-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BIQloAhkiMWPzqB5OL14mEhWjnZdwTS8KKpOiM8wsNv4gy9dRB0LiDYxf1ZRt6+k kWKKI8vuUvJSrfHc2XpezA== 0000891618-96-003076.txt : 19961217 0000891618-96-003076.hdr.sgml : 19961217 ACCESSION NUMBER: 0000891618-96-003076 CONFORMED SUBMISSION TYPE: F-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19961216 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZINDART INDUSTRIAL CO LTD CENTRAL INDEX KEY: 0001028637 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: F-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-17973 FILM NUMBER: 96681525 BUSINESS ADDRESS: STREET 1: C/O MCCUTCHEN DOYLE BROWN & ENERSEN LLP STREET 2: 3 EMBARCADERO CENTER CITY: SAN FRANCISCO STATE: CA ZIP: 94111 MAIL ADDRESS: STREET 1: C/O MCCUTCHEN DOYLE BROWN & ENERSEN LLP STREET 2: 3 EMBARCADERO CENTER CITY: SAN FRANCISCO STATE: CA ZIP: 94111 F-1 1 FORM F-1 1 REGISTRATION NO. - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ 1,400,000 AMERICAN DEPOSITARY SHARES REPRESENTING 1,400,000 ORDINARY SHARES ZINDART INDUSTRIAL COMPANY LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.) ------------------------ HONG KONG 3944 NOT APPLICABLE (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
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 1733 BROADWAY, NEW YORK, NEW YORK 10019 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ COPIES OF ALL COMMUNICATIONS SHOULD BE SENT TO: LIOR O. NUCHI, ESQ. AUGUST J. MORETTI, ESQ. DANIEL D. MEYERS, ESQ. SIMON C. LUK, ESQ. ELAN Q.G. NGUYEN, ESQ. TIMOTHY G. HOXIE, ESQ. MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP DAWN L. JUDD, ESQ. ONE EMBARCADERO PLACE HELLER EHRMAN WHITE & MCAULIFFE 2100 GENG ROAD, SUITE 200 525 UNIVERSITY AVENUE PALO ALTO, CA 94303-9173 PALO ALTO, CA 94301 (415) 846-4000 (415) 324-7000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ 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. [ ] ------------------------ CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------------------------- Ordinary Shares represented by American Depositary Shares(3)... 1,610,000 $12.00 $19,320,000 $6,662.07 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Includes (a) 1,400,000 Ordinary Shares represented by 1,400,000 ADSs that are to be sold in the Offering, and (b) 210,000 Ordinary Shares represented by 210,000 ADSs that the Underwriters may purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457. (3) A separate Registration Statement on Form F-6 has been filed with respect to the American Depositary Shares evidenced by American Depositary Receipts issuable upon deposit of the Ordinary Shares registered hereby. Each American Depositary Share will represent one Ordinary Share. ------------------------ 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 FURTHER AMENDMENT WHICH 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ZINDART INDUSTRIAL COMPANY LIMITED CROSS REFERENCE SHEET Pursuant to Rule 404(a) and Item 501(b) of Regulation S-K
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION ----------------------------------------- ----------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus........... Facing Page; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................... Inside Front Cover Page; Additional Information; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Prospectus Summary; Selected Financial Data; Risk Factors 4. Use of Proceeds.......................... Use of Proceeds, Dividends and Dividend Policy 5. Determination of Offering Price.......... Underwriting 6. Dilution................................. Dilution 7. Plan of Distribution..................... Outside Front Cover Page; Underwriting 8. Description of Securities to be Registered............................... Prospectus Summary; Description of Shares; Description of American Depositary Receipts 9. Interests of Named Experts and Counsel... Legal Matters 10(a). Information with Respect to the Registrant............................... Prospectus Summary; Use of Proceeds; Dividends and Dividend Policy; Dilution; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Description of Shares; Description of American Depositary Receipts; Shares Eligible for Future Sale; Taxation; Certain Foreign Issuer Considerations; Financial Statements 10(b). Financial Statements..................... Index to Financial Statements
3 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 , 1997 1,400,000 AMERICAN DEPOSITARY SHARES REPRESENTING 1,400,000 ORDINARY SHARES ZINDART LIMITED All of the 1,400,000 American Depositary Shares ("ADSs") offered hereby are being sold by Zindart Limited ("Zindart" or the "Company"). 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 ("Van Kasper" or the "Representative") and the several underwriters named herein (together with the Representative, the "Underwriters") (the "Offering"). Prior to this Offering, there has been no public market for the ADSs or the Shares. It is currently estimated that the initial public offering price per ADS will be between $10.00 and $12.00. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Company has applied for inclusion of the ADSs on the Nasdaq National Market upon commencement of this Offering under the symbol ZNDT. THE ADSS OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS," COMMENCING ON PAGE 8. 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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------- Per ADS............................ $ $ $ - ----------------------------------------------------------------------------------------------- Total (3).......................... $ $ $ - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities and to pay the Underwriters an amount not to exceed $280,000 as reimbursement of their expenses. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $1,300,000. (3) The Company has granted to the Underwriters a 45-day option to purchase up to 210,000 additional ADSs representing 210,000 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 and Underwriting Discount will be $ and $ , respectively. See "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. The Depositary will charge a fee of $1.50 or less per certificate for an ADS or ADSs transferred pursuant to the Deposit Agreement. See "Description of American Depositary Receipts." It is expected that delivery of the ADSs will be made against payment therefore at the office of Van Kasper & Company, San Francisco, California on or about , 1997. VAN KASPER & COMPANY THE DATE OF THIS PROSPECTUS IS , 1997 4 REPORTS TO SECURITIES HOLDERS As of the date of this Prospectus, the Company will become subject to the reporting requirements of the Securities Exchange Act of 1934 and in accordance therewith will file reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the "Securities and Exchange Commission"). 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 United States ("U.S. GAAP"). The Company currently intends to make certain summary financial information publicly available 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. CURRENCY CONVERSIONS Unless otherwise specified, 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 legal tender 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 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 or may be located outside the United States. 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 United States. The Company has appointed CT Corporation System, 1733 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 District of New York under the laws of the United States 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 United States judgments against the Company or any of its officers and directors or the experts named herein obtained in the United States in any such actions, including actions predicated upon the civil liability provisions of the United States federal securities laws. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce against them judgments obtained in United States federal or state courts, including judgments predicated upon the civil liability provisions of United States federal securities laws. 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 United States federal or state courts obtained against the Company or such persons predicated upon the civil liability provisions of United States federal or state laws or (ii) in original actions brought in the PRC or Hong Kong, claims against the Company or such persons predicated upon United States federal or state laws. 2 5 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT ARE INTENDED TO STABILIZE OR MAINTAIN THE MARKET PRICE OF THE ADSs AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ 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. ------------------------ Zindart(TM) is a trademark of the Company. This Prospectus also includes trade names and trademarks of companies other than Zindart, whose mention herein is with due recognition of and without intent to misappropriate their marks. 3 6 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 following summary is qualified in its entirety by the more detailed information and the financial statements and notes appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information contained in this Prospectus assumes that the Over-allotment Option will not be exercised. See "Underwriting." Unless otherwise indicated, all Share and per Share information in this Prospectus gives effect to the 20 for 1 stock split of the Company's Shares effected in December 1996. THE COMPANY Zindart Limited ("Zindart" or the "Company") manufactures high-quality, detailed die-cast and injection-molding products, including: (i) die-cast collectibles, (ii) collectible holiday ornaments, and (iii) action figures and miniature figurine playsets used primarily as toys. Zindart's headquarters are located in Hong Kong and its manufacturing operations are located in the neighboring Guangdong Province in the People's Republic of China (the "PRC"). In fiscal year 1996, Zindart sold its products to approximately 20 customers, many of which are the premier U.S. designers and marketers of die-cast collectibles, collectible holiday ornaments and toys. Hallmark Cards, Inc. ("Hallmark") and The Ertl Company, Inc. ("Ertl") are Zindart's two largest customers, each accounting for approximately one-third of the Company's sales in the last two fiscal years. Hallmark, a customer of the Company since 1982, is a leading U.S. designer and marketer of greeting cards and collectible holiday ornaments under the Keepsake Ornaments line, which are sold through authorized retail outlets. Ertl, a customer of the Company since 1978, is a leading U.S. designer and marketer of high-quality, die-cast scale model replicas of automobiles, trucks, planes, farm implements, construction equipment and other similar items targeted at adult collectors, equipment dealers and children. Ertl's die-cast replicas are sold through hobby shops, collectors' clubs, car and equipment dealers, toy and gift stores and other similar channels. Zindart's other customers include Mattel Inc., Sieper Werke Gmbh ("SWG"), MBI Inc. (The Danbury Mint), Revell-Monogram, Inc., a subsidiary of Hallmark ("Revell-Monogram"), Hasbro, Inc. and Tyco Toys, Inc. See "Business -- Markets, Products and Customers." Zindart seeks to develop a partnering relationship with each of its customers and to improve and expand such relationships for the parties' mutual benefit. In order to enhance these partnering relationships, in 1994 Zindart introduced its Turnkey Manufacturing Service, which enables Zindart to satisfy a customer's requirements at every stage in the production process -- from product engineering to model making, to computer-aided mold design and production, to manufacturing and packaging of the finished product. This coordinated, "one-stop" production strategy enables Zindart and its customers to shorten lead times from design to production, lower the costs of production, better control the quality and consistency of the manufactured products and better meet shipping and delivery schedules. See "Business -- Manufacturing." In February 1996, the Company completed Phase I of the construction of a large, modern facility located on a 20-acre site in HengLi, Dongguan (the "Dongguan Facility"), approximately 60 miles north of Hong Kong. Currently, the Company has approximately 1,300 employees in the Dongguan Facility. By early 1998, the Company intends to complete Phase II of the construction of the Dongguan Facility, using approximately $7 million of the net proceeds of this offering, and to close its other two manufacturing facilities. As a result, all of the Company's production is expected to be consolidated at the Dongguan Facility. Upon completion of Phase II of the construction of the Dongguan Facility, the net manufacturing area of the Dongguan Facility will be 887,000 square feet, 470,773 square feet more than Phase I's manufacturing space and double the size of the manufacturing space in the Company's original two manufacturing facilities. The Dongguan Facility will be able to accommodate 8,000 employees. See "Business -- Properties." Management intends to establish a sales, marketing and investor relations office in the U.S. in 1997. 4 7 Zindart's net sales for the fiscal year ended March 31, 1996 were $46.9 million, an increase of 27% from the prior fiscal year. Net sales for the six months ended September 30, 1996, were $32.4 million, an increase of 39% from the prior year's comparable period, and consisted of die-cast collectibles (39.9% of net sales), collectible holiday ornaments (29.3%), action figures and miniature figurine playsets (18.6%) and molds (12.2%). As a percentage of sales for the 12 months ended September 30, 1996, sales in each quarter during such period were 21.9%, 20.1%, 28.6%, and 29.4%, respectively. The lower sales figure for the quarter ended March 31, 1996 reflects the annual customary two-week factory closing for the Chinese New Year holiday. As of September 30, 1996, Zindart had orders on hand of approximately $19.6 million, compared to $17.3 million at September 30, 1995. The Company's net income for the six months ended September 30, 1996 was $2.8 million, versus $2.6 million for the prior year's comparable period. See "Summary Consolidated Financial Data." Zindart's largest shareholders are private equity funds under the management of two U.S.-based venture capital firms -- ChinaVest Group ("ChinaVest") and Advent International Corporation ("Advent") -- which funds acquired their interests in Zindart in 1993. Prior to the Offering, the funds under the management of ChinaVest indirectly owned 51.5% of the outstanding Shares of the Company, and funds under the management of Advent indirectly owned 14.9% of the outstanding Shares of the Company. See "Risk Factors -- Risks Relating to the Company -- Control by Principal Shareholders" and "Principal Shareholders." 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, its fax number is 011-852-2664-7066, and its email address is zndt@aol.com. THE OFFERING SECURITIES OFFERED......... 1,400,000 ADSs, each representing one Share. SHARES TO BE OUTSTANDING AFTER THE OFFERING......... 6,400,000 Shares. USE OF PROCEEDS............ Approximately $7,000,000 will be used to finance Phase II of the construction of the Dongguan Facility, $1,600,000 to purchase equipment, $2,400,000 to repay certain indebtedness, and $300,000 to establish a sales, marketing and investor relations office in the U.S. in 1997. The balance will be used for working capital and general corporate purposes. See "Use of Proceeds." OVER-ALLOTMENT OPTION...... The Company has granted the Underwriters an option to purchase up to an additional 210,000 ADSs solely for the purpose of covering over-allotments, if any. See "Underwriting." PROPOSED NASDAQ NATIONAL MARKET SYMBOL............ ZNDT. 5 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables present summary consolidated financial information derived from the consolidated financial statements of the Company and certain other data, all of which have been prepared in conformity with U.S. GAAP. See also "Business," "Selected Consolidated Financial and Other Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto appearing elsewhere herein.
SIX MONTHS ENDED YEARS ENDED MARCH 31 SEPTEMBER 30, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ------- INCOME STATEMENT DATA: Net sales.................................. $29,116 $35,603 $35,583 $36,879 $46,930 $23,251 $32,398 Gross profit............................... 7,037 8,294 10,546 11,235 12,814 6,469 7,979 Operating income........................... 2,178 3,214 4,195 4,429 6,316 3,238 3,817 Interest income (expense) net.............. (7) (1) (21) 91 (194) 35 (460) Other income (expense), net................ 52 122 80 492 (416) 7 122 Income before income taxes................. 2,223 3,335 4,254 5,012 5,706 3,280 3,479 Income before minority interests........... 2,004 3,033 3,818 4,529 5,218 2,977 3,195 Minority interests(1)...................... 0 0 83 337 622 405 425 ------- ------- ------- ------- ------- ------- ------- Net income................................. $ 2,004 $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 2,572 $ 2,770 ======= ======= ======= ======= ======= ======= ======= Earnings per share(2)...................... $ 0.40 $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 0.51 $ 0.55 ======= ======= ======= ======= ======= ======= ======= Weighted average number of shares.......... 5,000 5,000 5,000 5,000 5,000 5,000 5,000 ======= ======= ======= ======= ======= ======= =======
AS OF AS OF MARCH 31, 1996 SEPTEMBER 30, 1996 -------------- --------------------------- ACTUAL ACTUAL AS ADJUSTED(3) -------------- -------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,294 $ 4,253 $ 6,637 Working capital............................................. 3,401 5,764 9,570 Property, plant and equipment, net.......................... 10,800 11,216 19,816 Total assets................................................ 31,710 36,220 46,826 Short-term debt(4).......................................... 8,899 7,530 6,108 Long-term debt and capital lease obligations................ 2,128 2,085 1,091 Shareholders' equity........................................ 11,608 14,378 27,400
- --------------- (1) Certain third parties own minority equity interests in the Company's subsidiaries. See "Business -- Subsidiaries. (2) Earnings per share is computed by dividing net income for each year by 5,000,000, the weighted average number of ordinary shares outstanding during the years or periods on the basis that the 20 for 1 stock split had been consummated prior to the years or periods presented. (3) As adjusted to reflect the sale of 1,400,000 ADSs at an assumed public offering price of $11.00 per ADS and the application of the net proceeds therefrom. See "Use of Proceeds." (4) Includes current portions of long-term debt and capital lease obligations. 6 9 ORGANIZATION OF THE COMPANY The following chart shows the organization of the Company, its principal shareholders and subsidiaries prior to giving effect to the Offering. [LOGO] OPERATING STRUCTURE The following chart shows the operating structure of the Company's three manufacturing facilities. [LOGO] 7 10 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. RISKS RELATING TO THE COMPANY Dependence on Two Major Customers. Sales to two major customers -- Hallmark and Ertl -- account for a majority of the Company's total net sales. Sales to these two customers as a percentage of the Company's total net sales during the fiscal years ended March 31, 1994, 1995 and 1996 were approximately 66.3%, 63.3% and 52.9%, respectively. The Company's dependence on these two 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 either one of its major customers 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. While these purchase orders may be cancelled by the customer, to date, such cancellations have not been significant in the aggregate. Except for these purchase orders, the Company has no written purchase agreements with its customers relating to the sale of products. 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 collective product lines would impair the Company's results of operations. The die-cast collectible, collectible holiday ornament and toy 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. Accordingly, there can be no assurance that the 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 United States, 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 and toys. Any downturn in the U.S. economy could have a material adverse effect on the Company's business, financial condition and results of operations. Competition. The Company expects significantly increased competition, both from existing and new competitors. Some of these competitors may have significantly greater financial, technical, manufacturing and marketing resources than the Company. The ability of the Company to compete successfully depends, in part, upon the Company's ability to maintain and increase demand for its manufacturing services and increase production capacity to meet such increased demand. There can be no assurance that the Company will be able to compete successfully in the future or that the Company will not be subject to increased price competition. See "Business -- Competition." In addition, the Company's major customers operate in highly competitive markets. There can be no assurance that these customers will be able to continue to enjoy market acceptance of their products in the face of such competition. Any failure by the Company's major customers to remain competitive could have a material adverse effect on the Company's business, financial condition and results of operations. Lack of Barriers to Entry. The Company does not believe that there are any significant barriers to entry into the manufacture of die-cast collectibles, collectible holiday ornaments and toys, although the Company 8 11 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. There can be no assurance that additional participants will not enter the market or that the Company could effectively compete with such entrants. Any failure by the Company to compete effectively with such new entrants would have a material adverse effect on the Company's business, results of operations and financial condition. Ability to Manage Growth and Expansion. The Company has experienced significant growth over the past few years and is expanding its manufacturing operations. The management of the Company's growth 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 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 growth 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. Reliance on New Production Facility. Historically, the Company conducted its manufacturing operations in two facilities in Guangzhou. In February 1996, the Company completed Phase I of the construction of the Dongguan Facility. By early 1998, the Company intends to complete Phase II of the construction of the Dongguan Facility, to consolidate all manufacturing operations at the Dongguan Facility and to close the other two facilities. In addition, the Company intends to transfer some administrative functions from the Hong Kong headquarters to the Dongguan Facility. See "Business -- Properties." Although the Company believes that it will be able to complete Phase II of the construction of the Dongguan Facility on schedule, no assurance can be given that such construction will be completed or completed on schedule. Any material delay in completing, or the inability to complete, Phase II of the construction of the Dongguan Facility would have a material adverse effect on the Company's business, financial condition and results of operations. Consolidating the Company's operations into the Dongguan Facility will require the Company's management to coordinate a wide array of key decisions and physical logistics, including the relocation of a majority of the Company's factory employees and equipment. Failure to timely and properly execute these tasks could have a material adverse impact on the Company'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 the Dongguan Facility or if 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. The Company maintains business interruption insurance. A significant portion of the benefits to be obtained from consolidating operations in the Dongguan Facility depends on the Company being able to terminate in a cost-effective and timely manner its obligations relating to the Company's other two manufacturing facilities. The Company does not have the right to terminate at will these agreements and thus must depend on the cooperation of other parties to attain this objective. There can be no assurance that the Company will be able to terminate these agreements on a timely basis or without incurring substantial costs. Any additional costs associated with terminating such agreements or otherwise consolidating operations at the Dongguan Facility could have a material adverse effect on the Company's business, financial condition and results of operations. In the event that the Company is unable to capitalize its 9 12 relocation costs, the Company will have to expense such costs, which may have an adverse effect on the Company's reported net income. Dependence on PRC Parties. The Company's oldest factory, located in the Tian He district of Guangzhou, is owned by a local economic development authority (the "Subcontractor") and operated under a subcontract operating agreement. The factory located in the Henan district of Guangzhou and the Dongguan Facility are each owned by Sino-foreign contractual joint ventures in which the Company has a majority interest. The other parties to these contractual joint ventures are entities (the "PRC Co-Venturers") that are controlled by PRC governmental bodies. The efficient and cost-effective operation of these facilities depends upon the cooperation and support of the Subcontractor and the PRC Co-Venturers (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 with the PRC Parties. Any lack of cooperation by 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. Dependence on Raw Materials. The Company uses zinc alloy and various plastic resins in its manufacturing operations. The Company's financial performance is dependent to a substantial extent on the cost of such raw materials. The capacity, 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 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. The Company has no formal written agreements with its suppliers. The Company purchases zinc alloy and over 12 different types of plastics from approximately 10 major suppliers and 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 any of 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 could 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. 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. See "Management." Successful expansion of the Company's business will require additional management resources and may require the hiring of additional senior management personnel. Potential Product Liability. The Company is engaged in a business that could result in possible claims for injury or damage resulting from its products. The Company is not currently 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 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 United States, as well as in Canada and Europe. The Company relies on its 10 13 customers to design products that comply with such safety standards and to test the products to ensure compliance with applicable regulatory safety standards. The Company has established a strong quality assurance program to meet the Company's objective of conforming to its customers' design specifications and delivering high-quality, safe products to its customers. 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 appropriate 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 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 business, financial condition and results of operations of the Company. Reduced Revenue in the Fourth Fiscal Quarter, Possible Fluctuation in Quarterly Results. The Company ceases production for a two-week period during January or February of each year due to the Chinese New Year holiday, which cessation in the past has caused revenue during the fourth fiscal quarter of each year to be somewhat lower than revenue during the other three quarters. The Company may also experience fluctuations in quarterly sales and related net income compared with the prior year due to the timing of receipt of orders from customers for die-cast collectibles, toys and molds and subsequent shipment of such products. As a result, it is possible that the Company may experience quarterly variations in operating results. Accordingly, the trading price of the Company's ADSs may be subject to fluctuations in response to quarterly variations in the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Control by Principal Shareholders. Following this Offering, Zindart Pte Limited, a Singapore corporation ("Zindart Singapore") will own approximately 78.1% of the outstanding Shares (approximately 75.6% if the Over-allotment Option is exercised in full). As majority shareholder, Zindart Singapore will have the ability to control the election of the Company's directors and most corporate actions of the Company. Zindart Singapore is controlled by ZIC Holdings Limited, a Cayman Islands corporation ("ZICHL"), which owns approximately 76.0% of the shares of Zindart Pte Limited. ZICHL, in turn, is currently controlled by limited life private equity funds managed by ChinaVest (the "ChinaVest private equity funds"), which own in the aggregate approximately 67.8% of the ordinary shares of ZICHL and which therefore will be indirectly in control of the Company. See "Principal Shareholders." Subject to agreements with the Representative not to sell or dispose any shares of the Company for 180 days following the closing of the Offering, these funds have the right, acting in their own interest, to sell or dispose of such shares as they see fit, subject to applicable law. Further, since these funds must dissolve by 2003, these funds will need to liquidate their investments, whether by way of sale, distribution or otherwise, prior to that date. Accordingly, although the Company has been advised that ChinaVest has no present intention to cause these funds to sell or dispose of their investments in the Company at any particular time, no assurance can be given that any current shareholder of the Company, including the ChinaVest private equity funds, will maintain any interest in the Company beyond the lock-up period. Taxation. During the past five years, under applicable Hong Kong and PRC tax laws, only 50% of the Company's profits have been subject to tax in Hong Kong and the Company has been exempt from taxation in the PRC pursuant to a tax holiday, which tax holiday will change from a complete exemption to a partial exemption, then to no exemption over time based on profitability of the Company's joint ventures. See "Taxation -- Hong Kong Taxation" and "-- PRC Taxation." As a result, during the past five years, the Company has enjoyed a relatively low effective tax rate of between 7.0% and 9.0%. No assurance can be given that the Company's effective tax rate will not increase in the future. In the event that certain special United States federal income tax rules are applicable to the Company, there is a risk that holders of ADSs who are U.S. taxpayers may be required to recognize income prior to the receipt of dividends or distributions from the Company. See "Taxation -- United States Federal Income Taxation -- Special United States Federal Income Tax Considerations." Tariffs and Quotas. Most of the Company's products are shipped to customers in the United States. The United States 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 have an adverse effect on the Company's 11 14 business, financial condition and results of operations and its ability to continue to export products to the United States at current or increased levels. The Company cannot predict what regulatory changes may occur, if any, or the type or amount 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 United States. 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 and oil-based paints. 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 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 believes that it has complied, and intends to continue to comply, with all applicable environmental protection laws and regulations. There can be no assurance that the Company will at all future times remain in compliance with such laws and regulations and 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 factory employees are women aged 18-24 who come from various rural regions 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. Accordingly, 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 communities 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 strife. Union organizing and worker unrest are not common in the PRC. No assurance can be given, however, 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. Lack of Dividends. The Company does not contemplate the payment of dividends in the foreseeable future. In addition, the Company's lines of credit prohibit the payment of dividends in excess of 25% of net income. See "Dividends and Dividend Policy." Dilution. Purchasers of ADSs offered hereby will incur immediate and substantial dilution in the net tangible book value per Share of the ADSs from the initial public offering price. See "Dilution." No Assurance of Public Market; Possible Volatility of Market Price of ADSs. Prior to this Offering, there has been no public trading market for the ADSs or the Shares. There can be no assurance that an active trading market for the ADSs will develop after this Offering or that, if developed, it will be sustained. Further, there will be no public market for the Shares. In the past several years, many foreign issuers with market capitalizations similar to that of the Company after this Offering have been unable to sustain an active trading market for their securities. The initial public offering price for the ADSs being sold by the Company in this Offering has been determined by negotiations between the Company and the Representative and does not necessarily reflect the Company's book value or other established criteria of value. The market price for the ADSs following this offering may be highly volatile, as has been the case with the securities of other companies in emerging businesses. The market price of the ADSs may fluctuate substantially in response to various factors affecting the collectible, holiday ornament and toy markets generally. Shares Eligible for Future Sale. No prediction can be made as to the effect, if any, that future sales of ADSs, or the availability of ADSs for future sale, will have on the market price of the ADSs prevailing from time to time. 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. See "Shares Eligible For Future Sale." The Company and 12 15 its shareholder have agreed not to sell or otherwise dispose of any ADSs for a period of 180 days after the closing of this Offering without the prior written consent of the Representative. See "Underwriting." 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. Exchange Rate Risk The Company's sales are denominated in U.S. 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. 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 U.S. $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 exchange rate system produced a significant devaluation of the Renminbi from $1.00 to Rmb 5.7 to approximately $1.00 to Rmb 8.7. 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 9.4%, 8.5%, 8.1% and 8.8% in 1992, 1993, 1994 and 1995, respectively. The annual inflation rate in the PRC was approximately 14.7%, 21.7% and 14.8% in 1993, 1994 and 1995, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." No assurance can be given that inflation in Hong Kong or the PRC will not have a material adverse effect on the business, financial condition and results of operations of the Company in the future. 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 will be transferred from the United Kingdom to the PRC, and Hong Kong will become 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 will have a high degree of autonomy except in foreign affairs and defense. Under the Basic Law, the Hong Kong SAR is to have 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 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 impact. 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 13 16 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, 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 United States, pursuant to which the United States imposes the lowest applicable tariffs on PRC exports to the United States. The United States 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 would adversely affect the Company's business by raising prices for its products in the United States, which could possibly result in a reduction in demand for the Company's products by its U.S. customers. Furthermore, trade friction between the PRC and the United States 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. In addition, 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. 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. 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. 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 United States. 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, 14 17 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. 15 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the ADSs offered hereby are estimated to be approximately $13,000,000 at an assumed initial public offering price of $11.00 per ADS, after deducting offering expenses and underwriting discounts, which are estimated to be approximately $2,400,000. The net proceeds will be applied as follows: (i) approximately $7,000,000 to finance Phase II of the construction of the Dongguan Facility; (ii) approximately $2,400,000 to reduce the outstanding amount of long-term bank loans and an equipment lease (including current portions thereof); (iii) approximately $1,600,000 for plant and equipment purchases; and (iv) approximately $300,000 to establish a combined sales and marketing and investor relations office in the U.S. in 1997. The balance of the proceeds will be used for general working capital. The Company intends to apply the amount specified in clause (ii) above as follows:
APPROXIMATE INTEREST RATE OF MATURITY DATE OF AMOUNT LOAN/LEASE LOAN/LEASE ----------- ---------------- ---------------- $ 388,000 10.0% January 1997 388,000 10.0% February 1997 218,000 9.5% December 1998 145,000 9.5% December 1998 243,000 9.5% March 1999 1,034,000 9.5% May 1999 ----- Total.... $ 2,416,000
Pending application of the net proceeds of this Offering to the uses 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. DIVIDENDS AND DIVIDEND POLICY The Company intends to retain earnings for expansion of its operations in accordance with its business strategy and does not contemplate the payment of dividends in the foreseeable future. In addition, the Company's present lines of credit prohibit the payment of dividends in excess of 25% of net income. The Company currently intends that dividends, if paid, would be paid to holders of ADSs in U.S. Dollars. See "Description of Shares -- Dividends" and "Description of American Depositary Receipts -- Dividends, Other Distributions and Rights." In the fiscal years 1992 through 1995, the Company 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 1996, the Company 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 the Company. The Company did not declare a cash dividend in FY 1996. 16 19 DILUTION As of September 30, 1996, the net tangible book value per Share of the Company was approximately $14,306,000, or $2.86 per Share. Net tangible book value per Share is determined by dividing the tangible net worth of the Company (total assets less liabilities) by the number of Shares outstanding. Without taking into account any change in such net tangible value after September 30, 1996, other than to give effect to the sale of 1,400,000 ADSs offered hereby (assuming an offering price of $11.00 per Share), and after deducting estimated offering expenses and underwriting discounts, the pro forma net tangible book value per Share as of September 30, 1996, on a consolidated basis, would have been approximately $27,328,000, or $4.27 per Share, representing an immediate dilution of $6.73 per Share to persons purchasing ADSs in this Offering. The following table illustrates this per ADS dilution: Initial public offering price per Share........................... $ 11.00 Net tangible book value per Share as of September 30, 1996........ $ 2.86 Increase per Share attributable to this offering.................. 1.41 ------- Pro forma net tangible book value per Share after offering........ 4.27 -------- Dilution to purchasers of ADSs in the offering.................... $ 6.73 ========
The computations in the table set forth above assume that the Over-allotment Option is not exercised. If the Over-allotment Option is exercised in full, the pro forma net tangible book value at September 30, 1996 would have been $29,476,000 or $4.46 per Share, resulting in dilution to purchasers of ADSs of $6.54 per Share. The following table summarizes, on a pro forma basis at September 30, 1996, the number of Shares or ADSs purchased, the total consideration paid to the Company, and the average price per Share or ADS paid by the existing shareholders and by new investors purchasing ADSs in this Offering at an initial public offering price of $11.00 per Share.
SHARES OR ADSS AVERAGE PURCHASED TOTAL CONSIDERATION PRICE --------------------- --------------------- PER NUMBER PERCENT AMOUNT PERCENT SHARE --------- ------- ----------- ----- ------ Existing Shareholders.......... 5,000,000 78.1% $14,378,000 48.3% $ 2.88 New investors (1).............. 1,400,000 21.9% 15,400,000 51.7% 11.00 --------- Total................ 6,400,000 100.0% $29,778,000 100.0% =========
- --------------- (1) Assuming no exercise of the Over-allotment Option. If such Over-allotment Option were exercised in full, the Number of Shares or ADSs Purchased would be 1,610,000, the Percent of Shares or ADSs Purchased would be 24.4% and the aggregate Amount of Total Consideration would be $32,088,000. 17 20 CAPITALIZATION The following table sets forth the pro forma consolidated capitalization of the Company at September 30, 1996, as adjusted to give effect to the sale by the Company of the ADSs offered hereby and the application of the estimated net proceeds to be received by the Company therefrom, at an initial offering price of $11.00 per ADS and after deducting the underwriting discounts and estimated 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 more detailed Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus.
AT SEPTEMBER 30, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (DOLLARS IN THOUSANDS) Short-term debt: Short-term bank borrowings........................................... $ 5,555 $ 5,555 Current portion of long-term loans................................... 811 165 Current portion of capital lease obligations......................... 1,164 388 ------ ------ Total short-term debt........................................ 7,530 6,108 ------ ------ Long-term debt: Long-term bank loans................................................. 1,336 342 Capital lease obligations, long-term................................. 749 749 ------ ------ Total long-term debt......................................... 2,085 1,091 Minority interest...................................................... 1,026 1,026 Shareholders' equity: Ordinary shares; 5,000,000 shares issued and outstanding; 6,400,000 shares issued and outstanding, as adjusted.............. 323 414 Additional paid-in capital........................................... -- 12,931 Retained earnings.................................................... 14,055 14,055 ------ ------ Total shareholders' equity................................... 14,378 27,400 ------ ------ Total capitalization................................................... $17,489 $29,517 ====== ======
18 21 SELECTED FINANCIAL DATA The selected consolidated income statement data for the fiscal years ended March 31, 1994, 1995 and 1996 and the selected consolidated balance sheet data as of March 31, 1995 and 1996 set forth below have been prepared in accordance with U.S. GAAP and are derived from the consolidated financial statements and notes thereto included elsewhere in this Prospectus which have been audited by Arthur Andersen & Co., independent public accountants, whose report thereon is also included elsewhere in this Prospectus. The selected consolidated income statement data for the fiscal years ended March 31, 1992 and 1993 and the selected consolidated balance sheet data as of March 31, 1992, 1993 and 1994 not included elsewhere in this Prospectus have been prepared in accordance with U.S. GAAP and are derived from Zindart's audited financial statements. The selected consolidated income statement data for the six months ended September 30, 1995 and 1996 and the selected balance sheet data as of September 30, 1996, are unaudited, but in the opinion of management, such unaudited consolidated financial statements include all adjustments necessary for a fair presentation of such data. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and the notes thereto and other financial information, which appears elsewhere in this Prospectus.
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------- --------------------- 1992 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales..................................... $29,116 $35,603 $35,583 $36,879 $46,930 $23,251 $32,398 Cost of goods sold............................ 22,079 27,309 25,037 25,644 34,116 16,782 24,419 ------ ------ ------ ------ ------ ------ ------ Gross profit.................................. 7,037 8,294 10,546 11,235 12,814 6,469 7,979 Selling, general and administrative expenses.................................... 4,859 5,080 6,351 6,806 6,498 3,231 4,162 Operating income.............................. 2,178 3,214 4,195 4,429 6,316 3,238 3,817 Interest expense.............................. 211 165 150 137 402 107 517 Interest income............................... 204 164 129 228 208 142 57 Other income (expense), net................... 52 122 80 492 (416) 7 122 ------ ------ ------ ------ ------ ------ ------ Income before income taxes.................... 2,223 3,335 4,254 5,012 5,706 3,280 3,479 Provision for income taxes.................... 219 302 436 483 488 303 284 ------ ------ ------ ------ ------ ------ ------ Income before minority interests.............. 2,004 3,033 3,818 4,529 5,218 2,977 3,195 Minority interests(1)......................... 0 0 83 337 622 405 425 ------ ------ ------ ------ ------ ------ ------ Net income.................................... $ 2,004 $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 2,572 $ 2,770 ====== ====== ====== ====== ====== ====== ====== Earnings per share(2)......................... $ 0.40 $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 0.51 $ 0.55 ====== ====== ====== ====== ====== ====== ====== Dividends per share(3)........................ $ 0.44 $ 0.29 $ 0.39 $ 0.21 $ 0.60 $ 0.60 $ -- ====== ====== ====== ====== ====== ====== ====== Weighted average number of shares............. 5,000 5,000 5,000 5,000 5,000 5,000 5,000 ====== ====== ====== ====== ====== ====== ======
AS OF SEPTEMBER 30, 1996 AS OF MARCH 31, --------------------- ----------------------------------------------- AS 1992 1993 1994 1995 1996 ACTUAL ADJUSTED(4) ------- ------- ------- ------- ------- ------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents..................... $ 2,692 $ 3,912 $ 4,068 $ 4,123 $ 3,294 $ 4,253 $ 6,637 Working capital............................... 2,621 3,775 3,210 5,399 3,401 5,764 9,570 Property, plant and equipment, net............ 1,528 1,882 2,545 3,902 10,800 11,216 19,816 Total assets.................................. 10,445 13,905 16,846 23,070 31,710 36,220 46,826 Short-term debt(5)............................ 1,528 1,052 1,020 1,780 8,899 7,530 6,108 Long-term debt and capital lease obligations................................. 566 745 420 859 2,128 2,085 1,091 Shareholders' equity.......................... 3,552 5,112 6,887 10,011 11,608 14,378 27,400
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------- --------------------- 1992 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ----------- (IN THOUSANDS) OTHER DATA: Capital expenditures.......................... $ 548 $ 1,086 $ 1,491 $ 3,197 $ 7,341 $ 3,748 $ 1,237
- --------------- (1) Certain third parties own minority equity interests in the Company's manufacturing and mold-making operations in the PRC. See "Business -- Subsidiaries." (2) Earnings per share is computed by dividing net income for each year by 5,000,000, the weighted average number of shares of common stock outstanding during the years/periods, on the basis that a 20 for 1 stock split had been consummated prior to the years/periods presented. (3) Dividends per Share are computed by dividing the total amount of dividends for such year by 5,000,000, the weighted average number of shares of common stock outstanding during the years or periods, on the basis that the 20 for 1 stock split had been consummated prior to years or periods presented. For the six months ended September 30, 1995, and accordingly during the year ended March 31, 1996, the Company distributed a dividend in kind of approximately $2,994,000 of a loan receivable and amounts due from a related company. (4) As adjusted to reflect the sale of 1,400,000 ADSs at an assumed public offering price of $11.00 per ADS and the application of the net proceeds therefrom. See "Use of Proceeds." (5) Includes current portions of long-term debt and capital lease obligations. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE HEREIN. The fiscal 1996 period is referred to herein as FY 1996, the fiscal 1995 period is referred to herein as FY 1995 and the fiscal 1994 period is referred to herein as FY 1994. OVERVIEW The Company manufactures a wide range of high-quality, detailed die-cast and injection-molding products including (i) die-cast collectibles, (ii) collectible holiday ornaments and (iii) action figures and miniature figurine playsets used primarily as toys. In fiscal 1996, the Company manufactured products for approximately 20 customers, most of which are leading U.S. marketers. Two of these customers accounted for a majority of the Company's production, as they have for the past five fiscal years. The Company's dependence on a relatively small number of customers may increase the volatility of the Company's net sales in response to changes in the level of demand by such customers for the Company's products. Such demand can vary both as a result of fluctuations in the business of these customers as well as changes in the proportion of such customers' needs for the manufactured products supplied by the Company. As a result, the Company's net sales can vary from period to period. The Company intends to seek to reduce its exposure to such fluctuations in financial performance by expanding its customer base and product lines. However, the Company is committed to strengthening its relationships with key customers since the Company believes such relationships are vital to its long-term success, even if they can expose the Company to short-term variations in financial performance. Notwithstanding fluctuations in net sales, the Company has, through emphasis on improving efficiency, managed to control costs such that the Company has experienced steady growth in both operating income as a percentage of net sales and net income. For example, for fiscal years 1992 through 1996, operating income as a percentage of net sales increased from 7.5% to 13.5%; for the same period, net income grew from $2.0 million to $4.6 million, a compounded annual growth rate of 23.1%. While on an absolute basis operating and net income may increase in FY 1997 as compared with FY 1996, the Company expects that, as a percentage of net sales, each is likely to be below FY 1996 percentages of net sales due primarily to expenses related to operating the Dongguan Facility at less than full capacity and training new employees. RESULTS OF OPERATIONS The table below sets forth certain statement of operations data as a percentage of net sales for the fiscal years ended March 31, 1994, 1995 and 1996 and the six months ended September 30, 1995 and 1996.
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ------------------------- --------------- 1994 1995 1996 1995 1996 ----- ----- ----- ----- ----- Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit....................................... 29.6% 30.5% 27.3% 27.8% 24.6% Selling, general, and administrative expenses...... 17.9% 18.5% 13.8% 13.9% 12.8% Operating income................................... 11.8% 12.0% 13.5% 13.9% 11.8% Income before income taxes......................... 12.0% 13.6% 12.2% 14.1% 10.7% Provision for income taxes......................... 1.2% 1.3% 1.0% 1.3% 0.9% Minority interests................................. 0.2% 0.9% 1.3% 1.7% 1.3% Net income......................................... 10.5% 11.4% 9.8% 11.1% 8.5%
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1995 Net Sales. Net sales for the six months ended September 30, 1996 totaled $32,398,000, an increase of $9,147,000, or 39.3%, from $23,251,000 in the six months ended September 30, 1995. This increase resulted from an increase in sales volume in all finished product categories. Sales of the Company's die-cast collectibles 20 23 increased from $9,128,000 to $12,954,000, or 41.9%, due to increased sales to Ertl. Sales of collectible holiday ornaments increased from $6,763,000 to $9,483,000, or 40.2%. Sales of action figures and miniature figurine playsets increased from $2,589,000 to $6,038,000, or 133.2%, primarily due to sales to two new customers. Mold sales decreased by 17.8% from $4,771,000 to $3,923,000, because during the period ended September 30, 1996 the Company's mold-making subsidiaries focused on manufacturing molds for the Company's products rather than for sale to third parties. Gross Profit. Gross profit during the six months ended September 30, 1996 totaled $7,979,000, an increase of $1,510,000, or 23.3%, from $6,469,000 in the six months ended September 30, 1995. The increase in gross profit was principally due to the increase in sales volume in all finished product categories. Gross profit as a percentage of net sales ("Gross Margin") decreased from 27.8% to 24.6% because of costs associated with operating the Dongguan Facility at less than full capacity and training new employees. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for the six months ended September 30, 1996 totaled $4,162,000, compared to $3,231,000 for the six months ended September 30, 1995, an increase of $931,000, or 28.8%, as a result of increased sales and a corresponding increase in selling expenses. As a percentage of net sales, SG&A declined from 13.9% to 12.8%. Operating Income. Income from operations totaled $3,817,000 for the six months ended September 30, 1996, compared to $3,238,000 for the six months ended September 30, 1995, an increase of $579,000, or 17.9%, due to the factors described above. Income from operations as a percentage of net sales decreased from 13.9% to 11.8%. Interest Expense. Interest expense totaled $517,000 for the six months ended September 30, 1996 compared to $107,000 for the six months ended September 30, 1995, an increase of $410,000. The increase in interest expenses resulted from the Company's assumption of additional indebtedness to finance Phase I of the construction of the Dongguan Facility. Approximately $2,400,000 of the proceeds from this Offering will be used to repay indebtedness. Provision for Income Taxes. The effective tax rate remained relatively constant at approximately 8.2% of pre-tax income in FY 1996, and 9.2% in FY 1995, respectively. Net Income. Net income during the six months ended September 30, 1996 was $2,770,000, an increase of $198,000, or 7.7% from $2,572,000 for the six months ended September 30, 1995, due to the factors stated above. COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 1996 AND 1995 Net Sales. Net sales in FY 1996 totaled $46,930,000, an increase of $10,051,000, or 27.3%, from $36,879,000 in FY 1995. This growth resulted from an increase in sales volume in all finished product categories. Sales of die-cast collectibles increased by 13.9%, from $17,500,000 to $19,934,000. Sales of collectible holiday ornaments increased by 10.0%, from $11,496,000 to $12,650,000. Sales of action figures and miniature figurine playsets increased by 63.9%, from $3,492,000 to $5,722,000. Mold sales increased by 96.4%, from $4,391,000 to $8,624,000, as a result of the Company'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 the Company, as well as an increase in Luen Tat Mould's sales. Gross Profit. Gross profit totaled $12,814,000 in FY 1996, an increase of $1,579,000, or 14.1%, from $11,235,000 in FY 1995. Gross Margin was 27.3% in FY 1996 compared to 30.5% in FY 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 the Company's other products. Sales of die-cast collectibles decreased from 47.5% of net sales to 42.5% of net sales, and sales of collectible holiday ornaments decreased from 31.2% of net sales to 27.0% of net sales. Sales of action figures and miniature figurine playsets increased from 9.5% of net sales to 12.2% of net sales, and sales of molds decreased from 19.6% of net sales to 18.4% of net sales. Selling, General and Administrative Expenses. SG&A expenses totaled $6,498,000 in FY 1996 compared to $6,806,000 in FY 1995, a decrease of $308,000, or 4.5%, as a result of the transfer of certain 21 24 engineering and administrative functions from Hong Kong to the PRC. SG&A expenses were 13.8% of net sales in FY 1996 as compared to 18.5% of net sales in FY 1995, a decrease of 4.7%. Operating Income. Income from operations totaled $6,316,000 in FY 1996 compared to $4,429,000 in FY 1995, an increase of $1,887,000, or 42.6%. The operating margin increased from 12.0% of net sales in 1995 to 13.5% of net sales in 1996. Interest Expense. Interest expense increased from $137,000 in FY 1995 to $402,000 in FY 1996 because the Company increased borrowings to undertake the construction of Phase I of the Dongguan Facility. Provision for Income Taxes. The effective income tax rate was 8.6% in FY 1996 and 9.6% in FY 1995. The effective rate decreased because profit contributions from subsidiaries of the Company are not taxable and the proportion of profits contributed from such subsidiaries was higher in FY 1996 than in FY 1995. Net Income. Net income totaled $4,596,000 in FY 1996, an increase of $404,000, or 9.6% from $4,192,000 for FY 1995. COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 1995 TO FISCAL 1994 Net Sales. Net sales in FY 1995 totaled $36,879,000, an increase of $1,296,000, or 3.6%, from $35,583,000 in FY 1994. During FY 1995, the Company did not emphasize increasing sales revenues, but instead focused on the introduction of its Turnkey Manufacturing Service, implementing cost control measures and increasing production efficiency. Also during FY 1995 sales of die-cast collectible products decreased by $939,000, or approximately 5.1% from $18,439,000 to $17,500,000 in FY 1995 due to a reduction in sales to a major customer. Sales of collectible holiday ornaments increased by $1,510,000, or approximately 15.1% from $9,986,000 to $11,496,000 in FY 1995. Sales of action figures and miniature figurine playsets increased by $466,000 or approximately 15.4%, from $3,026,000 to $3,492,000 in FY 1995. Mold sales increased 6.3% from $4,132,000 in 1994 to $4,391,000 in FY 1995. Gross Profit. Gross profit totaled $11,235,000 in FY 1995, an increase of $689,000, or 6.5%, from $10,546,000 in FY 1994. The Gross Margin increased from 29.6% in FY 1994 to 30.5% in FY 1995, principally as a result of a higher percentage of sales of collectible holiday ornaments relative to other products and an improvement in cost controls and efficiency. Selling, General and Administrative Expenses. SG&A expenses totaled $6,806,000 in FY 1995 as compared to $6,351,000 in FY 1994, an increase of $455,000, or 7.2%, due to the hiring of additional employees for the Turnkey Manufacturing Service. SG&A as a percentage of net sales increased from 17.9% in FY 1994 to 18.5% in FY 1995. Operating Income. Income from operations increased by $234,000, or 5.6%, from $4,195,000 in FY 1994 to $4,429,000 in FY 1995, due to the factors described above. Operating margins increased from 11.8% of net sales in FY 1994 to 12.0% of net sales in FY 1995. Provision for Income Taxes. The effective income tax rate as a percentage of pre-tax income remained relatively constant at approximately 10.0%. Net Income. Net income totaled $4,192,000 in FY 1995, an increase of $457,000, or 12.2%, from $3,735,000 in FY 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through cash generated from operations and borrowings from banks and other third parties. Cash and cash equivalents were $3,294,000 at March 31, 1996, and $4,253,000 at September 30, 1996, while total indebtedness at March 31, 1996 was $11,027,000 and total indebtedness at September 30, 1996 was $9,615,000. 22 25 The Company obtained a term loan in the amount of $2,600,000 from The Hong Kong and Shanghai Banking Corporation Limited in FY 1995 in connection with Phase I of the construction of the Dongguan Facility. This loan is partially secured by a mortgage on the Company's Hong Kong property and certain other assets. The term loan is repayable in 48 monthly installments, commencing on August 1, 1994. As of September 30, 1996, the outstanding principal amount of this loan was $1,640,000. The Company intends to use a portion of the proceeds from this Offering to repay a portion of the remaining balance of this loan. In FY 1995 and FY 1996, the Company obtained equipment lease financings in the aggregate amount of $3,700,000 from three different equipment lessors. One lease requires repayment in January and February of 1997 (the "First Lease") and the second and third leases (the "Second and Third Leases") require repayment in 48 monthly installments. The First Lease carries an interest rate of 10.0% and the Second and Third Leases carry interest rates of 9.3% and 7.2%, respectively. As of September 30, 1996, the aggregate outstanding amount under these leases was $1,900,000. The Company intends to use approximately $776,000 of the proceeds from this Offering to repay the First Lease. The Company has revolving lines of credit with three banks -- Standard Chartered Bank, The Hong Kong and Shanghai Banking Corporation Limited and Bank of China. As of March 31, 1996, these lines of credit allow for aggregate borrowings of up to $10,800,000. As at September 30, 1996, the Company had $4,400,000 of outstanding loans and letters of credit under these revolving lines of credit. The Company draws down from the lines of credit primarily to finance purchases of raw materials. The lines of credit contain covenants requiring the maintenance of net minimum worth, and limitations on payment of dividends and bonuses to management without the consent of the lender. Consistent with practice in the giftware and collectibles industry, the Company offers accounts receivable terms to its customers. This practice typically has created working capital requirements that the Company generally has financed with net cash balances, internally generated cash flow and borrowing. The Company's accounts receivable balance at March 31, 1996, was $8,315,000. The Company has never experienced any significant problems with collection of accounts receivable from its customers. Capital expenditures, for fiscal years 1994, 1995, 1996, and the six month period ended September 30, 1996, were $1,491,000, $3,197,000, $7,341,000, and $1,237,000, respectively. The Company believes that cash flow generated from its operations, the proceeds from this Offering and its existing credit facilities will be sufficient to satisfy its working capital and capital expenditure requirements for at least the next 18 months. FOREIGN EXCHANGE All of the Company's sales are generated either in Hong Kong Dollars or U.S. Dollars. Approximately 50% of the Company's expenses are incurred in Renminbi, and the remainder are incurred primarily in Hong Kong Dollars. The exchange rate of the Hong Kong Dollar is currently pegged to the U.S. Dollar, but during the past several years the market exchange rate has fluctuated within a narrow range. The PRC government sets the exchange rate between the Renminbi and all other currencies. As a result, the exchange rate between the Renminbi and the U.S. Dollar and the Hong Kong Dollar has fluctuated in the past and may fluctuate in the future. If the value of the Renminbi or the Hong Kong Dollar decreases relative to the U.S. Dollar, such fluctuation may have a positive effect on the Company's results of operations. If the value of the Renminbi or the Hong Kong Dollar increases relative to the U.S. Dollar, such fluctuation may have a negative effect on the Company's results of operations. See "Risk Factors -- Country Risks -- Exchange Rate Risk." The Company does not currently hedge its foreign exchange positions. EFFECT OF INFLATION During the past three years, the rate of inflation in Hong Kong has been between approximately 8% to 10% per year and the rate of inflation in the PRC has been approximately 14% to 22% per year. However, the Company has in such years been able to minimize the impact of inflation on profitability by increasing the prices of its products and reducing operating costs. No assurance can be given that the Company will be able to minimize the impact of inflation on profitability in the future. 23 26 BUSINESS Zindart manufactures high-quality, detailed die-cast and injection-molding products, including: (i) die-cast collectibles, (ii) collectible holiday ornaments, and (iii) action figures and miniature figurine playsets used primarily as toys. Zindart's corporate headquarters are located in Hong Kong and its manufacturing operations are located in the neighboring Guangdong Province in the PRC. DEVELOPMENT OF THE COMPANY Since its inception, Zindart's goal has been to become the leading manufacturer of high-quality die-cast and injection-molding products for the premier U.S. designers and marketers of die-cast collectibles, collectible holiday ornaments and toys. Zindart was founded in Hong Kong in 1978 by George K.D. Sun, who believed that, in order to succeed, Asian light manufacturers had to build industry partnerships with their customers by providing them with consistently high-quality, mass-produced products at affordable prices. It was Mr. Sun's plan to meet the needs of Zindart's customers and forge the desired industry partnerships by seeking to manage the entire product engineering and manufacturing process rather than acting simply as a volume contract manufacturer. Zindart's long-term relationships with its two largest customers exemplify the type of industry partnerships envisioned by Mr. Sun. See "Business -- Markets, Products and Customers." In the early 1980s, Zindart decided to capitalize on opportunities in the PRC by moving its manufacturing operations to Guangdong Province. In so doing, Zindart realized substantial savings in labor and operating costs and gained access to a large pool of technically trained craftsmen and other skilled but relatively inexpensive laborers. Zindart also developed and trained a local PRC management team, resulting both in cost savings and increased synergy between labor and management. In 1982, Zindart opened the Zhong Xin factory in the Tian He district of Guangzhou. In 1987, due to expanding sales and the need for additional production capacity, Zindart opened a second production facility in the PRC -- the Xin Xing factory in the Henan district of Guangzhou. In 1987, in order to secure PRC governmental support for the Company's operations in the PRC, Mr. Sun, Ertl and certain management staff collectively sold a controlling interest in the Company to certain PRC entities. In 1993, in order to enable the Company to gain access to U.S. management expertise and capital markets, Mr. Sun asked the PRC entities to sell their shares in the Company to funds under the management of ChinaVest, Advent and certain other shareholders, which they did, and concurrently Mr. Sun sold a majority of his shares to these parties. See "Principal Shareholders." 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. Phase I of the construction of the Dongguan Facility was completed in 1996. Upon completion of Phase II of the construction of the Dongguan Facility, Zindart will increase its current manufacturing space in the Dongguan Facility by 470,773 square feet and will have doubled the amount of its manufacturing space from the manufacturing space in its first two facilities. See "Business -- Properties." During the past two decades, Mr. Sun recruited and trained the Company's current executive team, and in the past few years gradually transferred to them 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. See "Management." MARKETS, PRODUCTS AND CUSTOMERS Die-cast Collectibles Zindart manufactures a wide range of metal die-cast collectible scale model replicas of automobiles, trucks, planes, farm implements and construction equipment, such as Mercedes Benz, BMW, Corvette and Mustang, farm 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 manufactured by Zindart have complex designs which require high-quality workmanship and decorative details, with pad printing of as many as one hundred imprints. The most 24 27 complex of these models incorporate up to 200 moveable parts. The die-cast scale model replicas manufactured by Zindart 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. 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 low-feature 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 have been traded on a secondary market. It is the Company's belief, based on 15 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. Zindart's primary customer for die-cast collectibles is Ertl, a leading U.S. designer and marketer of die-cast collectible replicas with 1995 sales of over $200 million. Ertl was Zindart's first customer in 1978 and has been a customer ever since. In 1982, Ertl's affiliated company, Ertl (Hong Kong) Limited, acquired a significant equity interest in Zindart. Currently, Ertl's Chief Executive Officer is a director of the Company. See "Management" and "Certain Transactions." In fiscal years 1995 and 1996, sales to Ertl accounted for 32.1% and 25.9% of the Company's net sales. Other customers of Zindart for die-cast collectibles include other well known designers and marketers of such products, such as Revell-Monogram, which has been a customer of Zindart since 1987, and SWG of Germany, which has been a customer of Zindart 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, which are sold under the brand name "Siku." The Company is currently manufacturing molds for die-cast collectibles for Mattel, Inc. Collectible Holiday Ornaments Hallmark, long known as a leading producer of greeting cards, has successfully diversified into collectible holiday ornaments and giftware products. Hallmark relies on Zindart 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 Ornament products also include free-standing decorations such as die-cast replicas of pedal cars, which were first manufactured by Zindart in 1992. Production of Keepsake Ornament products requires highly developed hand spray painting skills and attention to quality by each member of the workforce in order to meet Hallmark's exacting aesthetic and quality requirements. The Keepsake Ornaments manufactured by Zindart are collectibles sold through authorized retail outlets. These products typically retail in the U.S. 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. Sales to Hallmark accounted for 31.2% and 27.0% of the Company's net sales in FY 1995 and FY 1996, respectively. Action Figures and Miniature Figurine Playsets Zindart also manufactures action figures and miniature figurine playsets for various designers and marketers such as Hasbro, Inc., Tyco Toys, Inc. and Lewis Galoob Toys, Inc. These products 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. 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 Zindart. 25 28 MANUFACTURING NEEDS OF ZINDART'S CUSTOMERS Zindart believes that a significant sourcing problem facing its customers is locating suppliers who can manufacture: (i) high-quality products, (ii) in desired volumes (i.e., both in large quantities and limited runs) and (iii) in a timely and cost-effective manner. In addition, a significant problem facing the Company's customers is eliminating the cost, time and complexity of locating and managing the number of companies usually required to perform the different steps of the product development and production cycle of a single product. Different companies are often hired to engage in product engineering, model and mold making, and manufacturing and packaging of the finished product. The need to coordinate several different companies in the manufacturing process can cause production delays, inefficiencies in management of multiple contractors, and quality and reliability problems. ZINDART'S SOLUTION - High-quality Production Zindart has developed the ability to produce high-quality products by employing a skilled workforce of technically trained craftsmen using modern equipment 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 Zindart currently employs over 6,800 persons in its manufacturing facilities. Upon completion of Phase II of the construction of the Dongguan Facility, the Company will have an aggregate of 887,000 square feet of manufacturing space for up to 8,000 workers. 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. 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. - Commitment to Improvement in 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 by working in close cooperation with its customers. The Company expects to achieve greater efficiencies as a result of the consolidation of its operations in the Dongguan Facility. In addition, the Company intends to retain production experts to assist it in achieving further production efficiencies. - Turnkey Manufacturing Service Zindart's Turnkey Manufacturing Service fulfills a customer's requirements at every stage in the production process, from computer-aided product engineering and model and mold making, to manufacturing, assembling and packaging of the finished product. This coordinated, "one-stop" production process provides Zindart's customers with (i) shortened lead times from design to production; (ii) a single rather than multiple participants in the manufacturing process; and (iii) increased efficiency resulting in lower per-unit costs. See "-- Manufacturing." ZINDART'S STRATEGY Zindart's goal is to become the leading manufacturer of high-quality die-cast and injection-molding products for the premier designers and marketers of die-cast collectibles, collectible holiday ornaments and toys. Zindart's business strategy to achieve this goal is to focus on the following: - Develop Additional Major Customers Currently, Zindart has two major customers, but manufactures products for an additional 15 premier marketers. Some of these marketers have become customers in the last few years. The Company expects that it will be able to develop several of these new customers into major customers as these customers become 26 29 familiar with the benefits of the Company's Turnkey Manufacturing Service. Upon completion of Phase II of the construction of the Dongguan Facility, Zindart will be able to offer new major customers a dedicated production team and dedicated production space, which can provide such customers with attractive advantages. For example, the Company will be able to customize its production facility to meet the specific needs of such customers, and the customer will then be able to exercise greater control over the production process. thereby enhancing quality control and cost efficiency, increasing confidentiality, and expediting scheduling and delivery timetables. - Diversify Product Offerings Zindart has established itself as a leading manufacturer of die-cast collectibles and collectible holiday ornaments and toys. Zindart intends to further diversify the Company's product offerings to include the manufacture of other consumer products which utilize Zindart's current competitive advantages and know-how. In this regard, the Company intends to establish a sales, marketing and investor relations office in the U.S. in 1997 to pursue such efforts. - Invest in Plant, Equipment and Employees The completion of Phase II of the Dongguan Facility will provide the Company with additional production space. In addition, Zindart intends to purchase new equipment for this facility and hire additional employees. This expansion will increase Zindart's capacity and, the Company believes, the quality of its operations and overall efficiency, which should in turn enable Zindart to meet additional demand for its manufacturing services. 27 30 MANUFACTURING A significant problem facing the Company's customers is eliminating the cost, time and complexity of locating and managing the number of companies usually required to perform the different steps of the product development and production cycle of a single product. Different companies are often hired to engage in product engineering, model and mold making, and manufacturing and packaging of the finished product. The need to coordinate several different companies in the manufacturing process can cause production delays, inefficiencies in management of multiple contractors, quality and reliability problems. To address this problem, the Company in 1994 broadened its manufacturing capability to provide a fully integrated service known as Turnkey Manufacturing Service. With this service, Zindart is able to provide product engineering, model making and mold making, which Zindart integrates with the production of the finished product. With this vertical integration, Zindart can meet all of a customer's design engineering and manufacturing needs (other than the design and printing of product packaging), thus avoiding the need for a Hong Kong intermediary. Zindart's commitment to providing a comprehensive product development service is evidenced by a team currently consisting of approximately 130 engineers and technicians, 350 model makers and tool makers and a total workforce of approximately 6,800. By coordinating product development and process design with production and packaging, Zindart 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 Turnkey Manufacturing Service comprises the following processes: LOGO - Based on a customer's preliminary specifications, Zindart assists in product engineering through the use of computer-aided design systems and other means with an eye toward promoting cost effectiveness throughout the production cycle. - Zindart builds prototype scale models of the product which are then reviewed to ensure economical production and adherence to safety and quality requirements. - Using the model, Zindart produces tooling casts and then molds that are key to the quality, timing and cost of the finished product. - Zindart employs die-casting and injection-molding processes to shape zinc alloys or plastic into product parts. - The product parts are then painted through electrostatic painting, detailed hand spray painting and/or pad printing. - Zindart's large work force assembles multiple parts to produce the final product. - The product then undergoes buffing, finishing and quality control inspection. - Zindart assembles preprinted boxes, inserts the product and places the boxes in cartons for delivery as specified by the customer.
28 31 COMPETITION The Company faces competition from several companies for the manufacture of die-cast collectibles and several other companies for the manufacture of collectible holiday ornaments. The Company faces competition from numerous companies for the manufacture of toys. The Company believes that the basis for competition in the manufacture of all of these products is price, quality and the ability to produce in required volumes and to timely meet delivery schedules. The Company believes that, to date, it has been able to successfully compete with respect to each of these criteria. However, no assurance can be given that the Company will be able to continue to compete successfully or that it will not face increased competition from new entrants or increased price competition. The Company expects increased competition from manufacturers of low-priced toys that may seek to enter the higher margin business of manufacturing high-quality toys, die-cast collectibles and collectible holiday ornaments. Some of these potential competitors may have significantly greater financial, technical, manufacturing and marketing resources than the Company. See "Risk Factors -- Risks Relating to the Company -- Competition" and "-- Lack of Barriers to Entry." PROPERTIES Zindart owns a facility of approximately 14,700 square feet at Tai Po in Hong Kong's New Territories, which it acquired in 1982 and which currently serves as the Company's headquarters, housing its customer service, quality control, material control and purchasing, finance and accounting, marketing, project management and engineering, personnel and other administration functions, which are staffed by approximately 80 persons. Prior to the transfer of production to the PRC, Zindart's manufacturing plant was located at its Tai Po facility. In 1982, Zindart established its Zhong Xin factory in the Tian He district of Guangzhou, which is approximately 112 miles northwest of Hong Kong, on the Pearl River. The factory, which is not owned by Zindart, operates under a subcontract processing agreement with the local economic development authority, which provides Zindart with the factory building and facilities as well as the workforce. Zindart pays subcontracting fees for the use of these facilities and labor, and provides machinery, equipment and raw materials. All of the production machinery and equipment used in the plant is the property of Zindart. Under the subcontract processing agreement, Zindart has the right to operate and manage the production facility, including the authority to employ and dismiss plant workers and to make decisions on day-to-day operational matters. The Zhong Xin plant has been expanded over the years and currently provides a factory space of approximately 250,000 square feet and employs a workforce of approximately 2,500. The subcontract processing agreement expires in December 1999. The parties are currently negotiating the terms on which this agreement will be terminated when Zindart moves all production to the Dongguan Facility. See "Risk Factors -- Reliance on New Production Facility." Zindart established its Xin Xing factory in the Henan district of Guangzhou in 1987. The Xin Xing factory now occupies a factory space of approximately 170,000 square feet, with a workforce of approximately 1,500. In December 1993, Zindart entered into a contractual joint venture agreement with the PRC party that owned the Xin Xing factory to operate the factory through a majority-owned subsidiary of Zindart. Pursuant to the contractual joint venture agreement with the PRC party, the PRC party receives an annual fee from Zindart equal to the rent of this facility, but does not share in the profits or losses of the venture. This agreement will have to be terminated prior to the Company's transfer of its operations from this facility to the Dongguan Facility. See "Risk Factors -- Reliance on New Production Facility." In October 1994, Zindart decided to build its own production facility on approximately 20 acres of land in the city of Dongguan, which is located approximately 60 miles north of Hong Kong, near the Pearl River Delta. Virtually all land in the PRC is state-owned, but can be leased from the government on a long-term basis. Operation of the Dongguan Facility is structured as a contractual joint venture with a PRC governmental entity, Dongguan Xinda, which will receive an annual fee from Zindart but which does not share in the profits or losses of the venture. This contractual joint venture acquired a 50-year lease on the 20 acres of land, and has a term of fifteen years. At the end of this term, Zindart will continue to own the principle assets of the joint venture, including the fifty year land lease. Phase I of the construction of the Dongguan Facility, 29 32 with a gross floor area of approximately 560,000 square feet, including living accommodations for up to 3,500 workers, was completed in February 1996. The Company commenced Phase II of the construction in late 1996, and intends to complete such construction in early 1998. When Phase II of the construction of the Dongguan Facility is completed, it will have approximately 887,000 square feet of manufacturing space and approximately 385,000 square feet of space used for non-production purposes. The Dongguan Facility has been designed to meet or exceed applicable environmental, worker and fire safety requirements. Following completion of Phase II of the construction, Zindart intends to transfer all production activities from the two Guangzhou factories to the Dongguan Facility. RAW MATERIALS Zindart acquires the 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. Zindart's standard practice is to maintain a supply of raw materials sufficient for approximately three months' production. See "Risk Factors -- Risks Relating to the Company -- Dependence on Raw Materials." SUBSIDIARIES The Company has a controlling interest in two mold-making subsidiaries. In August 1994, the Company acquired a 55% interest in Onchart Industrial Limited, a British Virgin Islands corporation. In December 1994, the Company acquired a 51% interest in Luen Tat Mould. Prior to these acquisitions, the Company had regularly contracted with these companies to provide mold-making services to the Company. 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. Both subsidiaries will move their operations to the Dongguan Facility upon completion of Phase II of the construction. Luen Tat Mould owns an 18% interest in Luen Tat Model, which provides model-making services to Luen Tat Mould. BACKLOG AND SEASONALITY Zindart's customers generally place orders two to three months in advance of delivery target dates. These purchase orders may be cancelled by the customer upon reimbursement of actual costs incurred and payment of a portion of lost profits determined on a case-by-case basis. As is customary in the PRC, Zindart 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 other quarters in the future. Except as attributable to the observance of the New Year, the Company has not experienced seasonality in its operations, although it could show quarterly fluctuations based on the timing of orders placed by its customers. As of September 30, 1996, Zindart had orders on hand of approximately $19.6 million, compared to $17.3 million at September 30, 1995. Less than 1% of Zindart's total annual customer orders have been canceled in any of the last three years. TRADEMARKS AND OTHER PROPRIETARY RIGHTS Zindart has no registered trademarks or other registered proprietary rights. The Company's key employees have entered into to confidentiality agreements with the Company. ENVIRONMENTAL MATTERS The plants and equipment owned and operated by Zindart and the construction activity associated with the expansion program are subject to comprehensive laws and regulations for environmental protection. If Zindart were found to be in violation of any such regulation, it would be given a period of time to remedy the problem. If it failed to do so, the government could impose sanctions including, but not limited to, a shut-down of operations until such time as Zindart complied with such regulations. Each of Zindart's manufacturing 30 33 facilities have been subject to periodic environmental review by the local authorities and have never incurred a fine or penalty for any breach or violation of any applicable environmental laws. Zindart believes that its manufacturing and other operations are in compliance in all material respects with existing applicable environmental laws. See "Risk Factors -- Risks Relating to the Company -- Environmental Matters." EMPLOYEES Zindart currently employs over 6,800 persons, of whom approximately 5,400 are production workers, 600 are administrative staff and 800 are engineering and technical personnel. See "Risk Factors -- Risks Relating to the Company -- Employees." As is customary for employers in the PRC, each of Zindart's production facilities includes housing facilities for workers. Zindart 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 regulating human rights policies, including child labor, worker safety, wages and hours. Zindart intends to retain outside consultants to review and assist in improving the working and living conditions of its employees. Zindart provides training to its managers and executives in its Hong Kong headquarters through courses conducted by industry professionals engaged by Zindart as well by senior management. The courses cover management skills, total quality management, ISO 9000 requirements and the technical aspects of operations. In addition, Zindart 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. LEGAL PROCEEDINGS AND INSURANCE Zindart is not a party to any material pending legal or arbitration proceeding with respect to itself or any of its material properties. Zindart currently maintains insurance coverage with HSCB Insurance Ltd., the China Pacific Insurance Co., Ltd. and China Insurance Co., Ltd. on its property, plant and equipment in an amount in excess of the current net book value of such assets. It carries business interruption and third-party liability insurance to cover claims arising out of bodily injury or property or environmental damage caused by accidents on its property, or otherwise relating to its operations or defects in the products it manufactures. 31 34 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information with respect to the directors, executive officers and key employees of the Company:
NAME POSITION AGE - --------------------------------- ---------------------------------------------------- --- George K. D. Sun................. Founder, Chief Executive Officer and Director 56 Feather S. Y. Fok................ Chief Operating Officer, Chief Financial Officer and 35 Director Tony D. H. Lai................... Vice President of Production and Director 55 Andrew C. H. Mok................. Vice President of Marketing 45 Koulman N. Zheng................. Vice President of Engineering 41 Vickie W. K. So.................. Assistant Vice President and Financial Controller 36 Choi S. Leung.................... Assistant Vice President of Marketing and Purchasing 52 Pei J. Yu........................ Assistant Vice President of Production 50 Alexander M. K. Ngan............. Director 45 Henry H.L. Hu.................... Director 52 George B. Volanakis.............. Director 48 Domina W.K. Leung................ Director 36
George K. D. Sun, 56, founded Zindart in 1978 and served as a Director and Chief Executive Officer from 1978 to 1994. In 1994, Mr. Sun took a sabbatical from the Company to pursue philanthropic activities, including the creation of the Zindart (De Zhen) Foundation, the beneficiaries of which include Zindart's employees and their families, and other charities and churches. Mr. Sun returned to Zindart in 1996 as a Director and Chief Executive Officer. Feather S. Y. Fok, 35, 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 auditing and consulting department of a "Big 6" accounting firm 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 B.S. degree in Business Administration from the Chinese University of Hong Kong. Tony D. H. Lai, 55, has served as a Director and Vice President of Production since October 1994 and is responsible for production in the PRC. Mr. Lai graduated from the Shanghai Education University and was a secondary school teacher for 27 years in the PRC before he emigrated to Hong Kong. He joined the Company in 1989. Andrew C. H. Mok, 45, has served as Vice President of Marketing since January 1995, and in that capacity is responsible for the management of customer relations, marketing, product engineering and costing. 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. Koulman N. Zheng, 41, 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 in 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. Vickie W. K. So, 36, has served as the Assistant Vice President and Financial Controller since September 1996. Prior to joining the Company, Ms. So worked as Administration Manager, Group Accountant and Financial Controller of Pacific Dunlop (Asia) Ltd. for more than ten years. Ms. So is a qualified accountant in 32 35 Hong Kong. Ms. So received a B.S. degree in Business Administration from the Chinese University of Hong Kong in 1984 and an M.B.A. from the Australian Graduate School of Management, University of New South Wales. Choi S. Leung, 52, has served as the Assistant Vice President of Marketing and Purchasing since 1992 and is responsible for customer relations of the Hallmark account, and purchasing. Prior thereto, Mr. Leung worked for 12 years for the Hong Kong-based purchasing arm of Hallmark as a buyer and manager for its PRC operations. Pei J. Yu, 50, has served as the Assistant Vice President of Production since October 1993, and is responsible for production in all of the Company's manufacturing facilities. Prior to joining the Company in 1983, Mr. Yu worked as an engineer in various companies in the PRC for 15 years. Mr. Yu received a B.S. degree from the East China Chemical Engineering University. Alexander M. K. Ngan, 45, 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 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. Henry H. L. Hu, 52, has served as a Director since August 1993. Mr. Hu has over 25 years of experience in the light manufacturing industry in Hong Kong and the PRC. Prior to becoming an entrepreneur, Mr. Hu held senior executive positions in several multi-national toy companies. George B. Volanakis, 48, has served as a Director since November 1992. Mr. Volanakis joined Ertl in 1988 and has served as President and Chief Executive Officer of Ertl since 1993. Prior to joining Ertl, Mr. Volanakis was Senior Vice President of Marketing for Mattel Inc. Mr. Volanakis has served as President of Matchbox Toys U.S.A., Ltd. and as President and Chief Operating Officer of Playskool Inc., a subsidiary division of Milton Bradley Company, Inc. Mr. Volanakis is the Chairman of the Toy Manufacturing Association in the United States. Mr. Volanakis received a B.A. degree from Union College. Mr. Volanakis is a representative of Ertl. Domina W. K. Leung, 36, has been a Director since October 1994. Ms. Leung joined the Company in 1980 and is responsible for finance, personnel and administration. Ms. Leung has earned a London Chamber of Commerce certificate in accounting. Ms. Leung resigned from her executive officer position in the Company in July, 1996, but remains as a Director on the Board. BOARD OF DIRECTORS The Directors of the Company who are not executive officers do not receive compensation for serving on the Board of Directors or any committee thereof. All non-management directors are reimbursed for their expenses for each Board of Directors meeting attended. Pursuant to the listing requirements of the Nasdaq National Market, the Company is required to have at least two independent directors on its Board of Directors and to establish an audit committee, at least a majority of whose members are independent of management. Prior to the Offering, Mr. Ngan and two other directors will be appointed to be on the Audit Committee of the Board of Directors. EXECUTIVE COMPENSATION The aggregate amount of compensation paid by the Company to all directors, executive officers and significant employees as a group in FY 1996 was $939,145, of which $182,859 was paid as discretionary bonuses. In addition, $122,345 was contributed to the Company's provident fund (i.e., the Company's defined contribution benefit plan administered by Jardine Matheson) in FY 1996 on behalf of such persons. 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. The Chief Executive Officer recommends the size of the bonus pool to the 33 36 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 Messrs. Sun and Ngan. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY No officer or director of the Company currently has any option or warrant to purchase any securities of the Company. The Company intends to adopt an employee stock option plan following the closing of the Offering. The plan will provide for the issuance of options up to 10% of the outstanding Shares following the Offering. LIMITATION OF LIABILITY The organizational documents of the Company contain provisions limiting the personal liability of directors to the Company or its shareholders and indemnifying directors, officers, employees and agents of the Company for acts performed in such capacity, to the fullest extent permitted by law. The Underwriting Agreement provides for indemnification by the Underwriters of the Company, its directors and officers, and by the Company of the Underwriters, for certain liabilities, including liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), and affords certain rights of contributions 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. At present there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company for which indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that may result in a claim of indemnification by any director or officer. 34 37 PRINCIPAL SHAREHOLDERS The following table sets forth beneficial ownership of Shares as of December 11, 1996 and immediately following the completion of this offering, by (i) each person known by the Company to own beneficially more than 10% of the outstanding Shares and (ii) the officers and directors of the Company as a group. Zindart Pte Limited ("Zindart Singapore") owns 100% of the Shares prior to the offering, and after the Closing Date will own 78.1% of the Shares, thereby retaining control of the Company. ZICHL is the largest shareholder of Zindart Singapore by virtue of its ownership of 76.0% of the shares of Zindart Singapore. Funds under the management of ChinaVest own 67.81% of the shares of ZICHL. The Company is not aware of any present arrangement that may at a subsequent date result in a change of control of the Company.
PERCENTAGE OF SHARES OUTSTANDING (2) --------------------- SHARES BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING - ------------------------------------------------------------ ------------------- -------- -------- Zindart Singapore(3)........................................ 5,000,000 100.0% 78.1% ZICHL (4)................................................. 5,000,000 100.0% 78.1% ChinaVest IV Funds (5)................................. 5,000,000 100.0% 78.1% All executive officers and directors as a group ((2) persons) (6).............................................. 5,000,000 100.0% 78.1%
- --------------- (1) Beneficial ownership is determined pursuant to Rule 13d-3 of the Exchange Act. (2) Based on 5,000,000 Shares outstanding before the offering and 6,400,000 Shares outstanding after the offering. (3) Zindart Singapore is an investment holding company incorporated in Singapore. The shareholders of Zindart Singapore are ZIC Holdings Limited (76.0%), Longvest Management Limited (14.0%) and Ertl (Hong Kong) Limited (10%). The address of Zindart Singapore is 138 Cecil St., #18-00 Cecil Court, Singapore 069538. (4) ZICHL is an investment holding company incorporated in the Cayman Islands. The address of ZICHL is P.O. Box 309, Ugland House, South Church St., George Town, Grand Cayman, Cayman Islands, British West Indies. The shares of ZICHL are owned by four shareholders, whose indirect pecuniary interest in the Company is outlined below:
PERCENTAGE OF SHARES OUTSTANDING --------------------- SHARES BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING -------------------------------------------------- ------------------- -------- -------- ChinaVest IV Funds................................ 2,577,000 51.5% 40.3% Advent Funds...................................... 744,000 14.9% 11.6% Long Gain Limited................................. 239,500 4.8% 3.7% Cititrend International Holdings Ltd.............. 239,500 4.8% 3.7%
ChinaVest IV Funds are described in note (5). Advent Funds consist of the following three 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, which together hold 19.6% of ZICHL. The address of Advent Funds is c/o Advent International Corporation, 5th Floor, 101 Federal St., Boston, Massachusetts 02110. Long Gain Limited, incorporated in the British Virgin Islands, is the personal investment holding company of Mr. Henry H.L. Hu. The address of Long Gain Limited is Creque Building, P.O. Box 116, Roadtown, Tortola, British Virgin Islands. Cititrend International Holdings Ltd., incorporated in Bermuda, is the personal investment holding company of Mr. Carl Tong. The address of Cititrend International Holdings Ltd. is 12B Thomson Commercial Building, 4-10 Thomson Road, Wanchai, Hong Kong. (5) The ChinaVest IV Funds consist of the following three limited partnerships: ChinaVest IV, L.P., a Delaware partnership; ChinaVest IV-A, L.P., a Delaware limited partnership, and ChinaVest IV-B, 35 38 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. (6) Alexander M.K. Ngan is a partner of ChinaVest. On that basis, Mr. Ngan may be deemed to own beneficially the Shares held by ChinaVest. Mr. Ngan disclaims beneficial ownership of such Shares, except to the extent of his pecuniary interest therein. Henry H.L. Hu is a Director of the Company and of ZICHL. On that basis, Mr. Hu may be deemed to own beneficially the shares held by ZICHL. Mr. Hu disclaims beneficial ownership of such Shares, except to the extent of his pecuniary interest therein. 36 39 CERTAIN TRANSACTIONS Ertl has been one of the Company's two largest customers in the past three fiscal years. Ertl beneficially owns 10% of the Company's Shares and has a representative on the Company's Board of Directors (the "Board"). All sales transactions to Ertl are negotiated on an arm's length basis. In 1992, Zindart granted Mr. George Sun an option to buy from Zindart a leasehold apartment in Hong Kong, at Zindart's original cost. In 1995, Mr. Sun exercised his option to buy this leasehold apartment pursuant to the terms of the option. In 1994, the Company 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 interests were sold by the Company at its cost, approximately $350,000, and the Company recorded the sale as a loan by the Company to ZICHL with an interest rate of 2.0% above the Hong Kong prime lending rate. Subsequently, the Company made other advances to ZEL with similar interest rates such that as of September 30, 1995, the balance owing to the Company by ZEL was approximately $2,994,000. On September 30, 1995, the Company declared and distributed a dividend in kind of the debt owing from ZEL at its face value. The Company advanced ZICHL $95,000 in fiscal 1994 on an interest-free basis for working capital purposes. These advances were repaid in fiscal 1995. In February 1996, the Company borrowed $259,000 from Hua Yang Printing Co., Ltd., a company whose principal shareholders are funds under the management of ChinaVest and Advent. This loan was unsecured and had an interest rate of 2.0% above the Hong Kong prime lending rate. This loan was repaid by the Company in March 1996. In FY 1995, the Company 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 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 FY 1996. The Company intends that all transactions with affiliates will be approved by a committee of disinterested directors. 37 40 DESCRIPTION OF SHARES As of December 16, 1996, the authorized shares of the Company consisted of 5,000,000 Ordinary Shares with a par value of approximately $0.065, all of which were outstanding. The Company intends to increase the number of authorized Ordinary Shares to 10,000,000 prior to the closing of the Offering. The following statements are summaries of certain 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 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. Application has been made to list the ADSs on the Nasdaq National Market. 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 members 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 members as are entitled to, and do, vote in person or by proxy at a general meeting of the Company. Generally, resolutions of the members of the Company are passed by ordinary resolution. However, the Companies Ordinance stipulates that certain matters 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 member who is present in person at a general meeting of the Company shall have one vote, and on a poll every member 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 a 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. 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. 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 meting is required by law to be held. If such approval is given, the unissued Ordinary Shares of the Company 38 41 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. The shareholders may remove any director before the expiration of his period office only upon the vote of not less than three-quarters of the issued Ordinary Shares. 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 members according to their rights and interests in the profits available for distribution, but no dividend shall be declared in excess of the amount recommended by the Board. 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 members 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 Ordinary 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. The Company's loan facility with The Hong Kong and Shanghai Banking Corporation Limited restricts the Company to an annual dividend not in excess of 25% of net profits. See "Dividends and Dividend Policy". MISCELLANEOUS The shareholders have no redemption rights, conversion rights or preemptive rights on the transfer of securities of the Company. 39 42 DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS The following is a summary of certain provisions of the Deposit Agreement (the "Deposit Agreement"), to be entered into by 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 which has been filed as an exhibit to the Company's Registration Statement of which this Prospectus is a part, including the form of ADRs. 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, 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 40 43 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. 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 to 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 an 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. The Depositary may withhold any such distribution of ADRs if it has not received satisfactory assurances from the Company that such distribution does not require registration under the Securities Act or is exempt from registration under the provisions of such Act. 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 in Dollars 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 41 44 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 therefore 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 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; provided, that nothing in the Deposit Agreement will create, or be construed to create, any obligation on the part of the Company to file a registration statement with respect to such rights or underlying securities or to endeavor to have such a registration statement declared effective. 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 that it may be 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, after deduction or upon payment of any fees and expenses of the Depositary or any taxes or other governmental charges, in proportion to their holdings, respectively, 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 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, and 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 and the 42 45 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, respectively. Upon any change in nominal or par 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, and 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 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, and (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 Memorandum of Association and 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. Upon the written request of an Owner on 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 when so required pursuant to any regulations of the Securities and Exchange Commission. 43 46 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 without the consent of the Owners; 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 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, together with any dividends or other distributions received with respect thereto and the 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 the Deposit Agreement) whichever 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 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; (g) a fee of $1.50 or less per certificate for an ADR or ADRs for transfers made pursuant to the Deposit Agreement; and (h) a fee for the distribution of securities pursuant to the Deposit Agreement, such fee being in an amount equal to the fee for the execution and delivery of ADSs 44 47 referred to above which would have been charged as a result of the deposit of such securities (for purposes of this clause (h) treating all such securities as if they were Shares), but which securities are instead distributed by the Depositary to Owners and the net proceeds distributed. 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 such ADR or any withdrawal of Shares underlying such ADR until such payment is made, and may withhold any dividends or other distributions, or may 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 Memorandum of Association or 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, delayed or forbidden from, or be subject to any civil or criminal penalty on account of, doing or 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 it is provided 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 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 this 45 48 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 of 1933, unless a registration statement is in effect as to such Shares. The Depositary will keep books, at its Corporate Trust Office, 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. 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 will be governed by the laws of the State of New York. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 6,400,000 Shares issued and outstanding, assuming no exercise of the Over-allotment Option. Of such Shares, the 1,400,000 Shares represented by ADSs offered hereby will be freely tradable without restriction or further registration under the Securities Act, except for any Shares subsequently purchased by "affiliates" of the Company, which may include the Company's existing shareholders, officers or directors. All other Shares (including Shares purchased by certain officers and employees of the Underwriter and its affiliates) will become eligible for sale in the public market, although, with respect to sales of such Shares by affiliates of the Company into the U.S. public market, such shares will be subject to the volume and other limitations under Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act ("Rule 144"). Subject to certain exceptions, the Company and each affiliate prior to this Offering have agreed not to offer, sell, contract to sell, grant options to purchase, or otherwise dispose of any Shares or ADSs of the Company or any securities convertible into or exercisable or exchangeable for such Shares or ADSs or in any other manner transfer all or a portion of the economic benefits associated with the ownership of any such Shares or ADSs, except to the Underwriter pursuant to the Underwriting Agreement, for a period of 180 days after the date of this Prospectus without the prior written consent of the Representative. Following expiration of such lockup period, the Company will be able to sell Shares held by it as treasury shares, if any, and to issue additional Shares. Any Shares held by affiliates of the Company may be sold in the U.S. public markets only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, including Rule 144, or outside the United States in accordance with Regulation S promulgated by the Securities and Exchange Commission under the Securities Act. In general, Rule 144, as in effect on the date of this Prospectus, permits a person who has beneficially owned for at least two years (subject to applicable rules on tacking) restricted shares acquired from the Company or an affiliate of the Company 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 (approximately 64,000 Shares immediately following completion of this offering, assuming no exercise of this Over-allotment Option) 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 Securities and Exchange 46 49 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 that were not acquired from the Company or an affiliate of the Company within the past three 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. There can be no assurance that a significant public market for the ADSs or the Shares will be sustained after the Offering. No precise predictions can be made about the effect, if any, that market sales of ADSs or Shares or the availability of ADSs or Shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of a substantial number of ADSs or Shares in the public market, or the prospect of such sales, may have an adverse impact on the market price thereof. 47 50 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. The discussion under "PRC Taxation" generally summarizes the material PRC taxes applicable to Company's investment in the PRC. The discussion under "Hong Kong Taxation" generally summarizes the material Hong Kong taxes applicable to the Company's operations in Hong Kong. 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. UNITED STATES FEDERAL INCOME TAXATION The following discussion, solely to the extent relating to the U.S., is based on the advice of McCutchen, Doyle, Brown & Enersen LLP, Palo Alto, California, and addresses the United States federal income taxation of the Company and of a beneficial owner of ADSs that is a United States citizen or resident or a United States domestic corporation who owns the ADSs as a capital asset (a "United States Investor"). For purposes of the following discussion, a United States Investor who acquires 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, life insurance companies, tax-exempt investors, banks, broker-dealers and investors who or that hold Shares as part of hedging or conversion transactions), 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 advisor 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 Internal Revenue Code of 1986, as amended (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 it's business in the PRC 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 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 percent 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 48 51 person contemplating 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 have a basis in the Shares equal to his or her purchase price for United States federal tax purposes. The purchase price (and basis) will be allocated among the Shares received on the basis of their relative fair market values at the time of this offering. 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 on 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. 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 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. 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 and believes that it will not be treated as a PFIC, but this conclusion is a factual determination made annually and thus 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 percent of the gross income of the Company for the taxable year is passive income, or (ii) at least 50 percent of the value (or adjusted basis) of the Company's assets 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 (or adjusted basis) of the assets of any company in which the Company owns, directly or indirectly, 25 percent 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 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. 49 52 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 percent 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 or her 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 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 (causing the Company to be a so-called "pedigreed QEF" with respect to such shareholder) will be subject to the foregoing treatment only in such years in which the Company actually satisfies the income and asset tests for PFIC status described above. The shareholder's basis in his or her 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. 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 or her 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 than 50 percent (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. 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 percent in value of the corporation's stock and (ii) at least 50 53 60 percent 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 percent 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 percent of the total combined voting power or value of the corporation's stock and (ii) at least 60 percent 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 percent 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 percent 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 percent 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 percent 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: 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. 51 54 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 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 Xin Xing facility was the year ended March 31, 1995, and the first profitable year for 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 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 52 55 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 Income Tax Law on Foreign Investment Enterprises and Foreign Enterprises 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." 53 56 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 which 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." 54 57 UNDERWRITING The Underwriters named below, acting through their representative, Van Kasper & Company (the "Representative"), have severally agreed, subject to the terms and conditions set forth in an Underwriting Agreement with the Company, to purchase from the Company the number of ADSs set forth opposite their respective names below:
NUMBER NAME OF ADSS -------------------------------------------------------------------------- --------- Van Kasper & Company...................................................... --------- Total..................................................................... =========
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 Representative has advised the Company 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 initial Offering, the public offering price, concessions and re-allowance to dealers may be changed by the Representative as a result of market conditions or other factors. Prior to this Offering, there has been no public market for the ADSs or Shares. Consequently, the initial public offering price will be determined through negotiation between the Company and the Representative. Among the factors to be considered in making such determination are the prevailing market conditions, the Company's financial and operating history and condition, its prospects and the market prices of securities for companies in businesses similar to that of the Company. The Company has granted an option to the Underwriters, exercisable by the Representative within 30 days after the date of this Prospectus, to purchase up to 210,000 additional ADSs at the initial offering price, less underwriting discounts and commissions. The Representative 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 has agreed to pay the Underwriters all out-of-pocket costs and expenses of the Underwriters and their legal counsel, together in an amount not to exceed $280,000. The Company has agreed to indemnify the Underwriters for certain liabilities, including liabilities under the Securities Act. Certain beneficial owners of the Shares have agreed not to sell, offer to sell, contract to sell or otherwise dispose of any Shares or securities exercisable for Shares, directly or indirectly, for a period of 180 days after the date of this Prospectus without the prior written consent of the Representative and the Company. The Representative and the Company may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. In addition, the Company has agreed that for a period of 180 days after the date of this Prospectus, 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 the Representative, 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 55 58 and consultants so long as none of such options become exercisable during said 180 day period. Sales of such shares in the future could adversely affect the market price of the ADSs. See "Shares Eligible for Future Sale." LEGAL MATTERS United States counsel for the Company is McCutchen, Doyle, Brown & Enersen, LLP, Palo Alto, California. The validity of the issuance of the shares offered hereby 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 will be passed upon by the Guangzhou Law Office, Guangzhou, the PRC. Certain legal matters as to United States Law will be passed upon for the Underwriters by Heller Ehrman White & McAuliffe, Palo Alto, California. The matters included herein under the heading "Hong Kong Taxation" and "PRC Taxation" under the caption "Taxation" have been passed upon by Robert W.H. Wang & Co. as to Hong Kong Taxation and Guangzhou Law Office as to PRC Taxation, respectively, and are stated herein on their respective authority. EXPERTS The financial statements of the Company as of March 31, 1995 and 1996 and for years ended March 31, 1994, 1995 and 1996 included in this Prospectus have been audited by Arthur Andersen & Co., independent public accountants, as stated in their report appearing herein and are so included herein in reliance upon the report 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. The Company intends to furnish its security holders with annual reports containing audited financial statements and a report thereon by its independent public accountants, and quarterly reports containing unaudited financial information. Such financial statements and financial information will be prepared in accordance with U.S. GAAP and such quarterly and annual reports will include a "Management's Discussion and Analysis of Financial Condition and Results of Operations" section for all relevant periods. 56 59 INDEX TO FINANCIAL STATEMENTS
PAGE ---- ZINDART INDUSTRIAL COMPANY LIMITED: Report of Independent Public Accountants............................................ F-2 Consolidated audited Balance Sheets as of March 31, 1995 and 1996 and unaudited as of September 30, 1996............................................................ F-3 Consolidated audited Statements of Operations for each of the three years ended March 31, 1994, 1995 and 1996 and unaudited for the six-month periods ended September 30, 1995 and 1996...................................................... F-4 Consolidated audited Statements of Cash Flows for each of the three years ended March 31, 1994, 1995 and 1996 and unaudited for the six-month periods ended September 30, 1995 and 1996...................................................... F-5 Consolidated audited Statements of Changes in Shareholders' Equity for each of the three years ended March 31, 1994, 1995 and 1996 and unaudited for the six-month period ended September 30, 1996.................................................. F-7 Notes to financial statements....................................................... F-8
F-1 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Zindart Industrial Company Limited: We have audited the accompanying consolidated balance sheets of Zindart Industrial Company Limited, a company incorporated in Hong Kong, ("the Company") and Subsidiaries ("the Group") as of March 31, 1995 and 1996, and the related consolidated statements of operations, cash flows and changes in shareholders' equity for the years ended March 31, 1994, 1995 and 1996. 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 Industrial Company Limited and Subsidiaries as of March 31, 1995 and 1996, and the results of their operations and their cash flows for the years ended March 31, 1994, 1995 and 1996, in conformity with generally accepted accounting principles in the United States of America. ARTHUR ANDERSEN & CO. Certified Public Accountants Hong Kong Hong Kong, December 16, 1996. F-2 61 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1995 AND 1996 (AUDITED) AND SEPTEMBER 30, 1996 (UNAUDITED) (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
MARCH 31, SEPTEMBER 30, --------------- 1996 1996 ------------- ------ $'000 1995 $'000 (UNAUDITED) ------ $'000 ASSETS Current assets: Cash and bank deposits......................................... 4,123 3,294 4,253 Accounts receivable, net....................................... 4,300 8,315 10,599 Due from immediate holding company............................. -- 3 -- Due from ultimate holding company.............................. 95 -- -- Due from related companies..................................... 1,752 -- 3 Deposits and prepayments....................................... 1,575 1,528 1,376 Inventories, net............................................... 5,347 7,514 8,144 ------ ------ ------ Total current assets........................................ 17,192 20,654 24,375 Property, plant, equipment and capital leases, net............... 3,902 10,800 11,216 Loan receivable from a related company........................... 1,889 -- -- Long-term investment............................................. -- 179 179 Deferred stock issuance costs.................................... -- -- 378 Goodwill, net.................................................... 87 77 72 ------ ------ ------ Total assets................................................ 23,070 31,710 36,220 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term bank borrowings..................................... 1,269 7,055 5,555 Long-term bank loans, current portion.......................... 261 811 811 Capital lease obligations, current portion..................... 250 1,033 1,164 Accounts payable............................................... 2,305 4,107 4,194 Receipts in advance............................................ 1,321 958 1,616 Accrued liabilities............................................ 4,596 2,806 4,579 Due to related companies....................................... 52 -- 41 Due to a director.............................................. 66 -- -- Taxation payable............................................... 600 483 651 Dividend payable............................................... 1,073 -- -- ------ ------ ------ Total current liabilities................................... 11,793 17,253 18,611 Long-term bank loans............................................. 733 1,754 1,336 Capital lease obligations........................................ 126 374 749 Deferred taxation................................................ 120 120 120 ------ ------ ------ Total liabilities........................................... 12,772 19,501 20,816 ------ ------ ------ Minority interests............................................... 287 601 1,026 ------ ------ ------ Shareholders' equity: Common stock, par value $0.0646 (equivalent of HK$0.5); 323 authorized, outstanding and fully paid -- 5,000,000 shares...................................................... 323 323 Retained earnings.............................................. 9,683 11,285 14,055 Cumulative translation adjustments............................. 5 -- -- ------ ------ ------ Total shareholders' equity.................................. 10,011 11,608 14,378 ------ ------ ------ Total liabilities, minority interests and shareholders' 23,070 equity.................................................... 31,710 36,220 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-3 62 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED) (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, --------------------------- ------------------------------------- 1995 1996 1994 1995 1996 ---------- ---------- --------- --------- --------- $'000 $'000 $'000 $'000 $'000 (UNAUDITED) (UNAUDITED) Net sales......................... 35,583 36,879 46,930 23,251 32,398 Cost of goods sold................ (25,037) (25,644) (34,116) (16,782) (24,419) ------- ------- ------- ------- ------- Gross profit.................... 10,546 11,235 12,814 6,469 7,979 Selling, general and administrative expenses......... (6,351) (6,806) (6,498) (3,231) (4,162) Interest expenses................. (150) (137) (402) (107) (517) Interest income................... 129 228 208 142 57 Other income (expenses), net...... 80 492 (416) 7 122 ------- ------- ------- ------- ------- Income before income taxes...... 4,254 5,012 5,706 3,280 3,479 Provision for income taxes........ (436) (483) (488) (303) (284) ------- ------- ------- ------- ------- Income before minority interests.................... 3,818 4,529 5,218 2,977 3,195 Minority interests................ (83) (337) (622) (405) (425) ------- ------- ------- ------- ------- Net income...................... 3,735 4,192 4,596 2,572 2,770 ======= ======= ======= ======= ======= Earnings per common share......... $ 0.75 $ 0.84 $ 0.92 $ 0.51 $ 0.55 ======= ======= ======= ======= ======= Weighted average number of shares outstanding..................... 5,000 5,000 5,000 5,000 5,000 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-4 63 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED) (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, -------------------------- ----------------------------------- 1995 1996 1994 1995 1996 ---------- ---------- -------- -------- -------- $'000 $'000 $'000 $'000 $'000 (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................. 3,735 4,192 4,596 2,572 2,770 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation of property, plant and equipment......................... 762 946 1,021 521 821 Amortization of goodwill............. -- 10 10 5 5 Net gain on disposals of property, plant and equipment............... (37) (121) (6) (8) -- Minority interests................... 83 337 622 405 425 Provision for deferred taxation...... 70 -- -- -- -- (Increase) Decrease in operating assets -- Accounts receivable, net... 46 (1,395) (4,015) (4,717) (2,284) Deposits and prepayments............. 24 266 47 537 152 Inventories, net..................... (104) (1,589) (2,167) (816) (630) Increase (Decrease) in operating liabilities -- Accounts payable...... (503) 82 1,802 2,249 87 Receipts in advance.................. (156) 738 (363) (93) 658 Accrued liabilities.................. 1,212 1,112 (1,790) (372) 1,773 Taxation payable..................... 339 (93) (117) 187 168 ------ ------ ------ ------ ------ Net cash provided by (used in) operating activities............ 5,471 4,485 (360) 470 3,945 ------ ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net cash inflow from acquisition of a subsidiary........................ -- 168 -- -- -- Acquisition of long-term investment........................ -- -- (179) -- -- Acquisition of property, plant and equipment......................... (1,491) (3,197) (7,341) (3,748) (1,237) Proceeds from disposals of property, plant and equipment............... 103 1,040 13 15 -- ------ ------ ------ ------ ------ Net cash used in investing activities...................... (1,388) (1,989) (7,507) (3,733) (1,237) ------ ------ ------ ------ ------
F-5 64 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED) -- (CONTINUED) (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, -------------------------- ----------------------------------- 1995 1996 1994 1995 1996 ---------- ---------- -------- -------- -------- $'000 $'000 $'000 $'000 $'000 (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Increase (Decrease) in bank overdraft......................... 105 340 1,910 (13) (937) Increase (Decrease) in short-term bank loans........................ (119) 25 3,876 425 (563) New long-term bank loans............. -- 1,035 2,565 2,287 -- Repayment of long-term bank loans.... (120) (283) (994) (994) (418) New capital lease obligations ....... 209 107 776 321 727 Repayment of capital element of capital lease obligations......... (470) (300) (330) (167) (221) Stock issuance costs paid............ -- -- -- -- (378) Due from immediate holding company... -- -- (3) -- 3 Due from ultimate holding company.... -- (95) 95 (137) -- Due from related companies........... (466) (1,286) 647 602 (3) Due to related companies............. (1,545) 52 (52) (52) 41 Due from a director.................. (77) 77 -- -- -- Due to a director.................... -- (63) (66) 4 -- Dividends paid....................... (1,473) (1,959) (1,073) (167) -- Finance from minority interests...... 29 (33) -- -- -- Dividends paid by subsidiaries to their minority shareholders....... -- (63) (308) -- -- ------ ------ ------ ------ ------ Net cash (used in) provided by financing activities............ (3,927) (2,446) 7,043 2,109 (1,749) ------ ------ ------ ------ ------ Effect of cumulative translation adjustments.......................... -- 5 (5) -- -- ------ ------ ------ ------ ------ Net increase (decrease) in cash and bank deposits........................ 156 55 (829) (1,154) 959 Cash and bank deposits, as of beginning of years/periods..................... 3,912 4,068 4,123 4,123 3,294 ------ ------ ------ ------ ------ Cash and bank deposits, as of end of years/periods........................ 4,068 4,123 3,294 2,969 4,253 ====== ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-6 65 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (AUDITED) AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
COMMON STOCK RETAINED CUMULATIVE -------------------- EARNINGS TRANSLATION AMOUNT -------- ADJUSTMENTS ------ $'000 ----------- NUMBER OF $'000 $'000 SHARES --------- '000 Balance as of April 1, 1993....................... 5,000 323 4,788 -- Net income........................................ -- -- 3,735 -- Dividend -- $0.39 per share....................... -- -- (1,959) -- -- -- ---- ----- ------- - Balance as of March 31, 1994...................... 5,000 323 6,564 -- Net income........................................ -- -- 4,192 -- Dividend -- $0.21 per share....................... -- -- (1,073) -- Translation adjustments........................... -- -- -- 5 -- -- ---- ----- ------- - Balance as of March 31, 1995...................... 5,000 323 9,683 5 Net income........................................ -- -- 4,596 -- Dividend -- $0.60 per share....................... -- -- (2,994) -- Translation adjustments........................... -- -- -- (5) -- -- ---- ----- ------- - Balance as of March 31, 1996...................... 5,000 323 11,285 -- Net income (Unaudited)............................ -- -- 2,770 -- -- -- ---- ----- ------- - Balance as of September 30, 1996 (Unaudited)...... 5,000 323 14,055 -- ==== ===== ======== ====
The accompanying notes are an integral part of these financial statements. F-7 66 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Zindart Industrial Company Limited (the "Company") was incorporated in Hong Kong in July 1977. Prior to August 1993, the Company was owned by certain individual shareholders. In August 1993, as a result of a group reorganization, the Company became wholly owned by Zindart Holdings Limited ("ZHL"; a company incorporated in the Cayman Islands). In December 1995, ZHL transferred its 100% interest in the Company to Zindart Pte Limited (formerly known as Devenish Pte Limited; a company incorporated in Singapore) in return for 14,689,998 ordinary shares of S$1 each in Zindart Pte Limited. ZHL is majority owned by ZIC Holdings Limited ("ZIC"; a company incorporated in Cayman Islands). Prior to the Offering, 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 Company intends to increase its authorized share capital from HK$2,500,000 to HK$5,000,000 by authorizing an aggregate of 10,000,000 ordinary shares of HK$0.50 each, rank pari passu to the then existing shares prior to the closing of the Offering. The Share Split has been reflected retrospectively in the accompanying balance sheets and in all per share computations. The Company and its subsidiaries are principally engaged in the manufacturing of high-quality, detailed die-cast and injection-molding products, including collectibles, collectible holiday ornaments and toy action figures and figurine playsets in the People's Republic of China (the "PRC") for sales to customers in North America and Europe. 2. SUBSIDIARIES Details of the Company's subsidiaries (which together with the Company are collectively referred to as the "Group") as of March 31, 1996 were as follows:
PERCENTAGE OF EQUITY NAME PLACE OF INCORPORATION INTEREST HELD - ------------------------------------------------ --------------------------- -------------------- 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 Virgin Islands 51% Note(c) Onchart Industrial Limited...................... The British Virgin Islands 55% Onchart Industrial Limited...................... Hong Kong 55% Wealthy Holdings Limited........................ The British Virgin Islands 100%
- --------------- (a) Dongguan Xinda Giftware Company Limited is a contractual joint venture established in the PRC to be operated for 15 years up to 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 a pre- determined annual fee to its joint venture partner. (b) Guangzhou Zindart (Xin Xing)(Giftware) Company Limited is a contractual joint venture established in the PRC to be operated for 15 years up to 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 a pre-determined rental for the factory premises to its joint venture partner. (c) According to a shareholders' agreement dated October 10, 1994, the Group is only entitled to share 41% of the profit of Luen Tat Mould Manufacturing Limited. There is no restriction on the distribution of retained earnings by the subsidiaries. F-8 67 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Goodwill Goodwill, being the excess of cost over the fair value of the net assets of a subsidiary acquired during the year ended March 31, 1995, is amortized on a straight-line basis over ten years. The amortization recorded for the years ended March 31, 1995 and 1996 was $10,000 and $10,000, respectively, and for the six months ended September 30, 1995 and 1996 was $5,000 and $5,000, respectively. Accumulated amortization as of March 31, 1995 and 1996 and September 30, 1996 was $10,000, $20,000 and $25,000, respectively. 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 first-in first-out basis, or market value. Costs of work-in-process and finished goods are composed of direct materials, direct labor and an attributable portion of production overheads. e. Property, Plant, Equipment and Capital Leases Property, plant, 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: properties -- 10 to 20 years, machinery, tools, furniture and office equipment -- 4 to 5 years. All ordinary repair and maintenance costs are expensed as incurred. Interest costs incurred during the years/periods of construction of fixed assets are capitalized and amortized over the estimated useful lives of the related assets. Interest costs capitalized during the years ended March 31, 1994, 1995 and 1996 were Nil, approximately $23,000 and approximately $206,000, respectively, and for the six months ended September 30, 1995 and 1996 were approximately $90,000 and Nil, respectively. f. Long-term investments Investments held for the long-term are stated at market value. Income from long-term investments is accounted for to the extent of dividends received and receivable. g. Sales Sales represent the invoiced value of merchandise/molds supplied to customers. Sales are recognized upon delivery of goods and passage of title to customers. F-9 68 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) h. Income Taxes The Group accounts for income tax under the provisions of Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. i. Operating Leases Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to expense on the straight-line basis over the period of the relevant leases. j. Foreign Currency Translation The Company considers United States dollars as its functional currency as most of the Group's business activities are based in United States dollars and Hong Kong dollars ("HK$") (Note: Hong Kong dollars are pegged with United States dollars at the exchange rate of US$1 to HK$7.8). The translation of the financial statements of group companies 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, 1994, 1995 and 1996 were approximately $(102,000), approximately $182,000 and approximately $(160,000), respectively, and for the six months ended September 30, 1995 and 1996 were approximately $8,000 and approximately $1,000, respectively. k. Earnings Per Common Share Earnings per common share is computed by dividing net income for each year/period by 5,000,000, the weighted average number of shares of common stock outstanding during the years/periods, on the basis that the Share Split (see Note 1) had been consummated prior to the years/periods presented. l. 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. F-10 69 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. ACCOUNTS RECEIVABLE Accounts receivable comprised:
MARCH 31, SEPTEMBER 30, ----------------------- 1996 1996 ------------- --------- $'000 1995 $'000 (UNAUDITED) --------- $'000 Trade receivables................................. 4,339 8,354 10,638 Less: Allowance for doubtful accounts............. (39) (39) (39) ----- ----- ------ Accounts receivable, net.......................... 4,300 8,315 10,599 ===== ===== ======
5. DEPOSITS AND PREPAYMENTS Deposits and prepayments comprised:
SEPTEMBER 30, 1996 MARCH 31, ------------- ----------------------- $'000 1995 1996 (UNAUDITED) --------- --------- $'000 $'000 Deposits for acquisition of molds................. 1,268 1,083 1,058 Prepayments....................................... 287 352 289 Rental and utility deposits....................... 12 12 11 Other receivables................................. 8 81 18 ----- ----- ----- 1,575 1,528 1,376 ===== ===== =====
6. INVENTORIES Inventories comprised:
SEPTEMBER 30, 1996 MARCH 31, ------------- --------------- $'000 1995 1996 (UNAUDITED) ----- ----- $'000 $'000 Raw materials.......................................... 3,840 5,204 4,479 Work-in-process........................................ 903 1,170 2,098 Finished goods......................................... 663 1,199 1,626 ----- ----- ----- 5,406 7,573 8,203 Less: Allowance for obsolescence....................... (59) (59) (59) ----- ----- ----- Inventories, net....................................... 5,347 7,514 8,144 ===== ===== =====
F-11 70 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PROPERTY, PLANT, EQUIPMENT AND CAPITAL LEASES Property, plant, equipment and capital leases comprised:
MARCH 31, SEPTEMBER 30, ----------------- 1996 1996 ------------- ------ $'000 1995 $'000 (UNAUDITED) ------ $'000 Property, plant and equipment: Properties.............................................. 2,303 7,940 8,116 Machinery and tools..................................... 3,631 4,212 3,455 Furniture and office equipment.......................... 1,094 1,367 1,592 Capital leases: Machinery and tools..................................... 711 1,993 3,027 Furniture and office equipment.......................... 566 636 587 ----- ------ ------ Cost.................................................... 8,305 16,148 16,777 Less: Accumulated depreciation Property, plant and equipment........................... (3,558) (3,740) (3,656) Capital leases.......................................... (845) (1,608) (1,905) ----- ------ ------ Property, plant, equipment and capital leases, net...... 3,902 10,800 11,216 ===== ====== ======
As of March 31, 1995 and 1996 and September 30, 1996, properties with a net book value of approximately $1,409,000, approximately $7,225,000, and approximately $7,276,000, respectively, were mortgaged to secure certain of the Group's banking facilities. 8. 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 approximates the market value of this investment as of March 31, 1996 and September 30, 1996. 9. SHORT-TERM BANK BORROWINGS Short-term bank borrowings comprised:
MARCH 31, ----------------------- 1996 --------- SEPTEMBER 30, 1996 1995 $'000 ------------- --------- $'000 $'000 (UNAUDITED) Bank overdrafts................................... 456 2,366 1,429 Short-term bank loans............................. 813 4,689 4,126 ----- ----- ----- 1,269 7,055 5,555 ===== ===== =====
Short-term bank borrowings are denominated in Hong Kong dollars, and bear interest at the floating commercial bank lending rates in Hong Kong, which range from 8.72% to 10.50% per annum as of March 31, 1996 and from 8.94% to 10.50% per annum as of September 30, 1996. They are secured by certain properties, bank deposits and inventories of the Group. They are drawn for working capital purposes and are renewable with the consent of the relevant banks. F-12 71 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. SHORT-TERM BANK BORROWINGS -- (CONTINUED) Supplemental information with respect to short-term bank borrowings for the year ended March 31, 1996 and for the six months ended September 30, 1996 are as follows:
AVERAGE WEIGHTED AVERAGE AMOUNT INTEREST RATE AT WEIGHTED AVERAGE OUTSTANDING THE END OF AVERAGE INTEREST RATE DURING THE YEAR/PERIOD DURING THE YEAR/PERIOD YEAR/PERIOD ---------------- ---------------------- MAXIMUM ----------- AMOUNT OUTSTANDING $'000 DURING THE YEAR/PERIOD ----------- $'000 MARCH 31, 1996 Bank overdrafts.................. 2,366 1,232 9.66% 9.90% ===== ===== ==== ==== Short-term bank loans............ 5,551 3,632 8.92% 8.41% ===== ===== ==== ==== SEPTEMBER 30, 1996 (UNAUDITED) Bank overdrafts.................. 3,646 2,241 9.25% 9.50% ===== ===== ==== ==== Short-term bank loans............ 6,590 4,774 8.98% 8.94% ===== ===== ==== ====
10. ACCRUED LIABILITIES Accrued liabilities comprised:
MARCH 31, ----------------------- 1996 --------- SEPTEMBER 30, 1996 1995 $'000 ------------- --------- $'000 $'000 (UNAUDITED) Accruals for operating expenses -- Workers, wages and bonus..................... 560 467 679 -- Management bonus............................. 1,146 535 908 -- Rental expenses.............................. 457 408 417 -- Subcontracting charges....................... 622 271 198 -- Repair and maintenance....................... 714 -- -- Payable for land cost in the PRC.................. 531 98 -- Accruals for raw materials purchases.............. 75 339 1,018 Others............................................ 491 688 1,359 ----- ----- ----- 4,596 2,806 4,579 ===== ===== =====
F-13 72 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. LONG-TERM BANK LOANS Long-term bank loans are collateralized by certain properties and bank deposits of the Group. They bear interest rates ranging from 7% to 10% per annum as of March 31, 1996 and from 7% to 10% per annum as of September 30, 1996 and are repayable as follows:
MARCH 31, SEPTEMBER 30, --------------- 1996 1996 ------------- ----- $'000 1995 $'000 (UNAUDITED) ----- $'000 Payable during the following period: Within one year...................................... 261 811 811 Over one year but not exceeding two years............ 259 1,594 810 Over two years but not exceeding three years......... 259 160 470 Over three years but not exceeding four years........ 215 -- 56 ---- ----- ----- Total bank loans....................................... 994 2,565 2,147 Less: Current maturities............................... (261) (811) (811) ---- ----- ----- Long-term bank loans................................... 733 1,754 1,336 ==== ===== =====
12. CAPITAL LEASE OBLIGATIONS Future minimum lease payments under capital leases as of March 31, 1995 and 1996 and September 30, 1996, together with the present value of the minimum lease payments are:
MARCH 31, SEPTEMBER 30, ---------------- 1996 1996 ------------- ------ $'000 1995 $'000 (UNAUDITED) ----- $'000 Payable during the following period: Within one year..................................... 306 1,151 1,270 Over one year but not exceeding two years........... 87 438 801 Over two years but not exceeding three years........ 88 -- 106 ---- ----- ------ Total minimum lease payments.......................... 481 1,589 2,177 Less: Amount representing interest.................... (105) (182) (264) ---- ----- ------ Present value of minimum lease payments............... 376 1,407 1,913 Less: Current portion................................. (250) (1,033) (1,164) ---- ----- ------ Non-current portion................................... 126 374 749 ==== ===== ======
13. NET SALES Net sales comprised:
YEAR ENDED MARCH 31, SIX MONTHS ENDED ------------------------ SEPTEMBER 30, 1994 1995 1996 ------------------------- ------ ------ ------ 1995 1996 $'000 $'000 $'000 ----------- ----------- $'000 $'000 (UNAUDITED) (UNAUDITED) Sales of merchandise.................... 31,451 32,488 38,306 18,480 28,475 Sales of molds.......................... 4,132 4,391 8,624 4,771 3,923 ------ ------ ------ ------ ------ 35,583 36,879 46,930 23,251 32,398 ====== ====== ====== ====== ======
F-14 73 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. NET SALES -- (CONTINUED) Substantially all of the sales of merchandise and molds are shipped to the United States of America. 14. 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 are domiciled and operate. The Company is 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, is exempted from payment of the British Virgin Islands income taxes. The joint venture enterprises established in the PRC are subject to PRC income taxes at a rate of 27% (24% state unified income tax and 3% local income tax, in the open coastal areas of the PRC). However, they are exempted from state unified income tax and local income tax for two years starting from the first year of profitable operations and then are subject to a 50% reduction in state unified income tax 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 Dongguan Xinda Giftware Company Limited could not be determined as the joint venture has just started operations. Significant components of provision for income taxes are:
YEAR ENDED MARCH 31, SIX MONTHS ENDED --------------------------------- SEPTEMBER 30, 1994 1995 1996 ------------------------- --------- --------- --------- 1995 1996 $'000 $'000 $'000 ----------- ----------- $'000 $'000 (UNAUDITED) (UNAUDITED) Current tax -- Hong Kong profits tax........... 366 483 488 303 284 Deferred tax....................... 70 -- -- -- -- --- --- --- --- --- 436 483 488 303 284 === === === === ===
The reconciliation of the Hong Kong statutory tax rate to the effective income tax rate based on income before income taxes stated in the consolidated statements of operations is as follows:
YEAR ENDED MARCH 31, --------------------------------- 1994 1995 1996 --------- --------- --------- SIX MONTHS ENDED SEPTEMBER 30, ------------------------- 1995 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) Hong Kong statutory tax rate....... 17.5% 16.5% 16.5% 16.5% 16.5% Effect of tax exemption for Guangzhou Zindart (Xin Xing) (Giftware) Company Limited....... -- (1.4%) (1.1%) (0.9%) -- Non-taxable income arising from activities which qualified as offshore......................... (7.3%) (5.5%) (6.8%) (6.4%) (8.3%) ----- ---- - ---- - ---- - ---- - Effective income tax rate.......... 10.2% 9.6% 8.6% 9.2% 8.2% ===== ===== ===== ===== =====
F-15 74 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. INCOME TAXES -- (CONTINUED) Components of deferred tax balances as of March 31, 1995 and 1996 and September 30, 1996 are as follows:
MARCH 31, SEPTEMBER 30, --------------------- 1996 1995 1996 ------------- --------- --------- $'000 $'000 $'000 (UNAUDITED) Accumulated difference between taxation allowance and depreciation expenses............................... 120 120 120 === === ===
15. DIVIDENDS Dividends comprised:
YEAR ENDED MARCH 31, SIX MONTHS ENDED --------------------------------- SEPTEMBER 30, 1994 1995 1996 1996 --------- --------- --------- ---------------- $'000 $'000 $'000 $'000 (UNAUDITED) Cash dividend............................. 1,959 1,073 -- -- Dividend in kind.......................... -- -- 2,994 -- ----- ----- ----- ----- 1,959 1,073 2,994 -- ===== ===== ===== =====
Dividends 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. 16. COMMITMENTS a. Capital commitments As of March 31, 1995 and 1996 and September 30, 1996, the Group had capital commitments amounting to approximately $3,368,000, $975,000 and Nil, respectively, in respect of construction of factories in the PRC. F-16 75 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. COMMITMENTS -- (CONTINUED) b. Operating Lease Commitments The Group has various operating lease agreements for factory premises and office equipment which extend through December 1997. Rental expenses for the years ended March 31, 1994, 1995 and 1996 were approximately $615,000, approximately $936,000 and approximately $624,000, respectively, and for the six months ended September 30, 1995 and 1996 were approximately $300,000 and approximately $326,000, respectively. Most leases contain renewal options. Future minimum rental payments as of March 31, 1996 and September 30, 1996, under agreements classified as operating leases with non-cancelable terms in excess of one year, are as follows:
MARCH 31, SEPTEMBER 30, 1996 1996 --------- ------------- $'000 $'000 (UNAUDITED) Payable during the following period: Within one year............................................ 500 185 Over one year but not exceeding two years.................. 63 21 Over two years but not exceeding three years............... 3 -- --- --- 566 206 === ===
Under the supplementary joint venture agreement for the establishment of Dongguan Xinda Giftware Company Limited, the Group has committed to pay a pre-determined annual fee to the third-party joint venture partner for the period from January 1996 to November 2009. The total commitments for this pre- determined fee as of March 31, 1996 and September 30, 1996 are analyzed as follows:
MARCH 31, SEPTEMBER 30, 1996 1996 --------- ------------- $'000 $'000 (UNAUDITED) Payable during the following period: Within one year............................................ 39 39 Over one year but not exceeding two years.................. 39 39 Over two years but not exceeding three years............... 39 39 Over three years but not exceeding four years.............. 39 39 Over four years but not exceeding five years............... 39 39 Thereafter................................................. 348 328 --- --- 543 523 === ===
17. 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 Group's employees 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 employer's 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 F-17 76 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. RETIREMENT PLAN -- (CONTINUED) employer's contributions made by the Group during the years ended March 31, 1994, 1995 and 1996 were approximately $62,000, approximately $97,000, and approximately $71,000, respectively, and during the six months ended September 30, 1995 and 1996 were approximately $28,000 and approximately $28,000, respectively. The Group has no other post-retirement or post-employment benefit plans. 18. BANKING FACILITIES As of March 31, 1996 and September 30, 1996, the Group had banking facilities of approximately $10,754,000 and $12,153,000, respectively, for overdrafts, loans and trade financing. Unused facilities as of the same dates amounted to approximately $1,129,000 and approximately $4,446,000, respectively. These facilities were secured by: a. Mortgages over the Group's properties with a net book value of approximately $7,225,000 and $7,276,000 as of March 31, 1996 and September 30, 1996, respectively; b. Pledges of the Group's bank deposits of approximately $1,770,000 and $1,770,000 as of March 31, 1996 and September 30, 1996, respectively; and The Group's inventories held under trust receipt and import bank loans. In addition, the Group has agreed to observe certain restrictive bank covenants on maintenance of net worth, and payment of dividends and management bonuses. The Group has complied with all such covenants. The Group has also agreed not to create any debenture without a bank's prior consent. 19. RELATED PARTY TRANSACTIONS The Group entered into the following transactions with related parties:
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ------------------------------- ------------------------ 1995 1996 1995 1996 --------- --------- ----------- ----------- 1994 $'000 $'000 $'000 $'000 --------- (UNAUDITED) (UNAUDITED) $'000 Sales to ERTL (Note a) and ERTL's related company.................... 13,576 11,824 12,081 5,564 9,850 Management fee paid to ZIC........... -- 23 -- -- -- Management fee paid to related companies.......................... -- 171 -- -- -- Rental income from a related company............................ -- -- 8 -- -- ========= ========= ========= =========== ===========
F-18 77 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. RELATED PARTY TRANSACTIONS -- (CONTINUED) The Group had the following outstanding balances with related parties:
MARCH 31, SEPTEMBER 30, --------------------- 1996 1996 ------------- --------- $'000 1995 $'000 (UNAUDITED) --------- $'000 Accounts receivable from ERTL (Note a) and its related company................................. 1,140 1,536 3,241 Loan receivable from a related company (Note b)... 1,889 -- -- Due from immediate holding company (Note f)....... -- 3 -- Due from ultimate holding company (Note f)........ 95 -- -- Due from related companies (Notes b, and c and f).............................................. 1,752 -- 3 Due to related companies.......................... 52 -- 41 Due to a director (Note e)........................ 66 -- -- ========= ========= =============
Notes a. ERTL (Hong Kong) Ltd. ("ERTL") is a minority shareholder of Zindart Pte Limited, the Company's sole shareholder. b. Loan receivable from a related company of approximately $1,889,000 and the amount due from that related company of approximately $1,105,000 were distributed to Zindart Pte Limited, the Company's then sole shareholder, as dividends in kind during the year ended March 31, 1996. c. Included in amounts due from related companies of approximately $1,317,000 were unsecured and bore interest at two percentage points above the Hong Kong prime lending rate. Interest income earned from these related companies for the years ended March 31, 1994, 1995 and 1996 were Nil, approximately $85,000 and approximately $68,000, respectively and for the six months ended September 30, 1995 and 1996 were approximately $67,000 and Nil, respectively. d. During the year ended March 31, 1996, a related company had advanced approximately $259,000 to the Company. Such advance was unsecured and bore interest at two percentage points above the Hong Kong prime lending rate. During the year ended March 31, 1996, the Group paid to this related company interest of approximately $3,000. e. Amounts due to a director were unsecured and bore interest at two percentage points above the Hong Kong prime lending rate. Interest expenses paid to the director for the years ended March 31, 1994, 1995 and 1996 were Nil, approximately $1,000 and approximately $7,000, respectively and for the six months ended September 30, 1995 and 1996 were approximately $4,000 and Nil, respectively. f. The other outstanding balances with the ultimate and immediate holding company and related companies were unsecured, non-interest bearing and without pre-determined repayment terms. 20. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION a. Cash paid for interest and income taxes comprised:
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ---------------------- --------------------------- 1995 1996 1995 1996 ---- ---- ----------- ----------- 1994 $'000 $'000 $'000 $'000 ---- (UNAUDITED) (UNAUDITED) $'000 Interest............................. 150 160 608 197 517 ========= ========= ========= =========== =========== Income taxes......................... 165 742 605 116 116 ========= ========= ========= =========== ===========
F-19 78 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 20. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- (CONTINUED) b. Supplemental disclosure of investing activities: (i) During the year ended March 31, 1995, the Group acquired from an unrelated third party certain assets and liabilities with a net book value of approximately $82,000 at a consideration of approximately $179,000. Thereafter, it contributed such assets and liabilities to Luen Tat Mould Manufacturing Limited ("LTMML") in exchange for a 51% interest in LTMML. According to a shareholders' agreement dated October 10, 1994, the Group is only entitled to share 41% of the profit of LTMML. Details of net assets acquired were as follows:
$'000 ---- Cash and bank deposits...................................................... 347 Accounts receivable, net.................................................... 372 Deposits and prepayments.................................................... 328 Inventories, net............................................................ 2 Property, plant and equipment............................................... 26 Accounts payable............................................................ (604) Accrued liabilities......................................................... (157) Due to a director........................................................... (129) Taxation payable............................................................ (24) ---- Net assets as of the date of acquisition.................................... 161 Acquired percentage......................................................... 51% ---- Share of net assets as of the date of acquisition........................... 82 Consideration satisfied in cash............................................. (179) ---- Goodwill.................................................................... 97 ==== Net cash inflow: Cash acquired............................................................. 347 Cash paid................................................................. (179) ---- Net cash inflow........................................................... 168 ====
(ii) During the six months ended September 30, 1995 and accordingly 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. (iii) During the year ended March 31, 1996, the Group entered into capital lease arrangements in respect of originally owned assets and obtained cash finance of $776,000, and (ii) newly acquired assets with a capital value of approximately $585,000. 21. OPERATING RISK a. Country risk The Group's operations are conducted in Hong Kong and the PRC. As a result, 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. On July 1, 1997, sovereignty over Hong Kong will be transferred from the United Kingdom to the PRC, and Hong Kong will become a Special Administrative Region of the PRC (a "SAR"). As provided in the F-20 79 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. OPERATING RISK -- (CONTINUED) Sino-British Joint Declaration relating to Hong Kong and 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 will have an adverse impact on the Group'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 two PRC parties. The deterioration of any of these strategic relationships may have an adverse effect on the operations of the Group. c. Concentration of credit risk A substantial portion of the Group's sales are made to a small number of customers on an open account basis and generally no collateral is required. Details of individual customers accounting for more than 5% of the Group's sales are as follows:
YEAR ENDED MARCH 31, SIX MONTHS ---------------------- ENDED 1994 1995 1996 SEPTEMBER 30, ---- ---- ---- 1996 ------------- (UNAUDITED) Hallmark Cards (HK) Limited (a subsidiary of Hallmark Cards Inc.)........................... 28.1% 31.2% 27.0% 29.3% ERTL and its related company (Note a)............ 38.2% 32.1% 25.9% 30.4% Hasbro Far East Limited.......................... 8.0% 8.1% 9.3% 3.4% A buying office of Sieper Werke GmbH............. 7.0% 7.4% 6.2% 7.6% Drumwell Limited................................. 0.1% 0.7% 4.5% 7.2% Revell/Monogram, Inc............................. 5.8% 4.5% 3.0% 1.4% ==== ==== ==== ======
- --------------- Note a. ERTL is a minority shareholder of Zindart Pte Limited, the Company's sole shareholder. Concentration of accounts receivable as of March 31, 1995 and 1996 and September 30, 1996 is as follows:
MARCH 31, ----------------------- 1995 1996 --------- --------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) Five largest accounts receivable.................. 85% 52% 67% == == ==
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. F-21 80 ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. OPERATING RISK -- (CONTINUED) d. Concentration of Suppliers The Group purchases raw materials from a number of suppliers. Details of individual suppliers accounting for more than 5% of the Group's purchases are as follows:
YEAR ENDED MARCH 31, ------------------------------------- 1994 1995 1996 --------- --------- --------- SIX MONTHS ENDED SEPTEMBER 30, 1996 ------------- (UNAUDITED) Sogen (Far East) Limited............... 0.4% 2.5% 9.8% 5.0% Starlite Printers Limited.............. 3.3% 4.8% 8.3% 7.3% Wing Fu Carton & Printing Company Limited.............................. 5.0% 5.5% 6.3% 4.9% Lee Kee Metal Company Limited.......... 2.0% 9.0% 4.8% 2.6% Y.T. Cheng (Ching Tai) Limited......... 4.0% 7.2% 4.7% 1.9% Cominco Ltd............................ 16.4% 1.2% 0.9% 5.2% ==== === === ===
22. OTHER SUPPLEMENTAL INFORMATION The following items were included in the consolidated statements of operations:
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, --------------------------------- ------------------------- 1995 1996 1995 1996 --------- --------- ----------- ----------- 1994 $'000 $'000 $'000 $'000 --------- (UNAUDITED) (UNAUDITED) $'000 Depreciation of property, plant and equipment owned assets............................. 458 658 759 409 609 assets held under capital leases......... 304 288 262 112 213 Interest expenses for bank overdrafts and loans................ 70 91 519 160 451 capital lease obligations................ 80 68 79 33 66 amount due to a director................. -- 1 7 4 -- amount due to a related company.......... -- -- 3 -- -- Less: amount capitalized as property, plant and equipment............................ -- (23) (206) (90) -- ---- --- ---- ---- --- 150 137 402 107 517 Operating lease rentals for rented premises.......................... 590 913 613 299 308 machinery and equipment.................. 25 23 11 1 18 Repairs and maintenance expenses........... 636 289 286 160 268 Interest income from bank deposits............................ 129 143 140 75 57 amount due from related companies........ -- 85 68 67 -- Net foreign exchange (loss) gain........... (102) 182 (160) 8 1 ==== === ==== ==== ===
F-22 81 APPENDIX DESCRIPTION OF GRAPHICS PAGE 7: ORGANIZATION OF THE COMPANY This chart shows the organization of the Company, its principal shareholders and subsidiaries prior to giving effect to the Offering. OPERATING STRUCTURE This chart shows the operating structure of the Company's three manufacturing facilities. PAGE 28: This flow chart shows the steps in the manufacturing process that make up the Turnkey Manufacturing Service. 82 - ------------------------------------------------------ - ------------------------------------------------------ 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
PAGE ---- Reports to Securities Holders.......... 2 Currency Conversions................... 2 Enforceability of Civil Liabilities.... 2 Prospectus Summary..................... 5 Risk Factors........................... 9 Use of Proceeds........................ 17 Dividends and Dividend Policy.......... 17 Dilution............................... 17 Capitalization......................... 19 Selected Financial Data................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 21 Business............................... 25 Management............................. 33 Principal Shareholders................. 35 Certain Transactions................... 37 Description of Shares.................. 37 Description of American Depositary Receipts............................. 39 Shares Eligible for Future Sale........ 47 Taxation............................... 48 Certain Foreign Issuer Considerations....................... 53 Underwriting........................... 54 Legal Matters.......................... 55 Experts................................ 55 Additional Information................. 55 Report of Independent Public Accountants.......................... F-2
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OR ADSS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,400,000 AMERICAN DEPOSITARY SHARES REPRESENTING 1,400,000 ORDINARY SHARES Z I N DA R T LIMITED ------------------------------ PROSPECTUS ------------------------------ VAN KASPER & COMPANY , 1997 - ------------------------------------------------------ - ------------------------------------------------------ 83 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. SEC registration fee.................................................. $ 5,793.10 NASD filing fee....................................................... 2,180.00 Blue Sky fees and expenses............................................ 5,000.00 Printing and engraving expenses....................................... 85,000.00 Legal fees and expenses............................................... 700,000.00 Accounting fees and expenses.......................................... 250,000.00 Miscellaneous expenses................................................ 252,026.90 --------- Total............................................................ $ 1,300,000.00 =========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Reference is made to Section 8 of the Underwriting Agreement, a copy of which will be 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. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. To be provided by amendment. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. 1.1 -- Form of Underwriting Agreement. *3.1 -- Memorandum of Association of the Company. 3.2 -- Articles of Association of the Company. 4.1 -- Deposit Agreement *5.1 -- Opinion of Robert W.H. Wang & Co. *10.1 -- Contractual Joint Venture Agreement with Dongguan Xinda Giftware Company Limited (English summary of document in Chinese). *10.2 -- Contractual Joint Venture Agreement with Guangzhou (Xin Xing) Giftware Company Limited (English summary of document in Chinese). *10.3 -- Subcontract Processing Agreement with Guangzhou Tian He Dongpu Economic Development Company (English summary of document in Chinese). *10.4 -- Commitment Letter from The Hong Kong and Shanghai Banking Corporation Limited. *10.5 -- Commitment Letter from Standard Chartered Bank. *10.6 -- Commitment Letter from Bank of China. *10.7 -- Land Use Rights Agreement (English summary of document in Chinese). II-1 84 *15.1 -- Letter of Arthur Andersen & Co., re Unaudited Interim Financial Information. 22.1 -- Subsidiaries of the Registrant. *24.1 -- Consent of Arthur Andersen & Co. *24.2 -- Consent of Robert W.H. Wang & Co. - --------------- * To be filed by amendment. (b) Financial Statement Schedules Schedule II -- Amounts Receivable from Related Parties Schedule IV -- Indebtedness of Related Parties -- Not Current Schedule IX -- Valuation and Qualifying Accounts
All other 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. 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, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-2 85 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 on Form F-1 and has caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Hong Kong, on December 16, 1996. (Registrant) ZINDART INDUSTRIAL COMPANY LIMITED By George K.D. Sun Chief Executive Officer 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:
SIGNATURE TITLE DATE - ---------------------------------------- --------------------------------- ------------------ /s/ GEORGE K.D. SUN Chief Executive Officer and December 16, 1996 - ---------------------------------------- Director (Principal Executive George K.D. Sun Officer) /s/ FEATHER S.Y. FOK Chief Operating Officer and Chief December 16, 1996 - ---------------------------------------- Financial Officer (Principal Feather S.Y. Fok Financial Officer) /s/ VICKIE W.K. SO Financial Controller (Principal December 16, 1996 - ---------------------------------------- Accounting Officer) Vickie W.K. So /s/ ALEXANDER M.K. NGAN Director December 16, 1996 - ---------------------------------------- Alexander M.K. Ngan /s/ HENRY H.L. HU Director December 16, 1996 - ---------------------------------------- Henry H.L. Hu /s/ GEORGE VOLANAKIS Director December 16, 1996 - ---------------------------------------- George Volanakis /s/ TONY D.H. LAI Director December 16, 1996 - ---------------------------------------- Tony D.H. Lai /s/ DOMINA W.K. LEUNG Director December 16, 1996 - ---------------------------------------- Domina W.K. Leung /s/ ROBERT A. THELEEN Authorized U.S. Representative December 16, 1996 - ---------------------------------------- Robert A. Theleen
II-3 86 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the shareholders and Board of Directors of Zindart Industrial Company Limited: We have audited, in accordance with generally accepted auditing standards in the United States of America, the consolidated balance sheets of Zindart Industrial Company Limited (incorporated in Hong Kong; "the Company") and Subsidiaries as of March 31, 1994, 1995 and 1996 and the related consolidated statements of operations, cash flows and changes in shareholders' equity for the years ended March 31, 1994, 1995 and 1996, included in this registration statement and have issued our report thereon dated December 16, 1996. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to the schedules are the responsibility of the Company's management and are presented for the purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. Certified Public Accountants Hong Kong Hong Kong, December 16, 1996. S-1 87 SCHEDULE II ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES AMOUNTS RECEIVABLE FROM RELATED PARTIES (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
DEDUCTIONS BALANCE AT END ADDITIONS ----------------------- --------------------- --------- AMOUNTS AMOUNTS CURRENT NOT CURRENT NAME OF DEBTOR COLLECTED WRITTEN OFF ------- ----------- - -------------------------------------- BALANCE AT $'000 --------- ----------- $'000 $'000 BEGINNING $'000 $'000 ---------- $'000 Year ended March 31, 1994 Zindart Entertainment & Leisure Limited.................. $ -- $ 152 $ -- $ -- $ 152 -- Zindart Investment Company Limited.......................... -- 194 -- -- 194 -- Premium Gallery Limited............. -- 120 -- -- 120 -- ------ ------ ------- ------ ------ ------ $ -- $ 466 $ -- $ -- $ 466 $ -- ====== ====== ======= ====== ====== ====== Year ended March 31, 1995 Zindart Entertainment & Leisure Limited.................. $ 152 $ 880 $ -- $ -- $ 1,032 $ -- Zindart Investment Company Limited.......................... 194 -- (194) -- -- -- Premium Gallery Limited............. 120 -- (120) -- -- -- Sinomex Hong Kong Limited........... -- 526 -- -- 526 -- Verveine Limited.................... -- 4 -- -- 4 -- Gold Venture Limited................ -- 4 -- -- 4 -- Wealthy Holdings Limited............ -- 7 -- -- 7 -- Luen Tat Model Design Company Limited.......................... -- 179 -- -- 179 -- ------ ------ ------- ------ ------ ------ $ 466 $ 1,600 $ (314) $ -- $ 1,752 $ -- ====== ====== ======= ====== ====== ====== Year ended March 31, 1996 Zindart Entertainment & Leisure Limited.................. $1,032 $ 73 $ (1,105)* $ -- -- -- Sinomex Hong Kong Limited........... 526 41 (567) -- -- -- Verveine Limited.................... 4 2 (6) -- -- -- Gold Venture Limited................ 4 2 (6) -- -- -- Wealthy Holdings Limited............ 7 -- (7) -- -- -- Luen Tat Model Design Company Limited.......................... 179 -- (179) -- -- -- ------ ------ ------- ------ ------ ------ $1,752 $ 118 $ (1,867) $ -- $ -- $ -- ====== ====== ======= ====== ====== ======
- --------------- * This amount was distributed to Zindart Pte Limited, the Company's then sole shareholder, as dividends in kind. S-2 88 SCHEDULE IV ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES INDEBTEDNESS OF RELATED PARTIES -- NOT CURRENT (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
INDEBTEDNESS OF ------------------------ BALANCE ADDITIONS DEDUCTIONS AT END NAME --------- ---------- ------- - ------------------------------------------------ BALANCE $'000 $'000 $'000 AT BEGINNING ------------ $'000 Year ended March 31, 1994 Zindart Entertainment & Leisure Limited....... $ -- $ 1,889 $ -- $ 1,889 ====== ====== ======= ====== Year ended March 31, 1995 Zindart Entertainment & Leisure Limited....... $1,889 $ -- $ -- $ 1,889 ====== ====== ======= ====== Year ended March 31, 1996 Zindart Entertainment & Leisure Limited....... $1,889 $ -- $ (1,889)* $ -- ====== ====== ======= ======
- --------------- * This amount was distributed to Zindart Pte Limited, the Company's then sole shareholder, as dividends in kind. S-3 89 SCHEDULE IX ZINDART INDUSTRIAL COMPANY LIMITED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS EXPRESSES IN UNITED STATES DOLLARS)
ADDITIONS: CHARGED TO DEDUCTIONS BALANCE AT COST AND ---------- END DESCRIPTION EXPENSES ---------- - ------------------------------------------------ BALANCE AT ---------- $'000 $'000 BEGINNING $'000 ---------- $'000 Year ended March 31, 1994 Provision for doubtful accounts............... $ -- $ 26 $ -- $ 26 Provision for inventories obsolescence........ 59 -- -- 59 --- --- --- --- $ 59 $ 26 $ -- $ 85 === === === === Year ended March 31, 1995 Provision for doubtful accounts............... $ 26 $ 13 $ -- $ 39 Provision for inventories obsolescence........ 59 -- -- 59 --- --- --- --- $ 85 $ 13 $ -- $ 98 === === === === Year ended March 31, 1996 Provision for doubtful accounts............... $ 39 $ -- $ -- $ 39 Provision for inventories obsolescence........ 59 -- -- 59 --- --- --- --- $ 98 $ -- $ -- $ 98 === === === ===
S-4 90 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBITS PAGE - ------- ------------------------------------------------------------------------------ 1.1 -- Form of Underwriting Agreement................................................ *3.1 -- Memorandum of Association of the Company...................................... 3.2 -- Articles of Association of the Company........................................ 4.1 -- Deposit Agreement............................................................. *5.1 -- Opinion of Robert W.H. Wang & Co.............................................. *10.1 -- Contractual Joint Venture Agreement with Dongguan Xinda Giftware Company Limited (English summary of document in Chinese).............................. *10.2 -- Contractual Joint Venture Agreement with Guangzhou (Xin Xing) Giftware Company Limited (English summary of document in Chinese).............................. *10.3 -- Subcontract Processing Agreement with Guangzhou Tian He Dongpu Economic Development Company (English summary of document in Chinese).................. *10.4 -- Commitment Letter from The Hong Kong and Shanghai Banking Corporation Limited....................................................................... *10.5 -- Commitment Letter from Standard Chartered Bank................................ *10.6 -- Commitment Letter from Bank of China.......................................... *10.7 -- Land Use Rights Agreement (English summary of document in Chinese)............ *15.1 -- Letter of Arthur Andersen & Co., re Unaudited Interim Financial Information................................................................... 22.1 -- Subsidiaries of the Registrant................................................ *24.1 -- Consent of Arthur Andersen & Co............................................... *24.2 -- Consent of Robert W.H. Wang & Co..............................................
- --------------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 Zindart Limited (a Hong Kong corporation) 1,400,000 American Depositary Shares Representing 1,400,000 Ordinary Shares(1) UNDERWRITING AGREEMENT _____________, 1997 VAN KASPER & COMPANY As Representative of the several Underwriters named in Schedule I, 11661 San Vincente Boulevard, Suite 709 Los Angeles, California 90049 Ladies and Gentlemen: Zindart Limited, a corporation formed under the laws of Hong Kong (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters") 1,400,000 American Depositary Shares (the "Shares") representing 1,400,000 of the Company's Ordinary Shares (the "Ordinary Shares"). In addition, the Company also proposes to grant to the Underwriters an option to purchase up to an additional 210,000 American Depositary Shares representing 210,000 Ordinary Shares on the terms and for the purposes set forth in Section 2(b) (the "Option Shares"). The Shares and any Option Shares purchased pursuant to this Agreement are referred to collectively in this Agreement as the "Securities." Van Kasper & Company is acting as representative of the several Underwriters and in that capacity is referred to in this Agreement as the "Representative." The Company hereby confirms the 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: - ------------------ (1) Plus an option to purchase from the Company up to 210,000 additional American Depositary Shares representing 210,000 Ordinary Shares to cover over-allotments. 2 (a) A Registration Statement (Registration No. 33-____) 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 Representative 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 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" -2- 3 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 best 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 best 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. (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 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 Representative specifically for use therein. -3- 4 (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, whether as a shareholder, partner, member, joint venturer or otherwise. Except as set forth on Exhibit B, neither the Company nor any Subsidiary has any 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 its business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary 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 or such Subsidiary). 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 that are material to the conduct of its business, all of which are valid and in full force and effect. (f) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary 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 or any Subsidiary, 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 (or, if the Prospectus is not in existence, the most recent Preliminary 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 -4- 5 described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (g) There is no agreement, contract, license, lease or other document required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary 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 (or, if the Prospectus is not in existence, the most recent Preliminary 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 material breach of or default under any such contract. (h) The authorized and outstanding capital stock of the Company is set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the description of the Ordinary Shares and of the Securities therein conforms with and accurately describes the rights set forth in the instruments defining the same. 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, if any, and the options or other rights granted or exercised thereunder, if any, set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), accurately and fairly present the information required to be shown 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. There are no preemptive rights applicable to any of the Securities to be sold by the Company. (j) All of the stock or other equity interest 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 -5- 6 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 the Company in accordance with its terms, 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 (or, if the Prospectus is not in existence, the most recent Preliminary 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 transactions contemplated by this Agreement. 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) 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) free and clear of all liens, encumbrances and claims that -6- 7 might materially interfere with the business, properties, condition (financial or otherwise), results of operations or prospects of the Company or such Subsidiary. (n) The Company or the appropriate Subsidiary, as the case may be, owns or possesses adequate rights to use all material 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 (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as owned by or used by the Company or such Subsidiary, or which are necessary for the conduct business of the Company or such Subsidiary as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary 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, might have a material effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company or any Subsidiary. Except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) neither the Company nor any Subsidiary is a party to any 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 options, licenses, or agreements of any kind with respect to the Intellectual Property of any other party. No employee of the Company or of any Subsidiary is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree, or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interests of the Company or such Subsidiary or that would conflict with the business of the Company or such Subsidiary as presently conducted or proposed to be conducted. (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 best 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 (or, if the Prospectus is not in existence, in the most recent Preliminary 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 -7- 8 (whether owned or leased) may be subject, which violation might have a material effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company or any Subsidiary. (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 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. No bid or purchase by the Company and, to the best knowledge of the Company, no bid or purchase that could be attributed to the Company (as a result of bids or purchases by an "affiliated purchaser" within the meaning of Rule 10b-6 under the Exchange Act) for or of the Securities, the Ordinary Shares, any securities of the same class or series as the Ordinary Shares or any securities convertible into or exchangeable for or that represent any right to acquire Ordinary Shares is now pending or in progress or will have commenced at any time prior to the completion of the distribution of the Securities. (r) Arthur Andersen, LLP, 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 (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will 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 (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other 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 (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company has no 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 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 -8- 9 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 Representative the written agreement of each of its directors, officers, commissioners and shareholders (collectively, the "Material Holders") to the effect that each of the Material Holders will not, for a period of 180 days following the date of this Agreement, without the prior written consent of the Representative, offer, sell or contract to sell, or otherwise dispose of, 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 Representative. (u) No labor disturbance by the employees of the Company or any Subsidiary exists, is imminent or, to the best knowledge of the Company, is 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 might be expected to result in any material change in the business, properties, condition (financial or otherwise), results of operations or prospects of the Company. No collective bargaining agreement exists with any employees of the Company or any such Subsidiary and, to the best knowledge of the Company, no such agreement is imminent. 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. (v) 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. 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. (w) Except as set forth in the Prospectus (or if the Prospectus is not in existence, the most recent Preliminary 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. -9- 10 (x) 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. (y) 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 (or, if the Prospectus is not in existence, the most recent Preliminary 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. 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. (z) 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 Prospectus, the Registration Statement and any other material which may be permitted by the Securities Act and the Rules and Regulations. (aa) 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. (ab) The Securities have been approved for inclusion for listing on the Nasdaq National Market, subject only to official notice of issuance. (ac) 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. (ad) The Company satisfies the requirements for filing a registration statement on Form F-1. -10- 11 (ae) 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 (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been described therein. -11- 12 2. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, covenants and agreements of the Company contained in this Agreement and subject to the terms and conditions set forth in this Agreement, 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 I to this Agreement (subject to adjustment as provided in Section 8 of this Agreement). (b) On the basis of the several (and not joint) representations, warranties, covenants and agreements of the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company grants an option to the several Underwriters to purchase from the Company all or any portion of the Option Shares at the Purchase Price. -12- 13 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 Representative 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. The Option Shares shall be purchased severally, and not jointly, by each Underwriter, if purchased at all, in the same proportion that the number of Shares set forth opposite the name of the Underwriter in Schedule I to this Agreement bears to the total number of Shares to be purchased by the Underwriters under Section 2(a) above, subject to such adjustments as the Representative in its absolute discretion shall make to eliminate any fractional Shares. Delivery of Option Shares, and payment therefor, shall be made as provided in Section 2(c) and Section 2(d) below. (c) Delivery of the Shares and the Option Shares (if the option granted by the Company in Section 2(b) 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 at such time on such other day, not later than seven full business days after such third business day, as shall be agreed upon in writing by the Company and the Representative, or as provided in Section 8 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 Nasdaq National Market 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. ADRs representing the Shares shall be in such denominations and registered in such names as the Representative may request in writing at least two business days before the Closing Date. (d) If the option granted by the Company in Section 2(b) 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 Representative (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). (e) Payment of the purchase price for the Securities by the several Underwriters shall be made by certified or official bank check or checks drawn in next-day -13- 14 funds, payable to the order of the Company. Such payment shall be made upon delivery of the Securities to the Representative for the respective accounts of the several Underwriters. The Securities to be delivered to the Representative shall be registered in such name or names and shall be in such denominations as the Representative 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 Representative, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for Shares to be purchased by any Underwriter whose check shall not have been received by the Representative 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. (f) The several Underwriters propose to offer the Securities for sale to the public as soon as the Representative deems 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 Representative may from time to time thereafter change the public offering price and other selling terms. (g) The information set forth [in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), the legend respecting stabilization set forth on the inside front cover page 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. 3. 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 Representative of such timely filing. The Company will not file the Prospectus, any amended Prospectus, any amendment (including post-effective amendments) of the Registration Statement or any supplement to the Prospectus without (i) advising the Representative of the proposed filing of such amendment or supplement and, a reasonable time prior to the proposed filing, -14- 15 furnishing the Representative with copies thereof and (ii) obtaining the prior consent of the Representative to such filing. The Company will prepare and file with the Commission, promptly upon the request of the Representative, any amendment to the Registration Statement or supplement to the Prospectus that may be necessary or advisable in the opinion of the Representative 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 Representative (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 Representative and its 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 Representative) and will also deliver to the Representative 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 Representative and send to the several Underwriters, at such office or offices as the Representative may designate, as many copies of the Prospectus as the Representative 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 Representative may reasonably request for the purposes contemplated by the Securities Act. (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 -15- 16 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 Representative 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 Representative and its counsel in the qualification or registration of the Securities for offer and sale under the securities or blue sky laws of such jurisdictions as the Representative 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 Representative 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 Representative and to each 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 Nasdaq National Market or the NASD, (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) and (iv) any additional information concerning the Company or its business which the Representative may reasonably request. (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 -16- 17 Company will make generally available to its securities holders and furnish to the Representative 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, and at all times for a period of at least five years after the date of this Agreement, cause the Securities to be listed on the Nasdaq National Market, and the Company will comply with all registration, filing, reporting and other requirements of the Exchange Act and the Nasdaq National Market which may from time to time be applicable to the Securities, the Ordinary Shares and the Company. (k) The Company will use its best 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, 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 Representative's prior written consent. (m) The Company shall 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 Representative. 4. Fees and Expenses. (a) The Company agrees 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 (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 or, if applicable, printing (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 -17- 18 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 (x) incident to the sale and delivery of the Securities by the Company to the Underwriters and (y) incident to the sale and delivery of the Securities by the Underwriters to the initial purchasers thereof; the cost of printing the certificates for the Securities; the Transfer Agents', Depositary's and Registrars' 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 Representative 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); all fees and expenses in connection with listing of the Securities on the Nasdaq National Market; all advertising and road show expenses; and all other expenses incurred by the Company in connection with the performance of its obligations hereunder. In addition, the Company will pay 80 percent of the out-of-pocket costs and expenses of the Underwriters and their counsel with respect to the Offering whether or not the Offering is consummated; provided, however, that the amount paid by the Company in accordance with this sentence shall not exceed $280,000. Amounts paid in connection with state securities and Blue Sky qualification (including filing fees, fees and expenses of counsel shall not be taken into consideration when calculating the $280,000 "cap" in the preceding sentence. (ii) In addition to its obligations under Section 7(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 7(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) for all legal and other expenses incurred 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 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 -18- 19 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 7(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 7(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) 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 4(a)(ii) and 4(b) above, including the amounts of any requested reimbursement payments or advance, the method 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, therein electing the arbitration tribunal. 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 4(a)(ii) and 4(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 7 of this Agreement. -19- 20 (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 5 of this Agreement is not satisfied, or because of any termination pursuant to Section 9(b) of this Agreement, or because of any refusal, inability or failure on the part of the Company to perform any covenant or agreement set forth in this Agreement or to comply with any 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 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. 5. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase and pay for the Securities shall be subject, in the sole discretion of the Representative, to the accuracy 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 set forth in this Agreement, to the accuracy of the statements of the Company and its officers made in any certificate delivered pursuant to this Agreement, to the performance by the Company of all of its 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 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 Representative 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 and time as the Representative 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 Representative and its counsel. (b) The Representative 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 Representative may reasonably require, and the Company shall have furnished such counsel with all documents which they may request for the purpose of enabling them to pass upon such matters. -20- 21 (c) The Representative shall have received on the Closing Date or, if applicable, the later date on which Option Shares are purchased (i) the opinion of McCutchen, Doyle, Brown & Enersen LLP, counsel for the Company, (ii) Appleby, Spurling & Kempe, Bermuda counsel for the Company, (iii) Robert W.H. Wang & Co., Hong Kong counsel to the Company, and (iv) Guangzhou Foreign Economic Law Office, People's Republic of China counsel to the Company, 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 Representative. (d) The Representative shall be satisfied that there has not been any material change in the market for securities in general or in political, financial or economic conditions in any country or countries as to render it impracticable in the Representative's judgment to make a public offering of the Securities, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) The Representative 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 confirming certain of the representations and warranties of the Company, as follows: (i) the representations and warranties of the Company set forth in Section 1 of this Agreement are true and correct 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 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 instituted or are pending or are threatened under the Securities Act; (iii) the Securities have been approved for listing on the Nasdaq National Market, subject only to notice of issuance; 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 -21- 22 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 in or affecting the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiaries taken as a whole and, since such dates, neither the Company nor any of its Subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (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 and (E) there are not any license agreements, contracts, leases or other documents that are required to be filed as exhibits to the Registration Statement that have not been filed as required. (f) The Representative shall have received from Arthur Andersen, LLP, 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, 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 Representative 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 not disclose 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 Representative's sole 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. In addition, the Representative shall have received from Arthur Andersen LLP, on or prior to the Closing Date, a letter addressed to the Company and made available to the Representative for the use of the Underwriters stating that their review of the Company's system of internal controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of March 31, 1996 or in delivering their Original Letter, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) Prior to the Closing Date, the Securities shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. -22- 23 (h) On or prior to the Closing Date, the Representative shall have received from all Material Holders executed agreements covering the matters described in Section 1(s) of this Agreement. (i) The Company shall have furnished to the Representative such further certificates and documents as the Representative shall request (including certificates of officers of the Company) as to the accuracy of the representations and warranties of the Company set forth in this Agreement, the performance by the Company of its obligations under this Agreement and such other matters as the Representative 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 satisfactory to the Representative and its counsel. The Company will furnish the Representative with such number of conformed copies of such opinions, certificates, letters and documents as the Representative shall reasonably request. If any of the conditions specified in this Section 5 shall not have been fulfilled in all material respects when and as provided in this Agreement, time being of the essence, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects satisfactory in form and substance to the Representative and its counsel, this Agreement and all obligations of the Underwriters hereunder may be canceled by the Representative 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 in writing or by telephone, telecopy or telegraph confirmed in writing. Any such termination shall be without liability of the Company to the Underwriters (except as provided in Section 4 or Section 7 of this Agreement) and without liability of the Underwriters to the Company or the Selling Securityholders (except as provided in Section 7 of this Agreement). 6. Conditions of the Obligation of the Company and the Selling Securityholders. The obligations of the Company and the Selling Securityholders 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. 7. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereto) 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 other federal, state -23- 24 or foreign statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or action in respect thereof) related to negligence on the part of any Underwriter, and the Company agrees 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) 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 breach of any representation, warranty, covenant or agreement of the Company contained in this Agreement, (ii) any untrue statement or alleged untrue 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 (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 or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Securities under the securities or Blue Sky laws thereof or to obtain an exception from such qualification or registration or filed with the Commission, any securities association or the Nasdaq National Market, 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 light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company contained in this Section 7(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 Representative 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 7(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 -24- 25 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 3 of this Agreement. The indemnity agreements of the Company contained in this Section 7(a) and the representations and warranties of the Company 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 may otherwise have. (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 officer thereof) who controls the Company or any such other 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 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 Representative specifically for use in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The Company acknowledges and agrees that the matters described in Section 2(g) of this Agreement constitute the only information furnished in writing by or on behalf of any of the several Underwriters -25- 26 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 7(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 7(a) and 7(b) above agrees that, upon the service of a summons or other initial legal 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 7, 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 7(a) or 7(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 7(a) and 7(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 -26- 27 indemnified party or parties, the indemnifying party or parties will not be liable under Sections 8(a) through 8(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 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 8 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 7 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 7(a) or 7(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 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 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 7(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 7(d) and to the considerations referred to in the third sentence of the first paragraph of this Section 7(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 -27- 28 first sentence of the first paragraph of this Section 7(d) shall be deemed to include 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 7(d). Notwithstanding the provisions of this Section 7(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 7(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 7(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 7(c) above). (e) The Company 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 5(a)(ii), 5(b) and 5(c) and this Section 8 of this Agreement and that they are fully informed regarding all such provisions. They further acknowledge that the provisions of Sections 5(a)(ii), 5(b) and 5(c) and this Section 8 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 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 -28- 29 interpreted by the courts in certain jurisdictions, may be contrary to certain provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section 7 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 4(a)(ii), 4(b) or 4(c) or this Section 7 of this Agreement and further agree not to attempt to assert any such defense. 9. 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 5 or Section 9 of this Agreement) to purchase and pay for the number of Shares agreed to be purchased by such Underwriter or Underwriters, the Representative 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 Representative of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon among the Representative 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 Representative for purchase of such Shares on the terms set forth in this Agreement. In any such case, either the Representative or the Company shall have the right to postpone the Closing Date determined as provided in Section 2(c) of this Agreement for not more than seven business days after the date originally fixed as the Closing Date pursuant to Section 2(c) 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 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 Underwriter (except as provided in Section 4 or Section 7 of this Agreement) and without any liability on the part of any nondefaulting Underwriters to the Company (except to the extent provided in Section 7 of this Agreement). Nothing in this Section 8, and no action taken hereunder, shall relieve any defaulting Underwriter from -29- 30 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 8. 9. 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 Representative 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 4 or Section 7 of this Agreement). By giving notice before the time this Agreement becomes effective, the Representative, 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 4 and Section 7 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 Representative and the Company. (b) This Agreement may be terminated by the Representative in its absolute discretion 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, to the Company 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 Representative's 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 involving a prospective adverse change in or affecting the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole, which would, in the Representative's 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, Nasdaq National Market or over-the-counter market has been suspended or minimum or maximum prices for trading have 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 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 Representative's 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 -30- 31 subsidiaries taken as a whole; (iv) if 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 which, in the Representative's sole judgment, makes the offering or delivery of the Securities impracticable or inadvisable; or (vi) if 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 Representative's sole judgment make the offering or delivery of the Securities impracticable or inadvisable. If this Agreement shall be terminated pursuant to this Section 9, there shall be no liability of the Company to the Underwriters (except pursuant to Section 4 and Section 7 of this Agreement) and no liability of the Underwriters to the Company (except pursuant to Section 7 of this Agreement). 10. Notices. Except as otherwise provided herein, all communications hereunder shall be in writing or by either telecopier or telegraph and, if to the Underwriters, shall be mailed, telecopied or telegraphed or delivered to Van Kasper & Company, 11661 San Vincente Boulevard, Suite 709, Los Angeles, California 90049, Attention: Bruce P. Emmeluth (telecopier: (310) 820-5032); and if to the Company, shall be mailed, telecopied, telegraphed or delivered to it at its office at ______________________. All notices given by telecopy or telegraph shall be promptly confirmed by letter. 11. Persons Entitled to the Benefit of This Agreement. This Agreement shall inure to the benefit of the Company, the Selling Securityholders and the several Underwriters and, with respect to the provisions of Section 4 and Section 7 of this Agreement, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of Section 4 and Section 7 and in addition, as to Section 4, 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. 12. 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 3(f), 3(g), 3(h), 3(i) and 3(j) of this Agreement shall be of no further force or effect. -31- 32 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 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. 13. Authority of the Representative. In connection with this Agreement, the Representative will act for and on behalf of the several Underwriters, and any action taken under this Agreement by the Representative, as representative of the several Underwriters, will be binding on all of the Underwriters. -32- 33 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: /s/ Feather Siu Yung Fok ------------------------------------- Feather Siu Yung Fok The foregoing Agreement is hereby confirmed and accepted as of the date first above written. VAN KASPER & COMPANY By: /s/ Bruce P. Emmeluth ------------------------------------ Bruce P. Emmeluth, Managing Director On its behalf and on behalf of each of the several Underwriters named in Schedule I hereto 34 SCHEDULE I UNDERWRITERS Number of Firm Shares Underwriters to be Purchased ------------ --------------- Van Kasper & Company --------- Total ======= EX-3.2 3 ARTICLES OF ASSOCIATION OF THE COMPANY 1 EXHIBIT 3.2 THE COMPANIES ORDINANCE (CHAPTER 32) Private Company Limited by Shares ARTICLES OF ASSOCIATION OF ZINDART LIMITED ( ) PRELIMINARY 1. The regulations in Table A in the First Schedule to the Ordinance shall not apply to the Company. Any reference to an "Article" or "Articles" shall mean an article or articles contained herein. INTERPRETATION 2. (a) In these Articles "ORDINANCE" means the Companies Ordinance, Chapter 32. "SEAL" means the common seal of the Company or any official seal which the Company may, by the Ordinance, be permitted to have. "SECRETARY" means any person appointed to perform the duties of the secretary of the Company. Expressions referring to writing shall, unless the contrary intention appears, be construed as including references to printing, lithography, photography, and other modes of representing or reproducing words in a visible form. -1- 2 Unless the context otherwise requires, words or expressions contained in these Articles shall bear the same meaning as in the Ordinance or any statutory modification thereof in force at the date at which these Articles become binding on the Company. The headings are inserted for convenience only and shall not affect the construction of these Articles. (b) A cable telex or telexfax message sent by a member or by a director of the Company shall be deemed to be a document signed by him for the purposes of Article 1 1 5. SHARE CAPITAL AND VARIATION OF RIGHTS 3. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the Company may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may from time to time by ordinary resolution determine. 4. Subject to the provisions of Section 49 of the Ordinance, any preference shares may, with the sanction of an ordinary resolution, be issued on the terms that they are, or at the option of the Company are liable, to be redeemed on such terms and in such manner as the Company before the issue of the shares may by special resolution determine. 5. If at any time the share capital is divided into different classes of shares, the rights attached to any class may, whether or not the Company is being wound up, be varied with the consent in writing of the holders of three-fourths in nominal value of the issued shares of that class, or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of the class. 6. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. 7. The Company may exercise the powers of paying commissions conferred by Section 46 of the Ordinance, provided that the rate per cent or the amount of the commission paid or agreed to be paid shall be disclosed in the manner required by the said Section and the rate of the commission shall not exceed the rate of 10 per cent of the price at which the shares in respect whereof the same is paid are issued or an amount equal to 10 per cent of such price (as the case may be). Such commission may be satisfied by the payment of cash or the allotment of fully or partly paid shares or partly in one way and partly in the other. The Company may also on any issue of shares pay such brokerage as may be lawful. -2- 3 8. Except as required by law, no person shall be recognized by the Company as holding any share upon any trust, and the Company shall not be bound by or be compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except only as by these Articles or by law otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder. 9. Every person whose name is entered as a member in the register of members shall be entitled without payment to receive within 2 months after allotment or lodgment of transfer (or within such other period as the conditions of issue shall provide) one certificate for all his shares or several certificates each for 1 or more of his shares upon payment of HK$5 for every certificate after the first or such less sum as the directors shall from time to time determine. Every certificate shall be under the seal, or under the official seal kept by the Company under Section 73A of the Ordinance, and shall specify the shares to which it relates and the amount paid up thereon. Provided that in respect of a share or shares held jointly by several persons the Company shall not be bound to issue more than 1 certificate, and delivery of a certificate for a share to 1 of several joint holders shall be sufficient delivery to all such holders. 10. If a share certificate be defaced, lost or destroyed, it may be renewed on payment of a fee of HK$5 or such less sum and on such terms (if any) as to evidence and indemnity and the payment of out-of-pocket expenses of the Company of investigating evidence as the directors think fit. 11. The Company shall not give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connexion with a purchase or subscription made or to be made by any person of or for any shares in the Company or in its holding company nor shall the Company make a loan for any purpose whatsoever on the security of its shares or those of its holding company, but this Article shall not prohibit any transaction permitted by Section 47C of the Ordinance. LIEN 12. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys (whether presently payable or not) called or payable at a fixed time in respect of that share, and the Company shall also have a first and paramount lien on all shares (other than fully paid shares) standing registered in the name of a single person for all moneys presently payable by him or his estate to the Company; but the directors may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The Company's lien, if any, on a share shall extend to all dividends payable thereon. 13. The Company may sell, in such manner as the directors think fit, any shares on which the Company has a lien, but no sale shall be made unless a sum in respect of which the lien exists is presently payable, nor until the expiration of 14 days after a notice in writing, stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given -3- 4 to the registered holder for the time being of the share, or the person entitled thereto by reason of his death or bankruptcy. 14. To give effect to any such sale the directors may authorize some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. 15. The proceeds of the sale shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable, and the residue, if any, shall (subject to a like lien for sums not presently payable as existed upon the shares before the sale) be paid to the person entitled to the shares at the date of the sale. CALLS ON SHARES 16. The directors may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal value of the shares or by way of premium) and not by the conditions of allotment thereof made payable at fixed times and each member shall (subject to receiving at least 14 days' notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. A call may be revoked or postponed as the directors may determine. 17. A call shall be deemed to have been made at the time when the resolution of the directors authorizing the call was passed and may be required to be paid by instalments. 18. If by the conditions of allotment of any shares, the whole or part of the amount or issue price thereof shall be payable by instalments, every such instalment shall, when due, be paid to the Company by the person who for the time being and from time to time shall be the registered holder of the share, or his legal personal representative, and the word "call" wherever used in these Articles shall be deemed to include such an instalment. 19. If two or more persons are registered as joint holders of any share they shall be severally as well as jointly liable for any call or other liability in respect of such share but any one of them may give effectual receipts for any dividends, bonuses or other moneys payable in respect of such share. The first named upon the register shall, however, as regards voting, proxy, service of notices and delivery of certificates and dividend warrants, be deemed to be the sole owner of such share. 20. No person shall exercise any rights of a member until his name shall have been entered in the register of members and he shall have paid all calls and other moneys for the time being due and payable on any share held by him. -4- 5 21. If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate not exceeding 10 per cent per annum as the directors may determine, but the directors shall be at liberty to waive payment of such interest wholly or in part. 22. Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, shall for the purposes of these regulations be deemed to be a call duly made and payable on the date on which by the terms of issue the same becomes payable, and in case of non-payment all the relevant provisions of these regulations as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified. 23. The directors may, on the issue of shares, differentiate between the holders as to the amount of calls to be paid and the times of payment. 24. The directors may, if they think fit, receive from any member willing to advance the same, all or any part of the moneys uncalled and unpaid upon any shares held by him, and upon all or any of the moneys so advanced may (until the same would, but for such advance, become payable) pay interest at such rate not exceeding (unless the Company in general meeting shall otherwise direct) 8 per cent per annum, as may be agreed upon between the directors and the member paying such sum in advance. TRANSFER AND TRANSMISSION OF SHARES 25. The instrument of transfer of any share shall be executed by or on behalf of the transferor and transferee, and the transferor shall be deemed to remain a holder of the share until the name of the transferee is entered in the register of members in respect thereof. 26. Subject to such of the restrictions of these Articles as may be applicable, any member may transfer all or any of his shares by instrument in writing in any usual or common form or any other form which the directors may approve. 27. The directors may decline to register the transfer of a share (not being a fully paid share) to a person of whom they shall not approve, and they may also decline to register the transfer of a share on which the Company has a lien. 28. Any person becoming entitled to a share in consequence of the death or bankruptcy of a member (or, being a company, the liquidation thereof) may elect, instead of being registered himself as the holder of the share, to have some person nominated by him registered as the transferee thereof but if he shall so elect, the directors shall have the same right to refuse or suspend registration as they would have had in the case of a transfer of the share by that member before his death or bankruptcy (or liquidation), as the case may be. -5- 6 29. If the person so becoming entitled shall elect to be registered himself, he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. If he shall elect to have another person registered he shall testify his election by executing to that person a transfer of the share. All the limitations, restrictions and provisions of these Articles relating to the right to transfer and the registration of transfers of shares shall be applicable to any such notice or transfer as aforesaid as if the death or bankruptcy (or liquidation) of the member had not occurred and the notice or transfer were a transfer signed by that member. 30. A person becoming entitled to a share by reason of the death or bankruptcy (or liquidation) of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not before being registered as a member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company:- Provided always that the directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share, and if the notice is not complied with within 90 days the directors may thereafter withhold payment of all dividends, bonuses or other moneys payable in respect of the share until the requirements of the notice have been complied with. 31. Any person to whom the right to any shares in the Company has been transmitted by operation of law shall, if the directors refuse to register the transfer, be entitled to call on the directors to furnish within 28 days a statement of the reasons for the refusal. 32. The directors may decline to recognize any instrument of transfer unless:- (a) a fee of HK$5 or such lesser sum as the directors may from time to time require is paid to the Company in respect thereof; (b) the instrument of transfer is accompanied by the certificate of the shares to which it relates, and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer; and (c) the instrument of transfer is in respect of only one class of share. 33. If the directors refuse to register a transfer they shall within 2 months after the date on which the transfer was lodged with the Company send to the transferor and transferee notice of the refusal. 34. The registration of transfers may be suspended at such times and for such periods as the directors may from time to time determine, provided always that such registration shall not be suspended in any year for more than 30 days or, where the period for closing the register of members is extended in respect of that year under Section 99(2)(a) of the Ordinance, for more than that extended period. 35. The Company shall be entitled to charge a fee not exceeding HK$5 on the registration of every probate, letters of administration, certificate of death or -6- 7 marriage, power of attorney, or other instrument. 36. In case of the death of a member the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole holder, shall be the only persons recognized by the Company as having any title to his interest in the shares; but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by him with other persons. FORFEITURE OF SHARES 37. If a member fails to pay any call or instalment of a call on the day appointed for payment thereof, the directors may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued. 38. The notice shall name a further day (not earlier than the expiration of 14 days from the date of service of the notice) on or before which the payment required by the notice is to be made, and shall state that in the event of non-payment at or before the time appointed the shares in respect of which the call was made will be liable to be forfeited. 39. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the directors to that effect. 40. A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the directors think fit, and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the directors think fit. 41. A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, notwithstanding, remain liable to pay to the Company all moneys which, at the date of forfeiture, were payable by him to the Company in respect of the shares, but his liability shall cease if and when the Company shall have received payment in full of all such moneys in respect of the shares. 42. A statutory declaration in writing that the declarant is a director or the Secretary of the Company, and that a share in the Company has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration, if any, given for the share on any sale or disposition thereof and may execute a transfer of the share in favour of the person to whom the share is sold or disposed of and he shall thereupon be registered as the holder of the share, and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share. -7- 8 43. The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified. CONVERSION OF SHARES INTO STOCK 44. The Company may by ordinary resolution convert any paid-up shares into stock, and reconvert any stock into paid-up shares of any denomination. 45. The holders of stock may transfer the same, or any part thereof, in the same manner, and subject to the same Articles, as and subject to which the shares from which the stock arose might previously to conversion have been transferred, or as near thereto as circumstances admit; and the directors may from time to time fix the minimum amount of stock transferable but so that such minimum shall not exceed the nominal amount of the shares from which the stock arose. 46. The holders of stock shall, according to the amount of stock held by them, have the same rights, privileges and advantages as regards dividends, voting at meetings of the Company and other matters as if they held the shares from which the stock arose, but no such privilege or advantage (except participation in the dividends and profits of the Company and in the assets on winding up) shall be conferred by an amount of stock which would not, if existing in shares, have conferred that privilege or advantage. 47. Such of the Articles of the Company as are applicable to paid-up shares shall apply to stock, and the words "share" and "shareholder" therein shall include "stock" and "stockholder". ALTERATION OF CAPITAL 48. The Company may from time to time by ordinary resolution increase the share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe. 49. The Company may by ordinary resolution:- (a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (b) sub-divide its existing shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association subject, nevertheless, to the provisions of Section 53(l)(d) of the Ordinance; (c) cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person. 50. The Company may by special resolution reduce its share capital, any capital -8- 9 redemption reserve fund or any share premium account in any manner and with, and subject to, any incident authorized, and consent required, by law. PURCHASE OF OWN SHARES 51. At any time while the Company is a listed company within the meaning of the Ordinance, it may, subject to sections 49, 49A, 49B(6), 49BA, 49C, 49E, 49F, 49G, 49H, 49P, 49Q, 49R and 49S of the Ordinance, purchase its own shares (including any redeemable shares). 52. At any time while the Company is an unlisted company within the meaning of the Ordinance, it may, subject to sections 49 to 49S of the Ordinance, purchase its own shares (including any redeemable shares). 53. Notwithstanding section 49B(1) and (2) but subject to sections 49, 49A, 49B(6), 49F, 49G, 49H, 49I(4) and (5), 49P, 49Q, 49R and 49S of the Ordinance (except that such purchases may be made either out of or otherwise than out of the distributable profits of the Company or the proceeds of a fresh issue of shares), the Company may purchase its own shares (including any redeemable shares) in order to :- (a) settle or compromise a debt or claim; (b) eliminate a fractional share or fractional entitlement or an odd lot of shares (as defined in section 49B(5) of the Ordinance; (c) fulfil an agreement in which the Company has an option, or under which the Company is obliged, to purchase shares under an employee share scheme which had previously been approved by the Company in general meeting; or (d) comply with an order of the court under :- (i) section 8(4) (ii) section 47G(5), where such order provides for the matters referred to in section 47G(6); or (iii) section 168A(2) of the Ordinance. ALLOTMENT OF SHARES 54. The directors shall not exercise any power conferred on them to allot shares in the Company without the prior approval of the Company in general meeting where such approval is required by Section 57B of the Ordinance. GENERAL MEETINGS 55. The Company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year, and shall specify the meeting as such in the notices calling it; and not more than 15 months shall -9- 10 elapse between the date of one annual general meeting of the Company and that of the next. Provided that so long as the Company holds its first annual general meeting within 18 months of its incorporation, it need not hold it in the year of its incorporation or in the following year. The annual general meeting shall be held at such time and place as the directors shall appoint. 56. All general meetings other than annual general meetings shall be called extraordinary general meetings. 57. The directors may, whenever they think fit, convene an extraordinary general meeting, and extraordinary general meetings shall also be convened on such requisition, or in default, may be convened by such requisitionists, as provided by Section 1 1 3 of the Ordinance. A/% NOTICE OF GENERAL MEETINGS 58. All general meetings of the Company (including annual general meetings and extraordinary general meetings) shall be called by at least 21 days' notice in writing. The notice shall be exclusive of the day on which it is served or deemed to be served and of the day for which it is given, and shall specify the place, the day and the hour of meeting and, in case of special business, the general nature of that business, and shall be given, in manner hereinafter mentioned or in such other manner, if any, as may be prescribed by the Company in general meeting, to such persons as are, under the Articles of the Company, entitled to receive such notices from the Company. Provided that a meeting of the Company shall, notwithstanding that it is called by shorter notice than that specified in this Article, be deemed to have been duly called if it is so agreed :- (a) in the case of a meeting called as the annual general meeting, by all the members entitled to attend and vote thereat; and (b) in the case of any other meeting, by a majority in number of the members having a right to attend and vote at the meeting, being a majority together holding not less than 95 per cent in nominal value of the shares giving that right. 59. The accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting by, any person entitled to receive notice shall not invalidate the proceedings at that meeting. PROCEEDINGS AT GENERAL MEETINGS 60. All business shall be deemed special that is transacted at any extraordinary general meeting, and also all that is transacted at an annual general meeting, with the exception of declaring a dividend, the consideration of the accounts, balance sheets, and the reports of the directors and auditors, the election of directors in -10- 11 the place of those retiring and the appointment of, and the fixing of the remuneration of, the auditors. 61. No business shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business and continues to be present until the conclusion of the meeting; save as herein otherwise provided, 2 members present in person or by proxy shall be a quorum. 62. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of members, shall be dissolved; in any other case it shall stand adjourned to the same day in the next week, at the same time and place or to such other day and at such other time and place as the directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the members present shall be a quorum. 63. The chairman, if any, of the board of directors shall preside as chairman at every general meeting of the Company, or if there is no such chairman, or if he shall not be present within 15 minutes after the time appointed for the holding of the meeting or is unwilling to act or is absent from Hong Kong or has given notice to the Company of his intention not to attend the meeting, the directors present shall elect one of their number to be chairman of the meeting. 64. If at any meeting no director is willing to act as chairman or if no director is present within 15 minutes after the time appointed for holding the meeting, the members present shall choose one of their number to be chairman of the meeting. 65. The chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a meeting is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting. 66. At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands) demanded:- (a) by the chairman; or (b) by at least 2 members present in person or by proxy; or (c) by any member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or (d) by a member or members holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on -11- 12 all the shares conferring that right. Unless a poll be so demanded a declaration by the chairman that a resolution has on a show of hands been carried or carried unanimously, or by a particular majority, or lost and an entry to that effect in the book containing the minutes of the proceedings of the Company shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against such resolution. The demand for a poll may be withdrawn. 67. Except as provided in Article 69, if a poll is duly demanded it shall be taken in such manner as the chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. 68. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded, shall not be entitled to a second or casting vote. 69. A poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with pending the taking of the poll. VOTES OF MEMBERS 70. Subject to any rights or restrictions for the time being attached to any class or classes of shares, on a show of hands every member present in person or by proxy shall have 1 vote, and on a poll every member shall have 1 vote for each share of which he is the holder. 71. In the case of joint holders the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders; and for this purpose seniority shall be determined by the order in which the names stand in the register of members. 72. A member of unsound mind, or in respect of whom an order has been made by any court having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, receiver, curator bonis, or other person in the nature of a committee, receiver or curator bonis appointed by that court, and any such committee, receiver, curator bonis or other person may, on a poll, vote by proxy. 73. No member shall be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the Company have been paid. 74. No objection shall be raised to the qualification of any voter except at the meeting or adjourned meeting at which the vote objected to is given or tendered, and every -12- 13 vote not disallowed at such meeting shall be valid for all purposes. Any such objection made in due time shall be referred to the chairman of the meeting, whose decision shall be final and conclusive. 75. On a poll votes may be given either personally or by proxy. 76. The instrument appointing a proxy shall be in writing under the hand of the appointer or of his attorney duly authorized in writing, or, if the appointer is a corporation, either under seal, or under the hand of an officer or attorney duly authorized. A proxy need not be a member of the Company. 77. The attorney of any member shall be entitled to vote on a show of hands or on a poll on behalf of such member in the same manner as the duly appointed proxy of such member provided that a duly certified copy of the power of attorney shall have been deposited or handed over in the same manner and subject to the same time limits as provided for proxies in the following Article. 78. The instrument appointing a proxy and the power of attorney (if any) under which it is signed, or a duly certified copy thereof, shall be deposited at the registered office of the Company or with the Secretary of the Company before the meeting for which it is to be used or shall be handed to the Secretary or the chairman of the meeting at which it is to be used before the person named in such instrument purports to vote in respect thereof. No instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution. 79. An instrument appointing a proxy shall be in the following form or a form as near thereto as circumstances admit:- ZINDART LIMITED "I/We of being a member/members of the abovenamed company, hereby appoint of , or failing him, of as my/our proxy to vote for me/us on my/our behalf at the (annual or extraordinary, as the case may be] general meeting of the company to be held on the day of 19 , and at any adjournment thereof. Signed this day of 19 ," 80. Where it is desired to afford members an opportunity of voting for or against a resolution the instrument appointing a proxy shall be in the following form or a form as near thereto as circumstances admit:- ZINDART LIMITED I /We, of , being a member/members of -13- 14 the abovenamed company, hereby appoint of , or failing him, of , as my/our proxy to vote for me/us on my/our behalf at the [annual or extraordinary, as the case may be] general meeting of the company, to be held on the day of 19 , and at any adjournment thereof. Signed this day of 19 . * in favour of This form is to be used -------------- the resolution. against Unless otherwise instructed, the proxy will vote as he thinks fit. * Strike out whichever is not desired." 81. The instrument appointing a proxy shall be deemed to confer authority to demand or join in demanding a poll. 82. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the share in respect of which the proxy is given, provided that no intimation in writing of such death, insanity, revocation or transfer as aforesaid shall have been received by the Company at the office before the commencement of the meeting or adjourned meeting at which the proxy is used. 83. A general meeting of the Company may be held by telephonic conference call attended by such number of members of the Company who would be entitled to receive notice of and to attend and vote at a general meeting of the Company that will constitute a necessary quorum of general meetings, or by their duly appointed proxies or attorneys. Resolutions passed at such meeting shall be as valid and effectual as if it had been duly passed at a general meeting of the Company duly convened and held and, where relevant, as a special resolution passed. CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS 84. Any corporation or limited partnership which is a member of the Company may by resolution of its directors, partners or other governing body authorize such person as it thinks fit to act as its representative at any meeting of the Company or of any class of members of the Company, and the person so authorized shall be entitled to exercise the same powers on behalf of the corporation or limited partnership which he represents as that corporation or limited partnership could exercise if it were an individual member of the Company. DIRECTORS 85. (a) The names of the first directors shall be determined in writing by the subscribers of the Memorandum of Association or a majority of them. -14- 15 (b) The number of directors of the Company shall not be less than five and, unless and until the Company in general meeting shall otherwise determine, shall not be more than nine. Until the appointment of the first directors, the subscribers hereto may exercise all the powers of the directors. 86. The remuneration of the directors shall from time to time be determined by the Company in general meeting. Such remuneration shall be deemed to accrue from day to day. The directors may also be paid all travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors or any committee of the directors or general meetings of the Company or in connexion with the business of the Company. 87. The directors of the Company shall not be required to own any shares of the Company as a condition of their appointment or continued engagement as directors. 88. A director of the Company may be or become a director or other officer of, or otherwise interested in, any company promoted by the Company or in which the Company may be interested as shareholder or otherwise, and, subject to the Ordinance, no such director shall be accountable to the Company for any remuneration or other benefits received by him as a director or officer of, or from his interest in, such other company unless the Company otherwise direct. 89. If the directors or any of them or any other person shall become personally liable for the payment of any sum primarily due from the Company, the directors may execute or cause to be executed any mortgage charge or security over or affecting the whole or any part of the assets of the Company by way of indemnity to secure the directors or person so becoming liable as aforesaid from any loss in respect of such liability. BORROWING POWERS 90. The directors may exercise all the powers of the Company to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock, and, subject to Section 57B of the Ordinance, convertible debentures and convertible debenture stock, and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party. POWERS AND DUTIES OF DIRECTORS 91. The business of the Company shall be managed by the directors, who may pay all expenses incurred in promoting and registering the Company, and may exercise all such powers of the Company as are not, by the Ordinance or by these Articles, required to be exercised by the Company in general meeting, subject, nevertheless, to any of these Articles, to the provisions of the Ordinance and to such regulations, being not inconsistent with the aforesaid Articles or provisions, as may be prescribed by the Company in general meeting; but no regulation made -15- 16 by the Company in general meeting shall invalidate any prior act of the directors which would have been valid if that regulation had not been made. 92. The directors may from time to time and at any time by power of attorney appoint any company, firm or person or body of persons, whether nominated directly or indirectly by the directors, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such powers of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the directors may think fit and may also authorize any such attorney to delegate all or any of the powers, authorities and discretions vested in him. 93. The Company may exercise the powers conferred by Section 35 of the Ordinance with regard to having an official seal for use abroad, and such powers shall be vested in the directors. 94. The Company may exercise the powers conferred upon the Company by Sections 103, 104 and 106 of the Ordinance with regard to the keeping of a branch register, and the directors may (subject to the provisions of those Sections ) make and vary such Articles as they may think fit respecting the keeping of any such register. 95. (a) A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract (being a contract of significance in relation to the Company's business) with the Company shall, if his interest in the contract or proposed contract is material, declare the nature of his interest at a meeting of the directors in accordance with Section 162 of the Ordinance. (b) A director may vote in respect of any contract or arrangement in which he is interested or upon any matter arising thereout and if he shall so vote his vote shall be counted and he shall be counted in estimating the quorum when any such contract or arrangement is under consideration. (c) A director may hold any other office or place of profit under the Company (other than the office of auditor) in conjunction with his office of director for such period and on such terms (as to remuneration and otherwise) as the directors may determine and no director or intending director shall be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any director is in any way interested, be liable to be avoided, nor shall any director so contracting or being so interested be liable to account to the Company for any profit realized by any such contract or arrangement by reason of such director holding that office or of the fiduciary relation thereby established. (d) Any director may act by himself or his firm in a professional capacity for -16- 17 the Company, and he or his firm shall be entitled to remuneration for professional services as if he were not a director; provided that nothing herein contained shall authorize a director or his firm to act as auditor to the Company. 96. All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments, and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed, or otherwise executed, as the case may be, in such manner as the directors shall from time to time by resolution determine. 97. The directors shall cause minutes to be made in books provided for the purpose: (a) of all appointments of officers made by the directors; (b) of the names of the directors present at each meeting of the directors and of any committee of the directors; (c) of all resolutions and proceedings at all meetings of the Company, and of the directors, and of committees of directors, and every director present at any meeting of directors or committee of directors shall sign his name in a book to be kept for that purpose. 98. The directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any director who has held any other salaried office or place of profit with the Company or to his widow or dependents and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. DISQUALIFICATION OF DIRECTORS 99. The office of director shall be vacated if the director: (a) ceases to be a director by virtue of Section 155 of the Ordinance; or (b) becomes bankrupt or makes any arrangement or composition with his creditors generally; or (c) becomes prohibited from being a director by reason of any order made under Section 157E or 157F of the Ordinance; or (d) becomes of unsound mind; or (e) resigns his office by notice in writing to the Company given in accordance with Section 157D(3)(a) of the Ordinance; or (f) shall for more than 6 months have been absent without permission of the directors from meetings of the directors held during that period. 100. Subject to the provisions of any agreement with the Company, a director may -17- 18 retire from his office upon giving notice in writing to the Company of his intention so to do and such resignation shall take effect upon the expiration of such notice or its earlier acceptance. ROTATION OF DIRECTORS 101. (a) At each annual general meeting of the Company all the directors shall retire but shall be eligible for re-election. Every such retiring director shall be deemed automatically to have been re-elected at the annual general meeting in question unless one of the events specified in Article 99 shall have happened. (b) No person, not being a retiring director, shall, unless recommended by the directors for election, be eligible for election to the office of director at any general meeting, unless he, or some other member intending to propose him, has at least two clear days and not more than fourteen days before such meeting left at the registered office of the Company a notice in writing duly signed, signifying his candidature for the office, or the intention of such member to propose him. 102. The Company may from time to time by, ordinary resolution increase or reduce the number of directors, and may also determine in what rotation the increased or reduced number is to go out of office. 103. The directors shall have power at any time, and from time to time, to appoint any person to be a director, either to fill a casual vacancy or as an addition to the existing directors, but so that the total number of directors shall not at any time exceed the number fixed in accordance with these Articles. Any director so appointed shall hold office only until the next following annual general meeting, and shall then be eligible for re-election. 104. The Company may by special resolution remove any director before the expiration of his period of office notwithstanding anything in these Articles or in any agreement between the Company and such director. Such removal shall be without prejudice to any claim such director may have for damages for breach of any contract of service between him and the Company. 105. The Company may by ordinary resolution appoint another person in place of a director removed from office under the immediately preceding Article, and without prejudice to the powers of the directors under Article 103 of the Company in general meeting may appoint any person to be a director either to fill a casual vacancy or as an additional director. A person appointed in place of a director so removed or to fill such a vacancy shall be subject to retirement at the same time as if he had become a director on the day on which the director in whose place he is appointed was last elected a director. PROCEEDINGS OF DIRECTORS 106. The directors may meet together in Hong Kong or elsewhere in the world for the -18- 19 despatch of business, adjourn, and otherwise regulate their meetings, as they think fit. Questions arising at any meeting shall be decided by a majority of votes. In case of an equality of votes, the chairman shall not have a second or casting vote. A director may, and the Secretary on the requisition of a director shall, at any time summon a meeting of the directors. It shall in all cases be necessary to give notice of any meeting of directors to all directors whether in Hong Kong or for the time being absent from Hong Kong. 107. A director may at any time appoint any other person (whether a director or member of the Company or not) to act as alternate director at any meeting of the Board at which the director is not present, and may at any time revoke any such appointment. An alternate director so appointed shall not be entitled as such to receive any remuneration from the Company, but shall otherwise be subject to the provisions of these Articles with regard to directors. An alternate director shall be entitled to receive notices of all meetings of the Board and to attend and vote as a director at any such meeting at which the director appointing him is not personally present, and generally to perform all the functions, rights, powers and duties of the director by whom he was appointed in his capacity as a director. An alternate director shall ipso facto cease to be an alternate director if his appointor ceases for any reason to be a director: Provided that if a director retires by rotation and is re-elected by the meeting at which such retirement took effect, any appointment made by him pursuant to this Article which was in force immediately prior to his retirement shall continue to operate after his re-election as if he had not so retired. Where a director has been appointed to be an alternate director and is present at a meeting of the Board in the absence of his appointor he shall have one vote in addition to his vote as a director. Every appointment and revocation of appointment of an alternate director shall be made by instrument in writing under the hand of the director making or revoking such appointment and such instrument shall only take effect on the service thereof at the registered office of the Company or upon the Secretary. The remuneration of any such alternate director shall be payable out of the remuneration payable to the director appointing him and shall consist of such portion of the last mentioned remuneration as shall be agreed between the alternate director and the director appointing him. 108. The quorum necessary for the transaction of the business of the directors may be fixed by the directors, and unless so fixed shall be 4. 109. The continuing directors may act notwithstanding any vacancy in their body, but, if and so long as their number is reduced below the number fixed by or pursuant to the Articles of the Company as the necessary quorum of directors, the continuing directors or director may act for the purpose of increasing the number of directors to that number, or of summoning a general meeting of the Company, but for no other purpose. 110. The directors may elect a chairman of their meetings and determine the period for which he is to hold office; but if no such chairman is elected, or if at any meeting the chairman is not present within 5 minutes after the time appointed for holding the same, the directors present may choose one of their number to be chairman of the meeting. -19- 20 111. The directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the directors. 112. A committee may elect a chairman of its meetings; if no such chairman is elected, or if at any meeting the chairman is not present within 5 minutes after the time appointed for holding the same, the members present may choose one of their number to be chairman of the meeting. 113. A committee may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the members present, and in the case of an equality of votes the chairman shall not have a second or casting vote. 114. All acts done by any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director. 115. A proposed resolution in writing notice of which has been given to all the directors and consisting of one document or of separate copies prepared and/or circulated for the purpose, signed by such number of directors as shall be requisite for the passing of a resolution at a meeting of the directors, shall be as valid and effective if it had been passed at a meeting of the directors duly called and constituted. 116. A meeting of the directors may be held by telephonic conference call attended by such number of directors (or their alternate directors as the case may be), who would be entitled to receive notice of and to attend and vote at a meeting of the directors that will constitute a necessary quorum for meetings of the directors. Resolutions passed at such meetings shall be as valid and effectual as if it had been duly approved at a meeting of the directors duly convened and held. MANAGING DIRECTOR 117. The directors may from time to time appoint one or more of their body to the office of managing director for such period and on such terms as they think fit, and, subject to the terms of any agreement entered into in any particular case, may revoke such appointment. A director so appointed shall not, whilst holding that office, be subject to retirement by rotation or be taken into account in determining the rotation of retirement of directors, but his appointment shall be automatically determined if he ceases from any cause to be a director. 118. A managing director shall receive such remuneration (whether by way of salary, commission or participation in profits, or partly in one way and partly in another) as the directors may determine. 119. The directors may entrust to and confer upon a managing director any of the -20- 21 powers exercisable by them upon such terms and conditions and with such restrictions as they may think fit, and either collaterally with or to the exclusion of their own powers and may from time to time revoke, withdraw, alter or vary all or any of such powers. SECRETARY 120. The Secretary shall be appointed by the directors for such term, at such remuneration and upon such conditions as they may think fit; and any secretary so appointed may be removed by them. 121. A provision of the Ordinance or these Articles requiring or authorizing a thing to be done by or to a director and the Secretary shall not be satisfied by its being done by or to the same person acting both as director and as, or in place of, the Secretary. THE SEAL 122. The directors shall provide for the safe custody of the seal, which shall only be used by the authority of the directors or of a committee of the directors authorized by the directors in that behalf, and every instrument to which the seal shall be affixed shall be signed by a director and shall be counter-signed by the Secretary or by a second director or by some other person appointed by the directors for the purpose. DIVIDENDS AND RESERVE 123. The Company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors. 124. The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the Company. 125. No dividend shall be paid otherwise than out of profits. 126. The directors may, before recommending any dividend, set aside out of the profits of the Company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for any purpose to which the profits of the Company may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the Company or be invested in such investments (other than shares of the Company) as the directors may from time to time think fit. The directors may also without placing the same to reserve carry forward any profits which they may think prudent not to divide. 127. Subject to the rights of persons, if any, entitled to shares with special rights as to dividend, all dividends shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid, but no -21- 22 amount paid or credited as paid on a share in advance of calls shall be treated for the purposes of this Article as paid on the share. All dividends shall be apportioned and paid proportionately to the amounts paid or credited as paid on the shares during any portion or portions of the period in respect of which the dividend is paid; but if any share is issued on terms providing that it shall rank for dividend as from a particular date such share shall rank for dividend accordingly. 128. The directors may deduct from any dividend payable to any member all sums of money (if any) presently payable by him to the Company on account of calls or otherwise in relation to the shares of the Company. 129. Any general meeting declaring a dividend or bonus may direct payment of such dividend or bonus wholly or partly by the distribution of specific assets and in particular of paid up shares, debentures or debenture stock of any other company or in any one or more of such ways, and the directors shall give effect to such resolution, and where any difficulty arises in regard to such distribution, the directors may settle the same as they think expedient, and in particular may issue fractional certificates and fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any members upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the directors. 130. Any dividend, bonus, interest or other moneys payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder or, in the case of joint holders, to the registered address of that one of the joint holders who is first named on the register of members or to such person and to such address as the holder or joint holders may in writing direct. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. Any one of 2 or more joint holders may give effectual receipts for any dividends, bonuses, interest or other moneys payable in respect of the shares held by them as joint holders. 131. No dividend shall bear interest against the Company. 132. All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and shall revert to the Company. ACCOUNTS 133. The directors shall cause proper books of account to be kept with respect to: (a) all sums of money received and expended by the Company and the matters in respect of which the receipt and expenditure takes place; -22- 23 (b) all sales and purchases of goods by the Company; and (c) the assets and liabilities of the Company. Proper books shall not be deemed to be kept if there are not kept such books of account as are necessary to give a true and fair view of the state of the Company's affairs and to explain its transactions. 134. The books of account shall be kept at the registered office of the Company, or, subject to Section 121(3) of the Ordinance, at such other place or places as the directors think fit, and shall always be open to the inspection of the directors. 135. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of members not being directors, and no member (not being a director) shall have any right of inspecting any account or book or document of the Company except as conferred by statute or authorized by the directors or by the Company in general meeting. 136. The directors shall from time to time, in accordance with Sections 122, 124 and 129D of the Ordinance, cause to be prepared and to be laid before the Company in general meeting such profit and loss accounts, balance sheets, group accounts (if any) and reports as are referred to in those Sections. 137. A copy of every balance sheet (including every document required by law to be annexed thereto) which is to be laid before the Company in general meeting, together with a copy of the directors' report and a copy of the auditors' report, shall not less than 21 days before the date of the meeting be sent to every member of, and every holder of debentures of, the Company and to all persons other than members or holders of debentures of the Company, being persons entitled to receive notices of general meetings of the Company: Provided that this Article shall not require a copy of those documents to be sent to any person of whose address the Company is not aware or to more than one of the joint holders of any shares or debentures. CAPITALIZATION OF PROFITS 138. The Company in general meeting may upon the recommendation of the directors resolve that it is desirable to capitalize any part of the amount for the time being standing to the credit of any of the Company's reserve accounts or to the credit of the profit and loss account or otherwise available for distribution, and accordingly that such sum be set free for distribution amongst the members who would have been entitled thereto if distributed by way of dividend and in the same proportions on condition that the same be not paid in cash but be applied either in or towards paying up any amounts for the time being unpaid on any shares held by such members respectively or paying up in full unissued shares or debentures of the Company to be allotted and distributed credited as fully paid up to and amongst such members in the proportion aforesaid, or partly in the one way and -23- 24 partly in the other, and the directors shall give effect to such resolution: Provided that a share premium account and a capital redemption reserve fund may, for the purposes of this Article, only be applied in the paying up of unissued shares to be allotted to members of the Company as fully paid bonus shares. 139. Whenever such a resolution as aforesaid shall have been passed the directors shall make all appropriations and applications of the undivided profits resolved to be capitalized thereby, and all allotments and issues of fully-paid shares or debentures, if any, and generally shall do all acts and things required to give effect thereto, with full power to the directors to make such provision by the issue of fractional certificates or by payment in cash or otherwise as they think fit for the case of shares or debentures becoming distributable in fractions, and also to authorize any person to enter on behalf of all the members entitled thereto into an agreement with the Company providing for the allotment to them respectively, credited as fully paid up, of any further shares or debentures to which they may be entitled upon such capitalization, or (as the case may require) for the payment up by the Company on their behalf, by the application thereto of their respective proportions of the profits resolved to be capitalized, of the amounts or any part of the amounts remaining unpaid on their existing shares, and any agreement made under such authority shall be effective and binding on all such members. AUDIT 140. Auditors shall be appointed and their duties regulated in accordance with Sections 131, 132, 133, 140, 140A, 140B and 141 of the Ordinance. NOTICES 141. Every member and director shall register with the Company an address either in Hong Kong or elsewhere to which notices can be delivered or sent and if any member or director shall fail so to do notice may be given to such member or director by delivering or sending the same in any of the manners hereinafter mentioned to his last known place of business or residence or, if there be none, by posting up a notice in the registered office of the Company (in which case such notice shall be deemed to be duly served at the expiration of 24 hours after it is so posted up). 142. A notice may be given either by personal delivery or by sending it by prepaid post (airmail in the case of a registered address outside Hong Kong), cable, telex or telefax. 143. (a) A notice shall be deemed served: (i) in the case of personal delivery at the time of delivery; (ii) in the case of prepaid post to an address in Hong Kong on the second day following its posting; -24- 25 (iii) in the case of prepaid post to an address outside Hong Kong on the seventh day following its posting; (iv) in the case of cable, telex or telefax on the day following despatch of the cable or telex message. (b) In the case of a notice sent by prepaid post, in proving service thereof it shall be sufficient to prove that the envelope or wrapper containing the notice was properly addressed and stamped and was deposited in a post box or at a post office. 144. A notice may be given by the Company to the joint holders of a share by giving the notice to the joint holder first named in the register of members in respect of the share. 145. A notice may be given by the Company to the persons entitled to a share in consequence of the death or bankruptcy of a member by sending it through the post in a prepaid letter addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt, or by any like description, at the address, if any, supplied for the purpose by the persons claiming to be so entitled, or (until such an address has been so supplied) by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred. 146. Notice of every general meeting shall be given in any manner hereinbefore authorized to:- (a) every member except those members who have not supplied to the Company an address for the giving of notices to them; (b) every person entitled to a share in consequence of the death or bankruptcy of a member who, but for his death or bankruptcy, would be entitled to receive notice of the meeting; and (c) the auditor for the time being of the Company. No other person shall be entitled to receive notices of general meetings. WINDING UP 147. If the Company shall be wound up the liquidator may, with the sanction of a special resolution of the Company and any other sanction required by the Ordinance, divide amongst the members in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction, shall think fit, but so that no member shall be compelled to -25- 26 accept any shares or other securities whereon there is any liability. INDEMNITY 148. Subject to the provisions of the Ordinance but without prejudice to any indemnity to which a director may otherwise be entitled, every director or other officer or auditor of the Company shall be indemnified out of the assets of the Company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in which relief is granted to him by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the Company. -26- EX-4.1 4 DEPOSIT AGREEMENT 1 EXHIBIT 4.1 ZINDART LIMITED AND THE BANK OF NEW YORK AS DEPOSITARY AND OWNERS AND HOLDERS OF AMERICAN DEPOSITARY RECEIPTS DEPOSIT AGREEMENT DATED AS OF _______, 1996 2 DEPOSIT AGREEMENT DEPOSIT AGREEMENT dated as of _____________________, 1996 among Zindart Limited, incorporated under the laws of ________________________ (herein called the Issuer), THE BANK OF NEW YORK, a New York banking corporation (herein called the Depositary), and all owners and holders from time to time of American Depositary Receipts issued hereunder. W I T N E S S E T H: WHEREAS, the Issuer desires to provide, as hereinafter set forth in this Deposit Agreement, for the deposit of Shares (as hereinafter defined) of the Issuer from time to time with the Depositary or with the Custodian (as hereinafter defined) as agent of the Depositary for the purposes set forth in this Deposit Agreement, for the creation of American Depositary Shares representing the Shares so deposited and for the execution and delivery of American Depositary Receipts evidencing the American Depositary Shares; and WHEREAS, the American Depositary Receipts are to be substantially in the form of Exhibit A annexed hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement; NOW, THEREFORE, in consideration of the premises, it is agreed by and between the parties hereto as follows: 3 ARTICLE 1. DEFINITIONS. The following definitions shall for all purposes, unless otherwise clearly indicated, apply to the respective terms used in this Deposit Agreement: SECTION 1.1. American Depositary Shares. The term "American Depositary Shares" shall mean the securities representing the interests in the Deposited Securities and evidenced by the Receipts issued hereunder. Each American Depositary Share shall represent __________ ( ) Share(s), until there shall occur a distribution upon Deposited Securities covered by Section 4.3 or a change in Deposited Securities covered by Section 4.8 with respect to which additional Receipts are not executed and delivered, and thereafter American Depositary Shares shall evidence the amount of Shares or Deposited Securities specified in such Sections. SECTION 1.2. Article; Section. Wherever references are made in this Deposit Agreement to an "Article" or "Articles" or to a "Section" or "Sections", such references shall mean an article or articles or a section or sections of this Deposit Agreement, unless otherwise required by the context. SECTION 1.3. Commission. The term "Commission" shall mean the Securities and Exchange Commission of the United States or any successor governmental agency in the United States. SECTION 1.4. Custodian. The term "Custodian" shall mean the Hong Kong office of HongKong Shanghai Bank, as agent of the Depositary for the purposes of this Deposit Agreement, and any other firm - 2 - 4 or corporation which may hereafter be appointed by the Depositary pursuant to the terms of Section 5.5, as substitute or additional custodian or custodians hereunder, as the context shall require and shall also mean all of them collectively. SECTION 1.5. Deposit Agreement. The term "Deposit Agreement" shall mean this Agreement, as the same may be amended from time to time in accordance with the provisions hereof. SECTION 1.6. Depositary; Corporate Trust Office. The term "Depositary" shall mean The Bank of New York, a New York banking corporation and any successor as depositary hereunder. The term "Corporate Trust Office", when used with respect to the Depositary, shall mean the office of the Depositary which at the date of this Agreement is 101 Barclay Street, New York, New York, 10286. SECTION 1.7. Deposited Securities. The term "Deposited Securities" as of any time shall mean Shares at such time deposited or deemed to be deposited under this Deposit Agreement and any and all other securities, property and cash received by the Depositary or the Custodian in respect thereof and at such time held hereunder, subject as to cash to the provisions of Section 4.5. SECTION 1.8. Dollars;_____________. The term "Dollars" shall mean United States dollars. The term "_________________ shall mean _________________. SECTION 1.9. Foreign Registrar. The term "Foreign Registrar" shall mean the entity that presently carries out the duties of registrar for the Shares or any successor as registrar for the Shares and any - 3 - 5 other appointed agent of the Issuer for the transfer and registration of Shares. SECTION 1.10. Issuer. The term "Issuer" shall mean Zindart Limited, incorporated under the laws of ____________, and its successors. SECTION 1.11. Owner. The term "Owner" shall mean the person in whose name a Receipt is registered on the books of the Depositary maintained for such purpose. SECTION 1.12. Receipts. The term "Receipts" shall mean the American Depositary Receipts issued hereunder evidencing American Depositary Shares. SECTION 1.13. Registrar. The term "Registrar" shall mean any bank or trust company having an office in the Borough of Manhattan, The City of New York, which shall be appointed to register Receipts and transfers of Receipts as herein provided. SECTION 1.14. Restricted Securities. The term "Restricted Securities" shall mean Shares, or Receipts representing such Shares, which are acquired directly or indirectly from the Issuer or its affiliates (as defined in Rule 144 under the Securities Act of 1933) in a transaction or chain of transactions not involving any public offering or which are subject to resale limitations under Regulation D under that Act or both, or which are held by an officer, director (or persons performing similar functions) or other affiliate of the Issuer, or which are subject to other restrictions on sale or deposit under the laws of the United - 4 - 6 States or _______________, or under a shareholder agreement or the Articles of Association and By-laws of the Issuer. SECTION 1.15. Securities Act of 1933. The term "Securities Act of 1933" shall mean the United States Securities Act of 1933, as from time to time amended. SECTION 1.16. Shares. The term "Shares" shall mean ____________ shares in registered form of the Issuer, par value ____________ each, heretofore validly issued and outstanding and fully paid, nonassessable and free of any pre-emptive rights of the holders of outstanding Shares or hereafter validly issued and outstanding and fully paid, nonassessable and free of any pre-emptive rights of the holders of outstanding Shares or interim certificates representing such Shares. ARTICLE 2. FORM OF RECEIPTS, DEPOSIT OF SHARES, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS. SECTION 2.1. Form and Transferability of Receipts. Definitive Receipts shall be substantially in the form set forth in Exhibit A annexed to this Deposit Agreement, with appropriate insertions, modifications and omissions, as hereinafter provided. No Receipt shall be entitled to any benefits under this Deposit Agreement or be valid or obligatory for any purpose, unless such Receipt shall have been executed by the Depositary by the manual or facsimile signature of a duly authorized signatory of the Depositary and, if a Registrar for the Receipts shall have been appointed, countersigned by the manual or facsimile signature of a duly authorized officer of the Registrar. The Depositary shall maintain - 5 - 7 books on which each Receipt so executed and delivered as hereinafter provided and the transfer of each such Receipt shall be registered. Receipts bearing the manual or facsimile signature of a duly authorized signatory of the Depositary who was at any time a proper signatory of the Depositary shall bind the Depositary, notwithstanding that such signatory has ceased to hold such office prior to the execution and delivery of such Receipts by the Registrar or did not hold such office on the date of issuance of such Receipts. The Receipts may be endorsed with or have incorporated in the text thereof such legends or recitals or modifications not inconsistent with the provisions of this Deposit Agreement as may be required by the Depositary or required to comply with any applicable law or regulations thereunder or with the rules and regulations of any securities exchange upon which American Depositary Shares may be listed or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Receipts are subject by reason of the date of issuance of the underlying Deposited Securities or otherwise. Title to a Receipt (and to the American Depositary Shares evidenced thereby), when properly endorsed or accompanied by proper instruments of transfer, shall be transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that the Depositary, notwithstanding any notice to the contrary, may treat the Owner thereof as the absolute owner thereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for in this Deposit Agreement and for all other purposes. - 6 - 8 SECTION 2.2. Deposit of Shares. Subject to the terms and conditions of this Deposit Agreement, Shares or evidence of rights to receive Shares may be deposited by delivery thereof to any Custodian hereunder, accompanied by any appropriate instrument or instruments of transfer, or endorsement, in 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 this Deposit Agreement, and, if the Depositary requires, together with a written order directing the Depositary to execute and deliver to, or upon the written order of, the person or persons stated in such order, a Receipt or Receipts for the number of American Depositary Shares representing such deposit. No Share shall be accepted for deposit unless accompanied by evidence satisfactory to the Depositary that any necessary approval has been granted by any governmental body in ________________ which is then performing the function of the regulation of currency exchange. If required by the Depositary, Shares presented for deposit at any time, whether or not the transfer books of the Issuer or the Foreign Registrar, if applicable, are closed, shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Depositary, which will provide for the prompt transfer to the Custodian of any dividend, or right to subscribe for additional Shares or to receive other property which any person in whose name the Shares are or have been recorded may thereafter receive upon or in respect of such deposited Shares, or in lieu thereof, such agreement of indemnity or other agreement as shall be satisfactory to the Depositary. At the request and risk and expense of any person proposing to deposit Shares, and for the account of such person, the Depositary may receive certificates for Shares to be - 7 - 9 deposited, together with the other instruments herein specified, for the purpose of forwarding such Share certificates to the Custodian for deposit hereunder. Upon each delivery to a Custodian of a certificate or certificates for Shares to be deposited hereunder, together with the other documents above specified, such Custodian shall, as soon as transfer and recordation can be accomplished, present such certificate or certificates to the Issuer or the Foreign Registrar, if applicable, for transfer and recordation of the Shares being deposited in the name of the Depositary or its nominee or such Custodian or its nominee. Deposited Securities shall be held by the Depositary or by a Custodian for the account and to the order of the Depositary or at such other place or places as the Depositary shall determine. SECTION 2.3. Execution and Delivery of Receipts. Upon receipt by any Custodian of any deposit pursuant to Section 2.2 hereunder (and in addition, if the transfer books of the Issuer or the Foreign Registrar, if applicable, are open, the Depositary may in its sole discretion require a proper acknowledgment or other evidence from the Issuer that any Deposited Securities have been recorded upon the books of the Issuer or the Foreign Registrar, if applicable, in the name of the Depositary or its nominee or such Custodian or its nominee), together with the other documents required as above specified, such Custodian shall notify the Depositary of such deposit and the person or persons to whom or upon whose written order a Receipt or Receipts are deliverable in respect thereof and the number of American Depositary Shares to be evidenced thereby. Such notification shall be made by letter or, at the request, risk and expense of the person making the - 8 - 10 deposit, by cable, telex or facsimile transmission. Upon receiving such notice from such Custodian, or upon the receipt of Shares by the Depositary, the Depositary, subject to the terms and conditions of this Deposit Agreement, shall execute and deliver at its Corporate Trust Office, to or upon the order of the person or persons entitled thereto, a Receipt or Receipts, registered in the name or names and evidencing any authorized number of American Depositary Shares requested by such person or persons, but only upon payment to the Depositary of the fees of the Depositary for the execution and delivery of such Receipt or Receipts as provided in Section 5.9, and of all taxes and governmental charges and fees payable in connection with such deposit and the transfer of the Deposited Securities. SECTION 2.4. Transfer of Receipts; Combination and Split-up of Receipts. The Depositary, subject to the terms and conditions of this Deposit Agreement, shall register transfers of Receipts on its transfer books from time to time, upon any surrender of a Receipt, by the Owner in person or by a duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer, and duly stamped as may be required by the laws of the State of New York and of the United States of America. Thereupon the Depositary shall execute a new Receipt or Receipts and deliver the same to or upon the order of the person entitled thereto. The Depositary, subject to the terms and conditions of this Deposit Agreement, shall upon surrender of a Receipt or Receipts for the purpose of effecting a split-up or combination of such Receipt or Receipts, execute and deliver a new - 9 - 11 Receipt or Receipts for any authorized number of American Depositary Shares requested, evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered. The Depositary may appoint one or more co-transfer agents for the purpose of effecting transfers, combinations and split-ups of Receipts 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 Receipts and will be entitled to protection and indemnity to the same extent as the Depositary. SECTION 2.5. Surrender of Receipts and Withdrawal of Shares. Upon surrender at the Corporate Trust Office of the Depositary of a Receipt for the purpose of withdrawal of the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, and upon payment of the fee of the Depositary for the surrender of Receipts as provided in Section 5.9 and payment of all taxes and governmental charges payable in connection with such surrender and withdrawal of the Deposited Securities, and subject to the terms and conditions of this Deposit Agreement, the Owner of such Receipt shall been entitled to delivery,to him or upon his order, of the amount of Deposited Securities at the time represented by the American Depositary Shares evidenced by such Receipt. Delivery of such Deposited Securities may be made by delivery of (a) certificates in the name of such Owner or as ordered by him or by certificates properly endorsed or accompanied by proper instruments of transfer to such Owner or as ordered by him and (b) any other securities, property and cash to which such Owner is then entitled in respect of such Receipts to such Owner or as ordered by him. Such delivery -10- 12 shall be made, as hereinafter provided, without unreasonable delay. A Receipt surrendered for such purposes may be required by the Depositary to be properly endorsed in blank or accompanied by proper instruments of transfer in blank, and if the Depositary so requires, the Owner thereof shall execute and deliver to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be delivered to or upon the written order of a person or persons designated in such order. Thereupon the Depositary shall direct the Custodian to deliver at the Hong Kong office of such Custodian, subject to Sections 2.6, 3.1 and 3.2 and to the other terms and conditions of this Deposit Agreement, to or upon the written order of the person or persons designated in the order delivered to the Depositary as above provided, the amount of Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, except that the Depositary may make delivery to such person or persons at the Corporate Trust Office of the Depositary of any dividends or distributions with respect to the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary. At the request, risk and expense of any Owner so surrendering a Receipt, and for the account of such Owner, the Depositary shall direct the Custodian to forward any cash or other property (other than rights) comprising, and forward a certificate or certificates and other proper documents of title for, the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt to the Depositary for delivery at the Corporate Trust Office of the Depositary. Such direction shall be given by letter or, at - 11 - 13 the request, risk and expense of such Owner, by cable, telex or facsimile transmission. SECTION 2.6. Limitations on Execution and Delivery, Transfer and Surrender of Receipts. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any Receipt or withdrawal of any Deposited Securities, the Depositary, Custodian or Registrar may require payment from the depositor of Shares or the presenter of the Receipt 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 as herein provided, may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with any regulations the Depositary may establish consistent with the provisions of this Deposit Agreement, including, without limitation, this Section 2.6. The delivery of Receipts against deposits of Shares generally or against deposits of particular Shares may be suspended, or the transfer of Receipts in particular instances may be refused, or the registration of transfer of outstanding Receipts generally may be suspended, during any period when the transfer books of the Depositary are closed, or if any such action is deemed necessary or advisable by the Depositary or the Issuer at any time or from time to time because of any requirement of law or of any government or governmental body or commission, or under any provision of this Deposit Agreement, or for any other reason, subject to the provisions of Section 7.7 hereof. Notwithstanding any other provision of this Deposit Agreement or the Receipts, the surrender of outstanding Receipts and withdrawal of Deposited Securities may - 12 - 14 not be suspended subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Issuer 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 Receipts or to the withdrawal of the Deposited Securities. Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under this Deposit Agreement any Shares required to be registered under the provisions of the Securities Act of 1933, unless a registration statement is in effect as to such Shares. SECTION 2.7. Lost Receipts. etc. In case any Receipt shall be mutilated, destroyed, lost or stolen, the Depositary shall execute and deliver a new Receipt of like tenor in exchange and substitution for such mutilated Receipt upon cancellation thereof, or in lieu of and in substitution for such destroyed, lost or stolen Receipt. Before the Depositary shall execute and deliver a new Receipt in substitution for a destroyed, lost or stolen Receipt, the Owner thereof shall have (a) filed with the Depositary (i) a request for such execution and delivery before the Depositary has notice that the Receipt has been acquired by a bona fide purchaser and (ii) a sufficient indemnity bond and (b) satisfied any other reasonable requirements imposed by the Depositary. SECTION 2.8. Cancellation and Destruction of Surrendered Receipts. All Receipts surrendered to the Depositary shall be cancelled by the Depositary. The Depositary is authorized to destroy Receipts so cancelled. - 13 - 15 SECTION 2.9. Pre-Release of Receipts. Notwithstanding Section 2.3 hereof, the Depositary may execute and deliver Receipts prior to the receipt of Shares pursuant to Section 2.2 ("Pre-Release"). The Depositary may, pursuant to Section 2.5, deliver Shares upon the receipt and cancellation of Receipts 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 Receipt has been Pre-Released. The Depositary may receive Receipts in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or accompanied by a written representation from the person to whom Receipts are to be delivered that such person, or its customer, owns the Shares or Receipts 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 (5) business days notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of American Depositary Shares which are outstanding at any time as a result of Pre-Releases will not normally exceed thirty percent (30%) of the Shares deposited hereunder; provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may retain for its own account any compensation received by it in connection with the foregoing. - 14 - 16 ARTICLE 3. CERTAIN OBLIGATIONS OF OWNERS OF RECEIPTS. SECTION 3.1. Filing Proofs, Certificates and Other Information. Any person presenting Shares for deposit or any Owner of a Receipt may be required from time to time to file with the Depositary or the Custodian such proof of citizenship or residence, exchange control approval, or such information relating to the registration on the books of the Issuer or the Foreign Registrar, if applicable, to execute such certificates and to make such representations and warranties, as the Depositary may deem necessary or proper. The Depositary may withhold the delivery or registration of transfer of any Receipt or the distribution of any dividend or sale or distribution of rights or of the proceeds thereof or the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed or such representations and warranties made. SECTION 3.2. Liability of Owner for Taxes. If any tax or other governmental charge shall become payable with respect to any Receipt or any Deposited Securities represented by any Receipt, such tax or other governmental charge shall be payable by the Owner such Receipt to the Depositary. The Depositary may refuse to effect any transfer withdrawal of Deposited Securities represented by American Depositary Shares evidenced by such Receipt until such payment is made, and may withhold any dividends or other distributions, or may sell for the account of the Owner thereof any part or all of the Deposited Securities represented by the American Depositary Shares evidenced by such Receipt, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge and the Owner of such Receipt shall remain liable for any deficiency. - 15 - 17 SECTION 3.3. Warranties on Deposit of Shares. Every person depositing Shares under this Deposit Agreement shall be deemed thereby to represent and warrant that such Shares and each certificate therefor are validly issued, fully paid, nonassessable and free of any pre-emptive rights of the holders of outstanding Shares and that the person making such deposit is duly authorized so to do. Every such person shall also be deemed to represent that the deposit of such Shares and the sale of Receipts evidencing American Depositary Shares representing such Shares by that person are not restricted under the Securities Act of 1933. Such representations and warranties shall survive the deposit of Shares and issuance of Receipts. ARTICLE 4. THE DEPOSITED SECURITIES. SECTION 4.1. Cash Distributions. Whenever the Depositary shall receive any cash dividend or other cash distribution on any Deposited Securities, the Depositary shall, subject to the provisions of Section 4.5, convert such dividend or distribution into Dollars and shall distribute the amount thus received (net of the fees of the Depositary as provided in Section 5.9 hereof, if applicable) to the Owners entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively; provided, however, that in the event that the Issuer or the Depositary shall be required to withhold and does withhold from such cash dividend or such other cash distribution an amount on account of taxes, the amount distributed to the Owner of the Receipts evidencing American Depositary Shares representing such Deposited Securities shall be reduced accordingly. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Owner a fraction of one cent. Any such - 16 - 18 fractional amounts shall be rounded to the nearest whole cent and so distributed to Owners entitled thereto. The Issuer or its agent will remit to the appropriate governmental agency in _______ all amounts withheld and owing to such agency. The Depositary will forward to the Issuer or its agent such information from its records as the Issuer may reasonably request to enable the Issuer or its agent to file necessary reports with governmental agencies, and the Depositary or the Issuer or its agent may file any such reports necessary to obtain benefits under the applicable tax treaties for the Owners of Receipts. SECTION 4.2. Distributions Other Than Cash, Shares or Rights. Subject to the provisions of Section 4.11 and Section 5.9, whenever the Depositary shall receive any distribution other than a distribution described in Sections 4.1, 4.3 or 4.4, the Depositary shall cause the securities or property received by it to be distributed to the Owners entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, 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 Issuer or the Depositary withhold an amount on account of taxes or other governmental charges or that such securities must he registered under the Securities Act of 1933 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 - 17 - 19 received, or any part thereof, and the net proceeds of any such sale (net of the fees of the Depositary as provided in Section 5.9) shall be distributed by the Depositary to the owners entitled thereto as in the case of a distribution received in cash. SECTION 4.3. Distributions in Shares. If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Shares, the Depositary may, and shall if the Issuer shall so request, distribute to the owners of outstanding Receipts entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, additional Receipts evidencing an aggregate number of American Depositary Shares representing the amount 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 American Depositary Shares evidenced by Receipts, including the withholding of any tax or other governmental charge as provided in Section 4.11 and the payment of fees of the Depositary as provided in Section 5.9. In lieu of delivering Receipts for fractional American Depositary Shares in any such case, the Depositary shall sell the amount of Shares represented by the aggregate of such fractions and distribute the net proceeds, all in the manner and subject to the conditions described in Section 4.1. If additional Receipts are not so distributed, each American Depositary Share shall thenceforth also represent the additional Shares distributed upon the Deposited Securities represented thereby. SECTION 4.4. Rights. In the event that the Issuer shall offer or cause to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any - 18 - 20 other nature, the Depositary shall have discretion as to the procedure to be followed in making such Rights available to any Owners or in disposing of such rights on behalf 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 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 American Depositary Shares held by such Owner, warrants or other instruments therefor in such form as it deems appropriate. In circumstances in which rights would otherwise not be distributed, if an Owner of Receipts requests the distribution of warrants or other instruments in order to exercise the rights allocable to the American Depositary Shares of such Owner hereunder, the Depositary will make such rights available to such Owner upon written notice from the Issuer to the Depositary that (a) the Issuer has elected in its sole discretion to permit such rights to be exercised and (b) such Owner has executed such documents as the Issuer has determined in its sole discretion are reasonably required under applicable law. If the Depositary has distributed warrants or other instruments for rights to all or certain Owners, then upon instruction from such an Owner 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 - 19 - 21 for the account of such Owner of an amount equal to the purchase price of the Shares to be received upon the exercise of the rights, and upon payment of the fees of the Depositary and any other charges as set forth in such warrants or other instruments, the Depositary shall, on behalf of such Owner, exercise the rights and purchase the Shares, and the Issuer 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 pursuant to Section 2.2 of this Deposit Agreement, and shall, pursuant to Section 2.3 of this Deposit Agreement, execute and deliver Receipts to such Owner. In the case of a distribution pursuant to the second paragraph of this section, such Receipts shall be legended in accordance with applicable U.S. laws, and shall be subject to the appropriate restrictions on sale, deposit, cancellation, and transfer under such laws. 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 American Depositary Shares held by the Owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of such sales (net of the fees of the Depositary as provided in Section 5.9 and all taxes and governmental charges, payable in connection with such rights and subject to the terms and conditions of this Deposit Agreement) 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 Receipt or otherwise. - 20 - 22 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 of 1933 with respect to a distribution to Owners or are registered under the provisions of such Act. If an Owner of Receipts requests distribution of warrants or other instruments, notwithstanding that there has been no such registration under such Act, the Depositary shall not effect such distribution unless it has received an opinion from recognized counsel in the United States for the Issuer upon which the Depositary may rely that such distribution to such owner is exempt from such registration. The Depositary shall not be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Owners in general or any Owner in particular. SECTION 4.5. Conversion of Foreign Currency. Whenever the Depositary shall receive foreign currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and if at the time of the receipt thereof the foreign currency so received can in the judgment of the Depositary be converted on a reasonable basis into Dollars and the resulting Dollars transferred to the United States, the Depositary shall convert or cause to be converted, by sale or in any other manner that it may determine, such foreign currency into Dollars, and such Dollars shall be distributed to the Owners entitled thereto or, if the Depositary shall have distributed any warrants or other instruments which entitle the holders thereof to such Dollars, then to the holders of such warrants and/or instruments upon surrender thereof for cancellation. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Owners on account of - 21 - 23 exchange restrictions, the date of delivery of any Receipt or otherwise and shall be net of any expenses of conversion into Dollars incurred by the Depositary as provided in Section 5.9. If such conversion or distribution can be effected only with the approval or license of any government or agency thereof, the Depositary shall file such application for approval or license, if any, as it may deem desirable. If at any time the Depositary shall determine that in its judgment any foreign currency received by the Depositary is not convertible on a reasonable basis into Dollars transferable to the United States, 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 (or an appropriate document evidencing the right to receive such 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 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. - 22 - 24 SECTION 4.6. Fixing of Record Date. 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 Deposited Securities, or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall receive notice of any meeting of holders of Shares or other Deposited Securities, the Depositary shall fix a record date (a) for the determination of the Owners who shall 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 American Depositary Share will represent the changed number of Shares. Subject to the provisions of Sections 4.1 through 4.5 and to the other terms and conditions of this Deposit Agreement, the Owners on such record date shall be entitled, as the case may be, to receive the amount distributable by the Depositary with respect to such dividend or other distribution or such rights or the net proceeds of sale thereof in proportion to the number of American Depositary Shares held by them respectively and to give voting instructions and to act in respect of any other such matter. SECTION 4.7. Voting of Deposited Securities. Upon receipt of notice of any meeting of holders of Shares or other Deposited Securities, if requested in writing by the Issuer the Depositary shall, as soon as practicable thereafter, mail to the Owners a notice, the form of which notice shall be in the sole discretion of the Depositary, which shall contain (a) such information as is contained in such notice of meeting, and (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 - 23 - 25 ________________________law and of the Articles of Association of the Issuer, 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 American Depositary Shares and (c) a statement as to the manner in which such instructions may be given. Upon the written request of an Owner on such record date, received on or before the date established by the Depositary for such purpose, (the "Instruction Date") the Depositary shall endeavor, in so far as practicable, to vote or cause to be voted the amount of Shares or other Deposited Securities represented by the American Depositary Shares evidenced by such Receipt in accordance with the instructions set forth in such request. The Depositary shall 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 Owners generally or any Owner in particular will receive the notice described in the preceding paragraph sufficiently prior to the Instruction Date to ensure that the Depositary will vote the Shares or Deposited Securities in accordance with the provisions set forth in the preceding paragraph. SECTION 4.8. Changes Affecting Deposited Securities. In circumstances where the provisions of Section 4.3 do not apply, upon any change in nominal value, change in par value, split-up, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Issuer or to which it is a party, any securities which shall be received by the Depositary or a Custodian in exchange for or in conversion of or in respect of Deposited Securities, - 24 - 26 shall be treated as new Deposited Securities under this Deposit Agreement, and American Depositary Shares shall thenceforth represent the new Deposited Securities so received in exchange or conversion, unless additional Receipts are delivered pursuant to the following sentence. In any such case the Depositary may, and shall if the Issuer shall so request, execute and deliver additional Receipts as in the case of a dividend in Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts specifically describing such new Deposited Securities. SECTION 4.9. Reports. The Depositary shall make available for inspection by Owners at its Corporate Trust Office any reports and communications, including any proxy soliciting material, received from the Issuer which are both (a) received by the Depositary as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Issuer. The Depositary shall also, upon written request, send to the Owners copies of such reports furnished by the Issuer pursuant to Section 5.6. Any such reports and communications, including any such proxy soliciting material, furnished to the Depositary by the Issuer shall be furnished in English. SECTION 4.10. Lists of Owners. Promptly upon request by the Issuer, the Depositary shall, at the expense of the Issuer, furnish to it a list, as of a recent date, of the names, addresses and holdings of American Depositary Shares by all persons in whose names Receipts are registered on the books of the Depositary. - 25 - 27 SECTION 4.11. Withholding. In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may by public or private sale dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner as the Depositary deems necessary and practicable to pay any such taxes or charges and the Depositary shall 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 American Depositary Shares held by them respectively. ARTICLE 5. THE DEPOSITARY, THE CUSTODIANS AND THE ISSUER. SECTION 5.1. Maintenance of Office and Transfer Books by the Depositary. Until termination of this Deposit Agreement in accordance with its terms, the Depositary shall maintain in the Borough of Manhattan, The City of New York, facilities for the execution and delivery, registration, registration of transfers and surrender of Receipts in accordance with the provisions of this Deposit Agreement. The Depositary shall keep books for the registration of Receipts and transfers of Receipts which at all reasonable times shall be open for inspection by the Owners, provided that such inspection shall not be for the purpose of communicating with Owners in the interest of a business or object other than the business of the Issuer or a matter related to this Deposit Agreement or the Receipts. - 26 - 28 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 hereunder. If any Receipts or the American Depositary Shares evidenced thereby are listed on one or more stock exchanges in the United States, the Depositary shall act as Registrar or appoint a Registrar or one or more co-registrars for registry of such Receipts in accordance with any requirements of such exchange or exchanges. SECTION 5.2. Prevention or Delay in Performance by the Depositary or the Issuer. Neither the Depositary nor the Issuer shall incur any liability to any Owner or holder of any Receipt, 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 Issuer, or by reason of any act of God or war or other circumstances beyond its control, the Depositary or the Issuer shall be prevented or forbidden from, or be subject to any civil or criminal penalty on account of, doing or performing any act or thing which by the terms of this Deposit Agreement it is provided shall be done or performed; nor shall the Depositary or the Issuer incur any liability to any Owner or holder of any Receipt by reason of any non-performance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of this Deposit Agreement it is provided shall or may be done or performed, or by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement. Where, by the terms of a distribution pursuant to Sections 4.1, 4.2, or 4.3 of the Deposit Agreement, or an offering or distribution pursuant to Section 4.4 of the Deposit Agreement, or for any other reason, such - 27 - 29 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 shall not make such distribution or offering, and shall allow any rights, if applicable, to lapse. SECTION 5.3. Obligations of the Depositary, the Custodian and the Issuer. The Issuer assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to Owners or holders of Receipts, except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith. The Depositary assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to any Owner or holder of any Receipt (including, without limitation, liability with respect to the validity or worth of the Deposited Securities), except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith. Neither the Depositary nor the Issuer shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability shall be furnished as often as may be required, and the Custodian shall not be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary. - 28 - 30 Neither the Depositary nor the Issuer shall be liable for any action or nonaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Owner or any other person believed by it in good faith to be competent to give such advice or information. The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the Depositary or in connection with any matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary. The Depositary shall not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any such vote is cast or the effect of any such vote, provided that any such action or nonaction is in good faith. No disclaimer of liability under the securities Act of 1933 is intended by any provision of this Deposit Agreement. SECTION 5.4. Resignation and Removal of the Depositary. The Depositary may at any time resign as Depositary hereunder by written notice of its election so to do delivered to the Issuer, such resignation to take effect upon the appointment of a successor depositary and its acceptance of such appointment as hereinafter provided. The Depositary may at any time be removed by the Issuer by written notice of such removal effective upon the -29- 31 appointment of a successor depositary and its acceptance of such appointment as hereinafter provided. In case at any time the Depositary acting hereunder shall resign or be removed, the Issuer shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, The City of New York. Every successor depositary shall execute and deliver to its predecessor and to the Issuer an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor; but such predecessor, nevertheless, upon payment of all sums due it and on the written request of the Issuer shall execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all right, title and interest in the Deposited Securities to such successor, and shall deliver to such successor a list of the Owners of all outstanding Receipts. Any such successor depositary shall promptly mail notice of its appointment to the Owners. Any corporation into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act. SECTION 5.5 The Custodians. The Custodian shall be subject at all times and in all respects to the directions of the Depositary and shall be responsible solely to it. Any Custodian may resign and be discharged from its duties hereunder by notice of such resignation delivered to the Depositary at least 30 days prior to the date on which such resignation is to become effective. If -30- 32 upon such resignation there [shall be no Custodian acting hereunder, the Depositary shall,] promptly after receiving such notice, appoint a substitute custodian or custodians, each of which shall thereafter be a Custodian hereunder. Whenever the Depositary in its discretion determines that it is in the best interest of the Owners to do so, it may appoint substitute or additional custodian or custodians, which shall thereafter be one of the Custodians hereunder. Upon demand of the Depositary any Custodian shall deliver such of the Deposited Securities held by it as are requested of it to any other Custodian or such substitute or additional custodian or custodians. Each such substitute or additional custodian shall deliver to the Depositary, forthwith upon its appointment, an acceptance of such appointment satisfactory in form and substance to the Depositary. Upon the appointment of any successor depositary hereunder, each Custodian, then acting hereunder shall forthwith become, without any further act or writing, the agent hereunder of such successor depositary and the appointment of such successor depositary shall in no way impair the authority of each Custodian hereunder; but the successor depositary so appointed shall, nevertheless, on the written request of any Custodian, execute and deliver to such Custodian all such instruments as may be proper to give to such Custodian full and complete power and authority as agent hereunder of such successor depositary. SECTION 5.6. Notices and Reports. On or before the first date on which the Issuer gives notice, by publication or otherwise, of any meeting of holders of shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action in respect of any cash or other distributions or the offering of any rights, the Issuer agrees to transmit to the - 31 - 33 Depositary and the Custodian a copy of the notice thereof in the form given or to be given to holders of Shares or other Deposited Securities. The Issuer will arrange for the translation into English and the prompt transmittal by the Issuer to the Depositary and the Custodian of such notices and any other reports and communications which are made generally available by the Issuer to holders of its Shares. If requested in writing by the Issuer, the Depositary will arrange for the mailing, at the Issuer's expense, of copies of such notices, reports and communications to all Owners. The Issuer will timely provide the Depositary with the quantity of such notices, reports, and communications, as requested by the Depositary from time to time, in order for the Depositary to effect such mailings. SECTION 5.7. Distribution of Additional Shares, Rights, etc. The Issuer agrees that in the event of any issuance or distribution of (1) additional Shares, (2) rights to subscribe for Shares, (3) securities convertible into Shares, or (4) rights to subscribe for such securities, (each a "Distribution") the Issuer will promptly furnish to the Depositary a written opinion from U.S. counsel for the Issuer, which counsel shall be satisfactory to the Depositary, stating whether or not the Distribution requires a Registration Statement under the Securities Act of 1933 to be in effect prior to making such Distribution available to Owners entitled thereto. If in the opinion of such counsel a Registration Statement is required, such counsel shall furnish to the Depositary a written opinion as to whether or not there is a Registration Statement in effect which will cover such Distribution. The Issuer agrees with the Depositary that neither the Issuer nor any company controlled by, controlling under - 32 - 34 common control with the Issuer will at any time deposit any Shares, either originally issued or previously issued and reacquired by the Issuer or any such affiliate, unless a Registration Statement is in effect as to such Shares under the Securities Act of 1933. SECTION 5.8. INDEMNIFICATION. The Issuer agrees to indemnify the Depositary, its directors, employees, agents and affiliates and any Custodian against, and hold each of them harmless from, any liability or expense (including, but not limited to, the fees and expenses of counsel) which may arise out of acts performed or omitted, in accordance with the provisions of this Deposit Agreement and of the Receipts, as the same may be amended, modified or supplemented from time to time, (i) by either the Depositary or a Custodian or their respective directors, employees, agents and affiliates, except for any liability or expense arising out of the negligence or bad faith of either of them, or (ii) by the Issuer or any of its directors, employees, agents and affiliates. The Depositary agrees to indemnify the Issuer, its directors, employees, agents and affiliates and hold them harmless from any liability or expense which may arise out of acts performed or omitted by the Depositary or its Custodian or their respective directors, employees, agents and affiliates due to their negligence or bad faith. SECTION 5.9. Charges of Depositary. The Issuer agrees to pay the fees, reasonable expenses and out-of-pocket charges of the Depositary and those of any Registrar only in accordance with agreements in writing entered into between the Depositary and the Issuer from time to time. The Depositary shall present its statement for such charges and expenses to the Issuer once every three months. - 33 - 35 The charges and expenses of the Custodian are for the sole account of the Depositary. The following charges shall be incurred by any party depositing or withdrawing Shares or by any party surrendering Receipts or to whom Receipts are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Issuer or an exchange regarding the Receipts or Deposited Securities or a distribution of Receipts pursuant to Section 4.3), whichever applicable: (1) taxes and other governmental charges, (2) 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 Issuer 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 hereunder, (3) such cable, telex and facsimile transmission expenses as are expressly provided in this Deposit Agreement, (4) such expenses as are incurred by the Depositary in the conversion of foreign currency pursuant to Section 4.5 (5) a fee of $5.00 or less per 100 American Depositary Shares (or portion thereof) for the execution and delivery of Receipts pursuant to Section 2.3, 4.3 or 4.4, and the surrender of Receipts pursuant to Section 2.5 or 6.2, (6) a fee of $.02 or less per American Depositary Share (or portion thereof) for any cash distribution made pursuant to the Deposit Agreement including, but not limited to, Sections 4.1 through 4.4 hereof, (7) a fee of $1.50 or less per certificate for a Receipt or Receipts for transfers made pursuant to Section 2.4 and (8) a fee for the distribution of securities pursuant to Section 4.2, such fee being in an amount equal to the fee for the execution and delivery of American Depositary Shares referred to above which would have been charged as a result of the deposit of such securities (for purposes of this clause (8) treating all such securities as if they were Shares), but - 34 - 36 which securities are instead distributed by the Depositary to Owners. The Depositary, subject to Section 2.9 hereof, may own and deal in any class of securities of the Issuer and its affiliates and in Receipts. SECTION 5.10 Retention of Depositary Documents. The Depositary is authorized to destroy those documents, records, bills and other data compiled during the term of this Deposit Agreement at the times permitted by the laws or regulations governing the Depositary unless the Issuer requests that such papers be retained for a longer period or turned over to the Issuer or to a successor depositary. SECTION 5.11 Exclusivity. The Issuer agrees not to appoint any other depositary for issuance of American Depositary Receipts so long as The Bank of New York is acting as Depositary hereunder. SECTION 5.12 List of Restricted Securities Owners. From time to time, the Issuer shall provide to the Depositary a list setting forth, to the actual knowledge of the Issuer, those persons or entities who beneficially own Restricted Securities and the Issuer shall update that list on a regular basis. The Issuer agrees to advise in writing each of the persons or entities so listed that such Restricted Securities are ineligible for deposit hereunder. The Depositary may rely on such a list or update but shall not be liable for any action or omission made in reliance thereon. -35- 37 ARTICLE 6. AMENDMENT AND TERMINATION. SECTION 6.1. Amendment. The form of the Receipts and any provisions of this Deposit Agreement may at any time and from time to time be amended by agreement between the issuer and the Depositary in any respect which they may deem necessary or desirable. Any amendment which shall impose or increase 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 shall otherwise prejudice any substantial existing right of Owners, shall, however, not become effective as to outstanding Receipts until the expiration of thirty days after notice of such amendment shall have been given to the Owners of outstanding Receipts. Every Owner at the time any amendment so becomes effective shall be deemed, by continuing to hold such Receipt, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Owner of any Receipt to surrender such Receipt and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. SECTION 6.2. Termination. The Depositary shall at any time at the direction of the Issuer terminate this Deposit Agreement by mailing notice of such termination to the Owners of all Receipts then outstanding at least 90 days prior to the date fixed in such notice for such termination. The Depositary may likewise terminate this Deposit Agreement by mailing notice of such termination to the Issuer and the Owners of all Receipts then outstanding if at any time 90 days shall have expired after the Depositary shall have delivered to the Issuer a written notice of its election to resign and a successor depositary shall not -36- 38 have been appointed and accepted its appointment as provided in Section 5.4. On and after the date of termination, the Owner of a Receipt will, upon (a) surrender of such Receipt at the Corporate Trust Office of the Depositary, (b) payment of the fee of the Depositary for the surrender of Receipts referred to in Section 2.5, and (c) payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by the American Depositary Shares evidenced by such Receipt. If any Receipts shall remain outstanding after the date of termination, the Depositary thereafter shall discontinue the registration of transfers of Receipts, shall suspend the distribution of dividends to the Owners thereof, and shall not give any further notices or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in this Deposit Agreement, and shall continue to deliver Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the Owner of such Receipt in accordance with the terms and conditions of this 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 Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, unsegregated and without liability for interest, for the pro rata benefit of the Owners of Receipts which have not theretofore been surrendered, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the termination, the Depositary may sell the Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, unsegregated and without liability for interest, for the pro rata benefit of the Owners of Receipts which have not theretofore been surrendered, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the - 37 - 39 Depositary shall be discharged from all obligations under this Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the Owner of such Receipt in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges). Upon the termination of this Deposit Agreement, the Issuer shall be discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary under Sections 5.8 and 5.9 hereof. ARTICLE 7. MISCELLANEOUS. SECTION 7.1. Counterparts. This Deposit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of such counterparts shall constitute one and the same instrument. Copies of this Deposit Agreement shall be filed with the Depositary and the Custodians and shall be open to inspection by any holder or Owner of a Receipt during business hours. SECTION 7.2. No Third Party Beneficiaries. This Deposit Agreement is for the exclusive benefit of the parties hereto and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person. SECTION 7.3. Severability. In case any one or more of the provisions contained in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the -38- 40 validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. SECTION 7.4 Holders and Owners as Parties; Binding Effect. The holders and Owners of Receipts from time to time shall be parties to this Deposit Agreement and shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance thereof. SECTION 7.5. Notices. Any and all notices to be given to the Issuer shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to , or any other place to which the Issuer may have transferred its principal office. Any and all notices to be given to the Depositary shall be deemed to have been duly given if in English and personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to The Bank of New York, 101 Barclay Street, New York, New York 10286, Attention: American Depositary Receipt Administration, or any other place to which the Depositary may have transferred its Corporate Trust Office. Any and all notices to be given to any Owner shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission confirmed by letter, addressed to such Owner at the address of such Owner as it appears on the transfer books for Receipts of the Depositary, or, if such Owner shall have filed with the Depositary a written request that notices intended for such - 39 - 41 Owner be mailed to some other address, at the address designated in such request. Delivery of a notice sent by mail or cable, telex or facsimile transmission shall be deemed to be effected at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telex or facsimile transmission) is deposited, postage prepaid, in a post-office letter box. The Depositary or the Issuer may, however, act upon any cable, telex or facsimile transmission received by it, notwithstanding that such cable, telex or facsimile transmission shall not subsequently be confirmed by letter as aforesaid. SECTION 7.6. Governing Law. This Deposit Agreement and the Receipts shall be interpreted and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by the laws of the State of New York. SECTION 7.7 Compliance with U.S. Securities Laws. Notwithstanding anything is this Deposit Agreement to the contrary, the Issuer and the Depositary each agrees that it will not exercise any rights it has under this Deposit Agreement to prevent the withdrawal or delivery of Deposited Securities in a manner which would violate the U.S. securities laws, including, but not limited to, Section I.A.(1) of the General Instructions to the Form F-6 Registration Statement, as amended from time to time, under the Securities Act of 1933. - 40 - 42 IN WITNESS WHEREOF, ZINDART LIMITED and THE BANK OF NEW YORK have duly executed this agreement as of the day and year first set forth above and all Owners shall become parties hereto upon acceptance by them of Receipts issued in accordance with the terms hereof. ZINDART LIMITED By: ------------------------------------- THE BANK OF NEW YORK, as Depositary By: ------------------------------------- -41- EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 21.1 Subsidiaries of the Registrant The Company has two direct operating subsidiaries, both of which do business in Guangzhou, the PRC. The Company owns 51% of the shares of Luen Tat Mould Manufacturing Limited, organized under the laws of The British Virgin Islands. The Company owns 55% of the shares of Onchart Industrial Limited, which is organized in the British Virgin Islands. In addition to these direct subsidiaries, the Company is party to two contractual joint ventures, Dongguan Xinda Giftware Company Limited and Guangzhou Zindart (Xin Xing) Giftware Company Limited, both of which are organized under PRC law, which are treated as subsidiaries for accounting purposes. -----END PRIVACY-ENHANCED MESSAGE-----