<PAGE> 1
United States Securities & Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 000-22161
Zindart Limited
(A Hong Kong Corporation)
I.R.S. Employer Identification #: Not Applicable
Flat C&D, 25/F Block 1
Tai Ping Industrial Centre
57 Ting Kok Road, Tai Po
N.T., Hong Kong
011-852-2665-6992
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock outstanding as of July 15, 1999 was
8,813,625 (including the assumed issuance of 666,667 shares of common stock
reserved for future issuance pursuant to the acquisition of Hua Yang Holdings
Co., Ltd.).
Page 1 of 13
Exhibit index Page ____
1.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE PAGE 13
</TABLE>
REPORTS TO SHAREHOLDERS
Zindart Limited (the "Company") is publishing this report on Form 10-Q in order
to provide additional information to the Company's shareholders. However, the
Company, as a foreign private issuer, is not required to publish these reports
on these forms and may discontinue doing so at any time without prior notice.
Moreover, as a foreign private issuer, the company is and will remain exempt
from Section 14(a), 14(b), 14(c), and 14(f) of the Securities Exchange Act of
1934 (the "Exchange Act"), and the Company's officers, directors and principal
shareholders are and will remain exempt from the reporting and "short-swing"
profit recovery provisions contained in Section 16 of the Exchange Act until
such time as the company ceases to be a foreign private issuer.
2.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations
Unaudited
(in thousands, average number of shares is not in dollars,
except per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended June 30, Ended June 30,
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 28,573 $ 29,367
Cost of sales (20,443) (20,227)
-------- --------
Gross profit 8,130 9,140
Selling, general and administrative expenses (5,050) (5,002)
Other income (expenses), net 311 (135)
Amortization of goodwill (170) (150)
-------- --------
Income before income taxes 3,221 3,853
Provision for income taxes (287) (314)
-------- --------
Income before minority interests 2,934 3,539
Minority interests (148) (453)
-------- --------
Net income $ 2,786 $ 3,086
======== ========
Basic earnings per share $ 0.32 $ 0.35
======== ========
Weighted average number of shares outstanding - Basic 8,814 8,772
======== ========
Diluted earnings per share $ 0.32 $ 0.35
======== ========
Weighted average number of shares outstanding - Diluted 8,845 8,839
======== ========
</TABLE>
3.
<PAGE> 4
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
As of June 30, As of March 31,
1999 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and bank deposits $ 16,461 $ 17,061
Accounts receivable, net 27,019 18,871
Bills receivable 275 256
Deposits and prepayments 1,588 1,379
Inventories, net 12,506 11,078
--------- ---------
Total current assets 57,849 48,645
Property, machinery, equipment, net 29,975 30,311
Loan receivable 2,000 --
Goodwill, net 11,786 11,955
--------- ---------
Total assets $ 101,610 $ 90,911
========= =========
Liabilities, minority interests and shareholders' equity
Current liabilities:
Accounts payable $ 9,733 $ 5,421
Receipts in advance 1,598 1,802
Accrued liabilities 15,931 12,557
Taxation payable 1,716 1,436
--------- ---------
Total current liabilities 28,978 21,216
Deferred taxation 971 971
--------- ---------
Total liabilities 29,949 22,187
--------- ---------
Minority interests 1,094 946
--------- ---------
Shareholders' equity:
Common stock 527 527
Common stock reserved and to be issued 43 43
Additional paid-in capital 38,497 38,497
Reorganization adjustment (8,180) (8,180)
Retained earnings 39,810 37,024
Cumulative translation adjustments (130) (133)
--------- ---------
Total shareholders' equity 70,567 67,778
--------- ---------
Total liabilities, minority interests and shareholders' equity $ 101,610 $ 90,911
========= =========
</TABLE>
4.
<PAGE> 5
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended June 30, Ended June 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,786 $ 3,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 170 150
Depreciation of property, machinery and equipment 1,171 1,021
Minority interests 148 450
Amortization of deferred expenditures -- 94
(Increase) decrease in operating assets:
Accounts receivable, net (8,148) (6,168)
Bills receivable (19) 55
Deposits and prepayments (209) 41
Inventories, net (1,428) 2,729
Increase (decrease) in operating liabilities:
Accounts payable 4,312 61
Receipts in advance (204) (974)
Accrued liabilities 3,374 (444)
Taxation payable 280 81
-------- --------
Net cash provided by operating activities 2,233 182
-------- --------
Cash flows from investment activities:
Acquisition of property, machinery and equipment (836) (1,264)
New loan to a customer (2,000) --
-------- --------
Net cash used in investing activities (2,836) (1,264)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 4,834
Repayment of revolving credit facility -- (16,000)
-------- --------
Net cash used in financing activities -- (11,166)
-------- --------
Effect of cumulative translation adjustments 3 (144)
-------- --------
Net decrease in cash and bank deposits (600) (12,392)
Cash and bank deposits, as of the beginning of the period 17,061 22,373
-------- --------
Cash and bank deposits, as of the end of the period $ 16,461 $ 9,981
======== ========
</TABLE>
5.
<PAGE> 6
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements have been condensed or omitted.
In the opinion of management, the accompanying financial statements include
all adjustments considered necessary to present fairly the financial
position, results of operations, and cash flows of the Company. The results
of operations for the three months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for fiscal year 2000. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K
for the fiscal year ended March 31, 1999.
2. Inventories
Inventories comprised:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
$'000 $'000
<S> <C> <C>
Raw materials 7,729 6,641
Work-in-process 3,550 3,287
Finished goods 2,278 2,212
------- -------
13,557 12,140
Less: Allowance for slow-moving and
obsolete inventories (1,051) (1,062)
------- -------
12,506 11,078
======= =======
</TABLE>
3. Comprehensive Income
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" which
establishes guidance for the reporting and display of comprehensive income
and its components. The purpose of reporting comprehensive income is to
report a measure of all changes in equity that resulted from recognized
transactions and other economic events of the period other than
transactions with stockholders. Adoption of SFAS No. 130 had no economic
impact on the Company's consolidated financial position, net income,
stockholders' equity or cash flows, although the presentation of certain
items has changed. The components of
6.
<PAGE> 7
accumulated other comprehensive income included in the accompanying
consolidated balance sheets consist of cumulative translation adjustments
as of the end of each period.
Comprehensive income and its components, net of tax, comprised:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
------ ------
<S> <C> <C>
$'000 $'000
Net income 2,786 3,086
Other comprehensive income, net of tax :
Translation adjustments 3 (144)
----- -----
Comprehensive income 2,789 2,942
===== =====
</TABLE>
4. Computation of earnings per share:
The numerator in calculating both basic and diluted earnings per share for
each period is the reported net income. The denominator is based on the
following weighted-average number of common shares:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1999 1998
------- -------
`000 `000
<S> <C> <C>
Basic 8,814 8,772
Diluted 8,845 8,839
</TABLE>
The difference between basic and diluted weighted average common shares
results from the assumption that dilutive stock options outstanding were
exercised.
7.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the statement of operations data of the
Company for the three months ended June 30, 1999 and for the same period during
the prior year.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. These statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those anticipated. These risks and uncertainties include, but are not
limited to, the Company's dependence on major customers and on parties located
in the People's Republic of China, changes in market demand for the Company's
products, economic factors that include the international financial situation in
Asia, the Company's reliance on key personnel and those other factors discussed
in the section titled "Risk Factors" and elsewhere in the Company's Form 10-K
for the fiscal year ended March 31, 1999, as well as those discussed elsewhere
in this Form 10-Q. The Company undertakes no obligation to revise these
forward-looking statements to reflect subsequent events or circumstances.
Results of Operations
The table below sets forth certain statement of operations data as a percentage
of net sales for the three months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Three Months
Ended June 30, 1999 Ended June 30, 1998
------------------ -------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 28.5% 31.1%
Selling, general and administrative 17.7% 17.0%
expenses
Operating income 10.8% 14.1%
Other income (expenses), net 1.09% (0.5%)
Amortization of goodwill 0.6% 0.5%
Income before income taxes 11.3% 13.1%
Provision for income taxes 1.0% 1.1%
Minority interests 0.5% 1.5%
Net income 9.8% 10.5%
</TABLE>
Net sales. Net sales for the three months ended June 30, 1999 were $28.6
million, a decrease of $0.8 million, or 2.7%, from the same period in 1998. The
decrease is due to the lingering effects of our customers' move to a
just-in-time inventory system, resulting in a temporary shift in the timing of
orders from our customers.
Gross Profit. Gross profit was $8.1 million for the three months ended June
30, 1999, a decrease of $1.0 million, or 11.1%, from the same period in 1998.
Gross margin was 28.5% for the three months ended June 30, 1999 as compared to
31.1% for the same period in 1998. Decrease in gross margin is due to a decrease
in margin on paper products and additional overhead cost to meet customer's
just-in-time order pattern.
8.
<PAGE> 9
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.0 million for the three months ended June 30,
1999 and 1998.
Other income (expenses), net. Other income was $0.3 million for the three
months ended June 30, 1999, an increase of $0.4 million, from the same period in
1998. Increase in other income is due to interest in the amount of $0.4 million
paid during the three months ended June 30, 1998. No interest expense was
incurred for the 1999 period.
Net income. As a result of the factors discussed above, net income was $2.8
million for the three months ended June 30, 1999, a decrease of $0.3 million, or
9.7%, from the same period in 1998.
Liquidity and Capital Resources
During the three months ended June 30, 1999, Zindart financed its
operations through cash from operations. Cash and bank deposits were $16.5
million at June 30, 1999. Cash generated from operating activities was $2.2
million for the three months ended June 30, 1999. Cash used by investing
activities was $0.9 million, primarily as a result of acquisition of property,
machinery and equipment.
Zindart has revolving lines of credit with two banks: Standard Chartered
Bank and The Hong kong and Shanghai Banking Corporation Limited. As of June 30,
1999, the Company had banking facilities with these banks of up to $16.8
million.
In May 1999, the Company entered into a credit agreement with one of its
customers, Intervisual Books Inc. ("IBI") to facilitate its acquisition of a
distributing company. The Company believes this acquisition will be beneficial
to both IBI and the Company. Under the terms of this credit agreement, the
Company agreed to provide a $2.3 million revolving credit facility to IBI, which
bears interest at a rate of 5% above LIBOR per annum and will mature in May 2000
and is secured by certain assets of IBI. The credit agreement may be extended
for an additional year in exchange for warrants to purchase IBI stock. As of
June 30, 1999, the loan due from IBI was $2.0 million.
Consistent with the industry practice, the Company offers accounts
receivable terms to its customers. This practice has created working capital
requirements that the Company generally has financed with net cash balances and
internally generated cash flow. The Company's accounts receivable balance at
June 30, 1999 was $27.0 million.
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.
9.
<PAGE> 10
Year 2000 Compliance
The Company's operations may suffer if the computer systems on which it depends
are not Year 2000 compliant. The Company has undertaken a systematic approach to
address the Year 2000 issue. It has completed an upgrade of its current computer
systems to make them Year 2000 compliant. The Company is also building up
completed inventory lists and obtaining Year 2000 compliance letters from its
suppliers in order to reduce exposure to Year 2000 problems. The Company has
also obtained backup generators to reduce its exposure to any disruption of
plant operation as a result of Year 2000 problems. In addition, the Company has
adopted general procedures in its contingency plans for the safeguard of data
and protection of communications between its Hong Kong office and factories in
the PRC. The contingency plans established are under constant review during 1999
and into 2000. Risks, assumptions and contingency measures are regularly revised
in the light of changing circumstances. During the remainder of 1999, the
Company is focusing significant effort on the preparedness and readiness of our
key suppliers and customers. The Company is considering a series of preventive
actions such as building up additional stock of major materials, pre-production
of goods which should be delivered around December 1999 and January 2000, and
performing Year 2000 audits on vendors. The Company also continues to focus on
ways of mitigating Year 2000 risk and on contingency planning, to minimize
disruption from events external to the Company's own operation. Despite these
measures, there can be no assurance that the Company will not fall victim to
Year 2000 problems.
10.
<PAGE> 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in reported market risks since last filing of
Form 10-K for the fiscal year ended March 31, 1999.
11.
<PAGE> 12
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
27.1 Financial Data Schedule
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZINDART LIMITED
/s/ FEATHER FOK
------------------------------------
Dated: August 12, 1999 By: Feather Fok
Chief Financial Officer
13.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 16,461,000
<SECURITIES> 0
<RECEIVABLES> 27,294,000
<ALLOWANCES> 2,254,000
<INVENTORY> 12,506,000
<CURRENT-ASSETS> 57,849,000
<PP&E> 29,975,000
<DEPRECIATION> 17,108,000
<TOTAL-ASSETS> 101,610,000
<CURRENT-LIABILITIES> 28,978,000
<BONDS> 0
570,000
0
<COMMON> 0
<OTHER-SE> 69,997,000
<TOTAL-LIABILITY-AND-EQUITY> 100,516,000
<SALES> 28,573,000
<TOTAL-REVENUES> 28,573,000
<CGS> 20,443,000
<TOTAL-COSTS> 20,443,000
<OTHER-EXPENSES> 5,050,000
<LOSS-PROVISION> 196,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,221,000
<INCOME-TAX> 287,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,786
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.32
</TABLE>
