, which violation would or could reasonably be expected to have a
Material Adverse Effect.
(q) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the Exchange Act
8
<PAGE> 9
Rules and Regulations or otherwise, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities.
(r) Arthur Andersen & Co., whose reports appear in the
Registration Statement and the Prospectus, are, and during the periods covered
by their reports in the Registration Statement were, independent accountants as
required by the Securities Act and the Rules and Regulations. The financial
statements and schedules included in the Registration Statement, each
Preliminary Prospectus and the Prospectus present fairly the financial
condition, results of operations, cash flow and changes in shareholders' equity
and the financial statements and schedules included in the Registration
Statement present fairly the information required to be stated therein. Such
financial statements and schedules have been prepared in accordance with United
States generally accepted accounting principles applied on a consistent basis
throughout the periods presented. The selected and summary financial and
statistical data included in the Registration Statement and the Prospectus
present fairly the information shown therein. No other material financial
statements or schedules are required to be included in the Registration
Statement. Except as set forth in such financial statements or as set forth in
the Prospectus, the Company has no material debts, liabilities or obligations
(whether absolute, accrued, contingent or otherwise) of any nature whatsoever,
including, without limitation, any tax liabilities or deferred tax liabilities
or any other debts, liabilities or obligations.
(s) The books, records and accounts of the Company and each
Subsidiary (for the periods reflected in the Prospectus) accurately and fairly
reflect, in reasonable detail, the transactions in and dispositions of the
assets of the Company and such Subsidiary. The systems of internal accounting
controls maintained by the Company and each Subsidiary are sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary (x) to permit preparation of financial statements in conformity
with generally accepted accounting principles and (y) to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(t) The Company will not, and the Company has delivered to the
Representatives the written agreement of ZIC Holdings Limited ("ZICHL"),
Longvest Management Limited ("Longvest") and Ertl (Hong Kong Limited ("Ertl"),
holding, respectively, 3,800,000, 700,000 and 500,000 of the Company's ordinary
shares prior to the offering contemplated hereby, to the effect that ZICHL,
Longvest and Ertl will not, for a period of 90 days following the date of this
Agreement, without the prior written consent of Van Kasper & Company, offer,
sell or contract to sell, or otherwise dispose of,
9
<PAGE> 10
or announce the offer of, any Ordinary Shares, American Depositary Shares
("ADSs") representing Ordinary Shares, or options, convertible securities or
other securities exercisable or exchangeable for, or convertible into, Ordinary
Shares or ADSs in each case without the prior written consent of the Van Kasper
& Company (except for granting options and other equity incentives in the
ordinary course pursuant to any equity incentive plan described in the
Prospectus).
(u) The Company has delivered to Van Kasper & Company the First
Amendment to Agreement Regarding Future Share Distributions executed by the
Company, ZICHL, Longvest and Ertl.
(v) No labor disturbance by the employees of the Company or any
Subsidiary exists, or, to the knowledge of the Company, is imminent,
contemplated or threatened; and the Company is not aware of an existing,
imminent or threatened labor disturbance by the employees of any principal
suppliers, contract manufacturing organizations, manufacturers, authorized
dealers or distributors that would or could reasonably be expected to have a
Material Adverse Effect. No collective bargaining agreement exists with any
employees of the Company or any such Subsidiary and, to the knowledge of the
Company, no such agreement is imminent. Except as disclosed in the Registration
Statement, no officer, employee or consultant of the Company or any Subsidiary
whose continued services are material to the conduct of the business of the
Company or any Subsidiary has any plans to terminate employment with the Company
or such Subsidiary nor does the Company or any Subsidiary have a present
intention to terminate the employment or contract of any such person.
(w) The Company and each Subsidiary has filed all federal, state,
national, provincial, local and foreign tax returns that are required to be
filed or has requested extension thereof and has paid all taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
to the extent that the same have become due and payable, except where the
failure to pay any such taxes has not had and could not reasonably be expected
to have a Material Adverse Effect, or where such taxes are currently being
contested by the Company or have been fully reserved against in the financial
statements appearing in the Prospectus. No tax assessment or deficiency has been
made or proposed against the Company or any of its Subsidiaries, nor has the
Company or any Subsidiary received any notice of any proposed tax assessment or
deficiency.
(x) Except as set forth in the Prospectus, there are no
outstanding loans, advances or guaranties of indebtedness by the Company to or
for the benefit of any of (i) its "affiliates," as such term is defined in the
Rules and Regulations, (ii) any of the officers or directors of any of its
Subsidiaries or (iii) any of the members of the families of any of them.
10
<PAGE> 11
(y) Neither the Company nor any Subsidiary has, directly or
indirectly, at any time: (i) made any contributions to any candidate for
political office in violation of law; (ii) made any payment to any local, state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties; or (iii) violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended.
(z) Neither the Company nor any Subsidiary has any liability,
absolute or contingent, relating to: (i) public health or safety; (ii) worker
health or safety; (iii) product defect or warranty; or (iv) except as may be
disclosed in the Registration Statement and Prospectus, pollution, damage to or
protection of the environment, including, without limitation, relating to damage
to natural resources, emissions, discharges, releases or threatened releases of
hazardous materials into the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or otherwise
relating to the manufacture, processing, use, treatment, storage, generation,
disposal, transport or handling of any hazardous materials, except where such
liability has not had and could not reasonably be expected to have a Material
Adverse Effect or where such liability has been fully reserved against in the
financial statements appearing in the Prospectus. As used herein, "hazardous
material" includes chemical substances, wastes, pollutants, contaminants,
hazardous or toxic substances, constituents, materials or wastes, whether solid,
gaseous or liquid in nature.
(aa) The Company has not distributed and will not distribute
prior to the Closing Date or on or prior to any date on which the Option Shares
are to be purchased, as the case may be, any prospectus or other offering
material in connection with the offering and sale of the Securities other than
the Preliminary Prospectus, the Prospectus, the initially-filed Registration
Statement and any filed amendments thereto and any other material which may be
permitted by the Securities Act and the Rules and Regulations.
(bb) The Company has filed and will file in a timely manner all
reports and other documents required to be filed with the Commission under the
Exchange Act and with the National Association of Securities Dealers, Inc. (the
"NASD"), and each such report or other document contained, at the time it was
filed, such information as was required to be included in such report or other
document and all such information was correct and complete in all material
respects; except as disclosed in the Registration Statement, no event has
occurred or is likely to occur that required or would require an amendment to
any report or document referred to in this section that has not been filed or
distributed as required.
(cc) The Securities have been approved for inclusion for listing
on the Nasdaq National Market ("NNM"). The Company has taken no action designed
to, or likely to have the effect of, terminating the registration of the Common
Stock under the 1934 Act or delisting the Common Stock from the NNM, nor has the
Company received
11
<PAGE> 12
any notification that the Commission or the NNM is contemplating terminating
such registration or listing.
(dd) The Company is not now, and intends to conduct its affairs
in the future in such a manner so that it will not become, an investment company
within the meaning of the Investment Company Act of 1940, as amended.
(ee) The Company satisfies the requirements for filing a
registration statement on Form F-1.
(ff) Except as described in the Prospectus, neither the Company
nor any Subsidiary has entered into any transaction with any affiliate of the
Company other than an arm's length transaction, and all such transactions
required to be described in the Registration Statement or the Prospectus have
been described therein.
(gg) The Exchange Agreement dated February 10, 1998 by and among
the Company, Hua Yang Holdings Co., Limited, Hua Yang Printing Holdings Co.,
Limited, the Shareholders of Hua Yang Holdings Co., Limited, and the principal
shareholders of HYP Holdings Limited (the "Hua Yang Acquisition Agreement") is a
valid and binding obligation of each party thereto, enforceable in accordance
with its terms. The transactions contemplated by the Hua Yang Acquisition
Agreement have closed, and Hua Yang is now a Subsidiary of the Company.
2. Representations and Warranties of the Selling Shareholders. Each
Selling Shareholder severally and not jointly represents and warrants to the
Underwriters for itself that:
(a) Such Selling Shareholder has and at the Closing Date will
have good and marketable title to the Securities to be sold hereunder by such
Selling Shareholder (the "Selling Shareholder Shares"), free and clear of any
outstanding liens, encumbrances, security interests, rights, subscriptions,
warrants, calls, preemptive rights, options or other agreements, claims or
restrictions of any kind, and full right, power and authority to effect the sale
and delivery of such Shares; and upon the delivery of and payment for the
Selling Shareholder Shares pursuant to this Agreement, good and marketable title
thereto, free and clear of any liens, encumbrances, security interests, rights,
subscriptions, warrants, calls, preemptive rights, options or other agreements,
claims or restrictions of any kind, will be transferred to the several
Underwriters.
(b) Such Selling Shareholder has full right, power and authority
to execute and deliver this Agreement and the Custody Agreement referred to
below and to perform its obligations under such agreements. The execution and
delivery of this Agreement and the consummation by such Selling Shareholder of
the transactions herein
12
<PAGE> 13
contemplated and the fulfillment by such Selling Shareholder of the terms hereof
will not require any consent, approval, authorization, or other order of any
court, regulatory body, administrative agency or other governmental body (except
as may be required under the Securities Act, state securities laws or Blue Sky
laws). The consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other material agreement or instrument to which such
Selling Shareholder is a party, or any order, rule or regulation applicable to
such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(c) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result, under the Exchange Act, or
otherwise, in stabilization or manipulation of the price of the Company's
American Depositary Shares to facilitate the sale or resale of the Shares.
(d) Such Selling Shareholder has executed and delivered this
Agreement and the Custody Agreement, and in connection herewith, such Selling
Shareholder further represents, warrants and agrees that such Selling
Shareholder has deposited with the Company, pursuant to the Custody Agreement,
the certificates in negotiable form representing such Selling Shareholder Shares
for the purpose of further delivery pursuant to this Agreement; and the form of
the Custody Agreement has been previously delivered to you.
(e) There is no litigation or governmental proceeding to which
such Selling Shareholder is a party or to which any Selling Shareholder Shares
are subject which is pending or, to the knowledge of such Selling Shareholders,
threatened or contemplated that might affect the ability of the Selling
Shareholder to transfer good title to the Selling Shareholder Shares as required
hereby, or otherwise prevent the consummation of the transactions contemplated
hereby, or which is required to be disclosed, and is not so disclosed, in the
Registration Statement or Prospectus.
(f) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of the
Company contained herein or the information contained in the Registration
Statement and documents incorporated therein by reference, such Selling
Shareholder (i) has no reason to believe that the representations and warranties
of the Company contained in Section 1 hereof are not true and correct in all
material respects, and (ii) is familiar with the Registration Statement and has
no knowledge of any material fact, condition or information not disclosed in the
Registration Statement that has had a Material Adverse Effect; and the sale of
such Selling Shareholder's Shares by the Selling Shareholder pursuant hereto is
13
<PAGE> 14
not prompted by any information concerning the Company or any of the
Subsidiaries which is not set forth in the Registration Statement.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants
and agreements contained in this Agreement and subject to the terms and
conditions set forth in this Agreement, (i) the Company agrees to sell to the
several Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $_____ per Share
(the "Purchase Price") the respective number of Shares set forth opposite the
name of such Underwriter on Schedule II to this Agreement (subject to adjustment
as provided in Section 10 of this Agreement) and (ii) each Selling Shareholder
agrees to sell to the Underwriters the number of shares set forth opposite the
name of such Selling Shareholder on Schedule I hereof, subject to adjustments in
accordance with Section 10 hereof. The number of Firm Shares to be purchased by
each Underwriter from the Company and each Selling Shareholder shall be as
nearly as practicable in the same proportion to the total number of Firm Shares
being sold by the Company and the Selling Shareholders as the number of Firm
Shares being purchased by each Underwriter bears to the total number of Firm
Shares to be sold hereunder. The obligations of the Company and each of the
Selling Shareholders shall be several and not joint.
(b) Certificates in negotiable form for the total number of
Shares to be sold hereunder by the Selling Shareholders have been placed in
custody with the Company pursuant to the Custody Agreements executed by the
Selling Shareholders for delivery of all Selling Shareholder Shares. Each
Selling Shareholder specifically agrees that the Firm Shares and Option Shares
represented by the certificates held in custody for such Selling Shareholder
under the Custody Agreement are subject to the interest of the Underwriters
hereunder, and that the arrangements made by such Selling Shareholder for such
custody are to that extent irrevocable, and that the obligations of such Selling
Shareholder hereunder shall not be terminable by any act or deed of the Selling
Shareholder (or by any other person, firm or corporation, including the Company,
or the Underwriters) or by operation of law or by the occurrence of any other
event or events, except as set forth in the Custody Agreement. If any such event
should occur prior to the delivery to the Underwriters of the Firm Shares or
Option Shares hereunder, certificates for the Firm Shares or Option Shares shall
be delivered by the Company in accordance with the terms and conditions of this
Agreement as if such event had not occurred. The Company is authorized to
receive and acknowledge receipt of the proceeds of the sale of the Selling
Shareholder Shares held by it against the delivery of such Shares.
(c) On the basis of the several (and not joint) representations,
warranties, covenants and agreements of the Underwriters contained in this
Agreement and subject to
14
<PAGE> 15
the terms and conditions set forth in this Agreement, the Company and the
Selling Shareholders grant an option to the several Underwriters to purchase
from the Company and such Selling Shareholder all or any portion of the Option
Shares at the Purchase Price. Each Selling Shareholder agrees to sell the number
of Option Shares set forth next to such Selling Shareholders name on Schedule I.
This option may be exercised only to cover over-allotments in the sale of the
Shares by the Underwriters and may be exercised in whole or in part at any time
(but not more than once) on or before the 30th day after the date of the
Prospectus upon written, telecopied or telegraphic notice by the Representatives
to the Company setting forth the aggregate principal number of Option Shares as
to which the several Underwriters are exercising the option and the settlement
date. If the option to purchase the Option Shares is exercised, the Option
Shares shall be purchased severally, and not jointly, by each Underwriter in the
same proportion that the number of Shares set forth opposite the name of the
Underwriter on Schedule I to this Agreement bears to the total number of Shares
to be purchased by the Underwriters under Section 3(a) above, subject to such
adjustments as the Representatives in their absolute discretion shall make to
eliminate any fractional Shares. Delivery of Option Shares, and payment
therefor, shall be made as provided in Section 2(d) and Section 2(e) below.
(d) Delivery of the Firm Shares and the Option Shares (if the
option granted by the Company in Section 3(c) above has been exercised not later
than 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date), and payment therefor, shall be made at the office of Van Kasper &
Company, 600 California Street, San Francisco, California at 7:00 a.m., San
Francisco time, on the third business day after the date of this Agreement, or
as provided in Section 10 of this Agreement. The date and hour of delivery and
payment for the Shares are referred to in this Agreement as the "Closing Date."
As used in this Agreement, "business day" means a day on which the NNM is
operating and on which banks in New York and California are open for business
and not permitted by law or executive order to be closed. American Depositary
Receipts ("ADRs") representing the Shares shall be in such denominations and
registered in such names as the Representatives may request in writing at least
two business days before the Closing Date.
(e) If the option granted by the Company in Section 3(c) above is
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of the Option Shares and payment therefor
shall be made at the office of Van Kasper & Company, 600 California Street, San
Francisco, California at 7:00 a.m., San Francisco time, on the date specified by
the Representatives (which shall be three or four or fewer business days after
the exercise of the option, but not in excess of the period specified in the
Rules and Regulations).
(f) Payment of the purchase price for the Securities to the
Company and each of the Selling Shareholders by the several Underwriters shall
be made by wire
15
<PAGE> 16
transfer, payable to the order of the Company and each of the Selling
Shareholders or as otherwise provided in the Custody Agreement, in all cases to
such accounts as the Representatives shall have been advised to make payments
in writing at least two business days prior to the Closing Date. Such payment
shall be made upon delivery of the Securities to the Representatives for the
respective accounts of the several Underwriters. The Securities to be delivered
to the Representatives shall be registered in such name or names and shall be in
such denominations as the Representatives may request at least two business days
before the Closing Date, in the case of the Shares, and at least one business
day prior to the purchase of the Option Shares, in the case of the Option
Shares. The Representatives, individually and not on behalf of the Underwriters,
may (but shall not be obligated to) make payment to the Company or the Selling
Shareholder, as the case may be, for Shares to be purchased by any Underwriter
whose check shall not have been received by the Representatives on the Closing
Date or any later date on which Option Shares are purchased for the account of
such Underwriter. Any such payment shall not relieve such Underwriter from any
of its obligations hereunder.
(g) The several Underwriters propose to offer the Securities for
sale to the public as soon as the Representatives deem it advisable to do so.
The Securities are to be initially offered to the public at the public offering
price set forth (or to be set forth) in the Prospectus. The Representatives may
from time to time thereafter change the public offering price and other selling
terms.
(h) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), the
preceding table and footnotes, the legends respecting stabilization and passive
market making set forth on page 3 and the statements set forth under the caption
"Underwriting" in the Registration Statement, any Preliminary Prospectus and in
the final form of Prospectus filed pursuant to Rule 424(b) constitute the only
information furnished by the Underwriters to the Company for inclusion in any
Preliminary Prospectus, the Prospectus or the Registration Statement.
4. Further Agreements of the Company. The Company covenants and agrees
with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, and any amendment thereof, if not effective at the time
of execution of this Agreement, to become effective as promptly as possible. If
the Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule 424(b), the
Company will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will not file the Prospectus,
any amended Prospectus, any amendment (including post-effective
16
<PAGE> 17
amendments) of the Registration Statement or any supplement to the Prospectus
without (i) advising the Representatives of the proposed filing of such
amendment or supplement and, a reasonable time prior to the proposed filing,
furnishing the Representatives with copies thereof and (ii) obtaining the prior
consent of the Representatives to such filing. The Company will prepare and file
with the Commission, promptly upon the request of the Representatives, any
amendment to the Registration Statement or supplement to the Prospectus that may
be necessary or advisable in the reasonable opinion of the Representatives in
connection with the distribution of the Securities by the Underwriters and shall
use its best efforts to cause the same to become effective as promptly as
possible.
(b) The Company will promptly advise the Representatives (i) when
the Registration Statement becomes effective, (ii) when any post-effective
amendment thereof becomes effective, (iii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose, and (v) of the
receipt by the Company of any notification with respect to the suspension of the
registration, qualification or exemption from registration or qualification of
the Securities for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or suspension and, if issued, to
obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver
to the Representatives and to Underwriters' counsel a signed copy of the
Registration Statement as originally filed and of each amendment thereto filed
prior to the time the Registration Statement becomes effective and, promptly
upon the filing thereof, a signed copy of each post-effective amendment, if any,
to the Registration Statement (together with, in each case, all exhibits thereto
unless previously furnished to the Representatives) and will also deliver to the
Representatives for distribution to the several Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (excluding
exhibits) so that one copy of each may be distributed to each Underwriter, (ii)
as promptly as possible deliver to the Representatives and send to the several
Underwriters, at such office or offices as the Representatives may designate, as
many copies of the Prospectus as the Representatives may reasonably request and
(iii) thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer, likewise to send
to the Underwriters as many additional copies of the Prospectus and as many
copies of any supplement to the Prospectus and of any amended Prospectus, filed
by the Company with the Commission, as the Representatives may reasonably
request for the purposes contemplated by the Securities Act.
17
<PAGE> 18
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading or so that the Prospectus will
not omit to state a material fact necessary to be stated therein, in each case
at the time the Prospectus is delivered to a purchaser of the Securities, or if
it shall be necessary to amend or to supplement the Prospectus to comply with
the Securities Act or the Rules and Regulations, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended Prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein not misleading and so
that it then will otherwise comply with the Securities Act and the Rules and
Regulations. If, after the public offering of the Securities by the Underwriters
and during such period, the Underwriters propose to vary the terms of offering
thereof by reason of changes in general market conditions or otherwise, the
Representatives will advise the Company in writing of the proposed variation and
if, in the opinion either of counsel for the Company or counsel for the
Underwriters, such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the
Securities may be sold by the Underwriters to use the Prospectus, as from time
to time so amended or supplemented, in connection with the sale of the
Securities in accordance with the applicable provisions of the Securities Act
and the Rules and Regulations for such period.
(e) The Company will cooperate with the Representatives and
Underwriters' counsel in the qualification or registration of the Securities for
offer and sale under the securities or Blue Sky laws of such states as the
Representatives may designate and, if applicable, in connection with exemptions
from such qualification or registration and, during the period in which a
Prospectus is required by law to be delivered by an Underwriter or a dealer, in
keeping such qualifications, registrations and exemptions in effect; provided,
however, that, other than the appointment of a United States representative as
required by the Securities Act, the Company shall not be obligated to file any
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports and other
documents as are or may be required to continue such qualifications,
registrations and exemptions in effect for so long a period as the
Representatives may reasonably request for the distribution of the Securities.
(f) During a period of five years commencing with the date of
this Agreement, the Company will promptly furnish to the Representatives and to
each
18
<PAGE> 19
Underwriter who may so request in writing copies of (i) all periodic and special
reports furnished by it to shareholders of the Company, (ii) all information,
documents and reports filed by it with the Commission, any securities exchange
on which any securities of the Company are then listed, the NNM or the NASD, and
(iii) all press releases and material news items or articles in respect of the
Company or its affairs released or prepared by the Company (other than
promotional and marketing materials disseminated solely to customers and
potential customers of the Company in the ordinary course of business).
(g) As soon as practicable, but not later than the 45th day
following the end of the fiscal quarter first ending after the first anniversary
of the Effective Date, the Company will make generally available to its
securities holders and furnish to the Representatives an earnings statement or
statements in accordance with Section 11(a) of the Securities Act and Rule 158
of the Rules and Regulations.
(h) The Company will apply the net proceeds from the offering of
the Securities in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(i) The Company will comply with all provisions of all
undertakings contained in the Registration Statement.
(j) The Company will cause the Securities to be listed on the
NNM, and will use its best efforts to cause such listing (or a listing on a
comparable national securities exchange) to be continued (unless terminated as a
result of a "going private" transaction or an acquisition of the Company) for at
least five years after the date of this Agreement, and the Company will comply
with all registration, filing, reporting and other requirements of the Exchange
Act and the NNM which may from time to time be applicable to the Securities, the
Ordinary Shares and the Company.
(k) The Company will use all commercially reasonable efforts to
maintain insurance of the types and in the amounts which it deems adequate for
its business consistent with insurance coverage maintained by companies of
similar size and engaged in similar businesses in similar geographic locations,
including, but not limited to, product liability insurance and general liability
insurance covering all real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against.
(l) The Company will issue no press release prior to the Closing
Date with respect to the offering without the Representatives' prior consent.
19
<PAGE> 20
(m) The Company will not effect a change in its accounting firm
to any other firm other than a "big six" accounting firm for a period of three
years from the date of this Agreement without the written consent of the
Representatives.
(n) The Company has not and will not, without the prior written
consent of the Representatives, seek any exemption from the listing requirements
of the NNM.
(o) The Company will take all steps necessary to comply with the
requirements of the NASD in connection with the issuance and sale of the
Securities.
(p) Within a reasonable time after the Closing Date, the Company
shall supply to the Underwriters' counsel, at the Company's cost, up to five
bound volumes, each containing all material documents relating to the offering
of the Stock, as reasonably requested by such counsel.
5. Representations and Warranties, and Covenants of, the Underwriters.
Each Underwriter, severally and not jointly, represents and warrants to, and
agrees with the Company, that:
(a) It has not offered or sold and will not offer or sell the
Securities 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;
(b) 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 Securities 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
(c) 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 Securities, from or otherwise involving the United
Kingdom.
6. Fees and Expenses.
(a) The Company and the Selling Shareholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses
in connection with: the preparation, printing and filing of the Registration
Statement
20
<PAGE> 21
(including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus, any drafts of each of them and any amendments
or supplements to any of them; the duplication (including all drafts thereof) of
this Agreement, the Agreement Among Underwriters, any Selected Dealer
Agreements, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire, the Power of Attorney and the
Depositary Agreement and the duplication and printing (including of drafts
thereof) of any other underwriting documents and material (including but not
limited to marketing memoranda and other marketing material) in connection with
the offering, purchase, sale and deliver of the Securities; the issuance and
delivery of the Securities under this Agreement to the several Underwriters,
including all expenses, taxes, duties, fees and commissions on the purchase and
sale of the Securities and stock exchange brokerage and transaction levies with
respect to the purchase and, if applicable, the sale of the Securities by the
Company to the Underwriters (provided, however, that the Company will pay only
one half of the stamp duty assessed by Hong Kong in connection with the transfer
of the Selling Shareholders Shares to the Underwriters, with the remainder to be
paid by the Selling Shareholders in proportion to the number of Shares to be
sold by them hereunder); the cost of printing the certificates for the
Securities; the Depositary's fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent public
accountants and any other experts named in the Prospectus; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, the
agreements and other documents and instruments referred to above and any
amendments or supplements to any of the foregoing; the NASD filing fees; the
cost of qualifying or registering the Securities (or obtaining exemptions from
qualification or registration) under the laws of such jurisdictions as the
Representatives may designate (including filing fees and fees and
costs/disbursements of Underwriters' counsel in connection with such NASD
filings and state securities or Blue Sky qualifications, registrations and
exemptions and in preparing the preliminary and any final Blue Sky Memorandum
not to exceed $5,000); all fees and expenses in connection with listing of the
Securities on the NNM; and all other expenses incurred by the Company in
connection with the performance of its obligations hereunder. Amounts paid in
connection with state securities and Blue Sky qualification (including filing
fees, fees and expenses of counsel) shall be paid separately by the Company.
(ii) In addition to its obligations under Section 9(a) of
this Agreement, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any loss, claim, damage or liability described in
Section 9(a) of this Agreement, it will reimburse or advance to or for the
benefit of the Underwriters, and each of them, on a monthly basis (or more
often, if requested, but in no case more frequently than weekly) for all legal
and other expenses reasonably incurred in connection with investigating or
21
<PAGE> 22
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse or advance for the
benefit of the Underwriters for such expenses or the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any portion, or all, of any such interim
reimbursement payments or advances are so held to have been improper, the
Underwriters receiving the same shall promptly return such amounts to the
Company together with interest, compounded daily, at the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America, NT&SA, San Francisco, California (the
"Prime Rate"), but not in excess of the maximum rate permitted by applicable
law. Any such interim reimbursement payments or advances that are not made to or
for the Underwriters within 30 days of a request for reimbursement or for an
advance shall bear interest at the Prime Rate, compounded daily, but not in
excess of the maximum rate permitted by applicable law, from the date of such
request until the date paid.
(b) In addition to their obligations under Section 9(b) of this
Agreement, the Underwriters severally and in proportion to their obligation to
purchase Shares as set forth on Schedule I hereto, agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 9(b) of this Agreement, they will reimburse or
advance to or for the benefit of the Company on a monthly basis (or more often,
if requested, but in no case more frequently than weekly) for all legal and
other expenses incurred by the Company in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety or
enforceability of the Underwriters' obligation to reimburse or advance for the
benefit of the Company for such expenses and the possibility that such payments
or advances might later be held to have been improper by a court of competent
jurisdiction. To the extent that any portion, or all, of any such interim
reimbursement payments or advances are so held to have been improper, the
Company shall promptly return such amounts to the Underwriters together with
interest, compounded daily, at the Prime Rate, but not in excess of the maximum
rate permitted by applicable law. Any such interim reimbursement payments or
advances that are not made to the Company within 30 days of a request for
reimbursement or for an advance shall bear interest at the Prime Rate,
compounded daily, but not in excess of the maximum rate permitted by applicable
law, from the date of such request until the date paid.
(c) Any controversy arising out of the operation of the interim
reimbursement and advance arrangements set forth in Sections 6(a)(ii) and 6(b)
above, including the amounts of any requested reimbursement payments or
advances, the method
22
<PAGE> 23
of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted under the provisions of the Code of Arbitration Procedure of the NASD.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate. If the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to the demand or notice is
authorized to do so. Any such arbitration will be limited to the interpretation
and obligations of the parties under the interim reimbursement and advance
provisions contained in Sections 6(a)(ii) and 6(b) above and will not resolve
the ultimate propriety or enforceability of the obligation to indemnify for or
contribute to expenses that is created by the provisions of Section 9 of this
Agreement.
(d) If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 of this Agreement is not satisfied, or because of any
refusal, inability or failure on the part of the Company to perform any material
covenant or agreement set forth in this Agreement or to comply with any material
provision of this Agreement other than by reason of a default by any of the
Underwriters, the Company agrees to reimburse the several Underwriters upon
demand for all reasonable out-of-pocket accountable expenses actually incurred
(including fees and disbursements of counsel) that shall have been incurred by
any or all of them in connection with investigating, preparing to market or
marketing the Securities or otherwise in connection with this Agreement.
7. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase and pay for the Securities shall be subject to the
accuracy in all material respects as of the date of execution of this Agreement,
the Closing Date and the date and time at which the Option Shares are to be
purchased, as the case may be, of the representations and warranties of the
Company and the Selling Shareholders set forth in this Agreement, to the
accuracy in all material respects of the statements of the Company and its
officers and the Selling Shareholders made in any certificate delivered pursuant
to this Agreement, to the performance in all material respects by the Company
and the Selling Shareholders of all of their obligations to be performed under
this Agreement at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be, to the satisfaction of all
conditions to be satisfied or performed by the Company and the Selling
Shareholders at or prior to that date and to the following additional
conditions:
(a) The Registration Statement shall have become effective (or,
if a post-effective amendment is required to be filed pursuant to Rule 430A
under the Act, such post-effective amendment shall become effective and the
Company shall have provided evidence satisfactory to the Representatives of such
filing and effectiveness) not later than 5:00 p.m., New York time, on the date
of this Agreement or at such later date
23
<PAGE> 24
and time as the Representatives may approve in writing and, at the Closing Date
or, with respect to the Option Shares, the date on which such Option Shares are
to be purchased, no stop order suspending the effectiveness of the Registration
Statement or any qualification, registration or exemption from qualification or
registration for the sale of the Securities in any jurisdiction shall have been
issued and no proceedings for that purpose shall have been instituted or
threatened; and any request for additional information on the part of the
Commission shall have been complied with to the reasonable satisfaction of the
Representatives and Underwriters' counsel.
(b) The Representatives shall have received from Heller Ehrman
White & McAuliffe, counsel for the Underwriters, an opinion, on and dated as of
the Closing Date or, if applicable, the date on which Option Shares are to be
purchased, with respect to the issuance and sale of the Securities and such
other related matters as the Representatives may reasonably require, and the
Company shall have furnished such counsel with all documents which they may
reasonably request for the purpose of enabling them to pass upon such matters.
(c) The Representatives shall have received on the Closing Date
or, if applicable, the later date on which Option Shares are purchased, the
opinions of (i) Cooley Godward LLP, counsel for the Company, (ii) Robert W.H.
Wang & Co., Hong Kong counsel to the Company, (iii) Guangzhou Law Office,
People's Republic of China counsel to the Company, (iv) Shenzhen Law Offices,
People's Republic of China counsel to the Company in connection with the Hua
Yang acquisition, and (v) counsel for the Selling Shareholders, addressed to the
Underwriters and dated the Closing Date or such later date, with reproduced
copies or signed counterparts thereof for each of the Underwriters in each case
in form and substance satisfactory to the Representatives.
(d) The Representatives shall have received on the Closing Date
and on any later date on which Option Shares are purchased a certificate, dated
the Closing Date or such later date, as the case may be, and signed by the
President and the Chief Financial Officer of the Company on behalf of the
Company stating that, to their knowledge:
(i) the representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct in all material
respects with the same force and effect as if expressly made at and as of the
Closing Date or such later date on which Option Shares are purchased, and the
Company has complied with all the agreements and satisfied all the conditions in
all material respects on its part to be performed or satisfied at or prior to
the Closing Date or such later date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been
24
<PAGE> 25
instituted or are pending or, to the Company's knowledge, are threatened under
the Securities Act;
(iii) the Securities have been approved for listing on the
NNM; and
(iv) (A) the respective signers of such certificate have
carefully examined the Registration Statement in the form in which it originally
became effective and the Prospectus and any supplements or amendments to any of
them and, as of the Effective Date, the statements made in the Registration
Statement and the Prospectus were true and correct in all material respects and
neither the Registration Statement nor the Prospectus omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, (B) since the Effective Date, no event has
occurred that should have been set forth in an amendment to the Registration
Statement or a supplement or amendment to the Prospectus that has not been set
forth in such an amendment or supplement, (C) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus, there has not been any material
change or any development involving a prospective material change that has had
or could reasonably be expected to have a Material Adverse Effect and, since
such dates, neither the Company nor any of its Subsidiaries has entered into any
material transaction out of the ordinary course of business not referred to in
the Registration Statement in the form in which it originally became effective
and the Prospectus contained therein, and (D) there are not any pending or known
threatened legal proceedings to which the Company or any Subsidiary is a party
or of which property of the Company or any Subsidiary is the subject which are
material and which are not disclosed in the Registration Statement and the
Prospectus.
(e) The Representatives shall have received on the Closing Date
and on any later date on which Option Shares are purchased a certificate, dated
the Closing Date or such later date, as the case may be, and signed by the
President and the Chief Financial Officer of each of each of the Selling
Shareholders, or by any Selling Shareholders who are individuals, stating that
the representations and warranties of each of the Selling Shareholders set forth
in Section 2 of this Agreement are true and correct in all material respects
with the same force and effect as if expressly made at and as of the Closing
Date or such later date on which Option Shares are purchased, and each of the
Selling Shareholders has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or such later date.
(f) The Representatives shall have received from Arthur Andersen
& Co., accountants to the Company, a letter or letters, addressed to the
Underwriters and dated the Closing Date and any later date on which Option
Shares are purchased,
25
<PAGE> 26
confirming that they are independent accountants with respect to the Company
within the meaning of the Securities Act and the applicable Rules and
Regulations thereunder and, based upon the procedures described in their letter
delivered to the Representatives concurrently with the execution of this
Agreement (the "Original Letter"), but carried out to a date not more than five
business days prior to the Closing Date or such later date on which Option
Shares are purchased, (i) confirming, to the extent true, that the statements
and conclusions set forth in the Original Letter are accurate as of the Closing
Date or such later date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts described
in the Original Letter since the date of the Original Letter or to reflect the
availability of more recent financial statements, data or information. Such
letters shall reflect that there is not any change, or any development involving
a prospective change, in or affecting the business, properties or condition
(financial or otherwise), results of operations or prospects of the Company
which, in the Representatives' reasonable judgment, makes it impractical or
inadvisable to proceed with the public offering of the Shares or the purchase of
the Option Shares as contemplated by the Prospectus.
(g) Prior to the Closing Date, the Securities shall have been
approved for listing on the NNM, subject only to official notice of issuance.
(h) On or prior to the Closing Date, the Representatives shall
have received from the Company, ZICHL, Longvest and Ertl the executed agreements
described in Sections 1(t) and 1(u) of this Agreement.
(i) The Company and the Selling Shareholders shall have furnished
to the Representatives such further certificates and documents as the
Representatives shall reasonably request (including certificates of officers of
the Company and the Selling Shareholders) as to the accuracy of the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement, the performance by the Company and the Selling
Shareholders of their obligations under this Agreement and such other matters as
the Representatives may have then requested.
All the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement will be in compliance with the provisions
of this Agreement only if they are reasonably satisfactory to the
Representatives and the Underwriters' counsel. The Company and the Selling
Shareholders will furnish the Representatives with such number of conformed
copies of such opinions, certificates, letters and documents as the
Representatives shall reasonably request.
If any of the conditions specified in this Section 7 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, time being of
26
<PAGE> 27
the essence, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and the Underwriters'
counsel, this Agreement and all obligations of the Underwriters hereunder may be
canceled by the Representatives at or at any time prior to, the Closing Date or,
with respect to the Option Shares, prior to the date which the Option Shares are
to be purchased, as the case may be. Notice of such cancellation shall be given
to the Company and the Selling Shareholders in writing or by telecopy or
telegraph confirmed in writing. Any such termination shall be without liability
of the Company and the Selling Shareholders to the Underwriters (except as
provided in Section 6 or Section 9 of this Agreement) and without liability of
the Underwriters to the Company or the Selling Shareholders (except as provided
in Section 9 of this Agreement).
8. Conditions of the Obligation of the Company and the Selling
Shareholders. The obligations of the Company and the Selling Shareholders to
sell and deliver the Securities required to be delivered as and when specified
in this Agreement shall be subject to the condition that, at the Closing Date
or, with respect to the Option Shares, the date and time at which the Option
Shares are to be purchased, no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission or any state securities authority.
9. Indemnification and Contribution.
(a) The Company and the Selling Shareholders agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act or any other
federal, state or foreign statute, law or regulation, at common law or
otherwise, except to the extent such losses, claims, damages or liabilities are
finally judicially determined to have resulted from actions taken or the failure
to take action by the person claiming indemnification in bad faith or due to
gross negligence on the part of the person claiming indemnification, and the
Company and the Selling Shareholders agree to reimburse each such Underwriter
and controlling person for any legal or other expenses (including, except as
otherwise provided below, settlement expenses and fees and disbursements of
counsel) reasonably incurred by the respective indemnified parties in connection
with defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding that may be
brought against, the respective indemnified parties, in each case insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon, in whole or in part, (i) any untrue statement or
alleged untrue
27
<PAGE> 28
statement of a material fact contained in the Registration Statement in the form
originally filed or in any amendment thereto (including the Prospectus as part
thereof) or any post-effective amendment thereto, or 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 (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Shareholders contained in this Section 9(a) shall not apply to
such losses, claims, damages, liabilities or expenses if such statement or
omission was made in reliance upon and in conformity with information furnished
in writing to the Company by or on behalf of any Underwriter through the
Representatives specifically for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this Section
9(a) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Securities that is the subject
thereof (or to the benefit of any person controlling such Underwriter) if the
Company can demonstrate that at or prior to the written confirmation of the sale
of such Securities a copy of the Prospectus (or the Prospectus as amended or
supplemented) or, for this purpose, if applicable, a copy of the then most
recent Preliminary Prospectus was not sent or delivered to such person and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus or, if applicable, prior Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented) or, if applicable, the
then most recent Preliminary Prospectus, unless the failure is the result of
noncompliance by the Company with Section 4 of this Agreement. The indemnity
agreements of the Company and the Selling Shareholders contained in this Section
9(a) and the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 of this Agreement shall remain operative and
in full force and effect regardless of any investigation made by or behalf of
any indemnified party and shall survive the delivery of and payment for the
Securities. This indemnity agreement shall be in addition to any liabilities
which the Company and the Selling Shareholders may otherwise have. In no event
shall a Selling Shareholder's liability exceed the net proceeds received by such
Selling Shareholder in the offering.
(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its officers who signs the
Registration Statement, each of its directors, each other Underwriter and each
person (including each partner or
28
<PAGE> 29
officer thereof) who controls the Company or any such other Underwriter within
the meaning of Section 15 of the Securities Act and each of the Selling
Shareholders, each director of each Selling Shareholder and each person
(including each partner or officer thereof) who controls a Selling Shareholder
within the meaning of Section 15 of the Securities Act, from and against any and
all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or other federal, state or foreign statute, law or regulation
or at common law or otherwise and to reimburse each of them for any legal or
other expenses (including, except as otherwise hereinafter provided, settlement
expenses and fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any breach of
any covenant or agreement of the indemnifying Underwriter contained in this
Agreement, (ii) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof) or any post-effective amendment thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or (iii) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus or the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, but in
each case under clauses (i), (ii) and (iii) above, as the case may be, only if
such statement or omission was made in reliance upon and in connection with
information furnished in writing to the Company by or on behalf of such
indemnifying Underwriter through the Representatives specifically for use in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The Company and the Selling
Shareholders acknowledge and agree that the matters described in Section 3(h) of
this Agreement constitute the only information furnished in writing by or on
behalf of any of the several Underwriters for inclusion in the Registration
Statement or the Prospectus or in any Preliminary Prospectus. The several
indemnity agreement of each Underwriter contained in this Section 9(b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Securities. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Each person or entity indemnified under the provisions of
Sections 9(a) and 9(b) above agrees that, upon the service of a summons or other
initial legal
29
<PAGE> 30
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such Sections, it will, if a claim in
respect thereunder is to be made against the indemnifying party or parties under
this Section 9, promptly give written notice (the "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in Sections 9(a) or 9(b) above shall
be available to any person who fails to so give the Notice if the party to whom
such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related, but only to the
extent such party was materially prejudiced by the failure to receive the
Notice, and the omission to so notify such indemnifying party or parties shall
not relieve such indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of Sections 9(a) and 9(b). Any indemnifying party shall be entitled at
its own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses or rights available to such
indemnified party or parties different from or in addition to those available to
the indemnifying party or parties, then separate counsel for and selected by the
indemnified party or parties shall be entitled, at the expense of the
indemnifying parties, to conduct the defense of the indemnified parties to the
extent determined by counsel to the indemnified parties to be necessary to
protect the interests of the indemnified party or parties and (ii) in any event,
the indemnified party or parties shall be entitled to have counsel selected by
such indemnified party or parties participate in, but not conduct, the defense.
If, within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and, unless separate counsel is to be chosen by the
indemnified party or parties as provided above, the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
Sections 9(a) through 9(c) for any legal or other expenses subsequently incurred
by the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding, except that (A) the
indemnifying party or parties shall bear and pay the legal
30
<PAGE> 31
and other expenses incurred in connection with the conduct of the defense as
referred to in clause (i) of the "provided, however" clause in the preceding
sentence and (B) the indemnifying party or parties shall bear and pay such other
expenses as it or they have authorized to be incurred by the indemnified party
or parties. If, within a reasonable time after receipt of the Notice, no Notice
of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
9 but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in Section 9(a) or 9(b)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Securities or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, or actions in respect thereof,
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Shareholders and the Underwriters shall
be deemed to be in the same respective proportion as the total proceeds from the
offering of the Securities, net of the underwriting discounts, received by the
Company and the Selling Shareholders and the total underwriting discount
retained by the Underwriters bear to the aggregate public offering price of the
Securities. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 9(d) were to be determined by pro rata
allocation which does not take into account the equitable considerations
referred to in the first sentence of the first paragraph of this Section 9(d)
and to the considerations referred to in the third sentence of the first
paragraph of this Section 9(d). The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities, or actions in respect
thereof, referred to in the first sentence of the first paragraph of this
Section 9(d) shall be deemed to include
31
<PAGE> 32
any legal or other expenses incurred by such indemnified party in connection
with investigating, preparing to defend or defending against any action or claim
which is the subject of this Section 9(d). Notwithstanding the provisions of
this Section 9(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Securities purchased by
that Underwriter. For purposes of this Section 9(d), each person who controls an
Underwriter within the meaning of the Securities Act shall have the same rights
to contribution as such Underwriter, and each person who controls the Company
within the meaning of the Securities Act, each officer of the Company who signed
the Registration Statement and each director of the Company shall have the same
rights to contribution as the Company; provided, however, in each case that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute in this Section 9(d) are several in proportion to
their respective underwriting obligations and not joint.
Each party or other entity entitled to contribution agrees that
upon the service of a summons or other initial legal process upon it in any
action instituted against it in respect of which contribution may be sought, it
will promptly give written notice of such service to the party or parties from
whom contribution may be sought, but the omission to so notify such party or
parties of any such service shall not relieve the party from whom contribution
may be sought from any obligation it may have hereunder or otherwise (except as
specifically provided in Section 9(c) above).
(e) The Company and the Selling Shareholders shall not, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act is a party to
such claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each such Underwriter and each such
controlling person from any and all liability arising out of such claim, action,
suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 6(a)(ii), 6(b) and 6(c) and this Section
9 of this Agreement and that they are fully informed regarding all such
provisions. They further acknowledge that the provisions of Sections 6(a)(ii),
6(b) and 6(c) and this Section 9 of this Agreement fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement
32
<PAGE> 33
and Prospectus as required by the Securities Act, the Rules and Regulations, the
Exchange Act and the Exchange Act Rules and Regulations. The parties are advised
that federal or state policy, as interpreted by the courts in certain
jurisdictions, may be contrary to certain provisions of Sections 6(a)(ii), 6(b)
and 6(c) and this Section 9 of this Agreement and, to the extent permitted by
law, the parties hereto hereby expressly waive and relinquish any right or
ability to assert such public policy as a defense to a claim under Sections
6(a)(ii), 6(b) or 6(c) or this Section 9 of this Agreement and further agree not
to attempt to assert any such defense.
(g) No Selling Shareholder will be liable under the indemnity
agreements of this Section 9 unless and until the Underwriters have made
written demand on the Company for payment hereunder and such demand has gone
unpaid for 60 days after receipt thereof. The Company and the Selling
Shareholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each will be responsible. The parties hereby
acknowledge and agree that nothing in this Section 9(g) shall be construed to
make the Selling Shareholders guarantors of the obligations of the Company
hereunder. The Selling Shareholders acknowledge and agree that their obligations
under this Section 9 are primary, joint and several with those of the Company.
The Selling Shareholders hereby expressly waive any defenses which would be
available to them if their obligations hereunder were to be construed as those
of a guarantor.
10. Substitution of Underwriters. If for any reason one or more of the
Underwriters fails or refuses (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 7 or Section
11 of this Agreement) to purchase and pay for the number of Shares agreed to be
purchased by such Underwriter or Underwriters, the Representatives shall
immediately give notice thereof to the Company and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by the
Representatives of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon among the
Representatives and such purchasing Underwriter or Underwriters and upon the
terms set forth herein, all or any part of the Shares that such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail to make such arrangements with respect to all such Shares, the
number of shares of Shares that each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased on a
pro rata basis to absorb the remaining Shares that the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares that the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate amount of such
Shares exceeds 10% of the aggregate amount of Shares that all Underwriters
agreed to purchase under this Agreement. If the total number of shares of Shares
that the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the first 24-hour
period above referred to, to make arrangements with other underwriters or
purchasers satisfactory to the Representatives for purchase of such Shares on
the terms set forth in this Agreement. In any such case, either the
Representatives or the Company shall have the right to postpone the Closing Date
determined as provided in Section 3(d) of this Agreement for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
Section 3(d) in order that any necessary changes in the Registration Statement,
the Prospectus or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the time periods set forth above for the purchase of
all the Shares
33
<PAGE> 34
that the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting and without any
liability on the part of any nondefaulting Underwriters to the Company (except
to the extent provided in Section 9 of this Agreement). Nothing in this Section
10, and no action taken hereunder, shall relieve any defaulting Underwriter from
liability, if any, to the Company or any nondefaulting Underwriter for damages
occasioned by its default under this Agreement. The term "Underwriter" in this
Agreement shall include any persons substituted for an Underwriter under this
Section 10.
11. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as the Representatives and the Company
shall agree upon the public offering price and other terms and the purchase
price of the Securities. If the public offering price and other terms and the
purchase price of the Securities shall not have been determined prior to 5:00
p.m., New York time, on the third full business day after the Registration
Statement has become effective, this Agreement shall thereupon terminate without
liability on the part of the Company to the Underwriters (except as provided in
Section 6 or Section 9 of this Agreement). By giving notice before the time this
Agreement becomes effective, the Representatives, as representative of the
several Underwriters, may prevent this Agreement from becoming effective without
liability of any party to the other party, except that the Company shall remain
obligated to pay costs and expenses to the extent provided in Section 6 and
Section 9 of this Agreement. If the Registration Statement has been declared
effective prior to the date of this Agreement, this Agreement shall become
effective upon execution and delivery by the Representatives, the Company and
the Selling Shareholders.
(b) This Agreement may be terminated by the Representatives by
giving written notice to the Company at any time on or prior to the Closing Date
or, with respect to the purchase of the Option Shares, on or prior to any later
date on which the Option Shares are to be purchased, as the case may be, if
prior to such time any of the following has occurred or, in the Representatives'
opinion, is likely to occur: (i) after the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material change or development that has had or could reasonably be expected to
have a Material Adverse Effect and which would, in the Representatives' sole
judgment, make the offering or the delivery of the Securities impracticable or
inadvisable; or (ii) if trading in securities of the Company has been suspended
by the Commission or if trading generally on the New York Stock Exchange,
American Stock Exchange, NNM or over-the-counter market has been suspended or
minimum or maximum prices for trading have
34
<PAGE> 35
been fixed, or maximum ranges for prices for securities have been required, by
either of such exchanges, by the NASD or by the Commission; or (iii) if,
subsequent to the date hereof, there shall have been the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, court,
legislative body, agency or other governmental authority which in the
Representatives' sole judgment materially affects or may materially affect the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company and its subsidiaries taken as a whole; (iv) if,
subsequent to the date hereof, there shall have been the declaration of a
banking moratorium by federal, New York or California authorities; (v) existing
international monetary conditions shall have undergone a material change,
subsequent to the date hereof, which, in the Representatives' sole judgment,
makes the offering or delivery of the Securities impracticable or inadvisable;
or (vi) if, subsequent to the date hereof, there has occurred any material
change in the financial markets in the United States or internationally or any
outbreak of hostilities or escalation of existing hostilities or other crisis,
the effect of which in the Representatives' sole judgment make the offering or
delivery of the Securities impracticable or inadvisable. If this Agreement shall
be terminated pursuant to this Section 11, there shall be no liability of the
Company to the Underwriters (except pursuant to Section 6 and Section 9 of this
Agreement) and no liability of the Underwriters to the Company (except pursuant
to Section 9 of this Agreement).
12. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by either telecopier or telegraph and, if to
the Underwriters or the Representatives, shall be mailed, telecopied or
telegraphed or delivered to Van Kasper & Company, 600 California Street, Suite
1700, San Francisco, California, 94108, Attention: Bruce P. Emmeluth
(telecopier: (415) 954-8309), with copy to Timothy G. Hoxie, Esq., Heller Ehrman
White & McAuliffe, 333 Bush Street, San Francisco, California 97104 (telecopier:
(415) 772-6268); if to the Company, shall be mailed, telecopied, telegraphed or
delivered to it at its office at Flat C & D, 25/F Block 1, Tai Ping Industrial
Centre, 57 Ting Kok Road, Tai Po, N.T., Hong Kong, Attention: Feather Fok
(telecopier: (852) 2845-2504), with a copy to: Gregory C. Smith, Esq., Cooley
Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, California
94111-3580 (telecopier : (415) 951-3699); and if to the Selling Shareholders
shall be mailed telecopied, telegraphed or delivered to Benjamin Greenspan,
Esq., ChinaVest Limited, 160 Sansome Street, 18th Floor, San Francisco,
California 94104 (telecopier: (415) 276-8885). All notices given by telecopy or
telegraph shall be promptly confirmed by letter.
13. Persons Entitled to the Benefit of This Agreement. This Agreement
shall inure to the benefit of the Company, the Selling Shareholders, the several
Underwriters and, with respect to the provisions of Section 6 and Section 9 of
this
35
<PAGE> 36
Agreement, the several parties (in addition to the Company, the Selling
Shareholders and the several Underwriters) indemnified under the provisions of
Section 6 and Section 9 and in addition, as to Section 6, Van Kasper & Company,
and its respective personal representatives, successors and assigns (whether
such succession or assignment is by sale, assignment, merger, reverse merger,
consolidation, operation of law or, without limitation, otherwise). Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision contained herein. The term "successors and
assigns" as herein used shall not include any purchaser, as such, of any of the
Shares from the several Underwriters.
14. General. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or their respective directors or officers and (c) delivery and
payment for the Securities under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of Sections
4(f), 4(g), 4(h), 4(i) and 4(j) of this Agreement shall be of no further force
or effect.
This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which together shall constitute
one and the same instrument.
This Agreement supersedes and replaces in its entirety that certain
letter agreement, dated as of January 29, 1998, between the Company and Van
Kasper & Company.
15. Attorney-in-fact. Any person executing and delivering this Agreement
as Attorney-in-fact for any of the Selling Shareholders represents by so doing
that he or she has been duly appointed as Attorney-in-fact by such Selling
Shareholder pursuant to a validly existing and binding Power of Attorney which
authorizes such Attorney-in-fact to take such action. Any action taken under
this Agreement by an Attorney-in-fact will be binding on the Selling Shareholder
granting such Power of Attorney.
16. Jurisdiction. Governing Law. The parties agree that any litigation
arising out of or in any way related to this Agreement will be adjudicated in a
state or district court sitting in the City of San Francisco, California, and
the parties hereby consent to the jurisdiction of such court. The parties hereby
waive any right to object to such jurisdiction, including, without limitation,
any objection based on a claim of improper venue or forum non conveniens.
36
<PAGE> 37
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF CALIFORNIA.
17. Authority of the Representatives. In connection with this Agreement,
the Representatives will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by the Representatives, as representatives
of the several Underwriters, will be binding on all of the Underwriters.
37
<PAGE> 38
If the foregoing correctly sets forth your understanding, please
so indicate by signing in the space provided below for that purpose, whereupon
this letter shall constitute a binding agreement among the Company and the
several Underwriters.
Very truly yours,
ZINDART LIMITED
By:
--------------------------------------
Its:
-------------------------------------
THE SELLING SHAREHOLDERS
By:
--------------------------------------
(Attorney in fact for the Selling
Shareholders named in Schedule I
hereto)
ZIC HOLDINGS LIMITED
By:
--------------------------------------
Its:
-------------------------------------
LONGVEST MANAGEMENT LIMITED
By:
--------------------------------------
Its:
-------------------------------------
ERTL (HONG KONG) LIMITED
By:
--------------------------------------
Its:
-------------------------------------
38
<PAGE> 39
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
VAN KASPER & COMPANY
GERARD KLAUER MATTISON & CO., INC.
On behalf of each of the several
Underwriters named on Schedule II hereto
By: VAN KASPER & COMPANY
By:
-------------------------------------
Name:
Its:
39
<PAGE> 40
SCHEDULE I
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Name No. of Shares No. of Option Shares
- ---- ------------- --------------------
<S> <C> <C>
ZIC Holdings Limited 1,188,889 0
Longvest Management Limited 311,111 46,667
Ertl (Hong Kong) Limited 500,000 0
Total 2,000,000 46,667
</TABLE>
<PAGE> 41
SCHEDULE II
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------------
<S> <C>
Van Kasper & Company
Gerard Klauer Mattison & Co., Inc.
Total
</TABLE>
<PAGE> 42
EXHIBIT A
Subsidiaries of the Company
<TABLE>
<CAPTION>
Entity Jurisdiction Percent Ownership
- ------------------------------- ---------------- --------------------------------
<S> <C> <C>
Hua Yang Holdings Co., Ltd. Cayman Islands 100%
- ------------------------------- ---------------- --------------------------------
Hua Yang Printing Holdings Co., Hong Kong 100% (*)
Limited
- ------------------------------- ---------------- --------------------------------
Luen Tat Mould British Virgin 51%. Reference is made to
Manufacturing Limited Islands Note 3 of the Consolidated
Financial Statements of the
Company included in the
Registration Statement.
- ------------------------------- ---------------- --------------------------------
Onchart Industrial Limited Hong Kong 55%
- ------------------------------- ---------------- --------------------------------
Onchart Industrial Limited British Virgin 55%
Islands
- ------------------------------- ---------------- --------------------------------
Wealthy Holdings Limited British Virgin 100%
Islands
- ------------------------------- ---------------- --------------------------------
Dongguan Xinda PRC Joint Venture. Reference is
Giftware Company made to Note 3 of the
Limited Consolidated Financial
Statements of the Company
included in the Registration
Statement.
=============================== ================ =================================
</TABLE>
(*) Of the 1,000 shares of Hua Yang Printing Holdings Co., Limited issued and
outstanding, one share is held by Dennis Smith on behalf of Hua Yang Holdings
Co., Ltd; the balance of such shares are held by Hua Yang Holdings Co., Ltd.
<PAGE> 43
<TABLE>
<CAPTION>
================================== ===== =========================================
<S> <C> <C>
Guangzhou Zindart (Xin Xing) PRC Joint Venture. Reference is made to
(Giftware) Company Note 3 of the Consolidated Financial
Limited Statements of the Company included in
the Registration Statement.
- -------------------------------- - ----- -----------------------------------------
Shenzhen Huaxuan Printing Product PRC Joint Venture. Reference is made to
Co., Ltd. Note 3 of the Consolidated Financial
Statements of the Company and Note 2
of the Consolidated Financial Statements
of Hua Yang Holdings Co., Ltd.
Included in the Registration Statement.
- -------------------------------- - ----- -----------------------------------------
Guangzhou Jin Yi Advertising PRC Joint Venture. Reference is made to
Company Ltd. Note 3 of the Consolidated Financial
Statements of the Company and Note 2
of the Consolidated Financial Statements
of Hua Yang Holdings Co., Ltd.
Included in the Registration Statement.
================================== ===== =========================================
</TABLE>
<PAGE> 44
EXHIBIT B
Equity Interests of the Company and Its Subsidiaries
The Company owns 51% of Luen Tat Mould Manufacturing Limited, which in
turn owns 18% of Luen Tat Model Design Co. Ltd.
<PAGE> 1
EXHIBIT 23.1
March 10, 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 the Amendment
No. 3 to the Registration Statement on Form F-1 dated March 10, 1998
(Number 333-8134).
Very truly yours,
/s/ Arthur Andersen & Co.
