<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CREATIVE MASTER INTERNATIONAL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(852) 2396-0147
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DELAWARE 3944 11-2854355
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
CARL KA WING TONG
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(852) 2396-0147
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
DALE E. SHORT, ESQ. MARK A. KLEIN, ESQ.
STEPHANIE GRANATO, ESQ. KATHERINE J. BLAIR, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION FRESHMAN, MARANTZ, ORLANSKI,
1801 CENTURY PARK EAST, 16TH FLOOR COOPER & KLEIN
LOS ANGELES, CALIFORNIA 90067 9100 WILSHIRE BLVD.
(310) 553-4441 EIGHTH FLOOR, EAST TOWER
FAX: (310) 201-4746 BEVERLY HILLS, CALIFORNIA 90212
(310) 273-1870
FAX: (310) 274-8293
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES OFFERING REGISTRATION
TO BE REGISTERED PRICE(1) FEE
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<S> <C> <C>
Common Stock, $.0001 par value ("Common
Stock")(2).................................... $14,950,000
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Representative's Warrants(3)................... $ 200
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Common Stock issuable upon exercise of
Representative's Warrants(4).................. $ 1,560,000
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Total Registration Fee......................... $16,510,200 $4,871
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes shares of common stock registered for the account of the
Registrant and shares of common stock which the Underwriters have the
option to purchase from a selling stockholder to cover over-allotments, if
any.
(3) To be issued to the Representative of the Underwriters.
(4) Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional indeterminate number of shares of
common stock as may become issuable by reason of stock splits, stock
dividends and similar anti-dilutive adjustments as set forth in the
Representative's Warrants.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT YET COMPLETE, AND IT MAY +
+BE SUPPLEMENTED OR AMENDED IN THE FINAL VERSION. A REGISTRATION STATEMENT +
+RELATING TO THE SECURITIES DESCRIBED IN THIS PROSPECTUS HAS BEEN FILED WITH +
+THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SECURITIES, OR +
+ACCEPT OFFERS TO BUY THEM, UNTIL THE REGISTRATION STATEMENT BECOMES +
+EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE +
+ARE NOT SOLICITING OFFERS TO BUY THEM. THESE SECURITIES WILL NOT BE SOLD IN +
+ANY STATE WHERE THEIR OFFER OR SALE, OR SOLICITATIONS OF OFFERS TO BUY THEM, +
+WOULD BE UNLAWFUL PRIOR TO THEIR REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1998
PROSPECTUS
[LOGO OF CREATIVE MASTER INTERNATIONAL, INC.]
2,000,000 SHARES OF COMMON STOCK
$ PER SHARE
----------------
Creative Master International, Inc. is a leading independent manufacturer of
collectible-quality, die-cast replicas of cars, trucks, buses and other items.
Our customers market and distribute the products we manufacture primarily to
collectors, hobbyists and other vehicle enthusiasts at retail prices ranging
from $20 to $200. We are offering 2,000,000 shares of common stock to raise
funds that will be used primarily to expand and improve our manufacturing
facilities in China.
Our common stock is listed on the OTC Electronic Bulletin Board under the
symbol "CVMI," but there is no established trading market for the common stock.
Before this offering we and Cruttenden Roth Incorporated will negotiate the
initial public offering price of the common stock. We currently estimate that
the initial public offering price for the common stock will range between $5.50
and $6.50 per share. We have applied to list the common stock on the Nasdaq
National Market under the proposed symbol "CMST."
Your investment in the common stock involves a high degree of risk. Before
investing in the common stock, you should consider carefully the risks
described under "Risk Factors" beginning on page 8.
<TABLE>
<CAPTION>
THE OFFERING PER SHARE TOTAL
------------ --------- -----
<S> <C> <C>
Public Offering Price.................. Neither the Securities and
Underwriting Discounts and Commis- Exchange Commission nor
sions................................. any state securities com-
Proceeds to Creative Master............ mission has approved or
disapproved the common
stock or determined that
this Prospectus is com-
plete or accurate. Any
representation to the con-
trary is a criminal of-
fense.
</TABLE>
One of our stockholders has granted the underwriters of this offering a 45-day
option to purchase an additional 300,000 shares of common stock to cover any
over-allotments. We will not receive any proceeds from the sale of common stock
by the selling stockholder in the event the over-allotment option is exercised.
----------------
CRUTTENDEN ROTH
INCORPORATED
----------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[ART WORK]
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and financial
statements appearing elsewhere in this Prospectus. This summary is not complete
and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire Prospectus
carefully, including the risk factors and financial statements.
CREATIVE MASTER INTERNATIONAL, INC.
Our Business............ We are a leading independent manufacturer of
collectible-quality die-cast replicas of cars, trucks
and buses and other items. Our mission is to provide
the highest level of product quality and customer
service among independent manufacturers of
collectible die-cast replicas. We offer customers
turnkey product development and manufacturing
capabilities. This includes complete sourcing of raw
materials, engineering, assembly, quality control and
final packaging of die-cast products in commercial
quantities. Depending on the customer's needs, we
provide a self-contained production area within one
of our factories with tooling and other production
functions dedicated to manufacturing the customer's
products according to its particular design,
engineering and quality requirements. Our approach to
manufacturing permits customers to closely supervise
and control the production process and to protect the
confidentiality of their product design and
engineering.
Die-Cast Collectibles... Die-cast collectibles are distinguishable from die-
cast toys by their authentic design, exacting
engineering and attention to detail, including
abundant use of identifiable brand names, logos and
other licensed marks. The die-cast replicas we
manufacture are 1/12th to 1/64th scale and include as
many as 450 parts, including numerous moveable parts.
They are marketed and distributed by our customers
primarily to collectors, hobbyists and other vehicle
enthusiasts at retail prices ranging from $20 to
$200.
Our Customers........... Our customers are leading U.S. and European marketers
and distributors of vehicle replicas and other
collectibles. They include Danbury Mint, Mattel,
Hallmark Cards, Paul's Model Art and Brookfield
Collectors Guild.
Die-Cast Collectibles
Industry................ According to Unity Marketing, an independent research
firm, U.S. consumer sales of all collectibles totaled
$10 billion in 1997. U.S. consumer sales of die-cast
collectibles were approximately $753
3
<PAGE>
million in 1997, which was 47% more than in 1996. We
believe the total European consumer market for
collectibles of all types was approximately $6
billion in 1997. The BIS Ltd., a European market
analysis company, estimates that the European
consumer retail market for die-cast collectibles was
approximately $200 million in 1997.
Our Strategy.......... Key elements of our strategy are to:
. Manufacture Collectible-Quality, Die-Cast
Products. Since our inception, we have focused
primarily on manufacturing collectible-quality, die-
cast replicas. Although certain toy factories can
produce limited amounts of collectible-quality, die-
cast items, we believe our approach optimizes the
production of high-quality, die-cast replicas in
commercial quantities.
. Carefully Manage Growth/Focus on Quality
Customers. We have carefully managed our growth by
selectively taking on additional customers. From 1995
to 1997, we focused on building facilities and
developing a high-quality customer base to support
long-term growth. This disciplined approach to growth
has produced an 85% increase in net sales in the
first six months of 1998 over the same period in
1997.
. Increase the Diversity of Customers, Products and
Market Segments Served. Our customers market and
distribute products for diverse segments of the
collectibles industry, representing different product
categories and retail prices. We will continue
working to increase the diversity of our customer
base, in part, by seeking to manufacture new products
for new segments of the collectibles market as they
develop.
. Pursue Product Development Opportunities. We work
closely with our customers and others to develop new
die-cast products for our customers to market. For
example, we recently developed a die-cast outboard
boat motor replica which is expected to be test-
marketed by one of our customers. We intend to
increase our product development efforts as part of
our overall customer service.
. Invest in Plant, Equipment and Employees. We
currently employ 4,100 production workers and operate
three factories comprising over 320,000 square feet
of manufacturing space. These facilities currently
operate at or near full capacity. We are in the
process of building two new factories to expand our
manufacturing capacity to meet demand from existing
customers. The net proceeds of this offering will be
used primarily to pay the cost of constructing and
equipping these new factories.
4
<PAGE>
Our Manufacturing
Operations.............. Our manufacturing operations are conducted through
Creative Master Limited, our wholly-owned Hong Kong
subsidiary, and its subsidiaries. Our production
facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles
northwest of Hong Kong.
Our Offices............. Our principal executive offices are located at Casey
Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui,
Kowloon, Hong Kong, and our telephone number is 852-
2396-0147. We are a Delaware corporation.
THE OFFERING
Shares Outstanding...... We had 4,999,746 shares of common stock outstanding
before this offering.
Shares Offered.......... We are offering 2,000,000 shares of common stock, so
there will be a total of 6,999,746 shares of common
stock outstanding after this offering. See
"Underwriting." One of our stockholders has granted
the underwriters of this offering a 45-day option to
purchase 300,000 shares of common stock to cover
over-allotments. See "Principal Stockholders and
Selling Stockholder."
Use of Proceeds......... We will use the net proceeds of this offering
primarily to expand and improve our Chinese
manufacturing facilities. See "Use of Proceeds." We
will not receive any proceeds from the sale of stock
by the selling stockholder if the over-allotment
option is exercised.
Proposed Trading
Symbol.................. We have applied to list the common stock on the
Nasdaq National Market under the proposed symbol
"CMST." See "Market Price for Common Stock and
Dividend Policy."
BASIS OF PRESENTATION
Exchange
Reorganization.......... We acquired all of the capital stock of Creative
Master Limited on December 30, 1997 in exchange for
our issuance of 4,806,000 shares of common stock to
the shareholders of Creative Master Limited. The
acquisition has been treated as a reverse
acquisition, since Creative Master Limited is the
continuing entity. On this basis, our historical
financial statements prior to December 30, 1997
represent the consolidated financial statements of
Creative Master Limited. See Note 2 of Notes to
Consolidated Financial Statements.
5
<PAGE>
Reverse Stock Splits.... We effected a 1-for-100 reverse stock split in May
1996 and a 1-for-10 reverse stock split in March
1998. All share information in this Prospectus gives
retroactive effect to these reverse stock splits.
Currency Conversion..... All of our sales are denominated either in U.S.
dollars or Hong Kong dollars. Our expenses are
denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of
which is the yuan. All financial information in this
Prospectus is presented in U.S. dollars.
Options and Warrants.... Unless we indicate otherwise, all information in this
Prospectus assumes no exercise of the underwriters'
over-allotment option or the common stock purchase
warrants to be issued by us to Cruttenden Roth
Incorporated, as described under "Underwriting," or
options outstanding or available for grant under our
stock option plan. See "Management--Compensation
Pursuant to Plans."
Trademarks.............. This Prospectus refers to certain trademarks or
servicemarks of other companies. We do not own or
have any rights to any of these marks.
Forward-Looking
Statements.............. This Prospectus contains so-called forward-looking
statements within the meaning of the federal
securities laws. These include statements about our
expectations, beliefs, intentions or strategies for
the future, which we indicate by words or phrases
such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "the Company believes,"
"management believes" and similar language. The
forward-looking statements are based on our current
expectations and are subject to certain risks,
uncertainties and assumptions, including those set
forth in the risk factors and under "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Our actual
results may differ materially from results
anticipated in these forward-looking statements. We
base our forward-looking statements on information
currently available to us, and we assume no
obligation to update them.
6
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following summary financial data have been derived from our audited and
unaudited financial statements included in this Prospectus beginning on
page F-1.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 9,982 $ 14,054 $ 16,211 $ 7,723 $ 14,325
Cost of goods sold......... 7,878 9,782 12,703 6,119 10,258
Gross profit............... 2,104 4,272 3,508 1,604 4,067
Selling, general and admin-
istrative expenses........ 2,394 2,552 1,921 1,197 1,993
Interest expense, net...... 88 140 104 50 106
Other expenses, net........ 96 567 137 24 48
Income (loss) before income
taxes and minority inter-
ests...................... (507) 969 1,000 307 1,951
Net income (loss).......... (559) 815 788 251 1,409
--------- --------- --------- --------- ---------
Net income (loss) per com-
mon share(1).............. $ (0.11) $ 0.16 $ 0.16 $ 0.05 $ 0.28
========= ========= ========= ========= =========
Weighted average number of
common shares
outstanding(1)............ 4,999,746 4,999,746 4,999,746 4,999,746 4,999,746
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, 1998
DECEMBER 31, ----------------------
1997 ACTUAL AS ADJUSTED(2)
------------ ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(3).............. $ 471 $ 877 $ 3,931
Working capital (deficit)................. (829) 217 4,804
Total assets.............................. 10,499 13,333 21,287
Capital lease obligations, non-current
portion(4)............................... 266 478 --
Stockholders' equity...................... 2,739 4,150 14,115
</TABLE>
- --------
(1) Since we had no outstanding stock options or convertible securities during
the periods shown, basic and diluted net income (loss) per common share
were the same.
(2) As adjusted to reflect our sale of 2,000,000 shares of common stock at an
assumed initial public offering price of $6.00 per share and our
application of the estimated net proceeds. See "Use of Proceeds."
(3) Includes bank balances of approximately $72,000 at December 31, 1997 and
approximately $452,000 at June 30, 1998 that are pledged to secure our bank
credit facilities.
(4) Except for capital lease obligations, we had no long-term obligations as of
the dates shown.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. Before
deciding whether to invest, you should read and consider carefully the
following risk factors.
DEPENDENCE ON IMPORTANT CUSTOMERS
Our business is concentrated among a limited number of customers. In 1997,
sales to Danbury Mint, a subsidiary of MBI, accounted for approximately 64.2%
of our net sales and sales to Mattel Vendor Operations Ltd. and Tyco Hong Kong
Limited, subsidiaries of Mattel, totaled approximately 20.2% of net sales. In
1997, we sought to diversify our customer base and our efforts resulted in
several new customers in 1998, including Hallmark Cards. Despite our
diversification efforts, for the six months ended June 30, 1998, sales to
Danbury Mint accounted for approximately 32.9% of our net sales and sales to
Mattel accounted for approximately 28.1% of our net sales. We expect that we
will continue to depend on sales to Danbury Mint and Mattel. If we lose any one
of our major customers, particularly Danbury Mint or Mattel, our business,
financial condition and results of operations would be materially adversely
affected. See "Business--Principal Customers."
CONDUCTING BUSINESS IN CHINA
Our manufacturing facilities are located in the Dongguan region of Guangdong
Province, China, approximately 60 miles northwest of Hong Kong. Therefore, we
are subject to certain inherent risks of doing business in China.
Internal Political Risks. Our manufacturing operations and assets in China are
subject to significant political and economic uncertainties. Changes in laws
and regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our business,
results of operations and financial condition. Under its current leadership,
the Chinese government has been pursuing economic reform policies that
encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
Loss of Chinese Facilities. We conduct all of our manufacturing operations in
China through a Chinese limited liability company with a local Chinese partner.
The legal existence of this Chinese subsidiary expires in 2006, and we have no
assurance that it will be extended. If we cannot extend the legal existence, or
we were otherwise required to move our manufacturing operations outside of
China, our profitability, competitiveness and market position could be
materially adversely affected. Furthermore, there is no assurance that we could
continue our manufacturing operations.
Foreign Corrupt Practices Act. We are subject to the U.S. Foreign Corrupt
Practices Act, which generally prohibits U.S. companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some that may
compete with us, are not subject to these prohibitions. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices are common in China. We
have attempted to implement
8
<PAGE>
safeguards to prevent losses from such practices and to discourage such
practices by our employees and agents. There is no assurance, however, that we
will not suffer such losses or that our employees or other agents will not
engage in such conduct for which we might be held responsible.
Legal System. Unlike the U.S., China has a civil law system based on written
statutes in which judicial decisions have little precedential value. The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing, interpreting and
enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. These
matters may be subject to the exercise of considerable discretion by agencies
of the Chinese government, and forces unrelated to the legal merits of a
particular matter or dispute may influence their determination.
Our activities in China require business licenses. This requires a review and
approval of our activities by various national and local agencies of Chinese
government. There can be no assurance that the Chinese government will continue
to approve of our activities or grant or renew our licenses. Our inability to
obtain needed approvals or licenses would have a material adverse effect on our
business, financial condition and results of operations.
Effect of Trade Disputes. China currently enjoys Most-Favored-Nation ("MFN")
status from the U.S., under which the U.S imposes the lowest applicable tariffs
on Chinese exports to the U.S. The U.S. annually reconsiders whether it should
renew MFN trading status for China. In the past, the U.S. has had disputes with
China relating to trade and human rights issues and has considered imposing
trade sanctions against China, including the non-renewal of MFN status. There
can be no assurance that the U.S. will renew the MFN status with China in
future years or will not impose trade sanctions against China that involve
collectibles such as those we manufacture. Either event would cause an increase
in the cost of our products to our customers. This, in turn, could result in
lower demand for our manufacturing services by our U.S. customers and
materially adversely affect our business, financial condition and results of
operations.
Lease of Chinese Facilities. We operate our Chinese factories under tenancy
agreements with local Chinese government agencies that expire between May 1999
and June 2006. We also lease dormitory facilities under similar tenancy
agreements that expire between December 1998 and February 2000. The factories
and dormitories that we are building will be leased under similar agreements.
The continuance and renewal of our tenancy agreements and operations at our
Chinese facilities depend on our relationship with the local government. Our
operations and prospects will be materially adversely affected if the local
government fails to honor the tenancy agreements. We also may have difficulty
enforcing our rights under the tenancy agreements in China.
Property Damage. By U.S. standards, fire fighting, disaster relief and
assistance and other infrastructure is relatively undeveloped in the Dongguan
region of China, where our manufacturing facilities are located. We currently
maintain approximately $7,800,000 of property damage insurance covering our
manufacturing facilities. We have no business interruption insurance. Material
damage to, or the loss of, our manufacturing facilities due to fire, severe
weather, earthquake or other causes, even if insured against, could have a
material adverse effect on our business, financial condition and
9
<PAGE>
results of operations. Furthermore, we may not be able to find suitable
alternative facilities if any of our factories were destroyed or become
inoperable for any reason.
MAINTAINING HEADQUARTERS IN HONG KONG
We maintain headquarters in Hong Kong and conduct substantially all of our
administrative and sales operations there. The United Kingdom transferred
sovereignty over Hong Kong to China on July 1, 1997, and Hong Kong became a
Special Administrative Region of China. According to the Basic Law of Hong
Kong, Hong Kong will have a high degree of autonomy for 50 years, except as to
foreign affairs and defense. Based on the current political conditions and our
understanding of this new law, we believe that the transfer of sovereignty over
Hong Kong will not have a material adverse effect on our business, financial
condition or results of operations. There can be no assurance, however, that
the political, economic or commercial conditions in Hong Kong will remain
stable.
CUSTOMER CONSOLIDATION
The die-cast collectibles industry is fragmented and there appears to be a
trend toward consolidation among marketers and distributors of collectibles. In
the fourth quarter of 1997, Mattel acquired Tyco Hong Kong Limited, which
accounted for approximately 5.6% of our net sales in 1997. In 1998, Action
Performance Companies, Inc., a marketer and distributor of NASCAR die-cast
replicas and related products, acquired Brookfield Collectors Guild and a
controlling interest in Paul's Model Art, two of our customers. We believe that
both Mattel and Action Performance currently intend to continue the business
relationships we have developed with these customers. However, the change in
ownership of these customers may adversely affect our ongoing relationship with
them. Mattel owns and operates manufacturing facilities that are capable of
producing die-cast replicas, and Action Performance has a close business
relationship with a large, independent die-cast manufacturer that competes with
us. Our loss of one or more of these customers or other important customers
because of industry consolidation would have a material adverse effect on our
business, financial condition and results of operations.
CONCENTRATION OF CREDIT RISK
Our five largest customers--Danbury Mint, Mattel (including Tyco), Brookfield
Collectors Guild, Corgi Classic Cars and Hallmark--accounted for approximately
73% of our accounts receivable at June 30, 1998. These same five customers
accounted for approximately 92% of our accounts receivable at December 31,
1997. Therefore, our working capital position, financial condition and results
of operations depend heavily on the creditworthiness of these customers. If one
or more of these customers does not pay us, our business, financial condition
and results of operations could be materially adversely affected.
INTRODUCTION OF NEW PRODUCTS BY CUSTOMERS; MARKET ACCEPTANCE
Our operating results and growth in net sales depend substantially upon our
customers' ability to develop and market new products and upon continuing
market acceptance of our customers' products. Our customers' failure or delay
in introducing new products could impair our results of operations and limit
our future growth. Changes in consumer tastes affect the market for die-cast
10
<PAGE>
collectibles. Die-cast collectible products typically have limited life cycles
and our customers may discontinue them at any time. Accordingly, there can be
no assurance that our customers' products will achieve or maintain market
acceptance.
COMPETITION
We face significant competition from toy companies and other independent
manufacturers of die-cast products with manufacturing facilities located
primarily in China. There are no significant barriers to entering the die-cast
manufacturing business, and if the market for die-cast collectibles continues
to grow, we expect increased competition from other industry participants. Many
of our existing and potential competitors have significantly greater financial,
technical, manufacturing and marketing resources than we do. There can be no
assurance that we will be able to compete successfully.
Our executive officers and key employees are not subject to noncompetition
agreements or similar contractual obligations protecting the confidentiality of
our trade secrets or other information. Accordingly, we may not have adequate
protection in the event an officer or employee leaves our employ and goes into
competition with us.
Certain customers, including Mattel and Road Champ, manufacture and distribute
their own die-cast products in addition to marketing die-cast products that we
manufacture for them. There can be no assurance that we will be able to
continue our relationships with these customers, or that other customers will
not develop their own manufacturing capabilities, thereby reducing or
eliminating their need for our services. Such events could have a material
adverse effect on our business, financial condition and results of operations.
OUR GROWTH MAY BE LIMITED BY CAPACITY AT PRODUCTION FACILITIES
Our ability to grow is a function of our manufacturing capacity. Our
manufacturing facilities are currently operating at or near capacity. We are in
the process of building two new factories, the first of which we expect to
become operational by the end of 1998. We intend to use a portion of the net
proceeds of this offering to pay for the cost of constructing and equipping
these new factories. We expect to continue to require additional manufacturing
capacity in the near future. If we were unable to increase capacity on a timely
basis and on commercially reasonable terms, our growth would be materially
adversely effected. See "Use of Proceeds" and "Business--Facilities and Planned
Expansion."
POTENTIAL INCREASES IN RAW MATERIALS COSTS
We use zinc alloy and various plastic resins in our manufacturing operations.
The supply and demand for these and other raw materials are subject to cyclical
and other market factors and may fluctuate significantly. Therefore, our raw
materials costs are subject to increases over which we have no control. To the
extent that future increases in the cost of raw materials cannot be passed on
to our customers, our business, financial condition and results of operations
could be materially adversely affected.
11
<PAGE>
INTERNATIONAL SALES
We sell substantially all of our products to customers in the U.S. and Europe.
During the six months ended June 30, 1998, approximately 10.6% of our net sales
arose from sales to European customers. In 1997, approximately 6.2% of our net
sales were attributable to sales to European customers. The balance of our
sales during these periods was to customers in the U.S. The U.S. and European
governments may, from time to time, impose new quotas, duties, tariffs, or
other charges or restrictions, or adjust presently prevailing quota, duty or
tariff levels. Any changes of this nature could adversely affect our ability to
continue to export products to the U.S. and Europe at current or increased
levels.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS
We are subject to Chinese laws that regulate environmental quality, the
utilization of natural resources and the reduction of pollution. As a
manufacturer, we are subject to annual inspections. If we fail to comply with
these laws or to pass inspections, our business, results of operations and
financial condition could be materially adversely affected.
SEASONALITY; FLUCTUATING RESULTS
In keeping with Chinese customs, each year we close our facilities for two
weeks during the month of January or February to celebrate the Chinese New Year
holidays. As a result, our production and net sales during the first quarter of
each year have historically been lower than in other quarters. We expect this
trend to continue in future years.
We experience quarterly fluctuation in our sales due to the timing of customer
orders and product shipments. In addition, we incur substantial tooling and
other costs relating to the manufacturing of new products from three to nine
months in advance of when we receive the first customer orders for new
products. This long lead-time can contribute to fluctuations in our quarterly
operating results.
FOREIGN CURRENCY EXCHANGE RATES
All of our sales are denominated either in U.S. dollars or Hong Kong dollars.
Our expenses are denominated primarily in Hong Kong dollars and renminbi, the
Chinese currency, the basic unit of which is the yuan. 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. In January 1994, the
Chinese government established its current floating exchange rate system, which
resulted in an approximately 35% devaluation of the renminbi against most major
currencies and the yuan-to-U.S. dollar exchange rate has largely stabilized
since that time. However, in 1997 China's finance minister stated that if China
failed to achieve its target 8% growth in 1998, this failure could affect the
stability of the yuan against other currencies. Estimates of China's growth for
1998 are now between 4% and 7%, and there can be no assurance that the yuan
will not be devalued against the to U.S. dollar.
Any material increase in the value of the Hong Kong dollar or yuan relative to
the U.S. dollar would increase our expenses, and could have a material adverse
effect on our business, financial condition and results of operations. A
devaluation of the Hong Kong dollar or yuan relative to the U.S. dollar
12
<PAGE>
would be likely to reduce our expenses. However, any benefits we receive from a
devaluation could be offset if the devaluation results in inflation or
political unrest. Furthermore, if our sales in Europe increase, we may
experience increased currency risk. We do not currently hedge any foreign
exchange positions.
MARKET DECLINE IN EAST ASIA
Several countries in East Asia, including Japan, South Korea, Thailand and
Indonesia, have experienced significant devaluations of their currencies and
declines in the value of their capital markets during the past twelve months.
In addition, these countries have experienced a number of bank failures and
consolidations. Hong Kong, where we conduct our sales and administrative
activities, is in a recession. Because virtually all of our products are sold
into the U.S. and Europe, which are not generally experiencing these declines,
we believe that the economic situation in East Asia will not materially affect
the demand for our products. Furthermore, because most of our products are, or
at our request may be, paid for in U.S. dollars, we believe that we are less
susceptible to the effects of a possible devaluation in the Hong Kong dollar or
the yuan. However, the decline in the currencies of East Asian countries may
render our products less competitive if competitors in East Asia are able to
manufacture competing products at a lower effective cost. There can be no
assurance that our products will continue to be competitive with the products
of competitors from these countries. Currency fluctuations or other effects of
the economic downturn in East Asia also may have a material adverse effect on
our business, financial condition and results of operations.
POSSIBLE DELAYS IN OBTAINING RAW MATERIALS
We purchase our raw materials from a limited number of suppliers, primarily in
Australia and the United Kingdom, and we have no written agreements with any of
such suppliers. We have not had trouble obtaining needed materials, but there
is no assurance that we will be able to obtain sufficient quantities of such
raw materials to meet our future needs. To the extent we are unable to obtain
needed raw materials in sufficient quantities or at affordable prices, our
business, financial condition and results of operations could be materially
adversely affected.
FAILURE TO COMPLY WITH YEAR 2000 COMPUTER STANDARDS
We are not aware of any material operational issues or costs associated with
preparing our internal systems for the year 2000. However, we may have
operational problems or increased costs because of our implementation of
systems and changes necessary to address year 2000 issues. Our inability to
implement such systems and changes in a timely manner could have a material
adverse effect on our business, financial condition and results of operations.
We also rely, directly and indirectly, on external systems of business
enterprises such as financial institutions, government agencies, customers and
suppliers for accurate exchange of data. Even if the year 2000 issue does not
materially affect our internal systems, disruptions in the operation of the
enterprises with which we interact could adversely affect us.
13
<PAGE>
DETERMINATION OF INITIAL PUBLIC OFFERING PRICE; RISK OF STOCK PRICE VOLATILITY
Our common stock is quoted on the OTC Electronic Bulletin Board under the
symbol "CVMI," but there is no established trading market for our common stock.
See "Market Price for Common Stock and Dividend Policy." The initial public
offering price for our common stock will be determined by negotiations with
Cruttenden Roth Incorporated. It will not necessarily bear any relationship to
prices of our common stock as quoted on the OTC Electronic Bulletin Board, our
book value or other established criteria of value. See "Underwriting." In
recent years and months, the stock market has experienced significant price and
volume fluctuations. These fluctuations, which are often unrelated to the
operating performances of specific companies, have had a substantial effect on
the market price of stocks, particularly stocks of companies such as ours in
the "small cap" category. It is also possible that our operating results will
not meet the expectations of our public market analysts, which could have an
adverse effect on the trading price of the common stock. Accordingly, the
market price of the common stock may fluctuate substantially. There also is no
assurance that the market price for the common stock will ever exceed the
initial public offering price.
ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK DUE TO SALE OF ADDITIONAL SHARES
There were 4,999,746 shares of common stock outstanding before this offering,
of which approximately 4,500,016 shares were "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933. All of these restricted
shares of common stock will become eligible for resale under Rule 144
commencing December 30, 1998. See "Shares Eligible for Future Sale." The
holders of restricted shares and the holders of an additional 305,984
outstanding shares have agreed not to sell any common stock for six months
following completion of this offering without the prior written consent of
Cruttenden Roth Incorporated. See "Underwriting." Sales of common stock in the
public market, or even the possibility of such sales, may adversely affect the
market price of the common stock.
BENEFIT TO INSIDERS
This offering will benefit our insiders. We will use approximately $1,000,000
of the net proceeds of this offering to repay short-term bank debt which has
been guaranteed by Carl Ka Wing Tong, Leo Sheck Pui Kwok and Acma Strategic
Holdings Limited and supported with a standby letter of credit from Acma Ltd.
Messrs. Tong and Kwok are two of our directors and executive officers, Acma
Strategic Holdings Limited is one of our principal stockholders and Acma Ltd.
is its parent corporation. We have arranged with our lenders to eliminate the
guarantees of our debt by these insiders following this offering. See "Certain
Transactions--Guarantees of Company Debt."
DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant extent upon the continued services of
certain of our executive officers and key employees, including Messrs. Tong and
Kwok. If we lose the services of either of these executives, our business could
be materially adversely affected. We maintain "key person" life insurance on
Messrs. Tong and Kwok totaling approximately $333,000. We are applying to
increase our insurance to approximately $2,000,000 on Mr. Tong and
approximately $1,500,000 on Mr. Kwok. However, there is no assurance that the
proceeds of this insurance would be sufficient to compensate us for their loss.
14
<PAGE>
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
Before this offering, our directors, executive officers and principal
stockholders beneficially owned approximately 90% of the outstanding shares of
our common stock. Following this offering, they will own approximately 64% of
our outstanding shares (or approximately 60% if the over-allotment option is
exercised in full). Therefore, these stockholders will have the ability to
control the election of our directors and most of our corporate actions. See
"Principal Stockholders and Selling Stockholder" and "Shares Eligible for
Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the common stock. We
estimate this dilution to be approximately $4.09 per share, or approximately
68%, assuming an initial public offering price of $6.00 per share. See
"Dilution."
ANTI-TAKEOVER PROVISIONS
Before this offering, we will amend and restate our Certificate of
Incorporation. The amended certificate will authorize our Board of Directors to
issue up to 5,000,000 shares of preferred stock. The amended certificate will
also authorize our board to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of any preferred stock may adversely
affect the rights of holders of common stock. Our ability to issue preferred
stock will give us flexibility concerning possible acquisitions and financings,
but it could make it more difficult for a third party to acquire a majority of
our outstanding voting stock. In addition, Section 203 of the Delaware General
Corporation Law prohibits us from engaging in a "business combination" with an
"interested stockholder" for three years, unless the business combination is
approved in the manner required by Delaware law. Section 203 could delay or
prevent a change of control. Furthermore, certain provisions of our amended
certificate may delay or prevent a change in our control or management, which
could adversely affect the market price of our common stock. See "Description
of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to Creative Master International, Inc. ("Creative Master" or
the "Company") from the sale of the 2,000,000 shares of common stock offered,
after deducting underwriting discounts and commissions, the Underwriters' non-
accountable expense allowance and other estimated offering expenses payable by
the Company, are estimated to be $9,965,000. This assumes an initial public
offering price of $6.00 per share. The Company will not receive any proceeds
from the sale of shares upon exercise of the over-allotment option, if it is
exercised. The Company expects to use the net proceeds of this offering as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Expansion and improvement of the Company's manufac-
turing facilities(1)............................... $4,900,000 49%
Payment of capital lease obligations(2)............. 1,011,000 10
Repayment of short-term bank debt(3)................ 1,000,000 10
Working capital and general corporate purposes(4)... 3,054,000 31
---------- ---
Total............................................. $9,965,000 100%
========== ===
</TABLE>
- --------
(1) Consists primarily of estimated costs of construction and build-out of the
Company's fifth factory and related dormitory facilities and estimated
capital expenditures for equipment, furniture and fixtures at the new
facilities. Also includes the $300,000 estimated cost of purchasing new
hand tools, jigs and fixtures. See "Business--Facilities and Planned
Expansion."
(2) Represents the payment or prepayment of the Company's capital lease
obligations. See "Capitalization" and Note 12 of Notes to Consolidated
Financial Statements. The Company does not expect to incur any significant
premiums or penalties in connection with such prepayments.
(3) Consists of debt incurred under the Company's credit facilities with its
bank lenders. See Note 11 of Notes to Consolidated Financial Statements.
(4) Amounts expended for working capital and general corporate purposes may
include funding of research and development expenses as the Company expands
its product development efforts.
The Company has credit facilities from multiple lenders aggregating $1,864,000
as of June 30, 1998. As of June 30, 1998, the Company had an aggregate
outstanding balance under the credit facilities of $1,376,000. Borrowings under
the facilities bear interest at rates ranging from Hong Kong prime lending
rate, plus 1.5% to 4.3%, to U.S. prime lending rate, plus 2.3%. All of the
Company's credit facilities may be terminated by the respective lenders at any
time. There are no regularly scheduled repayments under the facilities, and the
Company pays down the facilities from time-to-time based upon its available
cash and in consultation with its lenders.
The Company secures its obligations under the credit facilities with its bank
deposits as well as personal guarantees by Messrs. Tong and Kwok, the corporate
guarantee of Acma Strategic Holdings Limited and a standby letter of credit
from its corporate parent, Acma Ltd., and a mortgage on certain property owned
by Mr. Tong. In addition, borrowings under certain of the facilities that are
used to finance the purchase of goods are secured by those goods. See "Certain
Transactions--Guarantees of Company Debt" and Note 19 to Notes of Consolidated
Financial Statements.
The Company may use a portion of the proceeds allocated for working capital and
general corporate purposes to acquire compatible businesses or enter into
strategic alliances with other companies. Other than the planned expansion and
improvement of its Chinese manufacturing facilities and its
16
<PAGE>
recent product development arrangement with Alterscale, a company engaged in
the development of collectible marine replicas, the Company has no current
agreements, commitments or arrangements with respect to any proposed
acquisition, joint venture or strategic alliance, and there is no assurance
that any acquisitions, joint ventures or strategic alliances will be made in
the future.
Prior to their use, the Company will invest the net proceeds of this offering
in short-term, high-grade interest-bearing investments or accounts.
17
<PAGE>
MARKET PRICE FOR COMMON STOCK AND DIVIDEND POLICY
The Company's common stock is quoted on the OTC Electronic Bulletin Board under
the symbol "CVMI." Trading in the common stock has been limited and sporadic,
however, and there is no established trading market for the common stock. The
Company has applied to list the common stock on the Nasdaq National Market
under the proposed symbol "CMST."
As of September 30, 1998, there were 1,199 record holders of the common stock.
The Company has not paid any cash dividends on the common stock, and it
currently intends to retain any future earnings to fund the development and
growth of its business. Dividends receive favorable tax treatment in Hong Kong
and other non-U.S. jurisdictions where the Company's principal stockholders
reside, and the Company may pay cash dividends in the future. Any future
determination to pay dividends will depend upon the Company's results of
operations, financial condition and capital requirements, applicable
restrictions under any credit facilities or other contractual arrangements and
such other factors deemed relevant by the Company's Board of Directors. The
Company's existing bank credit facilities restrict the payment of cash
dividends.
18
<PAGE>
DILUTION
As of June 30, 1998, the net tangible book value of the Company was
approximately $3,386,000, or $0.68 per share of common stock. Net tangible book
value per share is determined by dividing the tangible net worth of the Company
(total assets, net of goodwill, less total liabilities) by the number of shares
of common stock outstanding. Without taking into account any change in the
Company's net tangible book value after June 30, 1998, assuming an initial
public offering price of $6.00 per share and after deducting underwriting
discounts and commissions, the underwriters' non-accountable expense allowance
and other estimated offering expenses, the pro forma net tangible book value of
the Company as of June 30, 1998 would have been approximately $13,351,000, or
$1.91 per share. This represents an immediate increase in the net tangible book
value of $1.23 per share to existing stockholders and an immediate dilution of
$4.09 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $6.00
Net tangible book value per share as of June 30, 1998......... $0.68
Increase per share attributable to this offering.............. $1.23
Pro forma net tangible book value per share after this
offering....................................................... $1.91
-----
Dilution to new investors....................................... $4.09
=====
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1998, the
number of shares of common stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors in this offering. The information in the
table assumes an initial public offering price of $6.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 4,999,746 71.4% $ 4,150,000 25.7% $0.83
New investors........... 2,000,000 28.6% $12,000,000 74.3% $6.00
--------- ----- ----------- -----
Total................. 6,999,746 100.0% $16,150,000 100.0%
========= ===== =========== =====
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1998, and as adjusted as of that date to give effect to
the Company's sale of 2,000,000 shares of common stock and its application of
the estimated net proceeds and after deducting the underwriting discounts and
estimated offering expenses payable by the Company. The information in the
table assumes an initial public offering price of $6.00 per share. The
information in the table should be read in conjunction with the more detailed
consolidated financial statements and notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------
AS
ACTUAL ADJUSTED
-------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
SHORT-TERM DEBT:
Short-term bank borrowings................................ $ 1,376 $ 376
Capital lease obligations, current portion................ 533 --
-------- ---------
$ 1,909 $ 376
======== =========
LONG-TERM DEBT:
Capital lease obligations, non-current portion............ $ 478 $ --
Minority interests........................................ 331 331
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 60,000,000 shares autho-
rized, 4,999,746 shares issued and outstanding;
25,000,000 shares authorized, 6,999,746 shares issued and
outstanding, as adjusted(1).............................. 1 1
Preferred stock, $.0001 per value, 5,000,000 shares
authorized, no shares issued and outstanding, as
adjusted(1).............................................. -- --
Additional paid-in capital................................ 1,401 11,366
Retained earnings......................................... 2,746 2,746
Cumulative translation adjustments........................ 2 2
-------- ---------
Total stockholders' equity.............................. 4,150 14,115
-------- ---------
TOTAL CAPITALIZATION........................................ $ 4,959 $ 14,446
======== =========
</TABLE>
- --------
(1) Gives pro forma effect to the Company's amendment and restatement of its
Certificate of Incorporation which will be effected prior to the completion
of this offering. See "Description of Capital Stock."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 1995, 1996 and 1997, and the following selected consolidated
balance sheet data as of December 31, 1995, 1996 and 1997 are derived from the
audited consolidated financial statements of the Company included elsewhere in
this Prospectus that have been audited by Arthur Andersen & Co. The following
selected consolidated statement of operations data for the six-month periods
ended June 30, 1997 and 1998, and the following selected balance sheet data as
of June 30, 1998 are derived from the unaudited consolidated financial
statements of the Company that, in the opinion of management, contain all
adjustments necessary for a fair presentation of such data. The following
selected consolidated financial data have been prepared in accordance with U.S.
generally accepted accounting principles. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto appearing elsewhere in the Prospectus. The
selected interim consolidated financial data presented below do not necessarily
indicate the operating results or performance of the Company for the full year.
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 9,982 $ 14,054 $ 16,211 $ 7,723 $ 14,325
Costs of goods sold..... 7,878 9,782 12,703 6,119 10,258
---------- ---------- ---------- ---------- ----------
Gross profit............ 2,104 4,272 3,508 1,604 4,067
Selling, general and ad-
ministrative expenses.. 2,394 2,552 1,921 1,197 1,993
Interest income......... -- -- 112 4 14
Interest expense........ 88 140 216 54 120
Other expenses, net..... 96 567 137 24 48
Gain on dilution of eq-
uity interest in a sub-
sidiary................ -- -- -- -- 77
Reorganization ex-
pense(1)............... -- -- 284 -- --
Amortization of good-
will................... 33 44 62 26 46
---------- ---------- ---------- ---------- ----------
Income (loss) before in-
come taxes and minority
interests.............. (507) 969 1,000 307 1,951
Provision for income
taxes.................. 52 154 130 56 228
---------- ---------- ---------- ---------- ----------
Income (loss) before mi-
nority interests....... (559) 815 870 251 1,723
Minority interests(2)... -- -- 82 -- 314
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (559) $ 815 $ 788 $ 251 $ 1,409
========== ========== ========== ========== ==========
Net income (loss) per
common share(3)........ $ ($0.11) $ 0.16 $ 0.16 $ 0.05 $ 0.28
========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding(3)......... 4,999,746 4,999,746 4,999,746 4,999,746 4,999,746
========== ========== ========== ========== ==========
</TABLE>
- --------
(1) Represents the value of 305,984 shares of common stock transferred by
Messrs. Tong and Kwok and Acma Strategic Holdings Limited to a consultant
to the Company and other professional fees incurred by the Company for
services rendered in connection with the exchange reorganization completed
on December 30, 1997. See Note 15 of Notes to Consolidated Financial
Statements.
(2) Represents results of operations of certain of the Company's subsidiaries
attributable to minority interests in the subsidiaries.
(3) During the periods shown, the Company had no outstanding stock options or
convertible securities, and basic and diluted net income (loss) per common
share were the same.
21
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
------------------------ ----------
1995 1996 1997 1998
------- ------ ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4)............ $ 126 $ 435 $ 471 $ 877
Working capital (deficit)............... (1,064) (471) (829) 217
Total assets............................ 4,287 6,752 10,499 13,333
Capital lease obligations, non-current
portion(5)............................. 186 245 266 478
Stockholders' equity.................... 1,265 2,079 2,739 4,150
</TABLE>
- --------
(4) Includes bank balances of approximately $72,000 at December 31, 1997 and
approximately $452,000 at June 30, 1998 that the Company has pledged to
secure its obligations under its bank credit facilities.
(5) Except for capital lease obligations, the Company had no long-term
obligations as of the dates shown.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Prospectus that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company's expectations, beliefs,
intentions or strategies for the future, which are indicated by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "the Company
believes," "management believes" and similar words or phrases. The forward-
looking statements are based on the Company's current expectations and are
subject to certain risks, uncertainties and assumptions, including factors set
forth in the following discussion and in the discussions under "Risk Factors"
and "Business." The Company's actual results could differ materially from
results anticipated in these forward-looking statements. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements.
OVERVIEW
The Company is a leading independent manufacturer of collectible-quality, die-
cast replicas of cars, trucks, buses and other items. All of the Company's
business and operations are conducted through Creative Master Limited, its
wholly-owned Hong Kong subsidiary ("CML"), and CML's subsidiaries. CML was co-
founded in 1986 by Carl Ka Wing Tong and Leo Sheck Pui Kwok to produce die-cast
replicas of cars and other vehicles primarily for the collectibles industry. On
December 30, 1997, CML completed an exchange reorganization with Davin
Enterprises, Inc., a public company that was incorporated in Delaware in April
1987. In March 1998, Davin Enterprises, Inc. changed its name to Creative
Master International, Inc.
Through the exchange reorganization, the Company acquired all of the
outstanding capital stock of CML from Messrs. Tong and Kwok and Acma Strategic
Holdings Limited in exchange for the Company's issuance to them of 4,806,000
shares of common stock, representing approximately 96% of the Company's
outstanding stock. Davin Enterprises, Inc. had no significant assets,
liabilities, business or operations prior to the exchange reorganization. The
acquisition of CML by the Company on December 30, 1997 has been treated as a
reverse acquisition since CML is the continuing entity as a result of the
exchange reorganization. On this basis, the historical financial statements
prior to December 30, 1997 represent the consolidated financial statements of
CML. See Note 2 of Notes to Consolidated Financial Statements.
The Company's manufacturing facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles northwest of Hong Kong. In
March 1987, the Company built its first tooling and manufacturing factory in
Guangzhou, China. The Company moved the factory to Dongguan in 1995, and in May
1996, the Company completed its second factory in Dongguan. In September 1996,
the Company built its third factory, which it is in the process of expanding.
The Company believes that this expansion will be completed by November 1998. In
July 1997, the Company established a model-making division that is currently
located in the Company's third factory. The Company is in the process of
building a fourth factory at the Dongguan site to house
23
<PAGE>
this model-making division. This fourth factory will be operational by the end
of 1998. This fourth factory will contain approximately 40,000 square feet of
production area dedicated solely to model making and tool making and will
accommodate up to 200 technicians. The Company is also building a fifth factory
and related dormitory facilities with approximately 120,000 square feet of
manufacturing space and accommodating up to 1,000 workers. Construction of this
fifth factory began in July 1998 and the first phase is expected to be
completed in March 1999. A portion of the net proceeds of this offering will be
used to pay the cost of constructing and equipping these new factories. All the
Company's factories are located within a one-mile radius of each other. See
"Business--Facilities and Planned Expansion."
The Company's manufacturing operations in China are conducted through a Chinese
limited liability company established in October 1994 between CML and a local
Chinese partner. The Chinese subsidiary has a three-member board of directors,
two of whom are appointed by the Company and one of whom is appointed by CML's
local Chinese partner. Under the terms of the arrangement with the local
Chinese partner, the local Chinese partner is not entitled to any profits or
responsible for any losses from the subsidiary. Because of this profit-sharing
arrangement, the subsidiary is regarded for accounting purposes as if it were
wholly-owned by the Company.
Historically, the Company has paid no taxes in China. The Company is subject to
tax in Hong Kong at the statutory rate of 16% to 16.5%. However, under current
interpretations of Hong Kong tax law, a Hong Kong company which derives
revenues exclusively from manufacturing operations in China recognizes only 50%
of its gross profit as taxable income in Hong Kong.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............ 78.9 69.6 78.4 79.2 71.6
Gross profit.................. 21.1 30.4 21.6 20.8 28.4
Selling, general and
administrative expenses...... 24.0 18.2 11.8 15.5 13.9
Interest expense, net......... 0.9 1.0 0.6 0.6 0.7
Other expenses, net........... 1.0 4.0 0.8 0.3 0.3
Income (loss) before income
taxes and minority
interests.................... (5.1) 6.9 6.2 4.0 13.6
Minority interests............ -- -- 0.5 -- 2.2
Provision for income taxes.... 0.5 1.1 0.8 0.7 1.6
Net income (loss)............. (5.6) 5.8 4.9 3.3 9.8
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Sales. The Company's net sales for the six months ended June 30, 1998 were
$14,325,000, an increase of $6,602,000, or 85%, from $7,723,000 for the six
months ended June 30, 1997. The increase reflected increased demand from
existing customers. Sales to Mattel increased by $4,013,000 for the six months
ended June 30, 1998 compared to the same period in 1997. In addition, sales to
Corgi increased by $846,000, sales to Hallmark increased by $716,000 and sales
to Brookfield increased by $475,000.
24
<PAGE>
Cost of Goods Sold. The Company's cost of goods sold for the six months ended
June 30, 1998 was $10,258,000, an increase of $4,139,000, or 68%, from
$6,119,000 for the six months ended June 30, 1997. This increase reflected an
increase of $2,731,000 in materials cost and an increase of $561,000 in
salaries and direct labor costs. Cost of goods sold includes the cost of raw
materials, subcontracting charges for production of molds, direct labor costs,
utilities and other energy costs and depreciation and amortization of the
Company's owned equipment and other manufacturing-related depreciable assets.
Cost of goods sold constituted 72% of net sales for the six months ended
June 30, 1998, compared to 79% during the same period in 1997. The reduction
was a result of normalization of production of new customer orders and the
start-up of new facilities in 1997.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses totaled $1,993,000 for the six months ended June
30, 1998, an increase of $796,000, or 67%, from $1,197,000 for the six months
ended June 30, 1997. Selling, general and administrative expenses increased
because the Company incurred increased air freight charges, added additional
employees to its administrative and development staff at its Hong Kong
headquarters and increased administrative staff salaries. The Company intends
to hire a Chief Financial Officer following completion of this offering to
permit Mr. Tong to focus on his duties as President and Chief Executive
Officer. Thus, the Company anticipates an increase in general and
administrative expenses in future periods relating to salary and other employee
expenses of a new Chief Financial Officer. Selling, general and administrative
expenses decreased as a percentage of net sales to 14% of net sales for the six
months ended June 30, 1998, as compared to 16% of net sales for the six months
ended June 30, 1997. Selling expenses consist primarily of freight and
inspection charges. General and administrative expenses consist of salaries and
other employee expenses for the Company's administrative and product
development staffs, the majority of which are located in Hong Kong, and
overhead expenses of the Hong Kong office.
Interest Expense, Net. The Company's interest expense, net was $106,000 during
the six months ended June 30, 1998 as compared to a net interest expense of
$50,000 during the six months ended June 30, 1997. The increase in interest
expense was due primarily to increased finance costs associated with increased
short-term debt incurred in 1998 to meet working capital needs and, to a lesser
extent, to higher prevailing interest rates on these borrowings.
Minority Interests. The Company includes in net income before minority
interests all net income of its wholly-owned and majority-owned subsidiaries.
The portion of such net income attributable to minority interests in the
subsidiaries held by others is then eliminated. Minority interests at June 30,
1998 totaled approximately $314,000.
Provision for Income Taxes. The Company's effective income for tax rate was 12%
for the six months ended June 30, 1998 as compared to 18% for the six months
ended June 30, 1997. The decrease in the effective tax rate was due primarily
to the net effect of (i) an increase in the recognized tax losses contributed
by certain subsidiaries and (ii) an increase in taxable income of the Company's
Hong Kong subsidiaries earned from manufacturing activities in China. A Hong
Kong company whose manufacturing activities are conducted exclusively in China
recognizes 50% of its gross profit as taxable income in Hong Kong.
25
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. The Company's net sales for 1997 increased $2,157,000, or 15%, to
$16,211,000 from $14,054,000 for 1996. The increase was primarily due to
increased sales to a new customer, Mattel, and increased sales to Drumwell
Limited, the agent for Corgi Classic Cars. Sales to Mattel and Corgi amounted
to approximately $2,400,000 and $683,000, respectively, in 1997.
Cost of Goods Sold. The Company's cost of goods sold for 1997 was approximately
$12,703,000, an increase of approximately $2,921,000, or 30%, from
approximately $9,782,000 for 1996. Such increase reflected higher sales volume,
as well as increases of approximately $949,000 in salaries and direct labor
costs, approximately $795,000 in sub-contracting charges for the production of
molds and approximately $233,000 in depreciation charges. Cost of goods sold
constituted 78% of net sales in 1997, compared to 70% in 1996. The increase was
primarily a result of staff increases and production inefficiencies associated
with the start-up of production of new customer orders and operations at the
Company's new manufacturing facilities.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses totaled approximately $1,921,000 in 1997, a
decrease of $631,000, or 25%, from approximately $2,552,000 in 1996. The
decrease was primarily the result of a higher acceptance rate of products by
customers, which resulted in lower repair costs for the Company, and reduced
air freight charges resulting from better compliance with customer delivery
schedules. Air freight charges are typically incurred only when the Company
fails to meet customer delivery schedules. The higher acceptance rate resulted
from better quality control and an improvement in meeting product delivery
schedules. Selling, general and administrative expenses constituted 12% of net
sales in 1997 and 18% in 1996.
Interest Expense, Net. The Company's net interest expense was $104,000 in 1997
compared to a net interest expense of $140,000 in 1996. The decrease in net
interest expenses resulted from an increase in interest income arising from
higher average bank balances and higher prevailing interest rates in 1997.
Minority Interests. Minority interests were approximately $82,000 in 1997.
There were no minority interests in 1996.
Provision for Income Taxes. The Company's effective income tax rate was 13% in
1997 and 16% in 1996. The decrease in 1997 was primarily due to an increase in
the recognized tax losses contributed by the Company's Hong Kong subsidiaries.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. The Company's net sales in 1996 totaled approximately $14,054,000,
an increase of approximately $4,072,000, or 41%, from approximately $9,982,000
for 1995. This growth resulted from increased sales to Danbury Mint and the
addition of two new customers, Tyco and Brookfield, and was supported by an
increase in the Company's production capacity. Sales to Danbury Mint increased
to approximately $11,418,000 in 1996 from approximately $8,055,000 in 1995. New
orders from Tyco and Brookfield amounted to approximately $714,000 and
$1,081,000, respectively.
26
<PAGE>
Cost of Goods Sold. The Company's cost of goods sold for 1996 was approximately
$9,782,000, an increase of approximately $1,904,000 or 24% from approximately
$7,878,000 for 1995. This reflected an increase of approximately $986,000 in
materials cost and an increase of approximately $395,000 in direct labor costs.
Cost of goods sold constituted 70% of net sales in 1996, compared to 79% in
1995. The reduction was primarily a result of increased operating efficiencies
at the Company's Dongguan facilities and the shut down of its Guangzhou
facility.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses totaled $2,552,000 in 1996 compared to $2,394,000
in 1995, an increase of $158,000 or 7%. The increase resulted primarily from
increased administrative costs related to the Company's increased manufacturing
capacity. Selling, general and administrative expenses decreased to 18% of net
sales in 1996 from 24% of net sales in 1995, a decrease of 6%. The decrease as
a percentage of sales resulted from costs the Company incurred in relocating
its manufacturing operations from Guangzhou to the Dongguan facilities in 1995,
which was not expensed in 1996.
Interest Expense, Net. The Company's net interest expense was $140,000 in 1996
compared to a net interest expense of $88,000 in 1995. The increase in interest
expense was primarily due to increased borrowings to purchase additional
machinery and equipment.
Minority Interests. There were no minority interests in 1996 or 1995.
Provision for Income Taxes. The Company's effective income tax rate was 16% in
1996. In 1995, the Company paid approximately $52,000 of income taxes despite
having a consolidated net loss before income taxes and minority interests of
approximately $507,000 due to taxes on net income of certain of its Hong Kong
subsidiaries. The effective rate increased because the amount of net loss of
certain of the Company's subsidiaries substantially decreased in 1996. The net
loss incurred by those subsidiaries decreased to $472,000 in 1996 from $743,000
in 1995.
Liquidity and Capital Resources
Historically, the Company has financed its operations through a combination of
cash from operations, bank financing and capital lease arrangements. For the
six months ended June 30, 1998, the Company's operating activities provided
cash of $1,675,000. The Company's operations provided cash of approximately
$696,000 in 1997 and approximately $1,048,000 in 1996. For the six months ended
June 30, 1998 investing activities used approximately $797,000. Investing
activities generated approximately $16,000 in 1997 and used approximately
$854,000 in 1996. The Company used approximately $473,000 of cash in financing
activities during the six months ended June 30, 1998 and approximately $672,000
during 1997. The Company generated approximately $115,000 of cash in financing
activities during 1996.
At June 30, 1998, the Company had working capital of approximately $217,000 as
compared to a working capital deficit of $829,000 at December 31, 1997. The
approximately $1,046,000 increase was primarily due to an increase in
inventories and accounts receivable.
At June 30, 1998, net accounts and bills receivable totaled approximately
$3,698,000 as compared to $2,827,000 at December 31, 1997 and approximately
$1,733,000 at December 31, 1996. These increases were due primarily to
increased sales. Consistent with practice in the die-cast collectibles
27
<PAGE>
industry, the Company offers 30 to 60 days accounts receivable terms to its
customers. This practice has created working capital requirements that the
Company generally has financed with a combination of internally generated cash
flow and credit facilities provided by affiliates and third parties. At June
30, 1998, the Company's five largest accounts receivable accounted for
approximately 78% of its accounts receivable. Creative Master actively monitors
the creditworthiness of its customers, and to date has not experienced any
significant problems with collection of its accounts receivable. See Note 22 of
Notes to Consolidated Financial Statements.
The Company's accounts payable and accrued liabilities increased by
approximately $1,518,000, or 44%, to approximately $5,005,000 at June 30, 1998,
as compared to approximately $3,487,000 at December 31, 1997 and approximately
$2,491,000 at December 31, 1996. The increase in accounts payable and accrued
liabilities from December 1997 to June 1998 was due primarily to the increase
in the purchase of raw materials and packing materials for anticipated sales.
The Company's inventories increased by approximately $479,000, or 16%, to
approximately $3,407,000 at June 30, 1998, as compared to approximately
$2,928,000 at December 31, 1997 and approximately $1,544,000 at December 31,
1996. Inventory increases resulted from increases in the Company's purchase of
materials to support increased sales.
For the six months ended June 30, 1998, additions to property, plant and
equipment were $1,251,000 as compared to $1,226,000 in 1997 and $1,198,000 in
1996. In each of these periods, the Company expanded its facilities and entered
into capital leases for plant and equipment. The Company anticipates that it
will make approximately $1,990,000 of additional expenditures to expand and
improve its manufacturing operations during the remainder of 1998. As of June
30, 1998, the aggregate outstanding amount under all capital leases was
approximately $1,011,000 as compared to approximately $1,030,000 at December
31, 1997 and approximately $503,000 at December 31, 1996. The Company intends
to use a portion of the net proceeds of the offering to make regularly
scheduled payments under its capital leases.
The Company repaid short-term bank loans of approximately $825,000 in 1997 and
obtained equipment lease financing in the aggregate amount of approximately
$835,000. The Company also obtained additional short-term bank loans in the
total amount of approximately $1,097,000 secured by the individual guarantees
of Messrs. Tong and Kwok and by the corporate guarantee of Acma Strategic
Holdings Limited, its principal stockholder, and a standby letter of credit
from Acma Ltd., the parent corporation of Acma Strategic Holdings Limited.
The Company has revolving lines of credit with Hang Seng Bank, Banque Nationale
de Paris, Bank of China and Commonwealth Finance Corporation Limited. As of
June 30, 1998, these lines of credit allowed for aggregate borrowings of up to
$1,864,000. As of June 30, 1998, the Company had approximately $1,376,000
outstanding under these revolving lines of credit.
The Company expects that its cash needs for the foreseeable future will arise
primarily from working capital requirements, capital expenditures and debt
service requirements. The Company has no capital commitments to purchase
machinery or tools but expects to spend approximately $1,990,000 to purchase
such items during the remainder of 1998. The Company anticipates that its
capital expenditures will increase substantially in 1999 due to the planned
expansion and improvement of its manufacturing facilities.
28
<PAGE>
The Company expects that its principal sources of cash following this offering
will be the proceeds from this offering, net cash from operating activities,
borrowings under existing lines of credit and potential new bank lines. The
Company believes that these sources will be adequate to meet the Company's
anticipated cash requirements for at least the next twelve months. However,
there can be no assurance that these resources will be adequate to meet the
Company's needs, particularly in the event that the Company elects to further
expand its manufacturing facilities beyond the currently planned expansion. See
"Business--Facilities and Planned Expansion." In the event that the Company
requires additional capital, it may issue additional equity securities, which
could result in dilution to existing stockholders, or borrow funds, which could
adversely affect operating results.
Inflation. The Company believes that inflation has not had a material impact on
its business in recent years.
Year 2000 Compliance
The Company is not aware of any material operational issues or costs associated
with preparing its internal systems for the year 2000. However, there can be no
assurance that there will not be a delay in, or increased costs associated
with, the Company's implementation of the necessary systems and changes to
address the year 2000 issues. If the Company is unable to implement such
systems and changes in a timely manner, it could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as financial institutions, government agencies,
customers and suppliers for accurate exchange of data. Even if the internal
systems of the Company are not materially affected by the year 2000 issue, the
Company could be affected by disruptions in the operation of the enterprises
with which the Company interacts.
Currency Exchange Fluctuations
All of the Company's sales are denominated either in U.S. dollars or Hong Kong
dollars, while its expenses are denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of which is the yuan. Given the
current Asian financial crisis, there can be no assurance that the yuan-to-U.S.
dollar rate will remain stable. Although a devaluation of the Hong Kong dollar
or renminbi relative to the U.S. dollar would be likely to reduce the Company's
expenses, 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
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has never engaged in currency
hedging operations and has no present intention to do so.
Seasonality
Each year, the Company ceases production for a two-week period due to the
Chinese New Year holiday, which occurs during late January or early February.
This holiday shutdown has typically resulted in lower revenues during the first
quarter of each year than during the other three quarters.
29
<PAGE>
The Company experiences fluctuations in quarterly sales due to the timing of
receipt of orders from customers and product shipments. The Company also incurs
substantial tooling and other costs of manufacturing new products from three to
nine months in advance of obtaining the first customer orders for the new
product. This long lead time may contribute to fluctuations in the Company's
quarterly results of operations.
International Sales
The Company sells substantially all of its products to customers in the U.S.
and Europe. During the six months ended June 30, 1998, approximately 10.6% of
the Company's net sales arose from sales to European customers, and in 1997
approximately 6.2% of the Company's net sales were attributable to sales to
European customers. The U.S. and European governments may, from time to time,
impose new quotas, duties, tariffs, or other charges or restrictions, or adjust
presently prevailing quota, duty or tariff levels, which could adversely affect
the Company's ability to continue to export products to the U.S. and Europe at
current or increased levels.
Accounting For Stock Options
The Company intends to adopt a 1998 Stock Option Plan, pursuant to which it
will reserve a total of 560,000 shares of common stock for issuance upon the
exercise of options granted thereunder. Concurrently with this offering, it
intends to grant stock options under the plan to certain directors, officers,
employees and consultants to purchase approximately 424,000 shares of common
stock at an exercise price equal to the initial public offering price of the
common stock. See "Management--Compensation Pursuant to Plans." The Company
will be required to account for option grants in accordance with the rules of
the Financial Accounting Standards Board ("FASB"). In October 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which established the "fair value"
method of accounting for stock-based compensation arrangements, under which
compensation cost is determined using the fair value of the stock option at the
grant date and the number of options vested, and is recognized over the period
in which the related services are rendered. For securities issuances to
employees, SFAS 123 also permits the use of the "intrinsic value based" method
as set forth in the Statement of Financial Accounting Standards No. 116. At
present, the Company intends to report all issuance to employees using the
intrinsic value based method for issuances to employees, as allowed by SFAS
123. As further provided in SFAS 123, the Company will disclose the pro forma
effect of adopting the fair value based method.
Under SFAS 123, any transaction involving non-employees for which goods or
services is the consideration received in exchange for the issuance of equity
instrument, such as options, is to be recorded using the fair value method. The
fair value method states that the amount recorded is to be based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is a more reliable measure.
30
<PAGE>
BUSINESS
OVERVIEW
Creative Master is a leading independent manufacturer of collectible-quality,
die-cast replicas of cars, trucks, buses and other items. Die-cast collectibles
are distinguishable from die-cast toys by their authentic design, exacting
engineering and attention to detail, including abundant use of identifiable
brand names, logos and other licensed marks. The die-cast products the Company
manufactures are 1/12th to 1/64th scale and include as many as 450 parts,
including numerous moveable parts. They are marketed and distributed by the
Company's customers primarily to collectors, hobbyists and enthusiasts at
retail prices ranging from $20 to $200 or more. The Company's customers are
leading U.S. and European marketers and distributors of vehicle replicas and
other collectibles, including Danbury Mint, Mattel, Hallmark Cards, Paul's
Model Art and Brookfield Collectors Guild.
The Company's mission is to provide the highest level of product quality and
customer service among independent manufacturers of die-cast collectibles. The
Company offers its customers turnkey product development and manufacturing
capabilities that are customized to meet their specific needs. The Company's
vertically integrated process affords complete sourcing of raw materials,
engineering, assembly, quality control and final packaging of die-cast products
in commercial quantities. Depending on the customer's needs, the Company
provides a self-contained production area within one of its factories with
tooling and other production functions dedicated to manufacturing the
customer's products according to its particular design, engineering and quality
requirements. This approach permits customers to closely supervise and control
all aspects of the production process and to protect the confidentiality of
their product design and engineering. The Company's turnkey process enables its
customers to shorten the lead time from conceptual design to product delivery
and to minimize production costs while maintaining high quality and
reliability.
All of the Company's manufacturing operations are conducted through CML, the
Company's wholly-owned Hong Kong subsidiary, and CML's subsidiaries. The
Company's manufacturing facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles northwest of Hong Kong. The
Dongguan facilities contain an aggregate of approximately 320,000 square feet
of manufacturing space and related housing for up to approximately 4,100
workers.
INDUSTRY
The U.S. collectibles industry comprises numerous market segments and
subsegments served by a variety of toy companies and other distributors. In
addition to die-cast items, including cars, trucks and other vehicles,
collectibles include such items as figurines, dolls, "plush" dolls, ceramic
cottages, prints, plates, glass, ornaments, steins, music boxes and trading
cards. According to the Collectibles Industry Report for 1997 published by
Unity Marketing, an independent market research firm, U.S. consumer sales of
collectibles totalled approximately $10 billion in 1997. According to Unity
Marketing, U.S. consumer sales of die-cast vehicle replicas totalled
approximately $753 million in 1997, which was 47% more than in 1996. The
Company believes that the aging of the so-called baby-boomers, with their
relatively higher discretionary spending on leisure goods such as collectibles,
is the principal reason for the increased demand for collectibles.
31
<PAGE>
The Company believes the total European consumer market for collectibles was
approximately $6 billion in 1997. The BIS Ltd., a European market research
firm, estimates that the European consumer retail market for die-cast
collectibles was approximately $200 million in 1997. The Company believes the
size and growth of the European collectibles market, the increasing influence
of American culture in collectibles and the growing use of sophisticated
marketing techniques all favor collectible products marketed by American and
European companies.
BUSINESS STRATEGY
Key elements of the Company's strategy are to:
. Manufacture Collectible-Quality, Die-Cast Products. Since CML's
inception, it has focused primarily on manufacturing collectible-quality,
die-cast products. While many of the Company's competitors manufacture die-
cast toys and other products, the Company has devoted itself exclusively to
collectible-quality products and to understanding the market for die-cast
collectibles, enhancing the quality and detail of its customers' designs
and improving and streamlining the production process. As a result,
although certain die-cast toy factories can produce limited amounts of
collectible-quality items, the Company believes that its approach optimizes
the production of high-quality collectibles in commercial quantities.
. Carefully Manage Growth/Focus on Quality Customers. The Company has
carefully managed its growth by selectively taking on additional customers.
From 1995 to 1997, the Company focused on building facilities and
developing a high-quality customer base to support long-term growth rather
than accepting all potential assignments. This disciplined approach to
growth has produced an 85% increase in the Company's net sales in the first
six months of 1998 over the same period in 1997.
. Increase the Diversity of Customers, Products and Market Segments
Served. The Company's customers market and distribute products for diverse
segments of the collectibles industry representing different product
categories and prices. The Company is actively working to broaden its
customer base and reduce its reliance on its principal customers. The
Company intends to continue to expand its customer base by accelerating its
manufacture of die-cast replicas where there is a strong consumer market
for the product on which the replica is based. For example, the Company
recently began manufacturing die-cast replicas of vintage locomotives and
trains for Lionel Trains, a marketer and distributor of electric train sets
and model trains.
. Pursue Product Development Opportunities. The Company works closely with
its customers and others to develop new die-cast products for its customers
to market. For example, the Company recently developed a die-cast outboard
boat motor which is expected to be test-marketed by one of its principal
customers. The Company will continue to pursue product development as part
of its overall customer service. To bolster its product development
efforts, the Company recently appointed Henry Hai-Lin Hu as Executive Vice-
President-Marketing.
. Invest in Plant, Equipment & Employees. The Company currently employs
4,100 production workers and operates three factories comprising
approximately 320,000 square feet of manufacturing space. These facilities
currently operate at or near full capacity. The Company is in the process
of building two new factories to meet demand from existing customers. The
32
<PAGE>
Company's fourth factory is expected to be operational by the end of 1998,
and the first phase of construction of the fifth factory is expected to be
completed in the second quarter of 1999. The Company intends to use a
portion of the net proceeds of this offering to pay for the cost of
constructing and equipping these new factories.
PRODUCTS
The Company believes there are not more than 20 major marketers and
distributors of die-cast collectibles in the U.S. and Europe. The Company's
customers include many of the leading U.S. and European marketers and
distributors. The following sets forth certain information with respect to the
Company's customers:
<TABLE>
<CAPTION>
CUSTOMER NAME PRINCIPAL PRODUCT CATEGORY CUSTOMER SINCE
------------- ---------------------------- --------------
<S> <C> <C>
. Danbury Mint(1) U.S. classic cars and trucks 1986
. Tyco Hong Kong Limited(2) Matchbox collectibles 1996
. Brookfield Collectors Guild(3) NASCAR racing cars 1996
. Paul's Model Art(4) European Formula One and
Super Touring racing cars 1998
. Mattel(5) Matchbox collectibles 1997
. Corgi Classic Cars Hong Kong buses, United
Kingdom buses and airplanes 1997(6)
. First Gear Trucks 1998
. Road Champs(7) Police cars 1998
. Lionel Trains Vintage trains 1998
. Hallmark Cards Pedal cars and ornaments 1997
</TABLE>
- --------
(1) Danbury Mint is a division of MBI, Inc.
(2) Tyco Hong Kong Limited was acquired by Mattel in the fourth quarter of
1997.
(3) Brookfield Collectors Guild is a division of Action Performance Companies,
Inc.
(4) Action Performance Companies, Inc. acquired a controlling interest in
Paul's Model Art in August 1998.
(5) Sales to Mattel are made indirectly through its Mattel Vendor Operations
Asia Ltd. subsidiary.
(6) Until mid-1998, sales to Corgi Classic Cars were made indirectly through
its agent, Drumwell Limited.
(7) Road Champs is a subsidiary of JAKKS Pacific.
Cars, Trucks and Buses. The Company produces a wide range of collectible die-
cast replicas of automobiles, including classic cars, European cars, Formula 1
racing cars, trucks and buses. These replicas are produced at various scales
from 1/12th to 1/64th of the original size. They typically retail from $90 to
$200, depending on the number of parts and the level of intricacy in the
design. The Company's replicas have between 200 and 450 parts and quality
finishing that results in an authentic look that appeals to collectors and
other enthusiasts.
While the Company does not manufacture "toy-grade" replicas, it does produce
some replicas that sell at lower retail prices. The price is determined by the
size of the replica, the number of parts and the intricacy of the design. The
Company's medium-feature products typically retail for $40 to $90 and its
small-scale products retail for $20 to $40.
Vintage Trains and Locomotives. In April, 1998, the Company began working on a
limited number of die-cast replicas of vintage locomotives and trains for
Lionel Trains, a U.S. marketer and distributor of electric train sets and model
trains. Depending on the success of the initial product, the Company
anticipates manufacturing additional locomotive and train products in the
future.
33
<PAGE>
Outboard Motors and Marine Products. The Company is in the process of
formalizing an arrangement with Alterscale, a company engaged in the
development of collectible marine replicas, to co-develop die-cast collectible
replicas of outboard motors under license from the owner of the Johnson and
Evinrude brands. The Company has manufactured and sold a limited run of
approximately 1,000 of these replicas, and one of the Company's customers is
expected to test market these replicas. The Company also is engaged in
discussions with other owners of marks for marine related products to discuss
licensing opportunities.
PRINCIPAL CUSTOMERS
The Company's customers consist principally of specialty retailers, direct
marketers and other distributors of collectibles in the U.S. and Europe. The
Company's largest customer is Danbury Mint, a division of MBI, Inc. Danbury
Mint is a leading U.S. developer and marketer of 1/24th scale premium die-cast
replicas. It was the Company's first customer in 1987.
The Company's second largest customer is Mattel. In 1996, the Company began
manufacturing the popular Matchbox die-cast collectibles series for Mattel. In
the fourth quarter of 1997, Mattel purchased Tyco Hong Kong Limited, for which
the Company had been producing die-cast vehicle replicas since 1996.
The Company's other customers include Brookfield Collectors Guild
("Brookfield"), a subsidiary of Action Performance Companies, Inc. ("Action
Performance"), Paul's Model Art ("PMA"), First Gear, Hallmark Cards
("Hallmark"), Road Champs and Corgi Classic Cars. Action Performance acquired a
controlling interest in PMA in August 1998.
The following table sets forth sales to its principal customers as a percent of
net sales for the periods shown:
<TABLE>
<CAPTION>
PERCENT OF NET SALES
----------------------------------
YEAR ENDED SIX MONTHS ENDED
CUSTOMER DECEMBER 31, 1997 JUNE 30, 1998
-------- ----------------- ----------------
<S> <C> <C>
Danbury Mint.............................. 64.2% 32.9%
Mattel(1)................................. 20.4 28.1
Brookfield Collectors Guild............... 4.7 5.9
Hallmark Cards............................ 0.2 5.4
</TABLE>
- --------
(1) Includes sales to Tyco Hong Kong Limited, which was acquired by Mattel in
the fourth quarter of 1997.
The Company's sales transactions with its customers are based on purchase
orders received by the Company from time to time which are subject to
cancellation. Although the Company does not have any long-term agreements with
any of its clients, it believes that its relationships with its customers are
excellent.
MARKETING AND SALES
The Company historically has not engaged in any significant marketing
activities, and has relied primarily on its reputation for quality and
efficiency among its customers to obtain new business. The Company's senior
executives work closely with its customers to develop new products to meet
34
<PAGE>
consumer demand for die-cast collectibles. Recently, the Company hired Henry
Hai-Lin Hu to bolster its product development, marketing and sales efforts. Mr.
Hu has extensive experience in the collectible industry. See "Management--
Executive Officers, Directors and Director Nominees."
Historically, the Company has not sought to license the right to produce
replicas of particular classic cars or other products. The Company is in the
process of formalizing a joint product development agreement with Alterscale, a
company engaged in the development of collectible marine replicas, to develop
and manufacture outboard motors under license from the owner of the Johnson and
Evinrude brands. The Company may selectively license other marks in the future,
where such licensing would not compete with the licensing efforts of the
Company's customers. To the extent the Company obtains any licenses to
manufacture die-cast replicas, it will pursue arrangements with one or more of
its existing customers or others to market and distribute such replicas.
BACKLOG AND SEASONALITY
The Company's customers generally contact the Company nine to eighteen months
in advance of product delivery, so that the Company can engineer and fabricate
the necessary molds for producing the die-cast product. Purchase orders are
typically received two to six months in advance of target delivery dates.
Purchase orders are subject to cancellation at any time. The Company has no
significant backlog.
The Company's operating results may fluctuate depending upon general economic
and industry conditions and the Company's sales. Each year, the Company ceases
production for a two-week period due to the Chinese New Year holiday, which
occurs during late January or early February depending on the calendar. This
holiday shutdown has typically resulted in lower revenues during the first
quarter of each year than revenues during the other three quarters.
PRODUCT DEVELOPMENT AND MANUFACTURING
The Company offers turnkey manufacturing capabilities, including complete raw
materials sourcing, computer-aided product engineering, model-making, mold-
making, manufacturing, assembling and packaging of finished products. The
Company can meet all of a customer's design engineering and manufacturing
needs, thus eliminating the need for intermediaries. By coordinating product
development and process design with production and packaging, the Company is
able to shorten the lead time from conceptual design to product delivery and to
lower production costs while maintaining high quality and reliability.
The product production cycle occurs in four stages:
. Product development
. Model making
. Tooling
. Final production and assembly
The product development phase of the production cycle begins when a customer
provides the Company with photographs, drawings and other specifications for
the new product. The Company
35
<PAGE>
then works with the customer to design a product that meets the customer's
specifications and price point. For example, when building a classic car
replica the Company seeks to ensure that the product is properly proportioned
and historically correct. This means that the Company strives to precisely
reproduce the exterior and interior design, color schemes and accessories of
the original car. One example of this precision is the Company's 1/24th scale
Mercedes Benz SSKL, for which the Company holds a license. Among its many
authentic details, the Mercedes Benz SSKL includes wire wheels, rubber tires,
genuine leather seats, a working steering wheel and a hood that opens to reveal
the car's engine and a leather strap with a metal buckle to secure the hood.
The Company believes that model making is critical to producing the highest
quality collectibles. During the model-making stage of the production cycle,
the Company's engineering staff uses computer-aided design systems to develop a
prototype scale model. The Company will include as many functioning moving
parts as possible, given the Customer's desired price point. Examples of such
features are car doors, trunks and hoods that open, steerable wheels and
working suspension. The Company strives to ensure that the models it produces
also have an authentic build and finish. Once the prototype replica is ready,
it must be approved by the customer before the Company begins to fabricate the
molds and tools that will be used to manufacture the product in commercial
quantities. The Company can generally produce a prototype in one to three
months.
Once the customer has approved a prototype, the Company begins the tooling
process, which typically requires six to twelve months. The tooling process
occurs in two stages. First, the Company produces tooling and molds that will
be used to fabricate each component part of the product. Next, the Company
tests the components and the assembled product produced with the new tools and
molds. If necessary, the Company refines and modifies the molds and tools
before seeking customer approval to manufacture the product. Upon receiving
customer approval, the Company releases the molds and tools to produce final
products.
In the last stage of the production cycle, the Company produces the component
parts, then assembles, finishes, packages and ships the final products. The
die-casting, injection-molding and electrostatic painting areas of the
Company's facilities operate five days per week on a two-shift per day basis.
The finishing, assembly and packing areas also run on a multi-shift basis.
These areas account for most of the total work force and production area at the
Company's facilities.
Typically, customers pay 50% of the Company's tooling and mold-making costs
when the tooling and mold-making process commences and an additional 25% of
these costs when the initial test products are made using the new molds and
tools. The Company receives payment for the final 25% of the tooling costs when
the tools and molds are released for commercial production.
The Company usually insures the tools and molds until they are approved by the
customer for production. At that point, the customer takes ownership and
assumes the cost of insuring the molds and tools.
The long lead time required to develop new products and related tools and
molds, combined with each customer's financial commitment at the beginning of
the tooling process, provides the Company with an indication of prospective
orders for six to twelve months in advance.
36
<PAGE>
PRINCIPAL SUPPLIERS AND SOURCES OF SUPPLY
The Company uses zinc alloy and various plastic resins in its die-cast and
injection-molded production operations. The supply and demand for zinc alloy
and for both plastic resins and the petrochemical intermediates from which
plastic resins are produced are subject to cyclical and other market factors
and can fluctuate significantly. The Company acquires raw materials for its
die-cast production primarily from Australia and the United Kingdom. The
Company's standard practice is to maintain a supply of raw materials sufficient
for approximately two months of production. The Company anticipates that it
will be able to obtain sufficient supplies of raw materials as it expands its
production capacity and output.
Three of the Company's suppliers accounted for more than 5% of its supplies in
1997 as shown in the following table:
<TABLE>
<CAPTION>
PERCENT OF TOTAL RAW
MATERIAL SUPPLIED
------------------------
YEAR ENDED SIX MONTHS
COMPONENT DECEMBER ENDED
SUPPLIER SUPPLIED 31, 1997 JUNE 30, 1998
-------- ------------------- ---------- -------------
<S> <C> <C> <C>
. Manfield Coatings Co.,
Ltd......................... Paint 9.0% 11.8%
. Genesis Off-set Printing
Co., Ltd.................... Packaging materials 8.5% 9.2%
. Zinamet Co., Ltd............ Zinc alloy 6.9% 2.0%
. Lee Kee Metal Co., Ltd...... Zinc alloy 6.1% 7.7%
</TABLE>
The Company believes there are multiple sources of supply of these and other
raw materials used in the Company's business.
37
<PAGE>
FACILITIES AND PLANNED EXPANSION
The Company's growth is closely related to its manufacturing capacity. At
present, the Company operates three factories in the Dongguan region of
Guangdong Province, China. Legal and administrative functions of these
factories are conducted through the Company's Chinese subsidiary. Following is
a summary of certain information regarding the Company's manufacturing
facilities as of October 1, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF APPROXIMATE
FACTORY WORKERS SQUARE FOOTAGE(1) PRINCIPAL OPERATIONS
------- ------------- ----------------- ---------------------------------------------
1998 1999(2) 1998 1999(2) 1998 1999(2)
----- ------- -------- -------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
CML No. 1 2,100 2,100 178,000 178,000 Production of Production of
products for Danbury products for Danbury
Mint, Corgi, Mint, First Gear and
Hallmark, First Gear Brookfield. Tooling
and Brookfield. Also and corporate
includes tooling and functions will be
certain corporate continued.
functions such as
quality assurance
CML No. 2 900 900 69,000 69,000 Production of Production of
products for Tyco products for Tyco
(Matchbox) (Matchbox)
CML No. 3 1,000 1,500 70,000 100,000 Production of Production of
products for PMA and products for PMA and
Road Champs Road Champs
CML No. 4(3) 100 200 3,000 40,000 Tooling and model Tooling and model
making making
CML No. 5(3) -- 1,000 -- 120,000 -- Production of
products for Hallmark
and Corgi
----- ----- -------- --------
Total 4,100 5,700 320,000 507,000
===== ===== ======== ========
</TABLE>
- --------
(1) Includes production space only.
(2) Estimated.
(3) Currently under construction.
Each of the Company's factories houses a self-contained manufacturing
operation. Each factory contains personnel and equipment to provide production
planning, engineering, management, decorative processes and final assembly and
packaging. Within each factory, the Company provides customers a self-contained
production area with tooling and other production functions dedicated to
manufacturing each customer's products according to its particular design,
engineering and quality requirements. Quality assurance and certain technical
functions are centralized in CML No. 1. Certain other functions are centralized
in the Company's Hong Kong headquarters, including materials purchasing,
customer service, production scheduling among the factories, marketing, new
product development, shipment of finished goods and strategic planning.
CML Nos. 1, 2 and 3 are located in space leased exclusively by the Company.
They are surrounded by perimeter walls or fencing and are generally accessible
only to the Company's employees. CML No. 4 is currently located in shared
rented space. All of these factories are located within a one-mile radius of
each other.
CML No. 1 and CML No. 2 are operating at near capacity, and the Company
believes that these facilities are operating at an efficient level. Currently,
the Company has no plans to expand or modify these facilities.
38
<PAGE>
The Company is in the process of expanding CML No. 3 from approximately 70,000
square feet of production area to 100,000 square feet to meet an anticipated
increase in demand from existing customers. The Company is also building new
dormitory space to accommodate additional workers. Construction of the new
manufacturing area and dormitory space is substantially complete, and the
Company expects to commence initial operations in the new space by November
1998.
The Company has substantially completed the construction of its new CML No. 4
facility, which is intended to be dedicated primarily to model making and
tooling. This facility is expected to occupy 40,000 square feet of leased space
accessible only to the Company's employees and is designed to support the model
making and tooling needs for the Company. CML No. 4 is also expected to include
approximately 8,000 square feet dedicated to research and development and to
employ approximately 50 technicians for this purpose. The new CML No. 4
facility also will implement additional security controls to provide customers
enhanced confidentiality of their product design and engineering. The tool-
making production area will be increased to 20,000 square feet in the new CML
No. 4 facility, including workshop, engineering support and office space, and
the Company plans to increase the number of tooling technicians to
approximately 150. The Company expects CML No. 4 to be operational by the end
of 1998.
In July 1998, the Company began construction of its fifth factory, CML No. 5,
which the Company expects to complete in March 1999. A portion of the net
proceeds of this offering will be used for this purpose. CML No. 5 will become
operational in two phases, the first of which is expected to be completed in
March 1999. The total land area for these two phases is about 270,000 square
feet. The first phase will consist of workshop, office and paint warehouse
facilities in approximately 120,000 square feet. It is estimated that initially
CML No. 5 eventually will employ approximately 1,000 workers and that
construction of CML No. 5 will be completed in the second quarter of 1999. The
second phase will be built to provide excess capacity. Based on the Company's
current business expectations, this additional capacity will begin to be
employed in the second half of 1999. The maximum buildable area is
approximately 68,000 square feet for production and 60,000 square feet for
dormitories to accommodate up to 1,000 workers.
The Company works closely with its customers in order to understand and plan
for the customers' anticipated production needs. Plans for the expansion of the
Company's manufacturing facilities are based largely on the anticipated needs
of its primary customers. Adequate undeveloped land adjacent to the Company's
facilities in China permit it to expand as necessary. Typically the Company can
complete new facilities within six months. This six-month time frame is within
with the normal product development cycle, and the Company historically has not
experienced any significant delays in bringing additional capacity on-line to
meet increased customer demand.
COMPETITION
The Company faces significant competition from toy companies and other
independent manufacturers of die-cast products with production facilities
located in China. Certain of the Company's customers, including Mattel, Action
Performance and Road Champs, have their own die-cast manufacturing facilities
in China.
39
<PAGE>
The Company competes on the basis of quality, technical capabilities and
delivery schedules. To a lesser extent, it competes on the basis of price.
The Company believes it possesses trade secrets relating to sourcing of raw
materials and other aspects of its production process that may represent a
competitive advantage. The Company does not characterize its business as
proprietary, however, and does not own any patents. The Company typically
relies on its customers to obtain licenses from manufacturer of the products on
which its replicas are based. The Company currently holds a license to its
Mercedes Benz SSKL replica, and it intends to selectively seek licenses for
certain new products, such as marine outboard motors and other products that do
not compete with the products of existing customers. Other than trade secrets
and the capital required for factory equipment and training, the Company
believes that there are no significant barriers to entry to the manufacture of
die-cast products. Accordingly, additional participants may enter the market at
any time. Many of the Company's existing or potential competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company.
EMPLOYEES
As of September 30, 1998, the Company employed approximately 4,100 persons,
including part-time workers. Of these employees, approximately 3,570 were
production workers, 200 were administrative staff, 330 were engineers and
technicians. In addition, the Company employs 30 people in Hong Kong. As is
customary for employers in China, the Company's production facilities includes
housing facilities for its workers. The Company is committed to providing good
working and living conditions for its employees in China. The Company has
experienced no significant labor stoppages and believes that the relations with
its employees are satisfactory.
The Company anticipates hiring up to 1,600 new employees in connection with the
expansion of its manufacturing facilities currently underway. Historically, the
Company has had no difficulty in hiring additional employees, and it
anticipates that it will be able to hire additional employees in the future as
needed in connection with the growth of its business.
RESEARCH AND DEVELOPMENT
The Company did not incur research and development expenses during 1995, 1996
or 1997. Substantially all development costs associated with manufacturing
products for its customers are expensed as a cost of sales. The Company does
not rely on any proprietary technology. The Company intends to increase its
product development efforts, and may incur future research and development
expenses in connection with these efforts. The Company may use a portion of the
net proceeds of this offering to fund these efforts.
PROPERTIES
The Company's corporate and administrative offices occupy approximately 10,000
square feet of office space in Hong Kong. The Company subleases these
facilities at a cost of approximately $4,000 per month, pursuant to leases
which run through February 14, 1999 and May 15, 1999. The Company currently
expects to renew its existing leases as they expire.
40
<PAGE>
The Company's manufacturing facilities contain an aggregate of approximately
320,000 square feet of manufacturing space and dormitory space that can
accommodate up to 4,100 workers. The Company leases the factories from local
Chinese government agencies under separate tenancy agreements expiring from May
1999 to June 2006. The aggregate monthly rent for its factories is
approximately $30,000. The Company also leases dormitory space to house its
factory workers under similar agreements which expire between December 1998 to
February 2000. The Company is currently in the process of negotiating a renewal
of one of its dormitory tenancy agreements which expired in September 1998. The
aggregate monthly rent for its dormitory facilities is approximately $15,000.
The Company financed the cost of constructing the Dongguan facilities and
believes that its willingness to do so will facilitate the extension of its
leases on such facilities.
The Company has recently undertaken the planned expansion of its manufacturing
facilities as described above under "--Facilities and Planned Expansion."
Through September 30, 1998, the Company had entered into three new tenancy
agreements for the land underlying the new facilities for terms ranging from
four to five years.
INSURANCE
The Company carries property, liability, and workers' compensation insurance
policies, which it believes are customary for businesses of its size and type.
However, there can be no assurance that the Company's insurance coverage will
be adequate or that insurance will continue to be available to the Company at
reasonable rates.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR NOMINEES AND KEY EMPLOYEE
The executive officers, directors, director nominees and key employee of
Creative Master and their ages and positions with Creative Master as of
September 1, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
---- --- -----------
<S> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND
DIRECTOR NOMINEES
Carl Ka Wing Tong.................. 48 President, Chief Executive Officer,
Chief Financial Officer and Chairman
of the Board
Leo Sheck Pui Kwok................. 42 Chief Operating Officer and a Director
Henry Hai-Lin Hu................... 53 Executive Vice President--Marketing
Shing Kam Ming..................... 37 Senior Vice-President and Controller
Paul Mo............................ 46 Senior Vice-President--Marketing
Services and Secretary
Denny Cheng........................ 37 Vice-President--Customer Service and
Engineering
Chou Kong Seng..................... 43 Director
Steve Gordon(2).................... 43 Director Nominee
Clayton K. Trier(2)................ 47 Director Nominee
KEY EMPLOYEE
Albert Chui........................ 48 Assistant Vice President--Quality
Assurance
</TABLE>
- --------
(1) Each of the executive officers of the Company also serves in various
corresponding capacities with CML or its subsidiaries.
(2) Messrs. Trier and Gordon have indicated their willingness to serve as
directors of the Company following completion of this offering.
EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEES
Carl Ka Wing Tong is the Chairman, Chief Executive Officer, President and Chief
Financial Officer of the Company. He has served as Chairman, Chief Executive
Officer and President since December 1997 and Chief Financial Officer since
September 1998. He also serves as a Director of Acma Strategic Holdings
Limited. Mr. Tong co-founded CML in 1986. From 1993 to 1995, he also served as
Chief Financial Officer of ZIC Holdings Limited, the holding company of Zindart
Industrial Co. Ltd., a manufacturer of toys and collectibles. Prior to founding
CML, from 1985 to 1987 Mr. Tong was Vice President of Citibank N.A.'s
Institutional Banking, Specialized Finance Group. He is a certified public
accountant in Hong Kong and a chartered accountant in the United Kingdom. See
"Principal Stockholders and Selling Stockholder."
Leo Sheck Pui Kwok has been the Chief Operating Officer and a Director of the
Company since December 1997. Mr. Kwok co-founded CML in 1986. Before founding
CML, Mr. Kwok worked for the Hallmark Group in Asia from 1980 to 1987, where
his last position was as the Chief Merchandise Manager.
Henry Hai-Lin Hu has been Executive Vice--President-Marketing of the Company
since September 1998. Prior to joining the Company, from 1996 through 1998 Mr.
Hu served in executive management positions with various Hong Kong toy
manufacturers. Mr. Hu also served as the Chairman and Chief Executive Officer
of Zindart Industrial Co., Ltd. from 1993 until 1996.
42
<PAGE>
Shing Kam Ming has been the Senior Vice-President of the Company since January
1998. He also served as Chief Financial Officer until September 1998, when he
was appointed Controller. Mr. Shing joined Creative Master Limited in March
1993 as Manager--Finance and Administration.
Paul Mo has served as the Company's Senior Vice President--Marketing Services
since August 1996 and as Secretary of the Company since September 1998. Mr. Mo
joined the Company as Director of Engineering in November 1994 and helped
establish the Company's first Dongguan factory. Prior to joining the Company,
from 1992 to 1994 he was a General Manager of Sinomex (Hong Kong).
Denny Cheng has served as Vice President-Customer Service and Engineering since
November 1996. Before joining the Company, Mr. Cheng served as an Engineering
Manager with Sinomex (Hong Kong) from 1993 to 1996.
Chou Kong Seng has been a director of the Company since December 1997. Mr. Chou
has been the Finance Director of Acma Limited, a Company listed on the
Singapore stock exchange since 1994. He also serves as a Director of Acma
Strategic Holdings Limited, a principal stockholder of the Company. Before
joining Acma Limited, he was a senior manager with KPMG Peat Marwick LLP in
Singapore.
Steve Gordon has indicated his willingness to serve as a director of the
Company following the completion of this offering. Mr. Gordon has been a
principal of TFS Limited, a direct response marketing and fulfillment services
company, since 1995. Before joining ITS, Mr. Gordon served as a Division
Director of MBI, Inc., from 1985 to 1995.
Clayton K. Trier has indicated his willingness to serve as a director of the
Company following completion of this offering. Mr. Trier served as the Chairman
and Chief Executive Officer of Corporate Express Delivery Systems, a local
delivery company with offices nationwide, from 1993 through April 1997. He
founded Corporate Express Delivery System in 1993. Mr. Trier is a certified
public accountant.
KEY EMPLOYEE
The Company also considers the following person to be important to its
operations:
Albert Chui has served as Assistant Vice President--Quality Assurance and
Training since 1996. Before joining the Company, Mr. Chui served as a plant
manager with Sunshine Toys Manufacturing Limited from 1995 to 1996. In
addition, Mr. Chui worked as a quality manager with Artin Industries Company
Limited from 1993 to 1994.
BOARD, BOARD COMMITTEES AND COMPENSATION
Prior to completion of this offering, the Company intends to amend and restate
its Bylaws to provide for an authorized number of directors of between three
and nine. The Company intends to increase the number of directors to five and
to appoint Messrs. Gordon and Trier as directors following completion of this
offering.
The Company reimburses each director for reasonable expenses incurred in
attending meetings of the Company's board of directors. Directors currently
receive no other compensation for their services as
43
<PAGE>
Directors. Following completion of this offering, however, the Company intends
to pay each outside director fee of $1,300 for each meeting attended by such
director. Outside directors who serve on board committees will be paid a fee of
$300 for each committee meeting attended by such director. Directors also will
be eligible to receive grants of options under the Company's 1998 Stock Option
Plan. See "--Compensation Pursuant to Plans."
Following completion of this offering, the Board of Directors intends to
establish a two-person Audit Committee of the Board consisting of Messrs.
Gordon and Trier. The Audit Committee will make recommendations to the Board of
Directors regarding the selection of independent auditors, will review the
results and scope of the audit and other services provided by the Company's
independent certified public accountants and will review the Company's
financial statements.
A Compensation Committee of the Board of Directors also will be established
following completion of this offering, which will consist of Messrs. Gordon,
Trier and Tong. The Compensation Committee will make recommendations to the
Board of Directors concerning executive compensation and incentive compensation
for officers and employees, including the administration of the Company's 1998
Stock Option Plan.
The Board of Directors currently has no standing Nominating Committee.
EMPLOYMENT AGREEMENTS
The Company is party to a consulting agreement with Acma Strategic Holdings
Limited, which in turn has entered into a consulting agreement with Carl Tong &
Associates Management Consultancy Limited, a company beneficially owned by Carl
Ka Wing Tong ("Associates Management"), pursuant to which Mr. Tong acts as
Managing Director of Acma Strategic Holdings Limited and performs certain other
duties, including acting as the President, Chief Executive Officer and Chief
Financial Officer of the Company. The terms of these agreements are described
under "Certain Transactions--Tong Consulting Arrangement."
The Company also is party to a consulting agreement with Business Plus
Consultants Limited, which is beneficially owned by Henry Hai-Lin Hu, under
which Mr. Hu serves as Executive Vice-President - Marketing of the Company. See
"Certain Transactions--Hu Consulting Agreement" for a discussion of the terms
of Mr. Hu's agreement. Consulting arrangements such as the Company's
arrangements with Messrs. Tong and Hu are commonplace in Hong Kong.
In January 1996, the Company entered into a service agreement with Leo Sheck
Pui Kwok pursuant to which he was appointed as an executive officer of the
Company, effective as of February 1, 1996, for a term of three years. The
appointment automatically renews for a one-year term on each anniversary
beginning on February 1, 2000, unless either party provides six months written
notice to terminate the agreement. Mr. Kwok receives a salary of $46,000 per
year and a bonus of up to 2.5% of the Company's net after-tax profits on a
consolidated basis, provided the Company achieves certain net income targets.
In addition, the Company provides Mr. Kwok with a residence allowance of
approximately $5,000 per month.
44
<PAGE>
Other than Mr. Kwok as described above, the Company's executive officers and
key employees are not subject to any noncompetition agreements or other
contractual obligations regarding the confidentiality of this Company's trade
secrets or other information. However, the Company is in the process of
developing service contracts for all of its senior executives which will be
executed prior to completion of this offering and which are expected to include
certain restrictions against the executives' use of confidential information of
the Company.
The Company anticipates hiring a Chief Financial Officer following completion
of this offering in order to permit Mr. Tong to focus on his duties as
President and Chief Executive Officer.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain information
regarding compensation earned by the Company's Chief Executive Officer and its
one other executive officer (the "Named Executive Officers") whose compensation
exceeded $100,000 for the periods indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
FISCAL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
--------------------------- ------ -------- ------ ---------------
<S> <C> <C> <C> <C>
Carl Ka Wing Tong--President, Chief
Executive Officer and Chief
Financial Officer................... 1997 $115,000(2) $ -- $ --
1996 88,000(2) -- --
1995 12,000(4) -- --
Leo Sheck Pui Kwok--Chief Operating
Officer............................. 1997 $ 46,000 $4,000 $63,000(3)
1996 43,200 -- 59,000(3)
1995 102,000(5) -- --
</TABLE>
- --------
(1) Does not include dividends paid to the Named Executive Officers with
respect to shares of stock of CML. See "Certain Transactions--Dividends."
(2) Represents compensation paid to Acma Strategic Holdings Limited for
consulting services. See "Certain Transactions--Tong Consulting
Arrangement."
(3) Pursuant to an agreement dated January 2, 1996, the Company leases from
Wellholding Limited, a company beneficially owned by Mr. Kwok, a Hong Kong
apartment in which Mr. Kwok resides. The lease calls for a monthly rental
of approximately $5,000. The term of such lease expires in August 2000.
(4) Represents compensation paid to Carl Tong & Associates Management
Consultancy Limited, a Company beneficially owned by Mr. Tong, for Mr.
Tong's services. See "Certain Transactions--Tong Consulting Arrangement."
(5) Represents compensation paid to Excel Master Limited, a company
beneficially owned by Mr. Kwok at such time.
COMPENSATION PURSUANT TO PLANS
1998 Stock Option Plan. In October 1998, the Company's Board of Directors and
stockholders approved the Company's 1998 Stock Option Plan (the "1998 Plan").
The purpose of the 1998 Plan is to enable the Company to attract and retain
top-quality employees, officers, directors and consultants and to provide such
employees, officers, directors and consultants with an incentive to enhance
stockholder return. The 1998 Plan provides for the grant to officers,
directors, or other key employees and consultants of the Company of options to
purchase up to an aggregate of 560,000
45
<PAGE>
shares of common stock. Concurrently with this offering, the Company intends to
grant stock options under the 1998 Plan to certain directors, officers,
employees and consultants to purchase an aggregate of 424,000 shares of common
stock at an exercise price per share equal to the initial public offering price
of common stock. It is expected that these options will vest and become
exercisable as to 25% of the shares covered on the date six months from the
date of grant. The remaining options will vest and become exercisable monthly
pro rata over a 42 month period. It is proposed that Messrs. Tong and Kwok
receive options to purchase 150,000 shares and 90,000 shares, respectively.
The 1998 Plan may be administered by the Board of Directors or a committee of
the Board (in either case, the "Committee"), which has complete discretion to
select the optionees and to establish the terms and conditions of each option,
subject to the provisions of the 1998 Plan. Options granted under the 1998 Plan
may be "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified options.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the common stock as of the date of grant (110% of the fair
market value if the grant is to an employee who owns more than 10% of the total
combined voting power of all classes of capital stock of the Company). The Code
currently limits to $100,000 the aggregate value of common stock that may be
acquired in any one year pursuant to incentive stock options under the 1998
Plan or any other option plan adopted by the Company. Nonqualified options may
be granted under the 1998 Plan at an exercise price of not less than 100% of
the fair market value of the common stock on the date of grant. Nonqualified
options also may be granted without regard to any restriction on the amount of
common stock that may be acquired pursuant to such options in any one year.
Subject to the limitations contained in the 1998 Plan, options become
exercisable at such times and in such installments (but not less than 20% per
year) as the Committee shall provide in the terms of each individual stock
option agreement. The Committee must also provide in the terms of each stock
option agreement when the option expires and becomes unexercisable, and may
also provide the option expires immediately upon termination of employment for
any reason. No option held by directors, executive officers or other persons
subject to Section 16 of the Securities Exchange Act of 1934, as amended, may
be exercised during the first six months after such option is granted.
Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then
exercisable would terminate three months (three years in the case of
termination by reason of death or disability) following termination of
employment. Any options which were not exercisable on the date of such
termination would immediately terminate concurrently with this offering.
Options granted under the 1998 Plan may not be exercised more than ten years
after the grant (five years after the grant if the grant is an incentive stock
option to an employee who owns more than 10% of the total combined voting power
of all classes of capital stock of the Company). Options granted under the 1998
Plan are not transferable and may be exercised only by the respective grantees
during their lifetime or by their heirs, executors or administrators in the
event of death. Under the 1998 Plan, shares subject to cancelled or terminated
options are reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to
46
<PAGE>
adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends. The 1998 Plan is effective
for ten years, unless sooner terminated or suspended.
Pension Plan. In January 1997, CML adopted a defined contribution pension plan
(the "Pension Plan") which is available to all of the Company's Hong Kong
employees with at least three months of continuous service. Participating
employees may make monthly contributions to the Pension Plan of up to 5% of
each employee's base salary, with matching contributions by the Company. The
Hong Kong employees (or their beneficiaries) are entitled to receive their
entire contribution and the Company's matching contributions, with accrued
interest thereon, upon retirement or death of the employee. Upon resignation or
termination (other than for serious misconduct), employees are entitled to
receive their entire contributions to the Pension Plan, with accrued interest
thereon, plus the vested portion of the Company's matching contributions. A
participating employee becomes fully vested with respect to 30% of the
Company's matching contributions to the Pension Plan after completing three
years of service with the Company and becomes vested with respect to an
additional 10% of the Company's matching contributions for each year of
continuous service thereafter through year ten. CML's subsidiaries, Excel
Master Limited and Carison Engineering Limited, have each adopted pension plans
for their employees which are identical to the Pension Plan.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company intends to amend and restate its Certificate of Incorporation prior
to completion of this offering. As is customary among Delaware corporations,
the Company's Amended and Restated Certificate of Incorporation will eliminate
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors, except (i) for breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions by
the director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption; and (iv) for transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company also intends to enter into
indemnity agreements with each of its current directors and executive officers
which will provide for indemnification of, and advancement of expenses to, such
persons to the maximum extent permitted under the laws of the State of
Delaware, including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advancement of expenses are
discretionary under Delaware law.
The Company believes that it is the position of the Commission that, insofar as
the forgoing provisions may be invoked to disclaim liability for damages
arising under the Securities Act of 1933, as amended (the "Securities Act"),
the provisions are against public policy as expressed in the Securities Act and
are, therefore, unenforceable.
47
<PAGE>
CERTAIN TRANSACTIONS
Prior to this offering, the Company entered into transactions and business
relationships with certain of its officers, directors and principal
stockholders. Any future transactions between the Company and its officers,
directors or affiliates will be subject to approval by a majority of
disinterested directors or by the Company's stockholders in accordance with
Delaware law.
Hu Consulting Agreement. In August 1998, the Company entered into a consulting
agreement with Business Plus Consultants Limited ("Business Plus"), which is
beneficially owned by Henry Hai-Lin Hu, the Company's Executive Vice
President--Marketing. For its services and the services of Mr. Hu, the Company
will pay Business Plus a commission equal to 7.5% of all additional revenues of
the Company generated by Business Plus, with a guaranteed monthly minimum fee
of approximately $5,000, and all out-of-pocket expenses. The agreement has a
two-year term and will continue thereafter unless terminated by either party
upon three months prior written notice.
Tong Consulting Arrangement. In January 1996, the Company entered into a
consulting agreement with Acma Strategic Holdings Limited ("Acma Strategic"),
the principal stockholder of the Company and the selling stockholder in this
offering. See "--Acma Consulting Arrangement" below. Mr. Tong is a Director and
10% shareholder of Acma Strategic. In turn, Acma Strategic entered into a
consulting agreement with Associates Management, a company beneficially owned
by Mr. Tong, pursuant to which Mr. Tong acts as a Director of Acma Strategic
and performs such other duties as requested by Acma Strategic, including acting
as Chief Executive Officer, President and Chief Financial Officer of the
Company. Acma Strategic is an investment company whose only investment is its
ownership of common stock of the Company. Also, pursuant to the agreement
between Associates Management and Acma Strategic, Associates Management is
entitled to receive the entire amount of any bonus paid to Acma Strategic by
the Company under the consulting agreement between the Company and Acma
Strategic. The Company pays a bonus of up to 2.5% of its net after-tax profits
on a consolidated basis. During 1996, 1997 and the six months ended June 30,
1998, the Company paid consulting fees to Acma Strategic in the amounts of
$88,000, $115,000 and $68,000, respectively, including bonuses. In 1996, 1997
and the six months ended June 30, 1998, Acma Strategic paid consulting fees to
Associates Management in the amounts of $239,000, $261,000 and $80,000,
respectively, including bonuses.
Acma Consulting Arrangement. In January 1996, the Company entered into a
consulting agreement with Acma Strategic under which Acma Strategic will
receive an annual consulting fee of approximately $106,000. In addition, under
the terms of the agreement the Company may, at its discretion pay Acma
Strategic a performance bonus of up to 2.5% of the Company's consolidated net
after-tax profits (but not exceeding the highest bonus paid to any executive of
CML). During 1996, 1997 and the six months ended June 30, 1998, the Company
paid consulting fees in the amounts of $88,000, $115,000 and $68,000,
respectively, to Acma Strategic for consulting services provided. These
services consisted primarily of management of manufacturing facilities,
production design and personnel matters. The Company will discontinue its
arrangement with Acma Strategic upon completion of this offering and assume the
duties previously performed by Acma Strategic. In addition, pursuant to a
consulting agreement between Acma Strategic and Associates Management, Acma
Strategic pays Associates Management the amount of any bonus it receives from
its consulting agreement with the Company.
48
<PAGE>
Loans to Company. Messrs. Kwok and Tong had outstanding certain non-interest
bearing loans to CML in the amounts of $614,000 and $316,000, respectively as
of December 31, 1996 and $612,000 and $316,000, respectively, as of December
31, 1997. The loans were repayable on demand. As of June 30, 1998, the
outstanding balances of the loans were $611,000 and $316,000, respectively. As
of that date, however, Mr. Tong owed CML $95,000. See "--Loans from Company."
As of September 30, 1998, the net principal amount of the outstanding loans
from Messrs. Kwok and Tong were converted into non-interest bearing term loans
which will be due and payable in full on September 30, 2001.
In addition, in 1997 Acma Strategic advanced $9,000 on CML's behalf. As of June
30, 1998, CML owed $8,000 of this advance, which has since been repaid without
any interest.
Loans from Company. During 1996, 1997 and 1998 Mr. Tong borrowed certain
amounts from CML. The maximum balance of such loans at any one time was
$124,000. As of June 30, 1998, the amount outstanding was $95,000. As of that
date, however, CML owed Mr. Tong $316,000.
Dividends. During the year ended December 31, 1997, Carison Engineering
Limited, a subsidiary 70% owned by the Company, paid a dividend in the amount
of approximately $215,000. Mr. K.T. Yiu, Vice-President--Mold Engineering and
Production of the Company and a 30% shareholder of Carison Engineering Limited,
received approximately $64,500 of such dividend. For the year ended December
31, 1997, CML declared dividends in the amount of approximately $183,000 to
Acma Strategic, approximately $108,000 to Leo Sheck Pui Kwok and approximately
$32,000 to Carl Ka Wing Tong. These dividends were declared and will be paid
strictly in accordance with their respective share holdings in CML.
Guarantees of Company Debt. As of June 30, 1998, the Company had credit
facilities with Hang Seng Bank, Banque Nationale de Paris, Bank of China and
Commonwealth Finance Corporation Limited of $258,000, $250,000, $65,000 and
$1,291,000, respectively, which Messrs. Tong and Kwok personally guarantee. The
facilities also are secured by a mortgage on certain real property owned by Mr.
Tong. Additionally, Acma Strategic guarantees certain of the Company's debt and
Acma Ltd. has provided a standby letter of credit in favor of one of the
Company's lenders to further secure the Company's obligations. As of June 30,
1998, the Company has outstanding balances under such facilities of $248,000,
$250,000, $34,000 and $844,000, respectively. Approximately $1,000,000 of the
net proceeds to the Company of this offering will be used to repay outstanding
indebtedness under these facilities. Amounts repaid by the Company may be
reborrowed from time-to-time in accordance with the terms of the credit
facilities. The Company has arranged to eliminate the guarantees of Messrs.
Tong and Kwok and Acma Strategic following completion of this offering.
49
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
The following table sets forth the beneficial ownership of common stock as of
September 30, 1998, and as adjusted to reflect the sale of common stock offered
hereby, by (i) each person known by the Company to beneficially own 5% or more
of the outstanding shares of common stock, including the selling stockholder,
(ii) each director and director nominee of the Company, (iii) each Named
Executive Officer of the Company, and (iv) all directors, director nominees and
executive officers of the Company as a group. The information set forth in the
table and accompanying footnotes has been furnished by the named beneficial
owners.
<TABLE>
<CAPTION>
COMMON STOCK OWNED NUMBER OF COMMON STOCK OWNED
PRIOR TO THE OFFERING SHARES TO AFTER TO THE OFFERING
------------------------- BE SOLD ----------------------------
NUMBER OF PERCENT OF IN THE NUMBER OF PERCENT OF
BENEFICIAL OWNER(1) SHARES CLASS OFFERING SHARES CLASS
- ------------------- ------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Carl Ka Wing Tong(2).... 344,196 6.9% -- 344,195 4.9%
Leo Sheck Pui Kwok(3)... 753,250 15.1 -- 753,250 10.8
Clayton K. Trier........ -- -- -- -- --
Steve Gordon............ -- -- -- -- --
Acma Ltd. (4)........... 3,402,573 68.0 300,000(5) 3,102,573(6) 44.3(6)
All Directors, director
nominees and officers
as a group (9
persons)............... 1,097,445 22.0 -- 1,097,445 15.7
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to the shares shown. Except as indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(2) Mr. Tong is a Managing Director and 10% shareholder of Acma Strategic
Holdings Limited. As such, Mr. Tong shares investment and voting power with
respect to the shares shown as beneficially owned by Acma Strategic
Holdings Limited, as to which he disclaims beneficial ownership. Acma
Strategic Holdings Limited guarantees a banking facility of the Company.
(3) The shares shown are held of record by Superego, Inc., a British Virgin
Islands company beneficially owned by Mr. Kwok.
(4) The shares shown as being owned by Acma Ltd. consist of 2,450,876 shares
held of record by Acma Strategic Holdings Limited and an additional 951,697
shares held of record by Acma Investments Pte., Ltd., a wholly-owned
subsidiary of Acma Ltd. Acma Investments Pte., Ltd., is a 90% shareholder
of Acma Strategic Holdings Limited. Acma Strategic Holdings Limited has
guaranteed the Company's indebtedness under its bank credit facilities and
Acma Ltd. has provided a standby letter of credit in favor of one of the
Company's lenders.
(5) Acma Investments Pte., Ltd. will sell 300,000 shares of common stock if the
Underwriters' over-allotment option is exercised in full. See
"Underwriting."
(6) Assumes the Underwriters' over-allotment option is exercised in full.
50
<PAGE>
CHANGE IN ACCOUNTANTS
Effective April 30, 1998, Greenberg & Company, LLC ("Greenberg"), which had
been the Company's auditor prior to the exchange reorganization, resigned as
the independent accountants of the Company. The Company's Board of Directors
approved the appointment of Arthur Andersen & Co. as its new independent
accountants on April 30, 1998.
Greenberg's report on the Company's financial statements for the past two years
did not contain an adverse opinion or disclaimer, and was not modified as to
uncertainty, audit scope or accounting principles during that period. The
Company did not have any disagreements with Greenberg on any matter of
accounting principles, financial statements, auditing scope or procedure during
that period.
DESCRIPTION OF CAPITAL STOCK
The current authorized capital stock of the Company consists of 60,000,000
shares of common stock, par value $.0001 per share, 4,999,746 shares of which
were issued and outstanding as of September 30, 1998. Prior to completion of
this offering, the Company intends to amend and restate its Certificate of
Incorporation to reduce the authorized shares of Common Stock to 25,000,000
shares and to authorize 5,000,000 shares of preferred stock, $.0001 par value.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. The holders of common
stock are entitled to receive dividends ratably when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of common
stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are, and the
shares of common stock offered by the Company hereby, when issued against the
consideration set forth in this Prospectus, will be, validly issued, fully-paid
and nonassessable.
PREFERRED STOCK
Under the Company's Amended and Restated Certificate of Incorporation, the
Board of Directors will be authorized, subject to any limitations prescribed by
the laws of the State of Delaware, but without further action by the Company's
stockholders, to provide for the issuance of up to 5,000,000 shares of
preferred stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the designations,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. The Board of Directors may authorize and issue preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of common stock.
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<PAGE>
The Company has no current plan or intention to issue any shares of preferred
stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "Delaware Law"), an anti-takeover law. In general, the
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer & Trust Company in Glendale, California, will serve as
transfer agent and registrar for the common stock.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 6,999,746 shares of
common stock outstanding. The 2,000,000 shares to be sold by the Company in
this offering (and any shares sold by the Selling Stockholder) will be freely
tradeable without restriction or limitation under the Securities Act, except
for any such shares held by "affiliates" of the Company, as such term is
defined under Rule 144 of the Securities Act, which shares will be subject to
the resale limitations under Rule 144. Of the remaining outstanding shares,
approximately 4,500,016 shares are "restricted securities" within the meaning
of Rule 144 and may be publicly sold only if registered under the Securities
Act or sold in accordance with an applicable exemption from registration, such
as Rule 144. All of these restricted shares of common stock will become
eligible for resale under Rule 144 commencing December 30, 1998. The Company's
directors and officers and certain of its stockholders who collectively hold an
aggregate of 4,806,000 shares, have agreed not to sell, directly or indirectly,
any shares owned by them for a period of six months after the date of the
completion of this offering without the prior written consent of the
Representative. Upon the expiration of this six month lock-up period (or
earlier upon the consent of the Representative), all of these shares will
become eligible for sale subject to the restrictions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year,
including an affiliate of the Company, would be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
1% of the then-outstanding shares of common stock (approximately 70,000 shares
after this offering) and the average weekly trading volume in the common stock
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the Commission, provided certain manner of sale
and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
common stock. As defined in Rule 144, an "affiliate" of an issuer is a person
who, directly or indirectly, through the use of one or more intermediaries
controls, or is controlled by, or is under common control with, such issuer.
Under Rule 144(k), a holder of "restricted securities" who is not deemed an
affiliate of the issuer and who has beneficially owned shares for at least two
years would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above.
The Company intends to file a Registration Statement on Form S-8 covering the
shares of common stock that have been reserved for issuance under the 1998
Plan, which would permit the resale of such shares in the public market.
The Company is unable to estimate the number of shares that may be sold in the
future by its existing stockholders or the effect, if any, that such sales will
have on the market price of the common stock prevailing from time to time.
Sales of substantial amounts of common stock, or the prospect of such sales,
could adversely affect the market price of the common stock.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Underwriters named below, for whom
Cruttenden Roth Incorporated is acting as Representative, have agreed to
purchase from the Company and the Company has agreed to sell to the
Underwriters, the respective number of shares of common stock set forth
opposite each Underwriter's name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated........................................
Total........................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company's
counsel and independent public accountants. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of common stock if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of common stock directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such selected dealers may
reallow, a discount not in excess of $ per share to certain brokers and
dealers. After the public offering of the shares, the public offering price and
other selling terms may be changed by the Representative. No change in such
terms shall change the amount of proceeds to be received by the Company as set
forth on the cover page of this Prospectus.
Acma Investments Pte., Ltd., a wholly-owned subsidiary of Acma Ltd., has
granted an option to the Underwriters, exercisable for a period of 45 days
after the date of this Prospectus, to purchase up to an additional 300,000
shares of common stock at the public offering price set forth on the cover page
of this Prospectus, less the underwriting discounts and commissions. The
Underwriters may exercise this option only to cover over-allotments, if any. To
the extent that the Underwriters exercise this option, each of the Underwriters
will be committed, subject to certain conditions, to purchase such additional
shares of common stock in approximately the same proportion as set forth in the
above table.
The Company's directors and officers and certain of its stockholders who own an
aggregate of 4,800,016 shares of common stock have agreed that they will not,
without the prior written consent of Cruttenden Roth Incorporated (which
consent may be withheld in its sole discretion) and subject to certain limited
exceptions, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, sell short, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or enter into
any swap or similar agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common stock, for a period of six
months commencing on the date of this Prospectus. Cruttenden Roth Incorporated,
on behalf of the Underwriters, may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up
54
<PAGE>
agreements. In addition, the Company has agreed that, for a period of six
months after the date of this Prospectus, it will not, without the consent of
Cruttenden Roth Incorporated, make any offering, purchase, or sale or other
disposition of any shares of common stock of the Company or other securities
convertible into or exchangeable or exercisable for shares of common stock (or
agreement for such) except for the grant of options to purchase shares of
common stock pursuant to the 1998 Plan and shares of common stock issued
pursuant to the exercise of options granted under such plan, or the Company
shall obtain the written consent of the holder thereof not to transfer such
shares, until the end of such six-month period. See "Management--Compensation
Pursuant to Plans" and "Shares Eligible for Future Sale."
The Company has agreed to issue to the Representative, for a total of $200,
warrants to purchase up to 200,000 shares of common stock at an exercise price
per share equal to 120% of the initial public offering price of the shares in
this offering. The Representative's Warrants will be exercisable for a period
of four years beginning one year after the date of this Prospectus and will not
be transferable for a period of one year, except to officers of the
Representative or any successors thereof. The Representative's Warrants include
a "net" exercise provision permitting the holders to pay the exercise price by
cancellation of a number of shares with a fair market value equal to the
exercise price of the Representative's Warrants. The holders of the
Representative's Warrants will have no voting, dividend or other stockholder
rights until the Representative's Warrants are exercised. In addition, the
Company has granted certain rights to the holders of the Representative's
Warrants to register the common stock underlying the Representative's Warrants
under the Securities Act. The Company and the selling stockholder have agreed
to pay the Representative a non-accountable expense allowance of 3% of the
total offering proceeds from the sale of shares of common stock by them, of
which the Company has already paid $50,000.
The Representative has advised the Company that it does not expect any sales of
the shares of common stock offered hereby to be made to discretionary accounts
controlled by the Underwriters.
Although the Company's common stock has been traded on OTC Electronic Bulletin
Board prior to this offering, there is no active trading market for the common
stock and the initial public offering price for the common stock offered hereby
will be determined by negotiation between the Company and the Representative.
Among the factors to be considered in such negotiations are the preliminary
demand for the common stock, the prevailing market and economic conditions, the
Company's results of operations, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management, the consideration of
these factors in relation to the market valuation of comparable companies in
related businesses, the current condition of the markets in which the Company
operates, and other factors deemed relevant. There can be no assurance that an
active trading market will develop for the common stock or that the common
stock will trade in the public market subsequent to this offering at or above
the initial public offering price.
The Underwriting Agreement provides that the Company and the selling
stockholder will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof.
55
<PAGE>
The foregoing is a summary of the principal terms of the Underwriting Agreement
and the Representative's Warrants, does not purport to be complete and is
qualified in its entirety by reference to the form of Underwriting Agreement
and the form of Representative's Warrant which have been filed as exhibits to
the Company's Registration Statement of which this Prospectus is a part.
In connection with this offering, the Underwriters may over-allot or effect
transactions which stabilize or maintain the market price of the common stock
at a level above that which might otherwise prevail in the open market. Such
transactions may be effected on the Nasdaq National Market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
56
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California. The
Fada Law Firm, Beijing, China, and Angela Wang & Co., Hong Kong, have acted as
counsel to the Company with respect to certain matters of Chinese law and Hong
Kong law, respectively. Freshman, Marantz, Orlanski, Cooper & Klein, a Law
Corporation, Beverly Hills, California, has acted as counsel to the
Underwriters in connection with certain legal matters related to this offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997 and
for the years ended December 31, 1995, 1996 and 1997 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 (the
"Commission"), in Washington, D.C., a Registration Statement on Form SB-2 under
the Securities Act with respect to the common stock being offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the common stock offered hereby, reference is made to the
Registration Statement, and such exhibits and schedules. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center,
13th Floor, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from such offices upon payment of the
fees prescribed by the Commission. In addition, the Registration Statement may
be accessed at the Commission's site on the World Wide Web located at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets--as of December 31, 1996 and 1997 (audited)
and as of June 30, 1998 (unaudited)..................................... F-3
Consolidated Statements of Operations--for each of the three years ended
December 31, 1995, 1996 and 1997 (audited) and for each of the six-month
periods ended June 30, 1997 and 1998 (unaudited)........................ F-4
Consolidated Statements of Cash Flows--for each of the three years ended
December 31, 1995, 1996 and 1997 (audited) and for each of the six-month
periods ended June 30, 1997 and 1998 (unaudited)........................ F-5
Consolidated Statements of Changes in Stockholders' Equity--for each of
the three years ended December 31, 1995, 1996 and 1997 (audited) and for
the six-month period ended June 30, 1998 (unaudited).................... F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Creative Master
International, Inc.:
We have audited the accompanying consolidated balance sheets of Creative Master
International, Inc. (a company incorporated in the State of Delaware, United
States of America; formerly known as Davin Enterprises, Inc.; "the Company")
and Subsidiaries ("the Group") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years ended December 31, 1995, 1996 and 1997.
These financial statements give retroactive effect, for all years presented, to
the acquisition of Creative Master Limited as a reverse acquisition as
described in Note 2 to the accompanying financial statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Master
International, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and cash flows for the years ended December 31,
1995, 1996 and 1997 after giving retroactive effect to the acquisition of
Creative Master Limited as a reverse acquisition as described in Note 2 to the
accompanying financial statements, in conformity with generally accepted
accounting principles in the United States of America.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
September 30, 1998.
F-2
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 (AUDITED)
AND JUNE 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
NOTE 1996 1997 1998
---- ----- ------ -----------
$'000 $'000 $'000
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and bank deposits......................... 19 435 471 877
Accounts receivable, net....................... 5 1,733 2,827 3,698
Deposits and prepayments....................... 6 204 307 463
Inventories, net............................... 7 1,544 2,928 3,407
Due from a related company..................... 20 41 -- --
----- ------ ------
Total current assets......................... 3,957 6,533 8,445
Machinery, equipment and capital leases, net..... 8 2,398 3,155 4,123
Long-term investment............................. 9 1 1 1
Goodwill......................................... 10 395 810 764
Deferred taxation................................ 14 1 -- --
----- ------ ------
Total assets................................. 6,752 10,499 13,333
===== ====== ======
<CAPTION>
LIABILITIES, MINORITY INTERESTS
AND STOCKHOLDERS' EQUITY
-------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Short-term bank borrowings..................... 11 782 1,290 1,376
Capital lease obligations, current portion..... 12 258 764 533
Accounts payable............................... 1,512 1,908 2,689
Deposits from customers........................ -- 560 --
Accrued liabilities............................ 13 979 1,579 2,316
Due to directors............................... 20 879 861 832
Due to parent company.......................... 20 -- 9 8
Taxation payable............................... 14 18 68 151
Dividend payable............................... -- 323 323
----- ------ ------
Total current liabilities.................... 4,428 7,362 8,228
Capital lease obligations, non-current portion... 12 245 266 478
Deferred taxation................................ 14 -- 57 146
----- ------ ------
Total liabilities............................ 4,673 7,685 8,852
----- ------ ------
Minority interests............................... -- 75 331
----- ------ ------
Stockholders' equity:
Common stock, par value $0.0001; authorized
60,000,000 shares; outstanding and fully paid
4,999,746 shares.............................. 16 1 1 1
Additional paid-in capital..................... 1,202 1,401 1,401
Retained earnings.............................. 872 1,337 2,746
Cumulative translation adjustments............. 4 -- 2
----- ------ ------
Total stockholders' equity................... 2,079 2,739 4,150
----- ------ ------
Total liabilities, minority interests and
stockholders' equity........................ 6,752 10,499 13,333
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ----------------------
NOTE 1995 1996 1997 1997 1998
---- --------- --------- --------- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 21 9,982 14,054 16,211 7,723 14,325
Cost of goods sold...... (7,878) (9,782) (12,703) (6,119) (10,258)
--------- --------- --------- --------- ---------
Gross profit.......... 2,104 4,272 3,508 1,604 4,067
Selling, general and
administrative
expenses............... (2,394) (2,552) (1,921) (1,197) (1,993)
Interest income......... -- -- 112 4 14
Interest expense........ (88) (140) (216) (54) (120)
Other expenses, net..... (96) (567) (137) (24) (48)
Gain on dilution of
equity interest in a
subsidiary............. -- -- -- -- 77
Reorganization expense.. 15 -- -- (284) -- --
Amortization of
goodwill............... (33) (44) (62) (26) (46)
--------- --------- --------- --------- ---------
Income (Loss) before
income taxes and
minority interests... (507) 969 1,000 307 1,951
Provision for income
taxes.................. 14 (52) (154) (130) (56) (228)
--------- --------- --------- --------- ---------
Income (Loss) before
minority interests... (559) 815 870 251 1,723
Minority interests...... -- -- (82) -- (314)
--------- --------- --------- --------- ---------
Net income (loss)..... (559) 815 788 251 1,409
========= ========= ========= ========= =========
Net income (loss) per
common share........... 4.K $ (0.11) $ 0.16 $ 0.16 $ 0.05 $ 0.28
========= ========= ========= ========= =========
Weighted average number
of common shares
outstanding............ 4,999,746 4,999,746 4,999,746 4,999,746 4,999,746
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ------ ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ (559) 815 788 251 1,409
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation of machinery and
equipment..................... 320 448 469 255 283
Net (gain) loss on disposals of
machinery and equipment....... 20 12 (6) -- --
Net (gain) loss on disposal of
short-term investment......... (14) 2 -- -- --
Write-back of receivable from
minority interests............ -- (112) -- -- --
Write-down of long-term
investment.................... 235 449 -- -- --
Reorganization expense......... -- -- 199 -- --
Amortization of goodwill....... 33 44 62 26 46
Minority interests............. -- -- 82 -- 314
Deferred income taxes.......... -- 37 58 (38) 89
(Increase) Decrease in operating
assets--
Accounts receivable, net....... (471) (766) (1,094) 68 (871)
Deposits and prepayments....... (15) (130) 7 (473) (156)
Inventories, net............... 200 (980) (1,161) (588) (479)
Increase (Decrease) in operating
liabilities--
Accounts payable............... 143 598 234 (173) 781
Deposits from customers........ -- -- 560 2 (560)
Accrued liabilities............ 64 600 439 175 737
Due to parent company.......... -- -- 9 -- (1)
Taxation payable............... (164) 31 50 64 83
---- ----- ------ ---- -----
Net cash provided by (used
in) operating activities.... (208) 1,048 696 (431) 1,675
---- ----- ------ ---- -----
Cash flows from investing
activities:
Acquisition of machinery and
equipment..................... (474) (804) (24) (15) (797)
Proceeds from disposals of
machinery and equipment....... -- 8 -- -- --
Proceeds from disposal of
short-term investment......... 136 12 -- -- --
Net cash outflow from
acquisition of a subsidiary... -- (29) (1) -- --
Decrease (Increase) in due from
a related company............. -- (41) 41 41 --
Decrease (Increase) in due from
directors..................... 303 -- -- (40) --
---- ----- ------ ---- -----
Net cash (used in) provided
by investing activities..... (35) (854) 16 (14) (797)
---- ----- ------ ---- -----
</TABLE>
(To be continued)
F-5
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED) (CONT'D)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Increase (Decrease) in bank
overdrafts........................ -- 25 (28) (24) 1
New short-term bank loans.......... 651 564 1,097 723 1,935
Repayment of short-term bank
loans............................. (295) (468) (825) (188) (1,948)
Increase in import trust receipts
bank loans........................ 2 166 77 102 98
Repayment of capital element of
capital lease obligations......... (203) (206) (605) (227) (473)
(Decrease) Increase in due to
directors......................... 238 34 (18) (43) (29)
Decrease in due to a related
company........................... -- -- (363) (84) --
Finance from minority interests of
a subsidiary...................... -- -- -- -- 1
Dividends paid to minority
interests of a subsidiary......... (370) -- (7) -- (58)
---- ---- ----- ---- ------
Net cash (used in) provided by
financing activities............ 23 115 (672) 259 (473)
---- ---- ----- ---- ------
Effect of cumulative translation
adjustments....................... (1) -- (4) -- 1
---- ---- ----- ---- ------
Net increase (decrease) in cash and
bank deposits..................... (221) 309 36 (186) 406
Cash and bank deposits, as of
beginning of year/period.......... 347 126 435 435 471
---- ---- ----- ---- ------
Cash and bank deposits, as of end
of year/period.................... 126 435 471 249 877
==== ==== ===== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
----------------------- ADDITIONAL RETAINED TRANSLATION
NUMBER OF SHARES AMOUNT PAID-IN CAPITAL EARNINGS ADJUSTMENTS
---------------- ------ --------------- -------- -----------
<S> <C> <C> <C> <C> <C>
'000 $'000 $'000 $'000 $'000
Balance as of December
31, 1994............... 5,000 1 1,202 986 6
Net loss................ -- -- -- (559) --
Dividends............... -- -- -- (370) --
Translation
adjustments............ -- -- -- -- 1
----- ----- ----- ----- -----
Balance as of December
31, 1995............... 5,000 1 1,202 57 7
Net income.............. -- -- -- 815 --
Translation
adjustments............ -- -- -- -- (3)
----- ----- ----- ----- -----
Balance as of December
31, 1996............... 5,000 1 1,202 872 4
Net income.............. -- -- -- 788 --
Dividends............... -- -- -- (323) --
Reorganization expense
contributed by
stockholders (Note
15).................... -- -- 199 -- --
Translation
adjustments............ -- -- -- -- (4)
----- ----- ----- ----- -----
Balance as of December
31, 1997............... 5,000 1 1,401 1,337 --
Net income (unaudited).. -- -- -- 1,409 --
Translation adjustments
(unaudited)............ -- -- -- -- 2
----- ----- ----- ----- -----
Balance as of June 30,
1998 (unaudited)....... 5,000 1 1,401 2,746 2
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Creative Master International, Inc. ("the Company") is incorporated in the
State of Delaware, United States of America. With effect from March 2, 1998,
the Company changed its name from Davin Enterprises, Inc. to Creative Master
International, Inc., the present one.
During the period from January 1, 1995 (the earliest date covered by this
report) to December 30, 1997, the Company's sole asset was investment in a 9.6%
interest in Target Vision Inc., a company incorporated in the State of
Delaware, United States of America, which was principally engaged in the
trading of communication systems.
ACQUISITION OF CML
On December 30, 1997, the Company acquired 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing 4,806,000
shares of common stock of par value $0.0001 each (after the reverse stock
splits and the redenominations of par value as described in Note 16) to Acma
Strategic Holdings Limited ("ASHL"; a company incorporated in Hong Kong),
Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong. ASHL is 90% owned by Acma
Ltd., a company incorporated in Singapore and listed on the Singapore Stock
Exchange Limited, and 10% owned by Mr. Carl Ka-Wing Tong. CML and its
subsidiaries ("the CML Group") are principally engaged in the manufacturing of
collectible replica racing and classic cars for sale to customers in the United
States of America and Europe. The CML Group maintains its head office in Hong
Kong, where it coordinates sales and marketing, purchasing and administrative
functions. Its production facilities are located in Guangdong Province, the
People's Republic of China ("the PRC").
2. BASIS OF PRESENTATION
The acquisition of CML by the Company on December 30, 1997 has been treated as
a reverse acquisition since CML is the continuing entity as a result of the
exchange reorganization. On this basis, the historical financial statements
prior to December 30, 1997 represent the consolidated financial statements of
the CML Group. The historical stockholders' equity accounts of the Company as
of December 31, 1995 and 1996 have been retroactively restated to reflect the
issuance of 4,806,000 shares of common stock of par value $0.0001 each (after
the effect of the reverse stock splits and the redenominations of par value as
described in Note 16) in connection with the acquisition.
F-8
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
PLACE OF EQUITY INTEREST
NAME INCORPORATION HELD PRINCIPAL ACTIVITIES
- ---- ------------- --------------- ----------------------
<S> <C> <C> <C>
Creative Master Limited.... Hong Kong 100% Manufacturing and
trading of collectible
replica products
Excel Master Limited....... Hong Kong 100% Trading of collectible
replica products
Mastercraft Engineering Hong Kong 100% Manufacturing of
Limited .................. Note b molds
(formerly known as Queenex
Enterprises Limited)
Carison Engineering
Limited................... Hong Kong 70% Manufacturing of
(formerly known as Carison molds
Limited) (Note c)
Techtime Industries
Limited................... Hong Kong 55% Manufacturing of
collectible replica
products
Dongguan Chuangying Toys... The PRC Note a Manufacturing of
Factory Co., Ltd. collectible replica
products
</TABLE>
- --------
Notes
a Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006.
Under the joint venture agreement dated September 10, 1994 and the
supplemental agreement dated April 1, 1996, the Group's joint venture
partner is not entitled to any profit of the joint venture and is not
responsible for any loss of the joint venture. In view of the profit
sharing arrangement, the joint venture is regarded as 100% owned by the
Company.
b Effective from April 15, 1998, Queenex Enterprises Limited changed its name
to Mastercraft Engineering Limited ("MEL"), the present one. Prior to April
14, 1998, MEL was 100% owned by the Group. On April 14, 1998, MEL issued
9,000 shares of common stock of par value $0.129 each (equivalent of HK$1
each) to three parties which are not involved in management of the Company
at par and 11,000 shares of common stock to the Group at par. As a result,
the Group's equity interest in MEL was diluted from 100% to 70%, and
recognized a gain on dilution of approximately $77,000.
c Effective from May 20, 1998, Carison Limited changed its name to Carison
Engineering Limited, the present one.
F-9
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
subsidiaries and its contractual joint venture which is considered as a de
facto subsidiary. All material intra-group balances and transactions have been
eliminated on consolidation.
B GOODWILL
Goodwill, being the excess of cost over the fair value of the Group's share of
net assets of subsidiaries acquired, is amortized on a straight-line basis over
ten years. The amortization recorded during the years ended December 31, 1995,
1996 and 1997 was approximately $33,000, $44,000 and $62,000, respectively, and
during the six months ended June 30, 1997 and 1998 was approximately $26,000
and $46,000, respectively. Accumulated amortization as of December 31, 1996 and
1997 and June 30, 1998 was approximately $77,000, $139,000 and $185,000,
respectively. Management assesses the carrying amount and the remaining life of
the goodwill annually, taking into consideration current operating results and
future prospects of the subsidiaries.
C CONTRACTUAL JOINT VENTURE
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, and
market value. Costs of work-in-process and finished goods are composed of
direct materials, direct labor and an attributable portion of production
overhead.
E MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases are recorded at cost. Gains or losses
on disposals are reflected in current operations. Depreciation for financial
reporting purposes is provided using the straight-line method over the
estimated useful lives of the assets as follows: machinery and tools 3 to 10
years, leasehold improvements 3 to 10 years, furniture and office equipment 3
to 5 years, and motor vehicles--3 to 4 years. All ordinary repair and
maintenance costs are expensed as incurred.
The Group recognizes an impairment loss on machinery and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through sale.
Measurement of the impairment loss is based on the fair value of the assets.
F-10
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F LONG-TERM INVESTMENTS
Investments held for the long-term are stated at market value. Income from
investments is accounted for to the extent of dividends received and
receivable.
G NET SALES
Net sales represent the invoiced value of merchandise/molds supplied to
customers, net of sales returns and allowances. Sales are recognized upon
delivery of goods and passage of title to customers.
Deposits or advanced payments from customers prior to delivery of goods and
passage of title are recorded as deposits from customers.
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 translation of the financial statements of subsidiaries into United States
dollars is performed for balance sheet accounts using the closing exchange rate
in effect at the balance sheet dates 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 stockholders' equity separately as
cumulative translation adjustments. Aggregate losses (gains) from foreign
currency transactions included in the results of operations for the years ended
December 31, 1995, 1996 and 1997 were approximately $20,000, $104,000 and
$47,000, respectively, and for the six months ended June 30, 1997 and 1998 were
approximately $22,000 and ($33,000), respectively.
K NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income (loss) for each
year/period by the weighted average number of shares of common stock
outstanding during the year/period, as if the common stock issued for the
acquisition of CML (see Note 1) and the reverse stock splits and the
F-11
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
redenominations of par value (see Note 16) had been consummated prior to the
years/periods presented. The weighted average number of shares used to compute
net income (loss) per common share was 4,999,746 for all 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.
M FAIR VALUE OF FINANCIAL INSTRUMENTS
The Group's financial instruments are carried at cost, which approximate their
fair values.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables..................................... 1,857 2,966 3,837
Less: Allowance for doubtful accounts................. (124) (139) (139)
----- ----- -----
Accounts receivable, net.............................. 1,733 2,827 3,698
===== ===== =====
</TABLE>
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Deposits for acquisition of molds....................... 105 149 265
Rental and utility deposits............................. 38 69 26
Prepayments............................................. 32 83 140
Others.................................................. 29 6 32
--- --- ---
204 307 463
=== === ===
</TABLE>
F-12
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................................... 911 1,358 1,661
Work-in-process..................................... 229 722 967
Finished goods...................................... 431 959 890
----- ----- -----
1,571 3,039 3,518
Less: Allowance for slow-moving and obsolete
inventories........................................ (27) (111) (111)
----- ----- -----
Inventories, net.................................... 1,544 2,928 3,407
===== ===== =====
</TABLE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
----- ------ -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment:
Machinery and tools................................ 1,170 769 1,288
Leasehold improvements............................. 899 1,033 1,100
Furniture and office equipment..................... 330 455 552
Motor vehicles..................................... 19 21 21
Capital leases:
Machinery and tools................................ 1,060 2,412 2,980
Furniture and office equipment..................... -- 14 14
----- ------ ------
Cost................................................. 3,478 4,704 5,955
Less: Accumulated depreciation
Machinery and equipment............................ (863) (1,066) (1,224)
Capital leases..................................... (217) (483) (608)
----- ------ ------
Machinery, equipment and capital leases, net......... 2,398 3,155 4,123
===== ====== ======
</TABLE>
9. LONG-TERM INVESTMENT
Long-term investment represented a 9.6% interest in Target Vision Inc. (a
company incorporated in the State of Delaware, United States of America), which
was principally engaged in the trading of communication systems. The carrying
cost of the long-term investment represented:
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Long-term investment.................................. 685 685 685
Less: Write down of investment cost................... (684) (684) (684)
---- ---- ----
Long-term investment, net............................. 1 1 1
==== ==== ====
</TABLE>
F-13
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying cost of the long-term investment approximated its market value.
10. GOODWILL
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................... 472 949 949
Less: Accumulated amortization......................... (77) (139) (185)
--- ---- ----
Goodwill, net.......................................... 395 810 764
=== ==== ====
</TABLE>
11. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Overdrafts.............................................. 25 -- 1
Short-term loans........................................ 452 908 895
Import trust receipts loans............................. 305 382 480
--- ----- -----
782 1,290 1,376
=== ===== =====
</TABLE>
Short-term bank borrowings are denominated in Hong Kong dollars and bear
interest at the Hong Kong prime lending rate plus 1.5% to 4.3%, which ranged
from 11.0% to 13.8% per annum as of December 31, 1997; and at the Hong Kong
prime lending rate plus 1.5% to 4.3% or the United States prime lending rate
plus 2.3%, which ranged from 10.8% to 14.3% per annum as of June 30, 1998. They
are collaterized by the Group's bank deposits of approximately $72,000 and
$452,000 as of December 31, 1997 and June 30, 1998, respectively, personal
guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong,
mortgage over real estate property owned by Mr. Carl Ka-Wing Tong, corporate
guarantee provided by Acma Strategic Holdings Limited, and a standby letter of
credit issued by Acma Ltd. (see Note 19). They were drawn for working capital
purposes and are renewable with the consent of the relevant banks.
F-14
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental information with respect to short-term bank borrowings for the
year ended December 31, 1997 and six months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
MAXIMUM AVERAGE AVERAGE WEIGHTED
AMOUNT AMOUNT INTEREST AVERAGE
OUTSTANDING OUTSTANDING RATE AT THE INTEREST RATE
DURING THE DURING THE END OF DURING THE
YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD
----------- ----------- ----------- -------------
$'000 $'000
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
<S> <C> <C> <C> <C>
Overdrafts.................. 111 17 12.5% 12.1%
===== ===== ==== ====
Short-term loans............ 908 686 10.7% 10.1%
===== ===== ==== ====
Import trust receipts
loans...................... 448 291 12.5% 11.9%
===== ===== ==== ====
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 (UNAUDITED)
-------------------------
<S> <C> <C> <C> <C>
Overdrafts.................. 49 12 13.9% 14.1%
===== ===== ==== ====
Short-term loans............ 1,298 1,159 10.7% 10.8%
===== ===== ==== ====
Import trust receipts
loans...................... 480 351 10.7% 11.4%
===== ===== ==== ====
</TABLE>
12. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments, are:
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
--Within one year.................................... 299 830 632
--Over one year but not exceeding two years.......... 211 195 331
--Over two years but not exceeding three years....... 50 91 203
---- ----- -----
Total minimum lease payments........................... 560 1,116 1,166
Less: Amount representing interest..................... (57) (86) (155)
---- ----- -----
Present value of minimum lease payments................ 503 1,030 1,011
Less: Current portion.................................. (258) (764) (533)
---- ----- -----
Non-current portion.................................... 245 266 478
==== ===== =====
</TABLE>
F-15
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Accruals for operating
expenses
--Salaries, wages and
bonus.................. 360 575 1,096
--Subcontracting
charges................ 230 463 606
--Rentals............... 39 41 20
--Others................ 214 120 64
Accruals for purchases of
loose tools and
consumables.............. 64 269 409
Others.................... 72 111 121
--- ----- -----
979 1,579 2,316
=== ===== =====
</TABLE>
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
operate. The Company is subject to the United States federal tax at a rate of
35%. The Hong Kong subsidiaries are subject to Hong Kong profits tax at a rate
of 16.5% for the years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1997, and 16% for the six months ended June 30, 1998.
The contractual joint venture established in the PRC (Dongguan Chuangying Toys
Factory Co., Ltd.) is subject to PRC income taxes at a rate of 33% (30% state
income tax and 3% local income tax). However, the joint venture is exempted
from state income tax and local income tax for two years starting from the
first year of profitable operations and is subject to a 50% reduction in state
income tax for the next three years. The first profitable year of operations
for Dongguan Chuangying Toys Factory Co., Ltd. was the year ended December 31,
1997. If the tax holiday had not existed, the Group's income tax expenses would
have been increased by approximately nil, nil and $8,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, and approximately $3,000 and
$6,000 for the six months ended June 30, 1997 and 1998, respectively.
Provision for income taxes comprised:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current taxes
--Hong Kong Profits Tax................ 52 117 72 94 139
Deferred taxes........................... -- 37 58 (38) 89
--- --- --- --- ---
52 154 130 56 228
=== === === === ===
</TABLE>
F-16
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of the United States federal income tax rate to the
effective income tax rate based on income (loss) before income taxes and
minority interests stated in the consolidated statements of operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States federal income
tax rate..................... 35.0 % 35.0 % 35.0 % 35.0 % 35.0 %
Non-taxable income arising
from activities which
qualified as offshore........ 21.9 % (6.5)% (6.0)% (41.5)% (13.7)%
Non-taxable/non-deductible
activities................... (7.2)% (4.8)% (3.6)% 5.8 % 6.1 %
Tax losses not recognized..... (93.3)% 15.8 % 7.7 % 39.2 % 4.9 %
Effect of different tax rates
in foreign jurisdictions..... 33.3 % (23.6)% (20.1)% (20.3)% (20.6)%
----- ----- ----- ----- -----
Effective income tax rate..... (10.3)% 15.9 % 13.0 % 18.2 % 11.7 %
===== ===== ===== ===== =====
</TABLE>
Components of deferred tax assets (liabilities) as of December 31, 1996 and
1997 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Cumulative tax losses.................................. 77 42 42
Accumulated differences between taxation allowance and
depreciation expenses of machinery and equipment...... (76) (99) (188)
--- --- ----
Deferred taxation...................................... 1 (57) (146)
=== === ====
</TABLE>
15.REORGANIZATION EXPENSE
The reorganization expense comprised (i) the valuation of $199,000 of the
305,984 shares of common stock of the Company (after the effect of reverse
stock splits and the redenominations of par value as described in Note 16)
transferred from Mr. Leo Sheck-Pui Kwok, Mr. Carl Ka-Wing Tong and Acma
Strategic Holdings Limited, three of the Company's stockholders, to a
consultant in return for his services in connection with Company's acquisition
of CML as described in Note 1, and (ii) other professional fees for the
acquisition of CML.
16.SHARE CAPITAL
During the period from January 1, 1995 (the earliest date covered by this
report) to May 28, 1996, the Company had authorized share capital of
250,000,000 shares of common stock, par value $0.0001 each, and outstanding
share capital of 193,745,200 shares of common stock, par value $0.0001 each. On
May 29, 1996, the Company effected a one-for-one hundred reverse stock split
and a redenomination of par value in share capital, resulting in 1,937,452
shares of common stock, par value $0.0001 each, outstanding. Also, on May 29,
1996, the authorized share capital of the Company was decreased from
250,000,000 shares of common stock, par value $0.0001 each, to 50,000,000
shares of common stock, par value $0.0001 each. On December 30, 1997, the
Company
F-17
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
issued 48,060,000 shares of common stock (after the one-for-one hundred reverse
stock split as described above but before the one-for-ten reverse stock split
as described below), par value $0.0001 each, to the stockholders of CML in
connection with its acquisition of CML as described in Note 1. On March 2,
1998, the authorized capital of the Company was increased to 60,000,000 shares
of common stock, par value $0.0001 each. On March 12, 1998, the Company
effected a one-for-ten reverse stock split and a redenomination of par value in
share capital, resulting in 60,000,000 shares of common stock, par value
$0.0001 each, authorized, and 4,999,746 shares of common stock, par value
$0.0001 each, outstanding.
The effects of the one-for-one hundred reverse stock split, the one-for-ten
reverse stock split, and the redenominations of par value in share capital have
been reflected retroactively in the financial statements and all net income
(loss) per common share computations.
17. OPERATING LEASE COMMITMENTS
The Group has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2006. Rental expenses for the years
ended December 31, 1995, 1996 and 1997 were approximately $447,000, $509,000
and $602,000, respectively, and for the six months ended June 30, 1997 and 1998
were approximately $283,000 and $344,000, respectively. Future minimum rental
payments as of December 31, 1997 and June 30, 1998, under agreements classified
as operating leases with non-cancellable terms, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
$'000
(UNAUDITED)
<S> <C> <C>
Payable during the following period
--Within one year.................................... 563 614
--Over one year but not exceeding two years.......... 487 467
--Over two years but not exceeding three years....... 427 434
--Over three years but not exceeding four years...... 448 428
--Over four years but not exceeding five years....... 390 381
--Thereafter......................................... 977 787
----- -----
3,292 3,111
===== =====
</TABLE>
18. 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.
From January 1, 1997, the employees in Hong Kong, after completing a probation
period, may join the Group's defined contribution pension fund managed by an
independent trustee. Both the Group and its Hong Kong employees make monthly
contributions to the plan of 5% of the employees' basic salaries. The Hong Kong
employees are entitled to receive their entire contribution together with
accrued interest thereon at any time upon leaving the Group, and 100% of the
Group's employer contribution and the accrued interest thereon upon retirement
or leaving the Group after completing
F-18
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ten years of service or at a reduced scale of between 30% to 90% after
completing three to nine years of service. Any forfeited contributions made by
the Group and the accrued interest thereon are used to reduce future employer's
contributions. The aggregate amount of the Group's employer contributions (net
of forfeited contributions) for the year ended December 31, 1997 was $50,000,
and for the six months ended June 30, 1997 and 1998 were approximately $24,000
and $27,000, respectively.
The Group has no other post-retirement or post-employment benefit plans.
19. BANKING FACILITIES
As of December 31, 1997 and June 30, 1998, the Group had banking facilities of
approximately $1,421,000 and $1,864,000, respectively, for overdrafts, loans
and trade financing. Unused facilities as of December 31, 1997 and June 30,
1998 amounted to approximately $99,000 and $488,000, respectively. These
facilities were secured by :
a Pledges of the Group's bank deposits of approximately $72,000 and $452,000 as
of December 31, 1997 and June 30, 1998, respectively;
b Personal guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing
Tong;
c Mortgage over real estate property owned by Mr. Carl Ka-Wing Tong;
d Corporate guarantee provided by Acma Strategic Holdings Limited; and
e A standby letter of credit issued by Acma Ltd. of approximately $388,000 as
of June 30, 1998.
20. RELATED PARTY TRANSACTIONS
a The Group entered into the following transactions with related companies:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Consultancy/Management fees paid to
Carl Tong & Associate Management
Consultancy Limited*............... 12 -- -- -- --
Management fee paid to Acma
Strategic Holdings Limited......... -- 88 115 53 68
Rental expenses paid to Wellholding
Limited**.......................... -- 59 -- -- --
Purchases of machinery and tools
from Faithera Engineering Limited
***................................ -- -- -- -- 362
=== === === === ===
</TABLE>
- --------
* Carl Tong & Associate Management Consultancy Limited is beneficially owned
by Mr. Carl Ka-Wing Tong.
** Wellholding Limited is beneficially owned by Mr. Leo Sheck-Pui Kwok.
*** Faithera Engineering Limited is beneficially owned by certain minority
shareholders of Mastercraft Engineering Limited.
F-19
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
b Details of amounts due to directors of the Company are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Mr. Leo Sheck-Pui Kwok................................. 614 612 611
Mr. Carl Ka-Wing Tong.................................. 265 249 221
--- --- ---
879 861 832
=== === ===
</TABLE>
The amounts due to directors are unsecured, non-interest bearing and without
pre-determined repayment terms.
c Details of amount due from a related company are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Mastercraft Engineering Limited......................... 41 -- --
=== === ===
</TABLE>
Mastercraft Engineering Limited is a company in which Mr. Leo Sheck-Pui Kwok
and Mr. Carl Ka-Wing Tong are directors. During the year ended December 31,
1997, the Company acquired 100% equity interest in Mastercraft Engineering
Limited for approximately $1,000. The amount due from the related company was
unsecured, non-interest bearing and without pre-determined repayment terms.
d Details of amount due to parent company are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Acma Strategic Holdings Limited......................... -- 9 8
=== === ===
</TABLE>
The amount due to the parent company was unsecured, non-interest bearing and
without pre-determined repayment terms.
e As of December 31, 1997 and June 30, 1998, the Group's banking facilities
were secured by personal guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr.
Carl Ka-Wing Tong; mortgage over real estate property owned by Mr. Carl Ka-Wing
Tong; corporate guarantee provided by Acma Strategic Holdings Limited; and a
standby letter of credit issued by Acma Ltd. of approximately $388,000.
F-20
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. SEGMENTAL ANALYSIS
A NET SALES
Net sales comprised:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- ----------------------
1995 1996 1997 1997 1998
----- ------ ------ ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of merchandise................ 9,648 12,358 13,438 6,779 11,327
Sales of molds...................... 333 1,667 2,678 932 2,973
Others.............................. 1 29 95 12 25
----- ------ ------ ----- ------
9,982 14,054 16,211 7,723 14,325
===== ====== ====== ===== ======
</TABLE>
A substantial portion of Group's sales are made to customers in the United
States of America.
B ASSETS
Substantially all of the Group's assets are located in Hong Kong and the PRC.
C MAJOR CUSTOMERS
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
MBI Inc.............................. 80.7% 81.2% 64.2% 76.8% 32.9%
Mattel Vendor Operations Asia Ltd.... -- -- 14.8% -- 28.1%
Drumwell Limited..................... -- 1.8% 4.2% 1.3% 6.6%
Brookfield Collectors Guild.......... -- 7.7% 4.7% 4.7% 5.9%
Hallmark Cards (Hong Kong) Ltd. ..... -- -- 0.2% 0.8% 5.4%
Tyco Hong Kong Limited............... -- 5.1% 5.6% 13.0% --
==== ==== ==== ==== ====
</TABLE>
D MAJOR SUPPLIERS
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Manfield Coatings Co.,
Ltd.................... 12.6% 8.1% 9.0% 9.6% 11.8%
Genesis Off-set Printing
Co., Ltd. ............. -- 5.4% 8.5% 7.3% 9.2%
Lee Kee Metal Co. Ltd... -- 0.7% 6.1% 7.2% 7.7%
Zinamet Co., Ltd........ 8.7% 2.7% 6.9% 6.1% 2.0%
==== === === === ====
</TABLE>
F-21
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. OPERATING RISKS
A COUNTRY RISK
The Group's operations are conducted in Hong Kong and the PRC. Accordingly, the
Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong and
the PRC, and by the general state of the Hong Kong and the PRC economies.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the
PRC ("the Hong Kong SAR"). As provided in the Basic Law of the Hong Kong SAR of
the PRC, the Hong Kong SAR will have full economic autonomy and its own
legislative, legal and judicial systems for fifty years. The Group's management
does not believe that the transfer of sovereignty over Hong Kong 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
venture established between the Company and a PRC party, and several
subcontracting agreements entered into with certain PRC parties. The
deterioration of any or all of these strategic relationships may have an
adverse effect on the operations of the Group.
C CONCENTRATION OF CREDIT RISK
Concentration of accounts receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
----- ----- -----------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Five largest accounts receivable...................... 94.2% 92.1% 78.2%
==== ==== ====
</TABLE>
The Group performs ongoing credit evaluations of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
aggregate have not exceeded management's projections.
F-22
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a In March 1996, CML acquired an additional 19% equity interest in Carison
Engineering Limited for cash consideration of approximately $29,000. This
increase in the Group's equity interest in Carison Engineering Limited from 51%
to 70% resulted in goodwill of approximately $139,000.
b In October 1997, CML acquired a 100% interest in Mastercraft Engineering
Limited for a cash consideration of $1,000. Details of assets acquired and
liabilities assumed were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
$'000
<S> <C>
Deposits and prepayments........................................... 110
Inventories........................................................ 223
Machinery, equipment and capital leases............................ 361
Bank overdrafts.................................................... (3)
Short-term bank loans.............................................. (184)
Accounts payable................................................... (162)
Accrued liabilities................................................ (161)
Due to a related company........................................... (363)
Capital lease obligations.......................................... (297)
----
Net liabilities assumed as of the date of acquisition.............. (476)
Goodwill........................................................... 477
----
Consideration satisfied in cash.................................... 1
====
Net cash outflow:
Cash paid........................................................ 1
====
</TABLE>
c Cash paid for interest and income taxes comprised:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest.............................. 88 140 216 54 120
=== === === === ===
Income taxes.......................... 217 94 75 75 --
=== === === === ===
</TABLE>
d Supplemental disclosure of investing activities:
During the years ended December 31, 1995, 1996 and 1997 and six months ended
June 30, 1997 and 1998, the Group entered into capital lease arrangements to
purchase machinery and equipment with a capital value of approximately
$318,000, $394,000 and $835,000, respectively, and approximately $407,000 and
$454,000, respectively.
F-23
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24.OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Depreciation of machinery and
equipment
--owned assets.................... 242 275 122 104 160
--assets held under capital
leases........................... 78 173 347 151 123
Provision for/write-off of doubtful
accounts........................... -- 98 15 -- --
Provision for slow-moving and
obsolete inventories............... -- 11 84 -- --
Write-down of long-term investment.. 235 449 -- -- --
Interest expenses for
--bank overdrafts and loans....... 56 85 107 11 76
--capital lease obligations....... 32 55 109 43 44
Operating lease rentals for rented
premises........................... 447 509 602 283 344
Repairs and maintenance expenses.... 157 251 266 145 179
Net foreign exchange (gain) loss.... 20 104 47 22 (33)
=== === === === ===
</TABLE>
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLIC-
ITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HERETO.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 16
Market Price for Common Stock and Dividend Policy........................ 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 31
Management............................................................... 42
Certain Transactions..................................................... 48
Principal Stockholders and Selling Stockholder........................... 50
Change in Accountants.................................................... 51
Description of Capital Stock............................................. 51
Shares Eligible For Future Sale.......................................... 53
Underwriting............................................................. 54
Legal Matters............................................................ 57
Experts.................................................................. 57
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF CREATIVE MASTER INTERNATIONAL, INC.]
COMMON STOCK
---------------
PROSPECTUS
---------------
Cruttenden Roth
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company intends to amend and restate its Certificate of Incorporation prior
to completion of this offering. As is customary among Delaware corporations,
the Company's Amended and Restated Certificate of Incorporation will eliminate
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors, except (i) for breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions by
the director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption; and (iv) for transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company also intends to enter into
indemnity agreements with each of its current directors and executive officers
which will provide for indemnification of, and advancement of expenses to, such
persons to the maximum extent permitted under the laws of the State of
Delaware, including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advancement of expenses are
discretionary under Delaware law.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement
provides for the underwriters' indemnification of the Company and its directors
and officers for certain liabilities arising under the Securities Act or
otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the Commission, NASD and Nasdaq fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 4,871
NASD fees............................................................. $ 2,152
Nasdaq listing fee.................................................... $ 10,000
Underwriters' nonaccountable expenses allowance....................... $360,000
Accounting fees and expenses.......................................... $118,000
Printing and engraving expenses....................................... $ 80,000
Transfer agent and registrar fees and expenses........................ $ 5,000
Directors and officers insurance...................................... $ 20,000
Other legal fees and legal expenses................................... $225,000
Miscellaneous expenses................................................ $ 9,977
--------
Total................................................................. $835,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1997, the Company entered into a Share Exchange Agreement with Carl
Ka Wing Tong, Leo Sheck Pui Kwok and Acma Strategic Holdings Limited, all of
whom reside or are domiciled outside the U.S., pursuant to which the Company
issued an aggregate of 4,806,000 shares of common stock in exchange for all of
the capital stock of Creative Master Limited, in Hong Kong corporation. The
common stock was issued in reliance on available exemptions under U.S. federal
securities laws, including Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Bylaws of the Company (incorporated by reference to the exhibits of
the Company's registration statement (file no. 33-14521-NY)).
4.1 Specimen Stock Certificate of the Company.
4.2 Form of Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including form of Representative's Warrant.*
5.1 Opinion of Troy & Gould Professional Corporation.*
10.1 Form of Indemnification Agreement with officers and directors.
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997.
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994.
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996.
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998.*
10.6 Processing Agreement between Creative Master Limited and Dongguang
Process Assembly Servicing Company dated June 11, 1995.*
10.7 Supplement to Processing Agreement between Creative Master Limited and
Dongguan Process Assembly Servicing Company dated November 11, 1995.*
10.8 Entrepreneur Agreement by and among Creative Master Limited, Chen Hao
Qiang, Gan Zi Kuen and Wu Qing Su (undated).
10.9 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998.
10.10 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996.
10.11 Letter to extend credit facilities between Banque Nationale de Paris
Hong Kong Branch and Creative Master Limited dated April 21, 1997.
10.12 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992.
10.13 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated
December 20, 1997.
10.14 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to exhibit 10.2 of the Company's Form 10-KSB filed on
September 2, 1998).
</TABLE>
- --------
* To be filed by amendment.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to exhibit 10.1 of the Company's
Form 10-KSB filed on September 2, 1998).
10.16 Joint and Several Guarantee By Individuals or Partners in a Firm by
and among Commonwealth Finance Corporation Limited, Carl Tong and Leo
Kwok dated March 30, 1993.
10.17 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993.
10.18 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993.
10.19 Creative Master Limited Defined Contribution Scheme Rules effective
January 1, 1997.
10.20 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules.
10.21 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules.
10.22 Service Agreement by and between Creative Master Limited and Leo Sheck
Pui Kwok dated January , 1996.
10.23 Factory and dormitory leases for CML No. 1.*
10.24 Factory and dormitory leases for CML No. 2.*
10.25 Factory and dormitory leases for CML No. 3.*
10.26 Factory and dormitory leases for CML No. 4.*
10.27 Factory and dormitory leases for CML No. 5.*
10.28 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998.*
10.29 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Changying Toys Factory Co. (not dated).*
10.30 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995.*
10.31 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong between
Creative Master Limited and Fortune Wind Investments Limited dated
April 3, 1997.*
10.32 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited.*
10.33 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments
Limited.*
10.34 Loan Agreement dated January 31, 1996 between Carl Tong and Leo Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $1,000,000.
10.35 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck Pui
Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000.
10.36 Promissory Note, dated as of September 30, 1998, in the principal
amount of $ from Creative Master Limited in favor of Carl Ka Wing
Tong.*
10.37 Promissory Note, dated as of September 30, 1998, in the principal
amount of $ from Creative Master Limited to Leo Sheck Pui Kwok.*
</TABLE>
- --------
* To be filed by Amendment
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38 Lease of apartment from Wellholding Limited by Creative Master Limited
dated January 2, 1996.
16 Letter re: Change in Certifying Accountant (incorporated by reference
to exhibit 16 of the Company's Form 8-K dated April 30, 1998).
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen & Co. (incorporated by reference to Page
II-7).
23.2 Consent of Troy & Gould Professional Corporation (included in Exhibit
5.1).*
23.3 Consent of The Fada Law Firm.*
23.4 Consent of Angela Wang & Co.*
23.5 Consent of Steve Gordon to being named as a Director Nominee.
23.6 Consent of Clayton K. Trier to being named as a Director Nominee.
24 Power of Attorney (incorporated by reference to page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by Amendment
(b) Financial Statement Schedules
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) ((S)230.424(b) of this Chapter) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement of
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of this offering.
II-4
<PAGE>
Insofar as indemnification for liabilities arising from the Securities Act 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 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 the 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 to provide to the Underwriters 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.
For purposes of determining any liability under the Securities Act, 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 Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, 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
this offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Kowloon, Hong Kong, on the 21st day of October, 1998.
By: /s/ Carl Ka Wing Tong
__________________________________
NAME: CARL KA WING TONG
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Carl Ka Wing
Tong and Leo Sheck Pui Kwok, or either of them, his true and lawful attorney-
in-fact and agent, acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, any Amendments thereto and any
Registration Statement of the same offering which is effective upon filing
pursuant to Rule 462(b) under the Securities Act, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorney-in-fact and agent, each acting alone,
full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intends and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Carl Ka Wing Tong Chairman of the Board, October 21, 1998
______________________________________ President, Chief
CARL KA WING TONG Executive Officer
(principal executive
officer) and Chief
Financial Officer
(principal financial
officer)
/s/ Leo Sheck Pui Kwok Director and Chief October 21, 1998
______________________________________ Operating Officer
LEO SHECK PUI KWOK
/s/ Chou Kong Seng Director October 21, 1998
______________________________________
CHOU KONG SENG
/s/ Shing Kam Ming Senior Vice-President and October 21, 1998
______________________________________ Controller (principal
SHING KAM MING accounting officer)
</TABLE>
II-6
<PAGE>
October 21, 1998
The Directors
Creative Master International, Inc.
8/F., Casey Industrial Building
18 Bedford Road
Taikoktsui
Kowloon
Hong Kong
Dear Sirs,
As independent public accountants, we hereby consent to the use of our reports,
and to all references to our Firm included in or made a part of this
Registration Statement on Form SB-2.
Very truly yours,
/s/ Arthur Andersen & Co.
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Bylaws of the Company (incorporated by reference to the exhibits of
the Company's registration statement (file no. 33-14521-NY)).
4.1 Specimen Stock Certificate of the Company.
4.2 Form of Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including form of Representative's Warrant.*
5.1 Opinion of Troy & Gould Professional Corporation.*
10.1 Form of Indemnification Agreement with officers and directors.
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997.
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994.
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996.
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998.*
10.6 Processing Agreement between Creative Master Limited and Dongguang
Process Assembly Servicing Company dated June 11, 1995.*
10.7 Supplement to Processing Agreement between Creative Master Limited and
Dongguan Process Assembly Servicing Company dated November 11, 1995.*
10.8 Entrepreneur Agreement by and among Creative Master Limited, Chen Hao
Qiang, Gan Zi Kuen and Wu Qing Su (undated).
10.9 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998.
10.10 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996.
10.11 Letter to extend credit facilities between Banque Nationale de Paris
Hong Kong Branch and Creative Master Limited dated April 21, 1997.
10.12 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992.
10.13 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated
December 20, 1997.
10.14 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to exhibit 10.2 of the Company's Form 10-KSB filed on
September 2, 1998).
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to exhibit 10.1 of the Company's
Form 10-KSB filed on September 2, 1998).
10.16 Joint and Several Guarantee By Individuals or Partners in a Firm by
and among Commonwealth Finance Corporation Limited, Carl Tong and Leo
Kwok dated March 30, 1993.
10.17 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993.
10.18 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993.
10.19 Creative Master Limited Defined Contribution Scheme Rules effective
January 1, 1997.
10.20 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules.
10.21 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules.
10.22 Service Agreement by and between Creative Master Limited and Leo Sheck
Pui Kwok dated January , 1996.
10.23 Factory and dormitory leases for CML No. 1.*
10.24 Factory and dormitory leases for CML No. 2.*
10.25 Factory and dormitory leases for CML No. 3.*
10.26 Factory and dormitory leases for CML No. 4.*
10.27 Factory and dormitory leases for CML No. 5.*
10.28 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998.*
10.29 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Changying Toys Factory Co. (not dated).*
10.30 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995.*
10.31 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong between
Creative Master Limited and Fortune Wind Investments Limited dated
April 3, 1997.*
10.32 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited.*
10.33 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments
Limited.*
10.34 Loan Agreement dated January 31, 1996 between Carl Tong and Leo Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $1,000,000.
10.35 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck Pui
Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000.
10.36 Promissory Note, dated as of September 30, 1998, in the principal
amount of $ from Creative Master Limited in favor of Carl Ka Wing
Tong.*
10.37 Promissory Note, dated as of September 30, 1998, in the principal
amount of $ from Creative Master Limited to Leo Sheck Pui Kwok.*
</TABLE>
- --------
* To be filed by Amendment
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38 Lease of apartment from Wellholding Limited by Creative Master Limited
dated January 2, 1996.
16 Letter re: Change in Certifying Accountant (incorporated by reference
to exhibit 16 of the Company's Form 8-K dated April 30, 1998).
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen & Co. (incorporated by reference to Page
II-7).
23.2 Consent of Troy & Gould Professional Corporation (included in Exhibit
5.1).*
23.3 Consent of The Fada Law Firm.*
23.4 Consent of Angela Wang & Co.*
23.5 Consent of Steve Gordon to being named as a Director Nominee.
23.6 Consent of Clayton K. Trier to being named as a Director Nominee.
24 Power of Attorney (incorporated by reference to page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by Amendment
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
DAVIN ENTERPRISES, INC.
The undersigned, being of legal age, in order to form a corporation under
and pursuant to the laws of the State of Delaware, do hereby set forth as
follows:
FIRST: The name of the corporation is
DAVIN ENTERPRISES, INC.
SECOND: The address of the initial registered office and registered agent
in this state is c/o United Corporate Services, Inc., 410 South State Street, in
the City of Dover, County of Kent, State of Delaware 19901 and the name of the
registered agent at said address is United Corporate Services, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the corporation laws of
the State of Delaware.
FOURTH: The corporation shall be authorized to issue the following
shares:
Class Number of Shares Par Value
----- ---------------- ---------
COMMON 250,000,000 $.0001
FIFTH: The name and address of the incorporator are as follows:
1
<PAGE>
NAME ADDRESS
---- -------
Ray A. Barr 9 East 40th Street
New York, New York 10016
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and of
its directors and stockholders:
(1) The number of directors of the corporation shall be such as from time
to time shall be fixed by, or in the manner provided in the by-laws. Election
of directors need not be by ballot unless the by-laws so provide.
(2) The Board of Directors shall have power without the assent or vote of
the stockholders:
(a) To make, alter, amend, change, add to or repeal the By-Laws of the
corporation; to fix and vary the amount to be reserved for any proper purpose;
to authorize and cause to be executed mortgages and liens upon all or any part
of the property of the corporation; to determine the use and disposition of any
surplus or net profits; and to fix the times for the declaration and payment of
dividends.
(b) To determine from time to time whether, and to what times and
places, and under what conditions the accounts and books of the corporation
(other than the stockledger) or any of them, shall be open to the inspection of
the stockholders.
(3) The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and as binding upon the corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors interest, or for any other reason.
2
<PAGE>
(4) In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this certificate, and to any by-laws from time to time made by the
stockholders; provided, however, that no by-laws so made shall invalidate any
prior act of the directors which would have been valid if such by-law had not
been made.
SEVENTH: No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended from time to time. The corporation shall indemnify to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Sections
grant the corporation the power to indemnify.
EIGHTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of
3
<PAGE>
Delaware, may, on the application in a summary way of this corporation or of any
creditor or stockholder thereof or on the application of any receiver or
receivers appointed for this corporation under the provisions of Section 291 of
Title 8 of the Delaware Code or on the application of trustees in dissolution or
of any receiver or receivers appointed for this corporation under the provisions
of Section 279 Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths (3/4) in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
NINTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this reserved
power.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned hereby executes this document and
affirms that the facts set forth herein are true under the penalties of perjury
this seventh day of April, 1987.
Ray A. Barr /s/ Ray A. Barr
---------------------------
Ray A. Barr, Incorporator
5
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DAVIN ENTERPRISES, INC.
The undersigned corporation, in order to amend its Certificate of
Incorporation, hereby certifies as follows:
FIRST: The name of the Corporation is:
DAVIN ENTERPRISES, INC.
SECOND: The corporation hereby amends its Certificate of Incorporation as
follows:
Article Fourth of the Certificate of Incorporation, as amended, relating to
the shares of the corporation, is hereby amended to read as follows by adding
the following new Article Fourth.
FOURTH: The total number of shares of stock which the Corporation is
authorized to issue is 50,000,000 and the par value of each of such shares
is $.0001.
The corporation hereby reclassifies its Common shares pursuant to
Section 242 of the General Corporation Law of the State of Delaware in
order to effect a one (1) for one hundred (100) reverse split of its Common
Shares, $.0001 par value, so that one hundred (100) of the outstanding
Common Shares are equal to one (1) of the new Common Share certificates of
$.0001 par value.
THIRD: The amendment effected herein was authorized by the consent in
writing, setting forth the action so taken, signed by the holders of more than a
majority the outstanding shares entitled to vote thereon pursuant to Sections
228 and 242 of the General Corporation Law of the State of Delaware and that
written notice
1
<PAGE>
has been given to all shareholders who have not consented in writing to the
action.
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under penalties of perjury this 20th day of May,
1996.
/s/ Arthur Seidenfeld
---------------------
Arthur Seidenfeld, President
ATTEST:
/s/ Anne Seidenfeld
- -------------------------
Anne Seidenfeld, Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF DAVIN ENTERPRISES, INC.
(Pursuant to Section 242 of
the Delaware General Corporation Law)
================================================================================
The undersigned, Carl K. W. Tong, being the President, Chief Executive
Officer and Secretary of Davin Enterprises, Inc., a Delaware corporation (the
"Corporation"), does hereby certify as follows:
1. The Certificate of Incorporation of the Corporation is hereby amended
pursuant to Section 242(a)(1) of the General Corporation Law of the State of
Delaware to provide for the name change by amending Article First as follows:
ARTICLE FIRST
"The name of the corporation is
'Creative Master International, Inc.'"
2. The Certificate of Incorporation of the Corporation is hereby amended
pursuant to Section 242(a)(3) of the General Corporation Law of the State of
Delaware by amending Article Fourth as follows:
ARTICLE FOURTH
"The total number of shares of stock which the Corporation is authorized to
issue is Sixty Million (60,000,000) shares and the par value of each of
such shares is $.0001."
3. The foregoing Amendments to Article First and Article Fourth of the
Certificate of Incorporation was first authorized by the Board of Directors and
subsequently duly adopted by the consent in writing of the stockholders holding
a majority of the Corporation's outstanding stock entitled to vote thereon in
accordance with Section 228 of the General Corporation Law of the State of
Delaware.
4. In accordance with Section 228 of the General Corporation Law of the
Sate of Delaware, a written notice of the corporate action taken by the majority
of the stockholders has been given to all stockholders of record of the
Corporation who have not consented in writing.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment as of February 23, 1998 and DO HEREBY
1
<PAGE>
CERTIFY, that the facts stated in this Certificate of Amendment are true and
correct.
/s/ Carl Tong
-------------------------
Carl K.W. Tong, President
and Chief Executive
Officer
/s/ Carl Tong
-------------------------
Carl K.W. Tong, Secretary
2
<PAGE>
EXHIBIT 4.1
[CERTIFICATE OF CREATIVE MASTER INTERNATIONAL, INC. APPEARS HERE]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 22528Y 10 2
- --------------------------------------------------------------------------------
This Certifies that
SPECIMEN
is the record holder of
- --------------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.0001 PAR VALUE, OF
_______________ ______________
_______________________ CREATIVE MASTER INTERNATIONAL, INC. ____________________
_______________ ______________
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SIGNATURE ILLEGIBLE] [SIGNATURE ILLEGIBLE]
--------------------- ---------------------
SECRETARY PRESIDENT
[SEAL]
<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ............... Custodian ..................
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniforms Gifts to Minors
survivorship and not as tenants Act.........................................
in common (State)
UNIF GIFT MIN ACT - ........... Custodian (until age...........)
(Cust)
.................... under Uniform Transfers
(Minor)
to Minors Act ..............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated____________________
X ____________________________
X ____________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_______________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C RULE 17AG-15.
<PAGE>
EXHIBIT 10.1
CREATIVE MASTER INTERNATIONAL, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made as of
_____________, 1998 by and between Creative Master International, Inc., a
Delaware corporation (the "Company") and ________________, a director, director
nominee and/or officer of the Company (the "Indemnitee").
RECITALS
A. The Company and the Indemnitee recognize that the present state of the
law is too uncertain to provide the Company's directors and officers with
adequate and reliable advance knowledge or guidance with respect to the legal
risks and potential liabilities to which they may become personally exposed as a
result of performing their duties for the Company;
B. The Company and the Indemnitee are aware of the growth in the number of
lawsuits filed against corporate directors and officers in connection with their
activities in such capacities and by reason of their status as such;
C. The Company and the Indemnitee recognize that the cost of defending
against such lawsuits, whether or not meritorious, is often beyond the financial
resources of most directors and officers of the Company;
D. The Company and the Indemnitee recognize that the legal risks and
potential liabilities, and the threat thereof, associated with proceedings filed
against the directors and officers of the Company bear no reasonable
relationship to the amount of compensation received by the Company's directors
and officers;
E. The Company, after reasonable investigation prior to the date hereof,
has determined that the liability insurance coverage available to the Company as
of the date hereof is inadequate, unreasonably expensive or both. The Company
believes, therefore, that the interest of the Company's shareholders would be
best served by a combination of (i) such liability insurance as the Company may
reasonably obtain pursuant to the Company's obligations hereunder and (ii) a
contract with its directors and officers, including the Indemnitee, to indemnify
them to the fullest extent permitted by law (as in effect on the date hereof,
or, to the extent any amendment may expand such permitted indemnification, as
hereafter in effect) against personal liability for actions taken in the
performance of their duties to the Company;
F. The Company's Bylaws authorize the indemnification of corporate agents
of the Company;
G. The Board of Directors of the Company has concluded that, to retain and
attract talented and experienced individuals to serve as directors and officers
of the Company and to encourage such individuals to take the business risks
necessary for the success of the Company, it is necessary for the Company to
contractually indemnify its directors and officers to the fullest extent
permitted by law, and to assume for itself liability for expenses and damages in
connection with claims against such directors and officers in connection with
their service to the Company, and has further concluded that the failure to
provide such contractual indemnification could result in great harm to the
Company and its shareholders;
1.
<PAGE>
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director and/or officer of the Company, free from undue
concern for the risks and potential liabilities associated with such services to
the Company; and
I. The Indemnitee is willing to serve, or continue to serve, the Company,
provided, and on the expressed condition, that he or she is furnished with the
indemnification provided for herein.
AGREEMENT
NOW, THEREFORE, the Company and the Indemnitee agree as follows:
1. Definitions.
-----------
(a) "Expenses" means, for the purposes of this Agreement, all direct and
indirect costs of any type or nature whatsoever (including, without limitation,
any fees and disbursements of the Indemnitee's counsel, accountants and other
experts and other out-of-pocket costs) actually and reasonably incurred by the
Indemnitee in connection with the investigation, preparation, defense or appeal
of a Proceeding; provided, however, that Expenses shall not include judgments,
fines, penalties or amounts paid in settlement of a Proceeding.
(b) "Proceeding" means, for the purposes of this Agreement, any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (including an action brought by or in the right
of the Company) in which the Indemnitee may be or may have been involved as a
party or otherwise, by reason of the fact that the Indemnitee is or was a
director and/or officer of the Company, by reason of any action taken by him or
her or of any inaction on his or her part while acting as such director and/or
officer or by reason of the fact that he or she is or was serving at the request
of the Company as a director, officer, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a director and/or officer of the foreign or domestic corporation or
association which was a predecessor to the Company or of another enterprise at
the request of such predecessor whether or not he or she is serving in such
capacity at the time any liability or expense is incurred for which
indemnification or reimbursement can be provided under this Agreement.
2. Agreement to Serve. In consideration of the protection afforded by this
------------------
Agreement, if the Indemnitee is a director, he or she agrees to serve to the
best of his or her abilities until the earlier of (i) the time when the
Indemnitee fails to be reelected to the Board and qualified or (ii) such time as
he or she tenders his or her resignation in writing. If the Indemnitee is an
officer, he or she agrees to serve to the best of his or her abilities at the
will of the Company or under separate contract, if such contract exists, for so
long as the Indemnitee is duly appointed or employed or until such time as he or
she tenders his or her resignation in writing. Nothing contained in this
Agreement is intended to create in the Indemnitee any right to continued
employment or any requirement of a continuing relationship.
3. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify the Indemnitee
-----------------------
against Expenses, judgments, fines, penalties or amounts paid in settlement
actually and reasonably incurred by the Indemnitee in connection with a
Proceeding (other than a Proceeding by or in the right of the Company) if the
Indemnitee acted in good faith and in a manner the Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
the Indemnitee's conduct was unlawful. The termination of any Proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
----
2.
<PAGE>
contendere or its equivalent, shall not, of itself, create a presumption that
- ----------
the Indemnitee did not act in good faith and in a manner which the Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal Proceeding, had reasonable cause to
believe that the Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify the Indemnitee against Expenses and amounts paid in settlement,
actually and reasonably incurred by the Indemnitee in connection with a
Proceeding by or in the right of the Company to procure a judgment in its favor
if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company and its
shareholders. Notwithstanding the foregoing, no indemnification shall be made
in respect of any claim, issue or matter as to which the Indemnitee shall have
been adjudged liable to the Company in the performance of the Indemnitee's duty
to the Company and its shareholders unless and only to the extent that the court
in which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, the Indemnitee
is fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine proper.
(c) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company shall indemnify the Indemnitee to the fullest extent permitted by law,
notwithstanding that such indemnification is not specifically authorized by
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute.
4. Determination of Right to Indemnification. Upon receipt of a written
-----------------------------------------
claim addressed to the Board of Directors for indemnification pursuant to
Section 3, the Company shall indemnify the Indemnitee with respect to such
written claim to the full extent permitted by law. If a claim under Section 3
is not paid in full by the Company within thirty (30) days after such written
claim has been received by the Company, the Indemnitee may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim and, unless such action is dismissed by the court as frivolous or brought
in bad faith, the Indemnitee shall be entitled to be paid the expense of
prosecuting such claim. Neither the failure of the Company (including its Board
of Directors, independent legal counsel, or its shareholders) to make a
determination prior to the commencement of such action that indemnification of
the Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct under applicable law, nor an actual determination
by the Company (including its Board of Directors, independent legal counsel or
its shareholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct. The Company shall have the burden of proof
concerning whether the Indemnitee has or has not met the applicable standard of
conduct.
5. Advancement and Repayment of Expenses. The Expenses incurred by the
-------------------------------------
Indemnitee under Section 3 in defending and investigating any Proceeding shall
be paid by the Company in advance of the final disposition of such Proceeding
within 30 days after receiving from the Indemnitee the copies of invoices
presented to the Indemnitee for such Expenses, if the Indemnitee shall provide
an undertaking to the Company to repay such amount to the extent it is
ultimately determined that the Indemnitee is not entitled to indemnification.
In determining whether or not to make an advance hereunder, the ability of the
Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in a
Proceeding brought by the Company directly, in its own right (as distinguished
from an action brought derivatively or by any receiver or trustee), the Company
shall not be required to make the advances called for hereby if the Board of
Directors determines, in its sole discretion, that it does not appear that the
Indemnitee has met the standards of conduct which make it permissible under
applicable law to indemnify the Indemnitee and the advancement of Expenses would
not be in the best interests of the Company and its shareholders.
3.
<PAGE>
6. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification or advancement by the Company of
some or a portion of any Expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, penalties, and amounts paid in
settlement) incurred by him or her in the investigation, defense, settlement or
appeal of a Proceeding, but is not entitled to indemnification or advancement of
the total amount thereof, the Company shall nevertheless indemnify or pay
advancements to the Indemnitee for the portion of such Expenses or liabilities
to which the Indemnitee is entitled.
7. Notice to Company by the Indemnitee. The Indemnitee shall notify the
-----------------------------------
Company in writing of any matter with respect to which the Indemnitee intends to
seek indemnification hereunder as soon as reasonably practicable following the
receipt by the Indemnitee of written notice thereof, provided that any delay in
so notifying the Company shall not constitute a waiver by the Indemnitee of his
or her rights hereunder. The written notification to the Company shall be
addressed to the Board of Directors and shall include a description of the
nature of the Proceeding and the facts under lying the Proceeding and be
accompanied by copies of any documents filed with the court in which the
Proceeding is pending. In addition, the Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
the Indemnitee's power.
8. Maintenance of Liability Insurance.
----------------------------------
(a) The Company hereby agrees that so long as the Indemnitee shall
continue to serve as a director and/or officer of the Company and thereafter so
long as the Indemnitee shall be subject to any possible Proceeding, the Company,
subject to Section 8(b), shall use its best efforts to obtain and maintain in
full force and effect directors' and officers' liability insurance ("D&O
Insurance") which provides the Indemnitee the same rights and benefits as are
accorded to the most favorably insured of the Company's directors, if the
Indemnitee is a director; or of the Company's officers, if the Indemnitee is not
a director of the Company but is an officer.
(b) Notwithstanding the foregoing, the Company shall have no obligation
to obtain or maintain D&O Insurance if the Company determines in good faith that
such insurance is not reasonably available, the premium costs for such insurance
are disproportionate to the amount of coverage provided, the coverage provided
by such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
(c) Notice to Insurers. If, at the time of the receipt of a notice of a
------------------
claim pursuant to Section 7 hereof, the Company has D&O Insurance in effect, the
Company shall give prompt notice of the commencement of such Proceeding to the
insurers in accordance with the procedures set forth in the respective policies.
The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Indemnitee, all amounts payable as a
result of such Proceeding in accordance with the terms of such policies.
9. Defense of Claim. In the event that the Company shall be obligated
----------------
under Section 5 hereof to pay the Expenses of any Proceeding against the
Indemnitee and the Company or any other person entitled to indemnification by
the Company is a party to the Proceeding, the Company shall be entitled to
assume the defense of such Proceeding, with counsel approved by the Indemnitee,
which approval shall not be unreasonably withheld, upon the delivery to the
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by the Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to the Indemnitee under
this Agreement for any fees of counsel subsequently incurred by the Indemnitee
with respect to the same Proceeding, provided that (i) the Indemnitee shall have
the right to employ his or her counsel in any such Proceeding at the
Indemnitee's expense; and (ii) if (A) the employment of counsel
4.
<PAGE>
by the Indemnitee has been previously authorized by the Company, or (B) the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and the Indemnitee in the conduct of such defense
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such Proceeding, then the fees and expenses of the Indemnitee's
counsel shall be at the expense of the Company.
10. Attorneys' Fees. In the event that the Indemnitee or the Company
---------------
institutes an action to enforce or interpret any terms of this Agreement, the
Company shall reimburse the Indemnitee for all of the Indemnitee's reasonable
fees and expenses in bringing and pursuing such action or defense, unless as
part of such action or defense, a court of competent jurisdiction determines
that the material assertions made by the Indemnitee as a basis for such action
or defense were not made in good faith or were frivolous.
11. Continuation of Obligations. All agreements and obligations of the
---------------------------
Company contained herein shall continue during the period the Indemnitee is a
director and/or officer of the Company, or is or was serving at the request of
the Company as a director, officer, fiduciary, employee or agent of a
corporation, partnership, joint venture, trust or other enterprise, and shall
continue thereafter so long as the Indemnitee shall be subject to any possible
proceeding by reason of the fact that the Indemnitee served in any capacity
referred to herein.
12. Successors and Assigns. This Agreement establishes contract rights
----------------------
that shall be binding upon, and shall inure to the benefit of, the successors,
assigns, heirs and legal representatives of the parties hereto.
13. Non-exclusivity.
---------------
(a) The provisions for indemnification and advancement of expenses set
forth in this Agreement shall not be deemed to be exclusive of any other rights
that the Indemnitee may have under any provision of law, the Company's
Certificate of Incorporation or Bylaws, the vote of the Company's shareholders
or disinterested directors, other agreements or otherwise, both as to action in
his or her official capacity and action in another capacity while occupying his
or her position as a director and/or officer of the Company.
(b) In the event of any changes, after the date of this Agreement, in
any applicable law, statute, or rule which expand the right of a Delaware
corporation to indemnify its officers and directors, the Indemnitee's rights and
the Company's obligations under this Agreement shall be expanded to the full
extent permitted by such changes. In the event of any changes in any applicable
law, statute or rule, which narrow the right of a Delaware corporation to
indemnify a director or officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
14. Subrogation. In the event of any payment under this Agreement by the
-----------
Company to or on behalf of the Indemnitee, the Company shall be subrogated to
the extent of such payment to all of the rights of recovery of the Indemnitee,
who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
15. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or refrain from doing any act
in violation of applicable law, rule or regulation. The Company's inability,
pursuant to court order, to perform its obligations under this Agreement or the
modification of this Agreement by any regulatory agency through administrative
5.
<PAGE>
action shall not constitute a breach of this Agreement. The provisions of this
Agreement shall be severable as provided in this Section 15. If this Agreement
or any portion hereof shall be invalidated on any ground by any court of
competent jurisdiction, then the Company shall nevertheless indemnify the
Indemnitee to the full extent permitted by any applicable portion of this
Agreement that shall not have been invalidated, and the balance of this
Agreement not so invalidated shall be enforceable in accordance with its terms.
16. Governing Law. This Agreement shall be interpreted and enforced in
-------------
accordance with the laws of the State of Delaware. To the extent permitted by
applicable law, the parties hereby waive any provisions of law which render any
provision of this Agreement unenforceable in any respect.
17. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year set forth above.
CREATIVE MASTER INTERNATIONAL, INC.
By:
---------------------------------------
Carl Ka Wing Tong
President
Address: 18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
INDEMNITEE:
- --------------------------
(Signature)
- --------------------------
(Address)
6.
<PAGE>
EXHIBIT 10.2
SHARE EXCHANGE AGREEMENT
------------------------
THIS SHARE EXCHANGE AGREEMENT (the "Agreement" ) is dated as of December
15, 1997 by and between Davin Enterprises, Inc., ("Company") and ACMA Strategic
Holdings, Ltd., Carl Tong, and Leo Kwok, (collectively the "Shareholder"), the
owners of Creative Master Limited ("CML").
RECITALS
WHEREAS, Shareholder owns one hundred percent of the issued and
outstanding stock of CML (the "Shares"), and;
WHEREAS, Company is a Delaware incorporated US public company, currently
traded on the NASD Bulletin Board under the symbol DAVN, and;
WHEREAS, Company desires to acquire the Shares and Shareholder desires
to exchange the Shares for newly issued stock in the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and terms
contained herein and in reliance upon the representations and warranties
hereinafter set forth, the parties agree as follows:
I. EXCHANGE OF THE SHARES AND CONSIDERATION
1.01. SHARES BEING EXCHANGED. Effective at the closing of this Agreement
(the "Closing"), and subject to the terms and conditions of this Agreement,
Shareholder shall assign, transfer and deliver to the Company all of the Shares.
1.02. CONSIDERATION. Subject to the terms and conditions of this Agreement,
and in consideration of the assignment and delivery of the Shares to the
Company, the Company shall at Closing issue to Shareholder and/or its designees,
and Shareholder and/or its designees shall purchase, acquire and/or accept from
the Company, 48,060,000 shares in the Company (the "Consideration"), equal to
96.12% of all issued and outstanding stock.
1.03. CLOSING. The Closing of the transaction contemplated by this
Agreement (the "Closing") shall take place at the offices of Iwona J. Alami or
other such place as mutually agreed upon, on or before December 28, 1997.
1.04. METHOD OF CLOSING. The method of closing shall require the parties to
satisfy the conditions specified in
<PAGE>
Section 6.
II. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AND CML
Shareholder and CML represents and warrants to the Company as follows, as of the
closing:
2.01. ORGANIZATION. CML is a corporation duly organized, validly existing
and in good standing under the laws of Hong Kong. CML has the corporate power
and authority to carry on its business as presently conducted; and is qualified
to do business in all jurisdictions where the failure to be so qualified would
have a material adverse effect on its business.
2.02. CAPITALIZATION.
2.02(a) CML has 100,000 total shares authorized, of which 100,000 are
issued and outstanding. All issued and outstanding shares of CML are duly
authorized, validly issued, issued for value, fully paid and nonassessable.
2.02(b) There are no outstanding preferred stock, options, warrants,
or any other rights to purchase any securities of CML.
2.03. AUTHORITY. Shareholder has full power and authority to enter into
this Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, have been duly authorized and approved by
Shareholder and no other corporate proceedings on the part of CML and/or
Shareholder are necessary to authorize this Agreement and the transactions
contemplated hereby.
2.04. FINANCIAL INFORMATION & EARNINGS GUARANTEE.
2.04(a) Attached as Exhibit A is CML's audit for the period ending
December 31, 1996. The Financial Information provided by Shareholder to Company
is accurate and not misleading, to the best of Shareholder's knowledge.
2.04(b) Shareholder warrants that CML's consolidated net income, as
audited under US GAAP for the fiscal year ending December 31, 1998, will not be
less than US$1.2 million. In the event that the audited earnings fall below this
amount, Shareholder will cancel that number of Company shares necessary to
increase Company earnings per share ("EPS") to the level that would have existed
had the earnings met the minimum level stated above (before adjustment for any
splits or new issuances post closing). The warranted EPS is 2.4 cents per share,
based on the $1.2 million 1998 earnings guarantee and the 50,000,000 total
issued shares just after closing. The maximum number of shares that Shareholder
may have to cancel will, in any case, not exceed 18 million shares. Before
adjustments for
<PAGE>
any stock splits or new issuances, Shareholder will have to cancel 2,083,277
shares of Company common stock for each $50,000 shortfall (below $1.2 million)
in 1998 CML earnings, as audited under US GAAP.
Shareholder agrees that any share cancellation under this provision will
take effect on the date the 1998 CML US GAAP audit is completed and that the
Company's relevant SEC filing which discloses CML's 1998 results will
automatically include any required share cancellation and give effect to the EPS
increase from such share cancellation. If any delays in completing a required
share cancellation cause the Company to be unable to report the completed share
cancellation and improved earnings per share in the Company's SEC filing
immediately following the completion of CML's 1998 audit, due no later than
March 31, 1999, Shareholder agrees that it will pay the Company a penalty fee of
$US50,000 for each month of delay until the cancellation is completed and
reported in the Company's SEC filings, with such penalty fee(s) to be due and
payable at each month-end.
2.04(c) Shareholder represents that, upon completion of the US GAAP
audits for the year-ended 1997, sales and net equity will exceed US$10 million
and US$2 million, respectively. To the extent that the actual US GAAP audited
net equity is more than 10% less than US$2 million, the earnings guarantee
stated in 2.04(b) will increase, on a dollar for dollar basis.
2.04(d) To the extent that CML's earnings are below the guaranteed
level due to an exchange rate decline, the guaranteed earnings level will be
decreased by the same percentage as the change in exchanges rates (the
percentage change of the HK/US dollar exchange rate at the time of this
agreement to the rate applicable when the 1998 earnings are reporting in the
Company's SEC filings), with a maximum decrease in the guaranteed earnings of
10% (in $US dollar terms).
2.05. LITIGATION. There is no litigation, proceeding or investigation
pending or threatened against CML affecting any of its properties, subsidiaries,
or assets that might result, either in any case or in the aggregate, in any
adverse change in the business, operations, affairs or condition of CML or its
properties or assets, or that might call into question the validity of this
Agreement, or any action taken or to be taken pursuant hereto.
2.06. TITLE TO ASSETS. Shareholder has good and marketable title to CML,
and CML has good and marketable title to all of its assets and properties now
carried on its books. These assets include a 55% ownership stake in Techtime
Industries, Ltd., a 100% ownership stake in Queenex Enterprises, Ltd., a 100%
interest in Excel Master, Ltd., and a 70% interest in Carison, Ltd.
<PAGE>
2.07. CONTRACTS AND UNDERTAKINGS. CML and its subsidiary business
operations are not in material default, or alleged to be in material default,
under any Contract or Undertaking.
2.08. NO CONFLICT. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with or
result in a breach of any term or provision of, or constitute a default under,
the Memorandum and Articles of Association of CML, or any agreement, contract or
instrument to which CML is a party or by which it or any of its assets are
bound.
2.09. ACCURACY. No document furnished to the Company by or on behalf of the
Company in connection with the transactions contemplated hereby, contains any
untrue statement of a material fact or when taken as a whole omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.
2.10. FINANCIAL STATEMENTS AND TAX FILINGS. The financial statements of CML
(the "Financial Statements") submitted to the Company (a) were prepared in
accordance with the books and records of CML; (b) were prepared in accordance
with generally accepted accounting principles consistently applied, in this case
Hong Kong accounting principles; (c) are accurate and fairly present CML's
financial condition and the results of its operations as of the relevant dates
thereof and for the periods covered thereby; (d) contain and reflect all
necessary adjustments and accruals for a fair presentation of CML's financial
condition and the results of its operations for the periods covered by said
financial statements; and (e) contain and reflect adequate provisions for all
reasonably anticipated liabilities with respect to the period(s) then ended. All
CML tax filings and payments are current. Shareholder acknowledges that it will
cause CML to complete and file US GAAP audited financial statements for 3
historical years with the appropriate US governmental authorities no later than
March 31, 1998.
2.11. ABSENCE OF MATERIAL CHANGES. Since December 31, 1996, except as
described in any Exhibit hereto or as required or permitted under this
Agreement, there has not been any material negative change in the condition
(financial or otherwise) of the properties, assets, liabilities or business of
Company, except changes in the ordinary course of business which, individually
and in the aggregate, have not been materially adverse.
2.12. COMPLIANCE WITH LAW. CML has in all material respects complied with
and is now in all material respects in compliance with, all relevant laws
applicable to CML. The transfer of CML stock contemplated by this agreement will
<PAGE>
take place in compliance with relevant laws applicable to such transfer.
2.13. REORGANIZATION RELATED REPRESENTATIONS.
2.13(a) following the closing, CML will continue its historic
business.
2.13(b) CML is not an investment company as defined under section
368(a)(2)(f)(iii) and (iv) of the Internal Revenue Code.
2.13(c) CML is not under any jurisdiction of a court in title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Internal Revenue
Code.
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Shareholder as follows, as of
the Closing:
3.01. ORGANIZATION.
3.01(a) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware, has the
corporate power and authority to carry on its business as presently conducted
and is qualified to do business in all jurisdictions where the failure to be so
qualified would have a material adverse effect on the business of the Company.
3.01(b) Copies of the Certificate of Incorporation and the Article
and Bylaws of the Company, to be furnished to Shareholder prior to Closing, are
complete and correct copies of the Articles of Incorporation and the Bylaws of
the Company as amended and in effect on the date hereof. All minutes of meetings
and actions in writing without a meeting of the Board of Directors and
shareholders of the Company are contained in the minute book of the Company and
no minutes or actions in writing without a meeting have been excluded in such
minute book.
3.02. CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock, par value $0._____ per
share. 1,937,452 shares will be issued and outstanding prior to the closing. All
outstanding shares are duly authorized, validly issued, fully paid and non-
assessable. Except for such outstanding shares, there are no outstanding shares
of capital stock or other securities or other equity interests of the Company or
rights of any kind to acquire stock, other securities or other equity interests.
3.03. AUTHORITY. The Company has full power and authority to enter into
this Agreement and to carry out the
<PAGE>
transactions contemplated herein. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby, and the issuance of
the Consideration in accordance with the terms hereof, have been duly authorized
and approved by the Board of Directors of the Company and no other corporate
proceedings on the part of Company are necessary to authorize this Agreement,
the transactions contemplated hereby and the issuance of the Consideration in
accordance with the terms hereof.
3.04. FINANCIAL STATEMENTS. The Company's financial statements have been
prepared in accordance with US generally accepted accounting principles. The
Company has no liabilities other than as set forth in its financial statements
as filed with the SEC. The Company is not subject to any material undisclosed
liability or obligation of any nature, whether absolute, accrued, contingent, or
otherwise and whether due or to become due. As of the closing, all miscellaneous
fees and costs, including legal fees, transfer agent fees, etc., will be paid in
full.
3.05. LITIGATION. There is no litigation, proceeding, government inquiry,
or investigation pending or to the knowledge of the Company, threatened against
the Company affecting any of its properties or assets, or, to the knowledge of
the Company that might result, either in any case or in the aggregate, in any
material adverse change in the business, operations, affairs or condition of the
Company or any of its properties or assets, or that might call into question the
validity of this Agreement, or any action taken or to be taken pursuant hereto.
3.06. TITLE TO ASSETS. The Company has good and marketable title to all of
its assets and properties now carried on its books including those reflected in
the balance sheet contained in the Company's financial statements, free and
clear of all liens, claims, charges, security interests or other encumbrances,
except as described in the balance sheet included in the Company's financial
statements or on any Exhibits attached hereto.
3.07. CONTRACTS AND UNDERTAKINGS. The Company (including any of its
subsidiaries) has no contracts, agreements, leases, licenses, arrangements,
commitments and other undertakings (collectively "Contracts") to which the
Company or any such subsidiary is a party or by which it or its property is
bound, as of the Closing. The Company is not in material default, or alleged to
be in material default, under any Contract and, to the knowledge of the Company,
no other party to any Contract to which the Company is a party is in default
thereunder nor, to the knowledge of the Company, does there exist any condition
or event which, after notice or lapse of time or both, would constitute a
default by any party to any such Contract.
3.08. NO CONFLICT. The execution and delivery of this
<PAGE>
Agreement and the consummation of the transaction contemplated hereby will not
conflict with or result in a breach of any term or provision of, or constitute a
default under, the Certificate of Incorporation or Bylaws of the Company, or any
agreement, contract or instrument to which the Company is a party or by which it
or any of its assets are bound.
3.09. ACCURACY. No public filing, certificate or other document furnished
to Shareholder by or on behalf of the Company in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact or when taken as a whole omits to state a material fact necessary in order
to make the statements contained herein or therein not misleading.
3.10. FINANCIAL STATEMENTS AND TAX FILINGS. The financial statements of the
Company (the "Financial Statements") set forth in its public filings (a) were
prepared in accordance with the books and records of the Company; (b) were
prepared in accordance with generally accepted accounting principles
consistently applied; (c) are accurate and fairly present the Company's
financial condition and the results of its operations as of the relevant dates
thereof and for the periods covered thereby; (d) contain and reflect all
necessary adjustments and accruals for a fair presentation of the Company's
financial condition and the results of its operations for the periods covered by
said financial statements; and (e) contain and reflect adequate provisions for
all reasonably anticipated liabilities with respect to the period(s) then ended.
All Company state and federal tax filings are current, with no outstanding
indebtedness.
3.11. ABSENCE OF MATERIAL CHANGES. Since the September 30, 1997 SEC Form
10QSB filing, except as described in any Exhibit hereto or as required or
permitted under this Agreement, there has not been:
3.11(a) any material change in the condition (financial or otherwise)
of the properties, assets, liabilities or business of Company, except changes in
the ordinary course of business which, individually and in the aggregate, have
not been materially adverse.
3.11(b) any undisclosed redemption, purchase or other acquisition of
any shares of the capital stock of Company, or any issuance of any shares of
capital stock or the granting, issuance or exercise of any rights, warrants,
options or commitments by the Company relating to their authorized or issued
capital stock.
3.12. COMPLIANCE WITH LAW. The Company has in all material respects
complied with and it is now in all material respects in compliance with, all
Federal and State laws applicable to the Company, including that the Company
<PAGE>
is current in its SEC filings. The Consideration will be issued in full
compliance with all state and federal securities laws.
IV. COVENANTS AND AGREEMENTS OF THE PARTIES EFFECTIVE PRIOR TO CLOSING
4.01. CORPORATE EXAMINATIONS AND INVESTIGATIONS Prior to the Closing,
Shareholder shall be entitled, through its employees and representatives, to
make such investigations and examinations of the books, records and financial
condition of the Company as Shareholder may request to verify the Company's
representations. Company shall furnish Shareholder and its representatives
during such period with all such information as Shareholder or its
representatives may reasonably request and cause the Company's officers,
employees, consultants, agents, accountants and attorneys to cooperate fully
with Shareholder or its representatives in connection with such review and
examination and to make full disclosure of all information and documents
requested by Shareholder and/or its representatives. Company shall have the
right to request additional information on CML. Company acknowledges that US
GAAP audits will not be available on CML until after the Closing. Shareholder
agrees to supply Company with copies of available financial and business
information as requested. Each party's investigations and examinations shall be
conducted at reasonable times and under reasonable circumstances, with copies of
requested documents to be provided to the other party upon request.
4.02. COOPERATION; CONSENTS. Prior to the Closing Date, each party shall
cooperate with the other parties to the end that the parties shall (i) in a
timely manner make all necessary filings with, and conduct negotiations with,
all authorities and other persons the consent or approval of which, or a license
or permit from which is required for the consummation of the transactions
contemplated by this Agreement and (ii) provide to each other party such
information as the other party may reasonably request in order to enable it to
prepare such filings and to conduct such negotiations.
4.03. CONDUCT OF BUSINESS. From the date hereof through the Closing, the
Company and CML shall (i) conduct its business in the ordinary course and in
such a manner so that the representations and warranties contained herein shall
continue to be true and correct as of the Closing as if made at and as of the
Closing. Without the prior written consent of Shareholder, except as expressly
set forth herein, the Company shall not undertake or fail to undertake any
action if such action or failure would render any of said warranties and
representations untrue as of the Closing.
4.04. NOTICE OF DEFAULT. From the date hereof through the Closing, each
party hereto shall give to the other parties prompt written notice of the
occurrence or existence
<PAGE>
of any event, condition or circumstance occurring which would constitute a
violation or breach of this Agreement by such party or which would render
inaccurate in any material respect any of such party's representations or
warranties contained herein.
V. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants of the Company, Shareholder
and CML contained herein shall survive the closing.
VI. CONDITIONS PRECEDENT TO CLOSING
6.01. CONDITIONS PRECEDENT TO OBLIGATION OF SHAREHOLDER The obligations of
Shareholder under this Agreement shall be subject to each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES OF COMPANY TO BE TRUE. The
representations and warranties of Company herein contained shall be true in all
material respects at the Closing with the same effect as though made at such
time. The Company shall have performed in all material respects all obligations
and complied in all material respects, to its actual knowledge, with all
covenants and conditions required by this Agreement to be performed or complied
with by it at or prior to the Closing.
(b) NO LEGAL PROCEEDINGS. No injunction or restraining order shall be
in effect prohibiting this Agreement, and no action or proceeding shall have
been instituted and, at what would otherwise have been the Closing, remain
pending before the court to restrain or prohibit the transactions contemplated
by this Agreement.
(c) STATUTORY REQUIREMENTS. All statutory requirements for the valid
consummation by the Company of the transactions contemplated by this Agreement
shall have been fulfilled. All authorizations, consents and approvals of all
governments and other persons required to be obtained in order to permit
consummation by the Company of the transactions contemplated by this Agreement
shall have been obtained.
(d) DIRECTOR RESIGNATION. Prior to the Closing, all of the directors
and officers of the Company shall have submitted their resignations to Company
to be held in escrow and to become effective at the Closing.
(e) NO LIABILITIES. As of the closing, the Company shall have no
liabilities or taxes owed. In addition, the Company shall have no material
contingent liabilities or taxes owed.
(f) NO MATERIAL ADVERSE CHANGE. Following the
<PAGE>
execution of this agreement, there shall not have occurred any material adverse
change in the financial condition, business, or operations of, nor shall any
event have occurred which, with the lapse of time or the giving of notice, may
cause or create any material adverse change in the financial condition,
business, or operations, of Company.
6.02. CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY. The obligation of the
Company under this Agreement shall be subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AND CML TO BE TRUE.
The representations and warranties of Shareholder herein contained shall be true
in all material respects as of the Closing, and shall have the same effect as
though made at the Closing; Shareholder shall have performed in all material
respects all obligations and complied in all material respects, with all
covenants and conditions required by this Agreement to be performed or complied
with by them prior to the Closing.
(b) NO LEGAL PROCEEDINGS. No injunction or restraining order shall be
in effect, and no action or proceeding shall have been instituted and, at what
would otherwise have been the Closing, remain pending before the court to
restrain or prohibit the transactions contemplated by this Agreement.
(c) STATUTORY REQUIREMENTS. All statutory requirements for the valid
consummation by Shareholder of the transactions contemplated by this Agreement
shall have been fulfilled. All authorizations, consents and approvals of all
governments and other persons required to be obtained in order to permit
consummation by Shareholder of the transactions contemplated by this Agreement
shall have been obtained, including, but not limited to, requirements imposed by
the government of Hong Kong.
(d) INVESTMENT LETTERS: Shareholder shall provide relevant investment
letters to enable the Company to issue the Consideration under an available
exemption from registration.
(e) GOOD STANDING: Shareholder shall provide appropriate
documentation to show that CML is a corporation in good standing by the
requirements of Hong Kong.
(f) NO MATERIAL ADVERSE CHANGE. Following the execution of this
agreement, there shall not have occurred any material adverse change in the
financial condition, business, or operations of, nor shall any event have
occurred which, with the lapse of time or the giving of notice, may cause or
create any material adverse change in the financial condition, business, or
operations, of CML
<PAGE>
VII. MISCELLANEOUS
7.01. EXPENSES OF SALE. Except as otherwise provided herein, each party
shall bear its own direct and indirect expenses incurred in connection with the
negotiation and preparation of this Agreement and the consummation and
performance of the transactions contemplated herein. Without limitation, such
expenses shall include the fees and expenses of all attorneys, brokers,
investment bankers, accountants, agents, advisors, and finders and other
professionals incurred in connection herewith, acting on behalf of such party.
7.02. NOTICES. All notices, requests and other communications thereunder
shall be in writing and shall be delivered by courier or other means of personal
service (including by means of a nationally recognized courier service or
professional messenger service), or mailed first class, postage prepaid, by
certified mail, return receipt requested, or by Federal Express or other
reputable overnight delivery service, in all cases, addressed to:
To Shareholder:
Iwona J. Alami
Law Offices of Iwona J. Alami
120 Newport Center Drive
Suite 200
Newport Beach, CA 92660
Fax: 714-495-9927
To Company:
Arthur Seidenfeld
240 Clarkson Avenue
Brooklyn, NY 11226
Fax: 718-469-3292
All notices, requests and other communications shall be deemed given on the date
of actual receipt or delivery as evidenced by written receipt, acknowledgment or
other evidence of actual receipt or delivery to the address. In case of service
by telecopy, a copy of such notice shall be personally delivered or sent by
registered or certified mail, in the manner set forth above, within three (3)
business days thereafter. Either party hereto may from time to time by notice in
writing served as set forth above designate a different address or a different
or additional person to which all such notices or communications thereafter are
to be given.
7.03. PARTIES IN INTEREST. Except as otherwise expressly provided herein,
all the terms and provisions of this Agreement shall be binding upon, shall
inure to the benefit of and shall be enforceable by the respective heirs,
<PAGE>
beneficiaries, personal and legal representatives, successors, designees and
assigns of the parties hereto.
7.04. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including any
Schedules, Exhibits and other documents and writings referred to herein or
delivered pursuant hereto, which form a part hereof, contains the entire
understanding of the parties with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings other
than those expressly set forth herein or therein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to its
subject matter. This Agreement may be amended only by a written instrument duly
executed by the parties or their respective successors or assigns.
7.05. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
7.06. TERMINATION In the event that one party's due diligence determines a
material breach or inaccuracy in the other's representation(s) or other terms of
this agreement, the party may terminate its obligations under this agreement by
providing written notice of the breach. If the breach is not cured within 10
calendar days, the agreement is terminated, with no further obligations of the
parties.
7.07. GOVERNING LAW. This Agreement shall be subject to Delaware law and
jurisdiction, except insofar as the laws of the jurisdictions of domicile of the
parties shall control in any conflict of laws dispute.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto as of the date first above written.
DAVIN ENTERPRISES, INC.
By:_________________________
Name:_______________________
Title:______________________
CREATIVE MASTER, LTD.
By:_________________________
Name:_______________________
Title:______________________
<PAGE>
SHAREHOLDERS OF CML
A. By:_________________________
Name:_______________________
Title:______________________
B. By:_________________________
Name:_______________________
Title:______________________
C. By:_________________________
Name:_______________________
Title:______________________
<PAGE>
EXHIBIT 10.3
According to the laws and rules of China, the Joint Enterprise agreement is
signed in September 10, 1994 and the content of this agreement is as follow:
A) Involved parties
1) Dongguan Heng Li Trading Company (hereafter name "Party A")
Address: Dongguan Heng Li Zhen, Dongguan
Representative: Luk Yam Fai Title: Manager Nationality: China
2) Creative Master Limited (hereafter name "Party B")
Address: Flat A, 8/F., Casey Ind. Bldg., 18 Bedford Road, Taikoktsui,
Kowloon, HK.
Representative: Kwok Chek Pui Title: Manager Director Nationality: China
B) Joint Venture Enterprise
Both parties agree to set up a Joint Enterprise, named "Dongguan Changying Toys
Factory Co. Ltd.".
Address: Dongguan Heng Li Zhen, Dongguan
Representative: Mr. Leo Kwok Title Managing Director
Both parties agree that this Joint Enterprise business will last for 12
years, which will be effective on license issue day
The Joint Enterprise act as a corporate of the Peoples Republic of China.
It should obey the rules and regulation of China
C) Condition of cooperation and split of profit
Party A let 4,000m/2/ factory plant and 1,500 m/2/ dormitory.
Party B invest HK$3.8million, including facility asset HK$3million, floating
asset HK$0.8million.
After the verification by a registered accountant on the investment of Party
B, the Joint Enterprise will issue a certificate of investment for Party B.
After the termination of the agreement, Party B will restore all the facilities
(except depreciation). The rent of the factory plant and dormitory (let by Party
A) is RMB$10m/2//month and RMB$8m/2//month (Starting from the 4/th/ year, the
rent will increase 10% in every 3 years). The Joint Enterprise will pay the rent
to Party A, in which such expenses should be considered as expenditure, instead
of investment.
The profit of the Joint Enterprise (after deducting the cost and taxes) will
be shared between Party A and Party B in the proportion of 10% and 90%
respectively. The loss will also be shared in such proportion.
If Party B want to restore the profit back to HK, it should follow the
regulation of China by opening a foreign currency account in Dongguan province
bank and send the money to a bank appointed by Party B.
<PAGE>
D) Production and Sales of products
Joint Enterprise produces 6,000 tons metal plastic toys annually. 80% of the
products will be exported (responsible by Party B) and the remaining 20% will be
sold in China (responsible by Joint Enterprise). The price of all the products
should be the same, which is calculated by summing the cost of the product and
some reasonable profit. The profit will be re-considered bi-annually by the
Board of Directors.
If it is possible, the facilities, materials, etc should be purchased in
China. If it is allowed to import these items, the Joint Enterprise can appoint
another party or ask Party B to purchase these items from other countries. The
prices should be accepted by both parties.
If the facilities are purchased by Party B from other countries, it will be
the responsibility of Party B to send some technicians to teach or offer
training program for the workers.
E) Management
The Board of Directors is formed by the members of both parties. It possesses
the highest authorities, in which it is formed by 3 persons (1 from Party A and
2 from Party B). The Managing Director (1) and the Vice Managing Director (1) is
appointed by Party B and Party A respectively. The remaining one is a Director.
The tenure of the Directors will last for 4 years. The directors can hold the
posts for another term after being re-elected. Their rights and responsibilities
are listed clearly in the Joint Enterprise Agenda
The Board of Directors appoints 1 manager and 1 assistant manager. They are
responsible for executing all the decisions made by the Board of Directors.
Their right and tenure are listed clearly in the Joint Enterprise Agenda. If it
is found that there is misconduct or serious mistakes made by the either
manager, the Board of Directors has the right to terminate their jobs.
F) Wage and Welfare
The Board of Directors has to decide the wage, subsidies, award, etc of the
staff. Such wage/welfare should be determined according to the instruction of
the Chinese Government and the real price level of Dongguan province.
The Joint Enterprise must join a Dongguan insurance company for the
Employees' Compensation Scheme.
G) Finance, Account and Foreign Currencies Management
The accounting system must comply with the system of the Peoples Republic of
China and the rules of the Tax Department, and use RMB as the accounting unit.
The expenses of all the equipment and material will only be effective with an
invoice. For those invoices made outside China or in HK/Macau must accompany
with China custom declaration and the rate of custom.
The Joint Enterprise can open a foreign currencies account and RMB account in
one of the banks in Dongguan province. This bank has the right to go through all
the expenses of and
<PAGE>
supervise the Joint Enterprise. If Party B want to restore the money to other
countries, it must be handled by the captioned bank.
H) Registration, Taxation and Insurance
The Joint Enterprise must apply registration license from the China
Industrial Administrative Department. It should also register its taxation in
the Tax Department. The payment of tax must comply with the tax system of China.
The China Insurance Company (Dongguan province branch) is the only authority
in offering the insurance for the Joint Enterprise.
I) Import of Material
The equipment and material, and the products must be imported or exported
through customs of Guangdong
J) The Extend of this Agreement
The investment amount of Party B must be paid fully within 6 months after
the agreement is effective. If Party B cannot pay fully and cannot provide
sufficient reasons, it will be considered as a breach of contract, meaning that
Party B is willing to terminate the agreement. On the other hand, if Party B
cannot pay fully but with sufficient reasons, it may ask for extending the
payment period for 1 month. If Party B still cannot pay, it will also be
considered as a breach of contract and Party B is willing to terminate the
agreement. If these occur, the party, which still keep its promise, can ask for
the termination of the agreement and ask for remedy/compensation.
None of the parties can terminate the agreement with the consent of other
party. Under special condition, if one of the parties want to terminate the
agreement, it must inform the other party 6 months before. If any of the party
terminate the agreement without the consent of other parties, this party will be
responsible for compensating the damages or loss of the other party.
K) Unpredictable Event
Since the occurrences of earthquake, typhoon, flood and war are
unpredictable, any party (say Party A) faces these events must inform the other
party (say Party B) immediately. At the same time, Party A must, within 15 days,
inform party B the detail of the unpredictable event (with sufficient evident
provided by the local authority) which causes it unable to implement its
responsibilities. Both parties has to decide whether the agreement should be
terminated or not, or to exempt some of their responsibilities.
L) Trademark of the products
Both parties have the right to decide the trademark and the usage of the
products, but they should follow the registration procedures of the countries in
which their products are to be sold.
<PAGE>
M) Arbitration
If the argument between the parties cannot be solved by
coordination/cooperation, the China Commerce and Trading Arbitration Council
will be involved. Both parties must follow the decision made by this Council
N) Supplementary rules
This agreement will be effective after being signed by the two parties. If
the instruction of this agreement is inadequate, the parties can add some other
instructions, which should then be approved by the authorized organization
<PAGE>
EXHIBIT 10.4
This agreement is signed in 1/st/ April, 1996
Involved Parties
1. Dongguan Heng Li Zhen Trading Company (hereafter named "Party A")
Address: Dongguan Heng Li Zhen
2. (Hong Kong) Creative Master Limited (hereafter named "Party B")
Address: Flat A, 8/F, Casey Industrial Building, 18 Bedford Road,
Taikoktsui, Kowloon, HK.
Both parties signed a "Dongguan Chuangying Toys Factory Co. Ltd. (hereafter
named "Joint Enterprise")" contract in China on the date of 10/th/ September,
1994. The copy this original agreement is in the appendix A-1 for reference.
This internal supplementary agreement will serve as the reference of the
original agreement. After signing this supplementary agreement by both parties,
this supplementary agreement will be effective from 10/th/ September, 1994. This
supplementary agreement has the same legal binding as the original agreement. If
there is contradiction between these 2 agreement, both parties should comply
with the internal supplementary agreement.
The content of this agreement is as follow:
Condition 3: Cooperation condition and profit distribution
Party A agrees to waive 10% of its pre-profit/loss to Party B, in which
Party B act as a trustee. Party A does not have direct or indirect interest on
asset and loan of the joint enterprise. Party A also agrees to ask either Party
B or the joint enterprise for the agreed process fee. Such fee can be changed
under the consensus of the both parties
Condition 5: Joint enterprise management structure
The Direct and the Assistant Managing Director, appointed by Party A, do not
have the right to control the operation and finance of the joint enterprise.
<PAGE>
EXHIBIT 10.8
Entrepreneur Agreement -- Techtime Industries Limited
-----------------------------------------------------
After the discussion among the parties, they have compromise to establish a
entrepreneur in producing alloy, plastic toy, manufacturing and processing, with
the following agreement:
A) Name of Entrepreneur: Techtime Industries Ltd.
Address of Entrepreneur: 4/F China Building, 29 Queen's Road C., Central,
HK.
B) 1,500,000 Investment amount, share proportion as follow:
Creative Master -- 55%, Chen Hao Qiang -- 15%, Gan Zi Kuen -- 15%, Wu Qing
Su -- 15%. Such investment should be paid in cash or other appropriate ways.
All the shareholders have to invest the amount in March 96. Shareholder has
to pay the actual amount if he invest after the deadline.
C) Establishment of Board of Directors
1. The Board of Directors consists of 8 persons, in which the Managing
Director is appointed by Creative Master Limited, Chan Chi as the
Assistant Managing Director, Creative Master Limited appoint 3 others
person as directors and the remaining three parties has to appoint 1
person each. Under the Board of Director, a Management Council is formed.
This Council is composed of production technician, production planning
and administration.
2. The new policy of the Board of Directors must be accepted by majority of
the directors before it can be implemented. If the voting for and against
are the same, the Managing Director has the right to determine whether to
accept the policy or not.
3. The Board of Directors has the highest technical authority. It has the
right to determine its business objective, development regulation, audit
its own finance, employment, distribution of profit, welfare, salaries
and production.
4. Under the direction of the Board of Directors, the factory manager has to
manage the factory. He also has to supervise 2 assistant factory
managers. If it is observed that the factory manager did not work
properly, the Board of Directors has the right to terminate his job. His
responsibility is to implement all the policies made by the Board of
Director and directly responsible for the profit and loss of the
entrepreneur. He has to formulate all production planning system and
guarantee that he will implement these planning.
5. Financing/Accounting supervisor is appointed by Creative Master Limited.
<PAGE>
D) Production
1. It is planned that the entrepreneur will produce 15,000,000 to 18,000,000
annually. It should first produce the orders offered by Creative Master
Limited. If the amount is inadequate, it can produce the orders from other
companies, under the condition that there is no contradiction with the
products of Creative Master Limited.
2. When producing the orders offered by Creative Master Limited, the worker
and material should be provided by the entrepreneur. Creative Master
Limited should provide engineering and other materials. Creative Master
Limited will collect 8-12% management and profit from the price of the
product but the exact amount will depend on the product.
3. To develop tampo print in appropriate time.
E) Distribution of Profit (Profit/Loss will be distributed according to the
proportion of share)
1. The account is audited from Jan 1 to 31 Dec.
2. After deducting its operation cost, the distribution of profit of the
entrepreneur will be as follow:
i. 10% of the annual profit will be distributed to directors and other
production management staff as bonus.
ii. 15% of the annual profit as saving amount
iii. 75% of the annual profit will be distributed to the shareholders
F) If any party release its share, the other shareholders can purchase the
shares by the asset amount at that moment. Only if all the other shareholders
do not want to purchase the share, the one who release the share can sell his
share to third party.
<PAGE>
EXHIBIT 10.9
[LETTERHEAD OF HANG SENG BANK]
Our Ref: Corporate Banking - Trade Finance
Private & Confidential
Creative Master Limited 16 July 1998
Unit B 8/F Casey Industrial Building
18-20 Bedford Road
Tai Kok Tsui
Kowloon
Attention: Mr TONG Ka Wing Carl
- -------------------------------
Dear Sirs
BANKING FACILITIES
We have recently reviewed the undermentioned facilities (the "Facilities") and
are pleased to confirm that the Facilities will continuously be made available
to you subject to the same terms and conditions set out in our facility letter
to you dated 10 June 1996, a copy of which is enclosed for your reference:
HKD2,000,000.00 For establishment of documentary letters of credit for your
account in favour of parties and covering import of goods in
the ways acceptable to us and/or acceptance of bills drawn
thereunder.
HKD2,000,000.00 Trust receipt facility relating to goods imported and
financed under our documentary letters of credit established
for your account with overdraft sub-limit up to
HKD200,000.00.
All security documents, guarantees and letters of comfort, if any, executed in
our favour to secure the Facilities shall remain in full force and effect.
The Facilities shall continue to be subject to our usual review as well as our
customary overriding right of repayment on demand and also subject to our right
to call for cash cover on demand for prospective and contingent liabilities.
A handling fee shall be payable in respect of the present review and each
subsequent annual review of the Facilities. We are authorised to debit the
current account maintained by you with us for such handling fee when it becomes
payable.
1
<PAGE>
Kindly indicate your acceptance by signing and returning to us the duplicate of
this letter within 21 days from date hereof. Upon receipt of your acceptance, we
will debit your current account for the handling fee of HKD6,000.00 in respect
of the present review.
Our Insurance Agency Department offers a full range of insurance services and
will be pleased to quote you competitive rates on fire, marine and other
coverages upon your request. Should you require further information, please feel
free to contact Mr Jase YIU, Manager, Insurance Agency Department at 2532 0235.
Should you have any queries, please do not hesitate to contact our Mr LAU Chun
Man at 2825 3403.
We hope that you will make active use of the Facilities and assure you of our
willingness to serve you always.
Yours faithfully
/s/ Howard Lau
Howard Lau
Senior Credit Manager
Encl
/tkf
2
<PAGE>
EXHIBIT 10.10
[LETTERHEAD OF HANG SENG BANK]
Our Ref: Corporate Banking - Trade Finance
Private and Confidential
Creative Master Limited 10 June 1996
Unit B 8/F Casey Industrial Bldg
19-20 Bedford Road
Taikoktsui
Kowloon
Attention: Mr. Tong Ka Wing Carl
- --------------------------------
Dear Sirs
BANKING FACILITIES
We are pleased to offer you the following revised lines of credit facility:-
HKD2,000,000.00 For establishment of documentary letters of credit for your
account in favour of parties and covering import of goods in
the ways acceptable to us and/or acceptance of bills drawn
thereunder.
HKD2,000,000.00 Trust receipt facility relating to goods imported and
financed under our documentary letters of credit established
for your account. Out of this limit, a sub-limit of
HKD200,000.00 is set for overdraft facility on your current
account no. 262-181183-001 with interest chargeable at prime
rate plus 3%, presently at 11.5% per annum with monthly
rests and subject to fluctuation at our discretion.
In this connection, please sign and return to us the
attached "Undertaking for Repayment of Overdraft" and
Extract from the Minutes of a Meeting of the Board of
Directors".
The above facilities are secured against three Deeds of Guarantee to the total
extent of HKD1,000,000.00 already executed by Mr. Tong Ka Wing Carl in our
favour and a Deed of Guarantee to the extent of HKD1,200,000.00 to be executed
by Mr. Tong Ka Wing Carl and Mr. Kwok Sheck Pui in our favour. In this
connection, please arrange to have the attached Deed of Guarantee duly executed
by the guarantors and returned to us accordingly.
These facilities are subject to our usual review as well as our customary
overriding right of repayment on demand and are also subject to our right to
call for cash cover on demand for prospective and contingent liabilities.
You shall provide us with a certified copy of your annual audited accounts
within 6 months following the end of each financial year and such other relevant
financial information as we shall from time to time reasonably request.
Kindly sign and return to us the duplicate of this letter to indicate your
acceptance of this credit facility arrangement. This offer of facilities is
available for acceptance until 1 July 1996 and if not accepted by that date,
will be deemed to have lapsed.
Upon receipt of your acceptance, we shall debit your current account HKD6,000.00
to cover our administrative cost in arranging these facilities.
1
<PAGE>
Our Insurance Agency Department offers a full range of insurance services and
will be pleased to quote you competitive rates on fire, marine and other
coverages upon your request.
We hope that you will make active use of these facilities and wish to assure you
of our willingness to serve you always.
Yours faithfully
/s/ Herman Wong
Herman WONG
Credit Manager
/sms
Acceptance confirmed by:
For and on behalf of
CREATIVE MASTER LIMITED
ILLEGIBLE SIGNATURE
- -------------------------
Authorized Signature(s)
(A/C No. 262-181183-001)
2
<PAGE>
EXHIBIT 10.11
[LETTERHEAD OF BANQUE NATIONALE DE PARIS HONG KONG BRANCH]
Creative Master Ltd.
Unit B, 8/F.,
Casey Ind. Bldg.,
O/Ref: Credit/TY/st 18-20 Bedford Road,
Taikoktsui,
Y/Ref: Kowloon.
Attn: Mr. Kwok Sheck Pui
------------------------
PRIVATE & CONFIDENTIAL
- ----------------------
Hong Kong 21st April 1997
Dear Sirs,
We are pleased to inform you that we are placing at the disposal of your Company
the following facilities:
- - Overdraft &/or
Opening of Letters of Credit followed
by Trust Receipts (max. 60 days)............................HKD1,500,000.-
(of which: - OD max. HKD150,000.-)
against the following securities:
- - Single Personal Guarantee dd.13.6.90........................Covering all
signed by Mr. Tong Ka Wing, Carl commitments
- - Single Personal Guarantee dd.13.6.90........................Covering all
signed by Mr. Kwok Sheck Pui commitments
Please note that an administration fee of HKD3,750.- will be charged to your
account upon your acceptance of this offer letter.
To update our record, we also enclose two sets of blank networth statement form
for the abovenamed guarantors to fill in and return.
The above facilities are subject to review at any time, and in any event by 31st
January 1998 and to our unconditional right to terminate and demand immediate
repayment of the above facilities at any time and to require you to provide cash
collateral for any prospective or contingent liability at any time.
This offer letter is open for acceptance within one month from the date hereof.
Please indicate your acceptance to the above by signing and returning to us the
duplicate of this letter before 21st May 1997.
...P.2/
<PAGE>
[SECOND PAGE LETTERHEAD OF BANQUE NATIONALE DE PARIS HONG KONG BRANCH]
This letter supersedes all our previous correspondence regarding banking
facilities that were made available to you.
Assuring you of our best services at all times, we remain,
Yours faithfully,
BANQUE NATIONALE DE PARIS
Hong Kong Branch
/s/ David To /s/ Claudia Yeung
David To Claudia Yeung
Head of Deputy Head of
Commercial Desk Commercial Desk
<PAGE>
EXHIBIT 10.12
[LETTERHEAD OF BANK OF CHINA HONG KONG BRANCH]
Ref: CD/CI/920226/L8/ay
May 25, 1992
Creative Master Limited,
8/F., Casey Industrial Bldg.,
18 Bedford Road, Tai Kok Tsui,
Kowloon.
Attn: Mr. Carl Tong
-------------
Dear Sirs,
Re: General Banking Facilities
--------------------------
We are please to offer you General Banking Facilities ("the Facilities") on the
following terms and conditions.
1. Allocation of the Facilities
----------------------------
1.1 The Facilities are available by way of:-
(a) Overdraft Facility up to the extent of HKD200,000.00. Interest
will be charged at 4.25% per annum over our best lending rate or
cost of fund, whichever is the higher, currently 11.25% p.a.,
subject to fluctuation at our sole and absolute discretion;
(b) Letters of Credit Issuance and Inward Bills Facility up to the
extent of HKD300,000.00 (within which Trust Receipt Facility for
period up to 90 days and/or Shipping Guarantees Issuance Facility
up to the extent of HKD300,000.00 is available).
1.2 The abovementioned Facilities shall be deemed automatically drawn down
by you and/or advanced by us to you when payment is made by us under
the relevant Facilities.
1.3 Without prejudice to Clause 3, we reserve the right at any time to
re-allocate at our sole and absolute discretion the various banking
facilities.
-1-
<PAGE>
[LETTERHEAD OF BANK OF CHINA HONG KONG BRANCH]
2. Interest Rate and Calculation
-----------------------------
2.1 Save and except expressly provided otherwise in this letter, all
amounts advanced/drawn under the Facilities shall be charged with
interest at the relevant usual standard rates (as well after as
before judgment) as we may from time to time at our sole and
absolute discretion charge our customers on similar advances.
2.2 Interest will accrue from day to day and be calculated on the basis
of the actual number of days elapsed and a 365 day year for Hong
Kong Dollar and Sterling Pound and a 360 day year for any other
currency.
2.3 All accrued interest shall be paid in arrears on any appointed date
according to our customary practice and if not so paid shall be
capitalized as principal advance and bear interest at the same
rate.
2.4 We reserve the right to collect default interest on any sum overdue
and not paid which will be charged at the rate of 4.25% p.a. over
the best lending rate as may be quoted by us from time to time (as
well after as before judgment) from the date of default to actual
payment in full.
3. Expiry of the Facilities
------------------------
The Facilities will be subject to review on a regular basis and
shall expire forthwith as and when we have given you notice of
termination. Whilst it is our present intention that the Facilities
should remain available to you until that date and notwithstanding
any other provision of this letter, we nevertheless reserve the
right at our sole and absolute discretion to increase, reduce
and/or vary the Facilities or any part or parts thereof at any time
to be effective forthwith by notice to you.
4. Repayment
---------
4.1 All amounts borrowed under the Facilities (including interest
accrued thereon) are repayable on demand.
-2-
<PAGE>
[LETTERHEAD OF BANK OF CHINA HONG KONG BRANCH]
4.2 All payments made by you to us are to be made in the currency of
the Facilities in immediately available funds without set-off or
counter-claim and free and clear of and without withholding or
deduction for any and all present or future taxes, duties or other
charges.
4.3 Any payment made to us not in its correct currency may at our
absolute discretion be converted into the currency of the relevant
Facilities to cover your obligations and liabilities in that
currency at the then prevailing spot rate of exchange as
conclusively determined by us for purchasing the currency of the
relevant Facilities with the existing currency.
5. Conclusive Statement of Account
-------------------------------
Any statement of account relating to the Facilities signed as
correct by any one of our officers shall be conclusive evidence of
your indebtedness to us and be binding on you, save for manifest
errors.
6. Conditions Precedent
--------------------
The Facilities will be available for drawing when we have received
the following documents in form and content satisfactory to us:-
(a) The signed copy of the duplicate of this letter with Board
Resolutions indicating your acceptance of the Facilities on
terms and conditions set out in this letter;
(b) An Agreement of Pledge duly executed by your authorized
officer(s);
(c) A Running Trust Receipt Agreement duly executed by your
authorized officer(s);
(d) A General Shipping Guarantee duly executed by your authorized
officer(s);
(e) A General Letter of Hypothecation and Power of Attorney duly
executed by your authorized officer(s);
-3-
<PAGE>
[LETTERHEAD OF BANK OF CHINA HONG KONG BRANCH]
(f) A Joint and Several Guarantee for the repayment of principal
due up to the extent of HKD500,000.00 and accrued interest
thereon and other costs and expenses due under the Facilities
duly executed by Tong Ka Wing, Carl and Kwok Sheck Pui.
7. Further Covenants
-----------------
All necessary corporate resolutions required to be passed by you
and on the part of your shareholders, directors and officers to
authorize this letter and its execution and performance have been
properly passed in accordance with the laws of Hong Kong and your
Memorandum and Articles of Association and this letter constitutes
legal, valid and binding obligations on your part.
8. Waivers and rights cumulative
-----------------------------
No delay or omission on the part of us in exercising any right,
power, privilege or remedy in respect of this letter shall impair
such right, power, privilege or remedy, or to be construed as a
waiver of it, nor shall any single or partial exercise of any such
right, power, privilege or remedy preclude any further exercise of
it or the exercise of any other right, power, privilege or remedy.
The rights, powers, privileges and remedies provided in this letter
are cumulative and not exclusive of any rights, powers, privileges
or remedies provided by law.
9. Handling Charges
----------------
Handling charges of HKD2,500.00 flat shall be paid by you upon
acceptance of this letter and thereafter annually upon renewal of
the Facilities.
10. Expense
-------
All expenses including but not limited to legal fees,
communications and other out-of-pocket expenses are for your
account.
11. Governing Law
-------------
The laws of Hong Kong.
-4-
<PAGE>
[LETTERHEAD OF BANK OF CHINA HONG KONG BRANCH]
Please signify your understanding and acceptance of this offer by signing
and returning the duplicate of this letter to us on or before June 25, 1992,
failing which this offer shall lapse.
Should you have any queries, please do feel free to contact our Ms Sylvania
Fattedad at 8266544 at any time. We are here to serve you better.
Yours faithfully,
For Bank of China, Hong Kong Branch
/s/ [ILLEGIBLE]
Authorized Signature(s)
After due and careful
consideration of the terms of
this letter, we agree to
observe and be bound by all the
terms and conditions herein set
out.
CREATIVE MASTER LIMITED
/s/ [ILLEGIBLE]
-------------------------
Authorized Signature(s)
Date:
Encl. (a) Form of Certified Extract of the Minutes of Board Resolutions.
(b) Deed of Guarantee.
(c) Form of Agreement of Pledge.
(d) Form of Running Trust Receipt Agreement.
(e) Form of Shipping Guarantee.
(f) Form of General Letter of Hypothecation and Power of Attorney.
<PAGE>
EXHIBIT 10.13
[LETTERHEAD OF COMMONWEALTH FINANCE CORPORATION LIMITED]
CFCL/RCB/218
20 December 1997
M/s. Creative Master Ltd.,
Unit B, 8/F, Casey Ind. Bldg.,
18-20, Bedford Road,
Taikoktsui, Kowloon,
Hong Kong
- ---------
Dear Sir,
RE: Banking Facilities
------------------
With reference to your request, we are pleased to advise that we have at our
discretion placed the following facilities at your disposal:
(HK$ Million)
------------
Pre-Sale:
Packing Loans against orders HK$ 7.00 MN/US$ Equiv.(existing)
Post-Sale:
Loans against Receivables of Mattel HK$ 3.00 MN/US$ Equiv.
to the extent of 70% of Invoice value
------------
Max. HK$10.00 MN
------------
Margin : Presently 5% on MBI invoices being deducted w.e.f.
15/10/97 towards build up of margin. 15% of each cheque
received from Mattel will be deducted towards margin.
Build up as already agreed.
Rate of Interest : 2.25% over US$ Prime.
Overdue beyond 60 days of purchase of invoice/date of
Advance to be charged @1.50% over agreed rate with
compounding.
In any cse each invoice/group of invoices to be
settled/refunded within 75 days of Purchase date.
Terms and Conditions :
1. Company executing Standard documents alongwith various undertakings
supported by a Board Resolution for enhanced limits.
<PAGE>
[LETTERHEAD OF COMMONWEALTH FINANCE CORPORATION LIMITED]
Page...2...
2. Enhanced limits to be guaranteed by Mr. Tong Ka Wing Carl, Mr. Kwok Sheck
Pui and CML. Both Directors to file Statement of their Assets and Liabilities as
on 30-9-97
3. Enhanced limits also to be guaranteed by ACMA Strategic Holdings Ltd., Excel
Master Ltd., Techtime Industries Ltd and Carlson Ltd.
4. CML to arrange for an Irrevocable Standby L/C for US$388,000 approx. from
UOB Ltd., Singapore in our favour on behalf of ACMA Ltd., Singapore valid for 1
year to start with before release of the new limit. The quantum of actual
------
advance will be restricted to the amount of Standby L/C.
5. Mr. Tong KaWing, Carl to submit a Corporate/and Shareholders Resolution from
Comark Inv. Ltd. for extending mortgage charge for the revised limits within
next 4 weeks say by 31/01/98.
6. Mr. Tong KaWing, Carl to undertake to extend mortgage charge on the property
for last sanctioned dated 11/07/97 limit by 31/03/98. A suitable undertaking to
be signed by Mr. Tong KaWing Carl to these effects. Delay beyond 31/03/98 will
be viewed seriously by CFC Ltd.
7. CML to submit certified copies of:
a) latest Search Report from Company's Registry.
b) latest BRC.
c) latest Annual Return US 32 of Company's Act.
d) latest Inland Revenue Return.
8. All invoices presented for Purchase/Advance against them should be
accompanied by copies of B/L, Air Consignment Note, Forwarder's Combined Bill
of Lading or any other title to goods document for goods shipped from HK. All
invoices to carry notation "Please issue cheques favouring CFCL A/c. CML Ltd".
Only invoices on 60 days maturity to be advanced against to the extent of 70%
of their value.
9. CML to issue a letter of Authority to MVOA Ltd/Mattel requesting them to
issue all cheques favouring CFCL A/c. CML as per notation on the invoices.
Letter to be sent by Registered Post/Courier through CFC Ltd.
<PAGE>
[LETTERHEAD OF COMMONWEALTH FINANCE CORPORATION LIMITED]
Page...3...
10. CML to borrow from any other Bank/DTC/RLB with CFCL's written consent.
11. CML to pay HK$10,000 as process fee for this Review and HK$5,000 p.m. as
service charge after disbursement.
We reserve our right to modify, cancel or terminate at our discretion the
facility on demand and to declare all amounts then outstanding to be immediately
due and payable. The facility is subject to review at periodic intervals based
on uptodate financial data (to be provided by you) and prevalent market
conditions.
Please confirm your acceptance by signing and returning to us the original of
this letter alongwith certified true copy of Board Resolutions authorising
acceptance of these terms as also for execution of documents.
Thanking you and assuring you of our best services, always,
Yours faithfully
For Commonwealth Finance Corp Ltd.
[ILLEGIBLE SIGNATURE] [ILLEGIBLE SIGNATURE]
Manager Chief Executive
We accept the above conditions.
For Creative Master Ltd.
[ILLEGIBLE SIGNATURE]
- ----------------------
Director
<PAGE>
[LETTERHEAD OF COMMONWEALTH FINANCE CORPORATION LIMITED]
M/S CREATIVE MASTER LTD. CFCL/RC8/
UNIT B, 8/F CASEY INDUSTRIES BLDG. 11-Jul-97
18-20, BEDFORD ROAD,
TAIKOKTSUI
KOWLOON
HONG KONG
DEAR SIR,
RE:- YOUR REQUEST FOR ENHANCEMENT
IN CREDIT FACILITIES
WITH REFERENCE TO YOUR REQUEST WE ARE PLEASED TO INFORM YOU THAT WE HAVE
SANCTIONED A PACKING CREDIT LIMIT UPTO HKD 7 MN, SUBJECT TO TERMS AND CONDITIONS
AS PER ANNEXURE ATTACHED.
THE RATE OF INTEREST WILL BE 2% OVER HKD PRIME. PRESENTLY 10.75% P.A. IN
CASE OF OVERDUE PENAL RATE WILL BE CHARGED AS UNDER:-
- - OVERDUE UPTO 1 MONTH FROM DUE DATE - 1% OVER AGREED RATE
- - OVERDUE OVER 1 MONTH UPTO 2 MONTHS - 2% OVER AGREED RATE
- - IN CASE OF ROLL OVER OF LOAN - A MINIMUM OF HKD2,500 WILL BE CHARGED AT EACH
ROLL OVER FOR 6 MONTHS REQUEST FOR ROLL OVER SHOULD BE SENT AT LEAST 2 WEEKS
IN ADVANCE
THE PRESENT OUTSTANDING IN YOUR VARIOUS LOAN A/CS WITH US AS ON 8 JULY 97 IS AS
UNDER:
LOAN 201044 HKD 1,000,000.00 + INTEREST
201142 HKD 1,500,000.00 + INTEREST
201057 HKD 1,000,000.00 + INTEREST
201062 HKD 1,000,000.00 + INTEREST
------------------------------
TOTAL HKD 4,500,000.00 + INTEREST
------------------------------
PLEASE ACKNOWLEDGE THE DEBT AS ON 8 JULY 97 PLUS INTEREST AND CONFIRM THAT
SECURITY DOCUMENTS EXECUTED BY YOUR CO/GURANTORS ARE INFORCE AND VALID.
WE RESERVE OUR RIGHT TO MODIFY, CANCEL OR TERMINATE AT OUR DISCRETION, THE
FACILITY ON DEMAND AND TO DECLARE ALL AMOUNTS THEN OUTSTANDING TO BE IMMEDIATELY
DUE AND PAYABLE.
CONTINUE TO PAGE 2
<PAGE>
[LETTERHEAD OF COMMONWEALTH FINANCE CORPORATION LIMITED]
PLEASE CONFIRM ACKNOWLEDGEMENT OF DEBT AND SECURITY AS ALSO THE TERMS OF
SANCTION BY SIGNING AND RETURNING TO US THE ORIGINAL OF THIS LETTER WITH
ANNEXURE 1, ALONG WITH A COPY OF BOARD RESOLUTION (SPECIEMEN ENCLOSED)
AUTHORISING EXECUTION OF DOCUMENTS.
THANKING YOU AND ASSURING YOU OF OUR BEST SERVICES, ALWAYS
YOURS FAITHFULLY,
FOR COMMONWEALTH FINANCE CORP. LTD.
[ILLEGIBLE SIGNATURE] [ILLEGIBLE SIGNATURE]
- ------------------------ ------------------------
CHIEF EXECUTIVE MANAGER
WE CONFIRM THE DEBT AND SECURITY AS ABOVE AND ALSO ACCEPT THE CONDITIONS
MENTIONED HEREIN ABOVE AND THE ANNEXURE I.
FOR CREATIVE MASTER LTD.
[ILLEGIBLE SIGNATURE]
DIRECTOR
GURANTORS (PRESENT)
[ILLEGIBLE SIGNATURE]
------------------------ -----------------------
MR. TONG KA WING, CARL MR. KWOK SHECK, PUI
END OF PAGE 2
<PAGE>
ANNEXURE - I
A/C CREATIVE MASTER LTD.
[LETTERHEAD OF COMMONWEALTH FINANCE CORPORATION LIMITED]
Subject to following terms and conditions:
1. Company executing necessary documents supported by Board Resolution for
enhanced limits.
2. Limit of HKD 7 MN to be guaranteed by directors namely Mr. Tong Ka Wing,
Carl, Mr. Kwok Sheck Pui, CML to execute a guarantee supported by a Board
Resolution.
3. Charge of this loan to be extended within 6 months on the property situated
at 65, Bisney Road, Pokfulam, Hong Kong MV 13 MN in 1994 A Corporate and
Shareholder Resolution from Comark Inv. Ltd. to be obtained & kept on record
by 31.7.97.
4. CML to agree and undertake as under:
a) to inform CFCL any changes in its Directors/ Business/ and address.
b) to submit order book position at end of every quarter i.e. March, June,
Sept. And Dec. by 15/th/ of every month. The first such statement
containing details of quantity, amount of pending orders, name of the
buyer and last date of validity of order, should be submitted before
disbursement of additional limits.
c) to maintain a minimum margin of 50% on the amount outstanding of Packing
Credit Loan vis-a-vis outstanding order position at all times.
d) not to divert the Packing Credit Loans to acquisition of Fixed Assets or
to its subsidiaries.
e) to refund all the overdue Packing Credit as and when required by CFCL.
f) to start with 5% deduction on monthly payments from MBI Inc. USA will be
made commencing from 1-8-97.
5. Limit to be guaranteed by all the 3 subsidiary companies guarantee documents
to be executed by Authorised signatories supported by Board Resolution
certified copies of their BRC's, Meno of Articles Assoc to be submitted.
6. The level of capital and reserves at HKD15,194,000.00 (as on 31/st/ December,
1996) to be maintained during currency of this advance.
7. CML to provide latest Search Report from Co's Registry. CML to file CFCL
Charge on margin money as and when required by CFCL.
8. CML to provide certificate every 6 months confirming that PCL has been used
towards Working Capital requirements.
9. CML to approach CFCL at least 2 weeks in advance if a particular PCL is to
be Rolled Over. A Roll Over Fees of HKD2,500.00 will be charged at each Roll
Over on mutually acceptable terms.
10. CML to submit Audited Results within 3 months of close of financial year.
11. CML to pay HKD7,500.00 as process fees before disbursement along with copy
of facility letter duly accepted.
12. CML to confirm that the existing documents and terms will continue to hold
good.
13. Co. to divert Collection of proceeds of their other buyers to CFCL by Oct 97
on the lines of MBI Inc. and monthly process fees to be charged
14. Directors/ Guarantors to confirm that there is no change in their Worth as
declared by them on 2-3-1993.
15. This review will be valid upto July, 1998, unless otherwise notified.
16. CML to submit names of their other Bankers with facilities enjoyed as on
30/6/97.
17. CML to bring down the PC Loan by 20% every year commencing from July 98. and
the holding Co. of CML i.e. ACMA STRATEGIC HOLDING LTD.
18. CML to provide valuation report within 4 weeks.
For and on behalf of
CREATIVE MASTER LIMITED
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- --------------- --------------- ---------------
Manager Chief Executive
<PAGE>
EXHIBIT 10.16
JOINT AND SEVERAL GUARANTEE BY INDIVIDUALS
OR PARTNERS IN A FIRM
To: Commonwealth Finance Corporation Limited
11/F., Wyndham Place, 40-44 Wyndham Street, Hong Kong
(1) In consideration of your making or continuing advances or otherwise giving
credit or affording credit facilities (including inter alia the issue of
guarantees by you and your acceptance of guarantees by the Principal as
hereinafter defined in favour of third parties) for as long as you shall think
fit to. Creative Master Ltd. (hereinafter called "the Principal") we, the
undersigned, hereby agree to pay to you on demand all sums of money which are
now or shall at any time be owing to you anywhere on any account whatsoever
whether from the Principal solely or from the Principal jointly with any other
person or persons or from any firm in which the Principal may be a partner
including the amount of notes or bills discounted or paid and other loans,
credits or advances made to or for the accomodation or at the request either of
the Principal solely or jointly or of any such firm as aforesaid or for any
money for which the Principal may be liable as surety or in any other way
whatsoever together with in all the cases aforesaid all interest, discount and
other DTCS' charges including legal charges occasioned by or incident to this or
any other security held by or offered to you for the same indebtedness or by or
to the enforcement of any such security.
Provided always that the joint and several liability ultimately enforceable
against us shall not exceed in aggregate the sum of HKD 2.5 MN together with
interest thereon (as well after as before judgement) with monthly rests computed
from the date of demand at the rate of 1.50% per annum above its Best Lending
Rate (which expression shall mean the rate of interest per annum from time to
time quoted by the Hong Kong and Shanghai Banking Corporation in Hong Kong as
its prime or best lending rate for Hong Kong Dollars in Hong Kong).
(2) This guarantee shall not be considered as satisfied by any intermediate
payment or satisfaction of the whole or any part of any sum or sums of money
owing as aforesaid but shall be a continuing security and shall extend to cover
any sum or sums of money which shall for the time being constitute the balance
due from the Principal to you upon any such account as hereinbefore mentioned.
(3) This guarantee shall be binding as a continuing security on us, our
executors, administrators and legal representatives until the expiration of one
calendar month after each of us or in case of one or more of us dying or
becoming under disability the survivor or survivors of us and the executors,
administrators or legal representatives of the person or persons so dying or
becoming under disability shall have given to you notice in writing to
discontinue and determine it and shall extend thereafter to any bills, notes or
cheques current at the expiration of the notice but afterwards dishonoured and
until all such sums have been paid to you.
(4) In the event of this guarantee ceasing from any cause whatsoever to be
binding as a continuing security on us, our executors, administrators or legal
representatives you shall be at liberty without thereby affecting your rights
hereunder to open a fresh account or accounts and to continue any then existing
account with the Principal and no money paid from time to time into any such
account or accounts by or on behalf of the Principal and subsequently drawn out
by the Principal shall on settlement of any claim in respect of this guarantee
be appropriated towards or have the effect of payment of any part of the money
due from the Principal at the time of this guarantee ceasing to be so binding as
a continuing security or of the interest thereon unless the person or persons
paying in the money shall at the time in writing direct you specially to
appropriate it to that purpose.
(5) Any admission or acknowledgement in writing by the Principal or by any
person authorised by the Principal of the amount of indebtedness of the
Principal to you and any judgement recovered by you against the Principal in
respect of such indebtedness shall be binding and conclusive on and against us,
our executors, administrators and legal representatives in all courts of law and
elsewhere.
(6) You shall be at liberty without thereby affecting your rights against us
hereunder at any time to determine enlarge or vary any credit to the Principal
to very exchange abstain from perfecting or release any other securities held or
to be held by you for or on account of the monies intended to be hereby secured
or any part thereof to renew bills and promissory notes in any manner and to
compound with give time for payment to accept compositions from and make any
other arrangements with the Principal or any obligants on bills notes or other
securities held or to be held by you for and on behalf of the Principal.
(7) This guarantee shall be in addition to and shall not be in any way
prejudiced or affected by any collateral or other security now or hereafter held
by you for all or any part of the money hereby guaranteed nor shall such
collateral or other security or any lien to which you may be otherwise entitled
or the liability of any person or persons not parties hereto for all or any part
of the monies hereby secured be in anywise prejudiced or affected by this
present guarantee. And you shall have full power at your discretion to give time
for payment to or make any other arrangement with any such person or persons
without prejudice to this present guarantee or any liability hereunder. And all
money received by you from us or the Principal or any other person or persons
liable to pay the same may be applied by you to any account or items of account
or to any transaction to which the same may be applicable.
<PAGE>
(8) Although our ultimate liability hereunder cannot exceed the limit
hereinbefore mentioned yet this present guarantee shall be construed and take
effect as a guarantee of the whole and every part of the principal money and
interest owing and to become owing as aforesaid and accordingly neither we nor
any of us shall be entitled as against you to any right of proof in the
bankruptcy or insolvency of the Principal or other right of a surety discharging
his liability in respect of the principal debt unless and until the whole of the
principal money and interest shall have first been completely discharged and
satisfied. And further for the purpose of enabling you to sue the Principal or
prove against his estate for the whole of the money owing as aforesaid or to
preserve intact the liability of any other part you may at any time place and
keep for such time as you may think prudent any money received recovered or
realised hereunder to and at a separate or suspense account to the credit either
of us or of such other person or persons or transaction if any as you shall
think fit without any intermediate obligations on your part to apply the same or
any part thereof in or towards the discharge of the money owing as aforesaid or
any intermediate right on our part to sue the Principal or prove against his
estate in competition with or so as to diminish any dividend or other advantage
that would or might come to you or to treat the liability of the Principal as
diminished.
(9) Neither we nor any of us have taken in respect of the liability hereby
undertaken by us on behalf of the Principal nor will we nor any of us take from
the Principal either directly or indirectly without your consent any promissory
note bill of exchange mortgage charge or other counter-security whether merely
personal or involving a charge on any property whatsoever of the Principal
whereby we or any person claiming through us by indorsement assignment or
otherwise would or might on the bankruptcy or insolvency of the Principal and to
the prejudice of you increase the proofs in such bankruptcy or insolvency or
diminish the property distributable amongst the creditors of the Principal. And
as regards any such counter-security as aforesaid which we or any of us may have
taken or may take with such consent as aforesaid the counter-security shall be a
security to you for the fulfilment of our obligations hereunder and shall be
forthwith deposited by us with you for that purpose.
(10) You shall so long as any money remains owing hereunder have a lien
therefor on all money now or hereafter standing to our credit with you.
(11) For all purposes, including any legal proceedings a copy of the account of
the Principal in your books signed by any of your officers shall be accepted by
us as conclusive evidence of the state of such account.
(12) If the Principal is a corporation or an unincorporated body or firm the
absence or informality of borrowing powers on the part of the Principal or any
irregularity in the exercise thereof shall not affect our liability and any
moneys advanced to the Principal shall be deemed to be due and owing
notwithstanding such absence, informality or irregularity and this guarantee
shall not be affected by any change in the name or constitution of the
corporation or unincorporated body or firm or in the persons constituting the
same.
(13) This guarantee shall be in addition to and not in substitution for any
other guarantee for the Principal given by all or any of us to you.
(14) A notice by you under this guarantee may be served by post (which shall be
registered airmail with respect to any of us whose addresses given hereunder are
outside the Colony of Hong Kong) and shall be deemed to have been duly served on
the seventh day following the day of posting if addressed to us at the
respective addresses given hereunder.
(15) This guarantee and all rights, obligations and liabilities arising
hereunder shall be construed and determined under and may be enforced in
accordance with the laws of Hong Kong. [We hereby agree that the Courts in Hong
Kong shall have jurisdiction over all disputes arising under this guarantee and
irrevocably appoint ______________________________________ of __________________
__________________________________________________ to be our agent for the
purpose of accepting service of process hereunder on behalf of all or any of
us.]
<PAGE>
IN WITNESS whereof we have hereunto set our respective hands and seals this
30/th/ day of March 1993
<TABLE>
<S> <C>
SIGNED SEALED AND DELIVERED by ) /s/ Carl Tong
) _________________________________________________
) Signature of Guarantor
in the present of:--
/s/ [ILLEGIBLE]
________________________________________
Witness Signature
Miss Ho Wing Cheung
Name (in full) _________________________
10H, Ngan Sing Mansion, 3/fl., 65, Bisney Rd.,
Address ________________________________ Guarantor's Address _____________________________
Taikooshing, H.K. Pokfulam, H.K.
________________________________________ _________________________________________________
Admin Officer
Occupation ____________________________ _________________________________________________
SIGNED SEALED AND DELIVERED by ) /s/ Leo Kwok
) _________________________________________________
) Signature of Guarantor
in the present of:--
/s/ [ILLEGIBLE]
________________________________________
Witness Signature
/s/ Ho Wing Cheung
Name (in full) _________________________
10H, NGAN SING MANSION, 10H NGAN SING
Address ________________________________ Guarantor's Address _____________________________
TAIKOOSHING, H.K. MANSION, TAIKOOSHING, HKG.
________________________________________ _________________________________________________
ADMIN OFFICER
Occupation ____________________________ _________________________________________________
SIGNED SEALED AND DELIVERED by )
) _________________________________________________
) Signature of Guarantor
in the present of:--
________________________________________
Witness Signature
Name (in full) _________________________
Address ________________________________ Guarantor's Address _____________________________
________________________________________ _________________________________________________
Occupation ____________________________ _________________________________________________
</TABLE>
<PAGE>
EXHIBIT 10.17
To: Commonwealth Finance Corporation Limited
11/F., Wyndham Place, 40-44 Wyndham Street, Hong Kong.
(1) In consideration of your making or continuing advances or otherwise giving
credit or affording credit facilities (including inter alia the issue of
guarantees by you and your acceptance of guarantees by the Principal as
hereinafter defined in favour of third parties) for as long as you shall think
fit to Creative Master Ltd. (hereinafter called "the Principal") I, the
undersigned, hereby agree to pay to you on demand all sums of money which are
now or shall at any time be owing to you anywhere on any account whatsoever
whether from the Principal solely or from the Principal jointly with any other
person or persons or from any firm in which the Principal may be a partner
including the amount of notes or bills discounted or paid and other loans,
credits or advances made to or for the accomodation or at the request either of
the Principal solely or jointly or of any such firm as aforesaid or for any
money for which the Principal may be liable as surety or in any other way
whatsoever together with in all the cases aforesaid all interest, discount and
other DTC's charges including legal charges occasioned by or incident to this or
any other security held by or offered to you for the same indebtedness or by or
to the enforcement of any such security.
Provided always that the liability ultimately enforceable against me shall
not exceed in aggregate HKD 2.5 MN together with interest thereon (as well after
as before judgement) with monthly rests computed from the date of demand at the
rate of 1.50% per annum above its Best Lending Rate (which expression shall mean
the rate of interest per annum from time to time quoted by The HongKong and
Shanghai Banking Corporation as its prime or best lending rate for Hong Kong
Dollars in Hong Kong).
(2) This guarantee shall not be considered as satisfied by any intermediate
payment or satisfaction of the whole or any part of any sum or sums of money
owing as aforesaid but shall be a continuing security and shall extend to cover
any sum or sums of money which shall for the time being constituted the balance
due from the Principal to you upon any such account as hereinbefore mentioned.
(3) This guarantee shall be binding as a continuing security on me, my
executors, administrators and legal representatives until the expiration of one
calendar month after I or in case of my dying or becoming under disability my
executors, administrators or legal representatives shall have given to you
notice in writing to discontinue and determine it and shall extend thereafter to
any bills, notes or cheques current at the expiration of the notice but
afterwards dishonoured and until all such sums have been paid to you.
(4) In the event of this guarantee ceasing from any cause whatsoever to be
binding as a continuing security on me, my executors, administrators or legal
representatives you shall be at liberty without thereby affecting your rights
hereunder to open a fresh account or accounts and to continue any then existing
account with the Principal and no money paid from time to time into any such
account or accounts by or on behalf of the Principal and subsequently drawn out
by the Principal shall on settlement of any claim in respect of this guarantee
be appropriated towards or have the effect of payment of any part of the money
due from the Principal at the time of this guarantee ceasing to be so binding as
a continuing security or of the interest thereon unless the person or persons
paying in the money shall at the time in writing direct you specially to
appropriate it to that purpose.
(5) Any admission or acknowledgement in writing by the Principal or by any
person authorised by the Principal of the amount of indebtedness of the
Principal to you and any judgement recovered by you against the Principal in
respect of such indebtedness shall be binding and conclusive on and against me,
my executors, administrators and legal representatives in all courts of law and
elsewhere.
(6) You shall be at liberty without thereby affecting your rights against me
hereunder at any time to determine enlarge or vary any credit to the Principal
to vary exchange abstain from perfecting or release any other securities held or
to be held by you for or on account of the monies intended to be hereby secured
or any part thereof to renew bills and promissory notes in any manner and to
compound with give time for payment to accept compositions from and make any
other arrangements with the Principal or any obligants on bills notes or other
securities held or to be held by you for and on behalf of the Principal.
(7) This guarantee shall be in addition to and shall not be in any way
prejudiced or affected by any collateral or other security now or hereafter held
by you for all or any part of the money hereby guaranteed nor shall such
collateral or other security or any lien to which you may be otherwise entitled
or the liability of any person or persons not parties hereto for all or any part
of the monies hereby secured be in anywise prejudiced or affected by this
present guarantee. And you shall have full power at your discretion to give time
for payment to or make any other arrangement with any such person or persons
without prejudice to this present guarantee or any liability hereunder. And all
money received by you from me or the Principal or any other person or persons
liable to pay the same may be applied by you to any account or items of account
or to any transaction to which the same may be applicable.
<PAGE>
(8) Although my ultimate liability hereunder cannot exceed the limit
hereinbefore mentioned yet this present guarantee shall be construed and take
effect as a guarantee of the whole and every part of the principal money and
interest owing and to become owing as aforesaid and accordingly I am not to be
entitled as against you to any right of proof in the bankruptcy or insolvency of
the Principal or other right of a surety discharging his liability in respect of
the principal debt unless and until the whole of the principal money and
interest shall have first been completely discharged and satisfied. And further
for the purpose of enabling you to sue the Principal or prove against his estate
for the whole of the money owing as aforesaid or to preserve intact the
liability of any other part you may at any time place and keep for such time as
you may think prudent and money received recovered or realised hereunder to and
at a separate or suspense account to the credit either of me or of such other
person or persons or transaction if any as you shall think fit without any
intermediate obligations on your part to apply the same or any part thereof in
or towards the discharge of the money owing as aforesaid or any intermediate
right on my part to sue the Principal or prove against his estate in competition
with or so as to diminish any dividend or other advantage that would or might
come to you or to treat the liability of the Principal as diminished.
(9) I have not taken in respect of the liability hereby undertaken by me on
behalf of the Principal and I will not take from the Principal either directly
or indirectly without your consent any promissory note bill of exchange mortgage
charge or other counter-security whether merely personal or involving a charge
on any property whatsoever of the Principal whereby I or any person claiming
through me by indorsement assignment or otherwise would or might on the
bankruptcy or insolvency of the Principal and to the prejudice of you increase
the proofs in such bankruptcy or insolvency or diminish the property
distributable amongst the creditors of the Principal. And as regards any such
counter-security as aforesaid which I may have taken or may take with such
consent as aforesaid the counter-security shall be a security to you for the
fulfilment of my obligations hereunder and shall be forthwith deposited by me
with you for that purpose.
(10) You shall so long as any money remains owing hereunder have a lien
therefor on all money now or hereafter standing to my credit with you.
(11) For all purposes, including any legal proceedings a copy of the account of
the Principal in your books signed by any of your officers shall be accepted by
me as conclusive evidence of the state of such account.
(12) If the Principal is a corporation or an unincorporated body or firm the
absence or informality of borrowing powers on the part of the Principal or any
irregularity in the exercise thereof shall not affect my liability and any
moneys advanced to the Principal shall be deemed to be due and owing
notwithstanding such absence, informality or irregularity and this guarantee
shall not be affected by any change in the name or constitution of the
corporation or unincorporated body or firm or in the persons constituting the
same.
(13) This guarantee shall be in addition to and not in substitution for any
other guarantee for the Principal given by me to you.
(14) A notice by you under this guarantee may be served by post (which shall be
registered airmail in the event that the address given hereunder is outside the
Colony of Hong Kong) and shall be deemed to have been duly served on the seventh
day following the day of posting if addressed to me at address given hereunder.
(15) This guarantee and all rights, obligations and liabilities arising
hereunder shall be construed and determined under and may be enforced in
accordance with the laws of Hong Kong. [I hereby agree that the Courts in Hong
Kong shall have jurisdiction over all disputes arising under this guarantee and
irrevocably appoint_____________________________________________________________
of ______________________________________________________________________ to be
my agent for the purpose of accepting service of process hereunder.]
IN WITNESS whereof I have hereunto set my hand and seal this 30th day of March
1993
SIGNED SEALED AND DELIVERED by )
) /s/ Carl Tong
) ___________________________________________
) Signature of Guarantor
in the presence of:--
ILLEGIBLE SIGNATURE
_________________________________
Witness Signature
Name(in full) Miss Ho Wing Cheung
___________________
Address 10H, Ngan Sing Mansion, Guarantor's Address 3/fl., 65, Bisney Road,
_________________________ ________________________
Taikooshing, H.k. Pokfulam, H.K.
_________________________________ ____________________________________________
Occupation Admin. Officier
_____________________ ____________________________________________
<PAGE>
EXHIBIT 10.18
To: Commonwealth Finance Corporation Limited
11/F., Wyndham Place, 40-44 Wyndham Street, Hong Kong.
(1) In consideration of your making or continuing advances or otherwise giving
credit or affording credit facilities (including inter alia the issue of
guarantees by you and your acceptance of guarantees by the Principal as
hereinafter defined in favour of third parties) for as long as you shall think
fit to Creative Master Ltd. (hereinafter called "the Principal") I, the
undersigned, hereby agree to pay to you on demand all sums of money which are
now or shall at any time be owing to you anywhere on any account whatsoever
whether from the Principal solely or from the Principal jointly with any other
person or persons or from any firm in which the Principal may be a partner
including the amount of notes or bills discounted or paid and other loans,
credits or advances made to or for the accomodation or at the request either of
the Principal solely or jointly or of any such firm as aforesaid or for any
money for which the Principal may be liable as surety or in any other way
whatsoever together with in all the cases aforesaid all interest, discount and
other DTC's charges including legal charges occasioned by or incident to this or
any other security held by or offered to you for the same indebtedness or by or
to the enforcement of any such security.
Provided always that the liability ultimately enforceable against me shall
not exceed in aggregate HKD 2.5 MN together with interest thereon (as well after
as before judgement) with monthly rests computed from the date of demand at the
rate of 1.50% per annum above its Best Lending Rate (which expression shall mean
the rate of interest per annum from time to time quoted by The HongKong and
Shanghai Banking Corporation as its prime or best lending rate for Hong Kong
Dollars in Hong Kong).
(2) This guarantee shall not be considered as satisfied by any intermediate
payment or satisfaction of the whole or any part of any sum or sums of money
owing as aforesaid but shall be a continuing security and shall extend to cover
any sum or sums of money which shall for the time being constituted the balance
due from the Principal to you upon any such account as hereinbefore mentioned.
(3) This guarantee shall be binding as a continuing security on me, my
executors, administrators and legal representatives until the expiration of one
calendar month after I or in case of my dying or becoming under disability my
executors, administrators or legal representatives shall have given to you
notice in writing to discontinue and determine it and shall extend thereafter to
any bills, notes or cheques current at the expiration of the notice but
afterwards dishonoured and until all such sums have been paid to you.
(4) In the event of this guarantee ceasing from any cause whatsoever to be
binding as a continuing security on me, my executors, administrators or legal
representatives you shall be at liberty without thereby affecting your rights
hereunder to open a fresh account or accounts and to continue any then existing
account with the Principal and no money paid from time to time into any such
account or accounts by or on behalf of the Principal and subsequently drawn out
by the Principal shall on settlement of any claim in respect of this guarantee
be appropriated towards or have the effect of payment of any part of the money
due from the Principal at the time of this guarantee ceasing to be so binding as
a continuing security or of the interest thereon unless the person or persons
paying in the money shall at the time in writing direct you specially to
appropriate it to that purpose.
(5) Any admission or acknowledgement in writing by the Principal or by any
person authorised by the Principal of the amount of indebtedness of the
Principal to you and any judgement recovered by you against the Principal in
respect of such indebtedness shall be binding and conclusive on and against me,
my executors, administrators and legal representatives in all courts of law and
elsewhere.
(6) You shall be at liberty without thereby affecting your rights against me
hereunder at any time to determine enlarge or vary any credit to the Principal
to vary exchange abstain from perfecting or release any other securities held or
to be held by you for or on account of the monies intended to be hereby secured
or any part thereof to renew bills and promissory notes in any manner and to
compound with give time for payment to accept compositions from and make any
other arrangements with the Principal or any obligants on bills notes or other
securities held or to be held by you for and on behalf of the Principal.
(7) This guarantee shall be in addition to and shall not be in any way
prejudiced or affected by any collateral or other security now or hereafter held
by you for all or any part of the money hereby guaranteed nor shall such
collateral or other security or any lien to which you may be otherwise entitled
or the liability of any person or persons not parties hereto for all or any part
of the monies hereby secured be in anywise prejudiced or affected by this
present guarantee. And you shall have full power at your discretion to give time
for payment to or make any other arrangement with any such person or persons
without prejudice to this present guarantee or any liability hereunder. And all
money received by you from me or the Principal or any other person or persons
liable to pay the same may be applied by you to any account or items of account
or to any transaction to which the same may be applicable.
<PAGE>
(8) Although my ultimate liability hereunder cannot exceed the limit
hereinbefore mentioned yet this present guarantee shall be construed and take
effect as a guarantee of the whole and every part of the principal money and
interest owing and to become owing as aforesaid and accordingly I am not to be
entitled as against you to any right of proof in the bankruptcy or insolvency of
the Principal or other right of a surety discharging his liability in respect of
the principal debt unless and until the whole of the principal money and
interest shall have first been completely discharged and satisfied. And further
for the purpose of enabling you to sue the Principal or prove against his estate
for the whole of the money owing as aforesaid or to preserve intact the
liability of any other part you may at any time place and keep for such time as
you may think prudent and money received recovered or realised hereunder to and
at a separate or suspense account to the credit either of me or of such other
person or persons or transaction if any as you shall think fit without any
intermediate obligations on your part to apply the same or any part thereof in
or towards the discharge of the money owing as aforesaid or any intermediate
right on my part to sue the Principal or prove against his estate in competition
with or so as to diminish any dividend or other advantage that would or might
come to you or to treat the liability of the Principal as diminished.
(9) I have not taken in respect of the liability hereby undertaken by me on
behalf of the Principal and I will not take from the Principal either directly
or indirectly without your consent any promissory note bill of exchange mortgage
charge or other counter-security whether merely personal or involving a charge
on any property whatsoever of the Principal whereby I or any person claiming
through me by indorsement assignment or otherwise would or might on the
bankruptcy or insolvency of the Principal and to the prejudice of you increase
the proofs in such bankruptcy or insolvency or diminish the property
distributable amongst the creditors of the Principal. And as regards any such
counter-security as aforesaid which I may have taken or may take with such
consent as aforesaid the counter-security shall be a security to you for the
fulfilment of my obligations hereunder and shall be forthwith deposited by me
with you for that purpose.
(10) You shall so long as any money remains owing hereunder have a lien
therefor on all money now or hereafter standing to my credit with you.
(11) For all purposes, including any legal proceedings a copy of the account of
the Principal in your books signed by any of your officers shall be accepted by
me as conclusive evidence of the state of such account.
(12) If the Principal is a corporation or an unincorporated body or firm the
absence or informality of borrowing powers on the part of the Principal or any
irregularity in the exercise thereof shall not affect my liability and any
moneys advanced to the Principal shall be deemed to be due and owing
notwithstanding such absence, informality or irregularity and this guarantee
shall not be affected by any change in the name or constitution of the
corporation or unincorporated body or firm or in the persons constituting the
same.
(13) This guarantee shall be in addition to and not in substitution for any
other guarantee for the Principal given by me to you.
(14) A notice by you under this guarantee may be served by post (which shall be
registered airmail in the event that the address given hereunder is outside the
Colony of Hong Kong) and shall be deemed to have been duly served on the seventh
day following the day of posting if addressed to me at address given hereunder.
(15) This guarantee and all rights, obligations and liabilities arising
hereunder shall be construed and determined under and may be enforced in
accordance with the laws of Hong Kong. [I hereby agree that the Courts in Hong
Kong shall have jurisdiction over all disputes arising under this guarantee and
irrevocably appoint_____________________________________________________________
of ______________________________________________________________________ to be
my agent for the purpose of accepting service of process hereunder.]
IN WITNESS whereof I have hereunto set my hand and seal this 30/th/ day of
March 1993
<TABLE>
<S> <C>
SIGNED SEALED AND DELIVERED by ) /s/ Leo Kwok
) ------------------------------------
) Signature of Guarantor
in the presence of:--
/s/ Ho Wing Cheung
- ----------------------------------------
Witness Signature
Name (in full) Ho Wing Cheung
--------------------------
Address 10H, Ngan Sing Mansion, Guarantor's Address 10H, Ngan Sing Mansion,
-------------------------------- --------------------------------
Taikooshing, H.K. Taikooshing, H.K.
- ---------------------------------------- ---------------------------------------------------
Occupation Admin Officer
----------------------------- ---------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.19
CREATIVE MASTER LIMITED
DEFINED CONTRIBUTION SCHEME RULES
---------------------------------
These rules apply to a defined contribution scheme known as the CREATIVE MASTER
LIMITED DEFINED CONTRIBUTION SCHEME which is the subject of an insurance
arrangement made with Hang Seng Life Limited dated 1st January 1997 ("the
Policy").
Benefits shall be provided in accordance with the following Rules:-
(1) DEFINITIONS
-----------
(a) "Administrator" means Hang Seng Life Limited.
(b) "Beneficiaries" means:
(i) any person whom the Member has nominated in writing to the
Employer during his lifetime, or if no such person is nominated;
(ii) the Member's spouse, children, parents, brothers or sisters,
failing which the spouse or any child of such children, parents,
brothers or sisters;
(iii) if no other Beneficiary can be identified, the Member's legal
personal representative;
(c) "Compulsory Payment" means the long service payment or severance
payment payable by the Employer to employees in accordance with the
Employment Ordinance, or any other payment which the Employer is
liable to make on cessation of employment as a result of any
legislation in Hong Kong.
(d) "Employer" means CREATIVE MASTER LIMITED or such other associated
company or companies of CREATIVE MASTER LIMITED as have been invited
to participate subject to their agreeing in respect of their employees
to adhere to these Rules.
-1-
<PAGE>
(e) "Employer's Balance" means the sum of the Employer's contributions made in
respect of a Member together with accumulated interest or investment return
due in accordance with the Policy, less any charges due.
(f) "Ill Health" means such state of health, certified by the Employer's
medical adviser, as renders a Member substantially unable to carry out the
work for which the Member is currently employed, or where continuance of
such employment is, in the Employer's medical adviser's opinion,
prejudicial to the Member's health or well-being.
(g) "Member" means an employee of the Employer who has joined the Scheme in
accordance with Rule (2) and, at any relevant time, continues to
participate in the Scheme.
(h) "Member's Balance" means the sum of the Member's contributions together
with accumulated interest or investment return due in accordance with the
Policy, less any charges due.
(i) "Normal Retirement Date" means the sixty-fifth birthday of a Member, or
such later date as is mutually agreed by the Employer and the Member.
(k) "Resignation" means cessation of employment with the Employer at the
request of the Member prior to Normal Retirement Date.
(l) "Salary" means the basic monthly salary payment due to a Member pursuant to
his terms of employment with the Employer, excluding any bonus, commission,
allowance or other amounts which are or may be due to the Member by the
Employer at any time.
(m) "Scheme" means the CREATIVE MASTER LIMITED DEFINED CONTRIBUTION SCHEME.
(n) "Scheme Commencement Date" means 1st January 1997.
(o) "Years of Service" means the total period of continuous employment with the
Employer measured from the date of employment to the date of cessation of
employment in complete years and months. This may include any period of
employment in respect of a Member transferred under the provisions of Rule
(10). Periods of absence pursuant to Rule (3)(d) may be excluded.
In these Rules words importing the singular shall include the plural and vice
versa and words importing the masculine gender shall include the feminine and
vice versa.
-2-
<PAGE>
(2) ELIGIBILITY
-----------
All full time permanent employees of the Employer are eligible to join
this Scheme on the first day of the month following the completion of the
required period of probationary service.
(3) REGULAR CONTRIBUTIONS
---------------------
(a) Each Member shall make monthly contributions equal to 5% of his Salary
to the Scheme, such contributions being deducted monthly from the
Member's Salary by the Employer.
(b) The Employer shall make monthly contributions equal to 5% of the
Member's Salary in respect of each Member.
(c) The Employer shall pay the Employer's and Members' contributions to
the Administrator within one month from the date that Member's
salaries are paid.
(d) Contributions may be discontinued by the Member and the Employer in
the event of a Member being absent for a period in excess of thirty
days due to sickness or on unpaid leave. Contributions shall be
resumed on the Employee's return to work.
(e) Contributions shall cease when the Member ceases employment and if
that date does not coincide with the last day of the month then
contributions shall cease on the last day of the preceding month.
(f) Members may specify in which of the funds available to the Scheme
their contributions are to be invested. From time to time, Members may
give instructions to the Employer for transfer of the Member's Balance
between such funds. The Employer may issue rules about how and when
such instructions can be given.
(4) CHARGES
-------
Charges to administer the Scheme shall be paid by the Employer in addition
to the Employer's contributions.
-3-
<PAGE>
(5) BENEFITS
--------
On cessation of Scheme membership due to one of the following causes, the
benefit payable is:
(a) Normal Retirement or Ill Health
-------------------------------
On Normal Retirement Date or in the event of Ill Health, a Member
shall be entitled to receive a lump sum from the Scheme equal to the
total of the Member's Balance and the Employer's Balance.
(b) Resignation
-----------
On Resignation, a Member shall be entitled to receive a lump sum from
the Scheme equal to the Member's Balance plus a percentage of the
Employer's Balance determined in accordance with the scale set out
below:-
Years of Service Percentage
---------------- ----------
Less than 3 Nil
3 or more, but less than 4 30%
4 or more, but less than 5 40%
5 or more, but less than 6 50%
6 or more, but less than 7 60%
7 or more, but less than 8 70%
8 or more, but less than 9 80%
9 or more, but less than 10 90%
10 or more 100%
(c) Death
-----
In the event of a Member's death in employment, a lump sum calculated
in accordance with Rule (5)(a) shall be paid to such of the
Beneficiaries as the Employer thinks fair. Any benefit shall be paid
in accordance with the provisions of Occupational Retirement Schemes
Ordinance.
(d) Dismissal or Redundancy
-----------------------
(i) Notwithstanding anything contained in these rules, on dismissal
of a Member on the grounds that the Member is guilty of fraud or
dishonesty, or on any other ground on which the Employer would
be entitled to terminate the Member's employment without notice
under Hong Kong law, the Member shall be entitled to the
Member's Balance only.
-4-
<PAGE>
(ii) On termination of a Member's employment by the Employer on
grounds other than those stated in sub-clause (i) above,
such as redundancy or severance, or in circumstances in
which no reason is given by the Employer, the Member shall
be entitled to a lump sum calculated in accordance with
Rule 5(b) above.
(e) Compulsory Payment
------------------
Any Compulsory Payment due to a Member may be deducted from the
Employer's Balance of the benefit payable to that Member under Rules
5(a), (b), (c) or (d).
(6) FAILURE TO CLAIM
----------------
(a) No person entitled to receive a benefit under the Scheme shall be
entitled to claim such benefit more than twenty-four months after
the same became due, if the reason for such non-payment within the
period of twenty-four months was:
(i) the failure of that person to claim the same; or
(ii) the lack of knowledge by the Employer of the existence or
whereabouts of that person;
(iii) the lack of knowledge by the Employer that such person had
or claimed to have a right thereto
but the Employer may pay any such benefit or any part of it to such
Beneficiaries of the Member as it thinks fair.
(b) Any part of any benefit which is not claimed within twenty-four
months of the date when it was payable shall be credited to the
Forfeiture Account under Rule (7). The person entitled shall cease
to have any further claim to or interest in such benefit.
(7) FORFEITURE ACCOUNT
------------------
A forfeiture account shall be maintained by the Administrator, to which the
unvested portion of ex-Member's benefits under Rule (5) above, and any
unclaimed benefits specified under Rule (6) above, shall be credited. The
balance of the forfeiture account may be offset against future
contributions to the Scheme or refunded to the Employer pursuant to the
requirements of the Occupational Retirement Schemes Ordinance.
-5-
<PAGE>
(8) WITHHOLDING OF BENEFITS
-----------------------
The Employer shall be entitled to set-off against any benefit to which a
Member is entitled under this Scheme, or withhold such benefit, for the
purpose of paying:-
(a) a loss suffered by the Employer due to a dishonest act committed by
that Member; or
(b) a debt acknowledged in writing by that Member as owing to the
Employer.
(9) BANKRUPTCY, INSOLVENCY, INCAPACITY, ALIENATION OF BENEFITS
-----------------------------------------------------------
Any Member who becomes bankrupt or insolvent, or who the Employer
determines to be incapable of managing his own affairs, or who shall
purport to alienate or charge any amount which may now or in the future be
due to him under the Scheme shall immediately cease to be a Member. An
amount equal to the benefit payable to the Member pursuant to Rule (5)(b)
shall immediately vest in the Employer on trust to be paid to such of the
Beneficiaries as the Employer thinks fair.
(10) TRANSFER
--------
(a) In the event of a Member's transfer to this Scheme from the membership
of another scheme, a sum equal to the existing fund balances of that
person at the date of transfer may be accepted under this Rule.
(b) Notwithstanding anything contained in Rule (5), in the event of a
Member's transfer from this Scheme to the membership of another
scheme, a sum equal to the Member's Balance at the date of transfer
may be transferred under this Rule, and a sum equal to a proportion or
the whole of the Employer's Balance may be transferred, subject to the
consent of the Employer and the transferring employee.
(c) All transfers to or from this Scheme will be subject to the Employer's
and the transferring employee's consent.
(11) DISCHARGE OF LIABILITIES
------------------------
The receipt of benefits calculated in accordance with these Rules by the
Member or any of his Beneficiaries shall constitute a full and sufficient
discharge of all liabilities of the Employer towards the Member.
-6-
<PAGE>
(12) PROHIBITION OF WITHDRAWAL
-------------------------
Withdrawal by any Member from the Scheme prior to Normal Retirement Date
or to the date of his termination of employment, if earlier, will not be
permitted.
(13) AMENDMENTS TO SCHEME RULES
--------------------------
CREATIVE MASTER LIMITED may at any time alter, vary, modify or add to
all or any of these Rules PROVIDED THAT no such alteration, variation,
modification or addition shall be made if it will prejudice the accrued
rights or vested benefits of any Member under this Scheme for the time
being. In this section "accrued rights" and "vested benefits" have the
meaning assigned to those terms by the Occupational Retirement Schemes
Ordinance.
(14) TERMINATION OR REINSTATEMENT OF SCHEME
--------------------------------------
(a) Upon the Employer giving each Member one calendar month's prior
notice in writing, the Scheme shall determine with the following
effect at the expiration of such notice:
(i) all contributions shall immediately cease;
(ii) benefits will be paid to Members on the date of
retirement or cessation of employment in accordance with
Rule (5) above.
(b) The Scheme, if terminated, may be reinstated subject to agreement
between the Members and the Employer on the contributions in
default.
(c) In the event of the Employer being wound up or adjudicated
bankrupt, the Employer shall be deemed to have given notice of
discontinuance of the Scheme on commencement of the winding up or
the date of the bankruptcy order. However, in the event of the
Employer being wound up for the purpose of reconstruction,
reconstitution or amalgamation with any other company, the
Employer may in its discretion enter into an agreement for the
continuance of the Scheme as if such reconstructed, reconstituted
or amalgamated company was in fact the Employer.
(d) Immediately upon:
(a) the Employer giving notice of the discontinuance of the
Scheme; or
-7-
<PAGE>
(b) the High Court ordering, pursuant to Section 48 of the
Occupational Retirement Schemes Ordinance, that the
Scheme be wound-up -
the assets of the Scheme including the accounts of the Members
shall vest in and be held on trust by the Insurer to be paid -
(A) in accordance with the order, or any subsequent order, of
the High Court; or, if no such order is made,
(B) directly to the Members in accordance with Rule
(14)(a)(ii) PROVIDED THAT, if Rule (14)(a)(ii) conflicts
with the requirement for the payment of benefits stated
in Section 18(1)(c) of the Occupational Retirement
Schemes Ordinance, the requirement stated in that Section
shall prevail.
(15) CURRENCY
--------
All payments to and from the Scheme shall be made in Hong Kong dollars.
(16) GOVERNING LAW
-------------
This Scheme shall be governed by and construed in accordance with Hong
Kong law.
(17) OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE
-----------------------------------------
(a) Any terms or rules that are or may be required by the
Occupational Retirement Schemes Ordinance (as amended from time
to time) to be included in this Scheme so as to enable this
Scheme to be or remain registered (or to continue to be
registered) under that Ordinance shall be implied in this Scheme
unless expressed herein.
(b) In the event of a conflict between the requirements of the
Occupational Retirement Schemes Ordinance and this scheme, those
requirements shall prevail and the provisions of this Scheme
shall be void to the extent of any inconsistency.
-8-
<PAGE>
(c) This Scheme shall be interpreted as if the obligations imposed upon
the Employer and the Members by the Occupational Retirement Schemes
Ordinance form part of this Scheme.
For and on behalf of
CREATIVE MASTER LIMITED
[ILLEGIBLE]
------------------------------
Authorized Signature(s)
MAR 10, 97
------------------------------ ------------------------------
For and on behalf of Date
CREATIVE MASTER LIMITED
SL
-9-
<PAGE>
EXHIBIT 10.20
HANG SENG LIFE LIMITED
36/F Sun Hung Kei Centre, 30 Harbour Road, Wanchai, Hong Kong
HANG SENG POOLED PROVIDENT PLAN
-------------------------------
DEFINED CONTRIBUTION POLICY
---------------------------
POLICY HOLDER: EXCEL MASTER LIMITED
POLICY NUMBER: 3039374H2
Policy Issue Date: 19TH MARCH 1997
Policy Effective Date: 1ST JANUARY 1997
To the Policyholder:
This Policy is issued by HANG SENG LIFE LIMITED which will make the payments and
provide the services stated in this Policy subject to its conditions.
___________________________
Authorized Officer
HANG SENG LIFE LIMITED
<PAGE>
INDEX OF TERMS AND CONDITIONS
<TABLE>
<CAPTION>
CONDITIONS HEADING PAGE
- ---------- ------- ----
<S> <C> <C>
1 INTERPRETATION 1-4
2 BENEFITS 4
3 DEFERRED BENEFITS AND 4
FORFEITURE AMOUNTS
4 POLICY SURRENDER 4-5
5 CONTRIBUTIONS 5
6 CHARGES 5
7 INFORMATION 5-6
8 SPECIAL CIRCUMSTANCES 6
9 GOVERNING LAW AND 6
JURISDICTION
10 VALUATION OF ASSETS 6
11 CURRENCY 7
12 TERMINATION 7
13 TRANSFERS 7-8
14 RETURN ON SCHEME ACCOUNTS 8
15 NON-ASSIGNMENT 8
16 OCCUPATIONAL RETIREMENT 9
SCHEMES ORDINANCE
</TABLE>
SCHEDULE A SCHEME RULES
SCHEDULE B (I) GLOBAL GROWTH FUND AND GGF BALANCE
(II) RETURN ON CAF BALANCE
(III) HANG SENG HONG KONG EQUITY INVESTMENT FUND AND
HSHKEIF BALANCE
(IV) RETURN ON HANG SENG RETURN GUARANTEED FUND BALANCE
(V) HANG SENG INDEX INVESTMENT FUND AND HSIIF BALANCE
SCHEDULE C CHARGES
<PAGE>
The terms and conditions of this Policy are as follows:
1. INTERPRETATION
1.1 Throughout this Policy Hang Seng Life Limited is referred to as "we",
"our", or "us" and the Policyholder is referred to as "you" or "your".
1.2 In this Policy
"ACTUARY" means a qualified actuary appointed by us who may be our employee
or the employee of a related company;
"APPROPRIATE AUTHORITY" means any officer or department of the Government
of Hong Kong whose consent or approval is required before we may undertake
the acts or transactions contemplated in this Policy;
"APPLICATION" means your application for this Policy;
"AUTHORIZED INSURER" means an insurer authorized in accordance with the
Insurance Companies Ordinance;
"BUSINESS DAY" means any day which is not a Saturday and on which we are
open for business in Hong Kong;
"CAF BALANCE" at any particular time with respect to any Member, means the
balance as calculated by us, separately as regards the Employer's
Contributions and the Member's Contributions, of amounts held on behalf of
the Member in the Capital Assurance Fund plus Return credited to the
Capital Assurance Fund as calculated in accordance with Schedule B(II).
"CAPITAL ASSURANCE FUND" means the fund of which the CAF Balance is a part;
"CHARGE" means the charge payable as a percentage of Contributions
calculated in accordance with Schedule C;
"CONTRACT YEAR" means the period from the Policy Effective Date until the
next 31 December and each calendar year thereafter;
"CONTRIBUTIONS" means the amount specified in the Scheme payable to us each
month or at such other intervals as we may agree;
"DEFERRED BENEFIT" means any amount held by us to the credit of a former
Member when Clause 3 applies;
"DEFERRED BENEFIT CERTIFICATE" means a certificate issued by us to a former
Member in accordance with Clause 3;
"EMPLOYER'S CONTRIBUTIONS" means that part of the Contributions that has
been paid by the employer pursuant to the Scheme;
"FORFEITURES BALANCE" at any particular time means the balance as
calculated by us of:
(a) Forfeiture Amounts Transferred from Members' Scheme Accounts in
accordance with the Scheme rules;
less (b) Amounts Transferred to Members' Scheme Accounts in accordance
with the Scheme rules;
<PAGE>
less (c) Amounts paid by us to you in accordance with Clause 3.2;
plus (d) Amounts of interest credited to such balance;
"HSHKEIF BALANCE" at any particular time with respect to any particular
Member means the value as calculated by us, separately as regards the
Employer's Contributions and the Member's Contributions, of all units held
in the Hang Seng Hong Kong Equity Investment Fund described in Schedule
B(III);
"HSIIF BALANCE" at any particular time means the value as calculated by us
of all units held in the Hang Seng Index Investment Fund described in
Schedule B(V);
"GGF BALANCE" at any particular time with respect to any particular Member
means the value as calculated by us, separately as regards the Employer's
Contributions and the Member's Contributions, of all units held in the
Global Growth Fund described in Schedule B(I);
"INSURANCE COMPANIES ORDINANCE" means Chapter 41 of the Laws of Hong Kong
as amended from time to time;
"MEMBER" means a person who is at any relevant time a member of the Scheme
and, where the context so permits, includes any person or persons nominated
by such Member as a beneficiary or any former Member;
"MEMBER'S BENEFIT" means (a) the amount of the benefit or Deferred Benefit
to which a Member becomes entitled pursuant to the Scheme on his
retirement, death, disability or other termination of employment, but not
exceeding (b) his Scheme Account at the time the benefit or Deferred
Benefit is calculated. "FORFEITURE AMOUNT" means the excess of (b) over
(a);
"MEMBER'S CONTRIBUTIONS" means that part, if any, of the periodic
Contributions that has been paid by a particular Member pursuant to the
Scheme;
"OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE" means Chapter 426 of the Laws
of Hong Kong as amended from time to time;
"POLICY" and "THIS POLICY" mean this document, any Endorsement, any
Schedule and your Application;
"POLICY EFFECTIVE DATE" means the date specified as such on the first page
of this Policy being the date of which this Policy will be deemed to have
come into effect;
"RETURN" means any amount or amounts credited to:
(a) the Scheme Account in accordance with Clause 14;
(b) the Hang Seng Return Guaranteed Fund in accordance with Schedule
B(IV); and
(c) the Capital Assurance Fund in accordance with Schedule B(II);
"SCHEME" means that Scheme, the rules of which are set out in Schedule A,
as amended from time to time;
"SCHEME ACCOUNT" at any particular time with respect to any particular
Member means the balance, as calculated by us, separately as regards the
portion attributable to the Employer's Contributions and the Member's
Contributions, of:
<PAGE>
(a) Contributions received by us in respect of that Member;
plus (b) Amounts Transferred to the Scheme Account from the Hang Seng
Return Guaranteed Fund Balance, the CAF Balance, the Unitized
Funds Balance and the Forfeitures Balance;
less (c) Charges due;
less (d) Amounts Transferred from the Scheme Account to the Hang Seng
Return Guaranteed Fund Balance, the CAF Balance, the Unitized
Funds Balance and the Forfeitures Balance;
less (e) Amounts paid by us as Member's Benefits or in accordance with
Clause 4 or set aside as Deferred Benefits;
plus (f) Interest credited to the Scheme Account in accordance with Clause
14.
"TRANSFER" and its grammatical variations mean a transaction effected in
accordance with Clause 13 whereby any one of the Scheme Account, the Hang
Seng Return Guaranteed Fund Balance, the CAF Balance, the Unitized Funds
Balance or the Forfeitures Balance is increased and one other of them is
decreased and "AMOUNT TRANSFERRED" means the said amount in any particular
case and shall include any Return or interest credited or debited as the
case may be in accordance with Clause 14 or the Schedules;
"UNITIZED FUNDS BALANCE" at any particular time with respect to any
particular Member means the value as calculated by us, separately as
regards the portion attributable to the Employer's Contributions and the
Member's Contributions, of all units held on behalf of the Member in:
(a) the Global Growth Fund, the Hang Seng Hong Kong Equity Investment
Fund, the Hang Seng Index Investment Fund and such other unitized
funds as may be established by us from time to time; and
(b) such other unit trusts and mutual funds, authorised by the Securities
and Futures Commission of Hong Kong, as may be made available to you
for investment pursuant to this Policy from time to time;
and "UNITIZED FUND' means any such fund, unit trust or mutual fund; and
"HANG SENG RETURN GUARANTEED FUND BALANCE" at any particular time with
respect to any Member, means the balance as calculated by us, separately as
regards the Employer's Contributions and the Member's Contributions, of
amounts held on behalf of the Member in the Hang Seng Return Guaranteed
Fund plus Return credited to the Hang Seng Return Guaranteed Fund as
calculated in accordance with Schedule B(IV). The "HANG SENG RETURN
GUARANTEED FUND" means the fund of which the Hang Seng Return Guaranteed
Fund Balance is a part.
1.3 In this Policy
(a) References to this Policy, to the terms and conditions of this Policy
or the Schedules to this Policy includes any variation, amendment or
replacement to this Policy or its Schedules. After providing to you
not less than 8 months' written notice we may unilaterally amend this
Policy with effect from the beginning of the next Contract Year;
(b) A word denoting the singular includes the plural and vice versa;
(c) A word denoting either gender includes both genders; and
(d) Headings are inserted for convenience and do not affect the
interpretation of this Policy.
<PAGE>
1.4 This Policy, as defined above, constitutes the entire contract(s) between
you and us. Your participation in any guaranteed fund pursuant to this
Policy shall constitute a separate contract from your participation in any
non-guaranteed fund pursuant to this Policy.
2. BENEFITS
2.1 While this Policy is in force we will provide the Member's Benefit and
Deferred Benefit of each Member payable under the Scheme from the Scheme
Account held in respect of that Member.
2.2 Each Member's Benefits will be paid by us to the relevant Member or to his
nominee in accordance with the Occupational Retirement Schemes (Payment of
Benefit) Rules, if applicable, provided that, if the Scheme is terminated,
each Member's Benefit will be paid directly to the relevant Member or his
nominee notwithstanding your instructions to the contrary.
2.3 The receipt of any Member's Benefit by you, by the relevant Member or by an
authorized recipient will discharge us from all further liability in
respect of that Member.
2.4 We will not be liable to pay any Member's Benefit unless and until we have
received proof establishing that, in our opinion, such Benefit is due and
payable pursuant to the Scheme.
3. DEFERRED BENEFITS AND FORFEITURE AMOUNTS
3.1 (a) If under the Scheme a Member becomes entitled to a benefit or part of
a benefit not receivable immediately, we will set aside and hold such
amount as a Deferred Benefit. We will issue a Deferred Benefit
Certificate to the Member and he must collect and acknowledge receipt
of that Certificate.
(b) When it becomes payable we will pay the Deferred Benefit to the Member
or his nominee, on receipt of satisfactory proof of his identity and
entitlement and the surrender of his Deferred Benefit Certificate.
(c) At the written request of a former Member we may pay his Deferred
Benefit to the retirement scheme of his new employer. Before doing so
we will require satisfactory proof of his identity, the surrender of
his Deferred Benefit Certificate, and the consent of the Appropriate
Authorities. We will only make the Transfer directly to the trustees
or to the Authorized Insurer responsible for the administration of the
new employer's retirement scheme.
(d) Until a Deferred Benefit is paid it will be treated as a Scheme
Account and may be Transferred.
---
3.2 After any Member's Benefit has been paid (Clause 2) or his Deferred Benefit
has been set aside (Clause 3), the relevant Forfeiture Amount may in
accordance with Clause 13.4 be offset against future Contributions,
Transferred to the remaining Members' Scheme Accounts if allowed by the
Scheme rules or refunded to the Employer. Such Transfer will take place at
the end of the Contract Year or earlier if requested by you and permitted
by us, and will be treated as Employer's Contributions. Forfeiture Amounts
shall be treated as a Scheme Account and may be Transferred.
4. POLICY SURRENDER
4.1 You may surrender this Policy only by providing to us 6 months' written
notice of your intention to do so and such surrender will take effect on
the 31 December next occurring on the expiration of that notice period.
<PAGE>
4.2 On surrender of the Policy we will pay to the Scheme's trustee or the
Authorized Insurer who will hold the Scheme's assets an amount equal to the
sum of the Scheme Accounts (and the Forfeitures Balance) as soon as
practicable after we have calculated and credited Return for the Contract
Year. Such payment will include interest calculated pursuant to Clause 14
from 1 January to the day preceding the date of payment and we will be
liable to pay no other interest or Return in respect of that period.
4.3 Before paying any such amount we must be satisfied that it will be used for
the purposes of the Scheme and that the Appropriate Authority, if required
to do so, consents to such payment.
5. CONTRIBUTIONS
5.1 You will pay Contributions to us every month or at such other intervals as
we may agree.
5.2 For the purposes of this Policy any payment of Contributions will be deemed
not to have been paid until it is credited to our bank account.
6. CHARGES
6.1 You are liable to us for Charges that will be due monthly on the same date
as that on which we receive your Contributions for the month.
6.2 We may change the way in which Charges are calculated and amend Schedule C
accordingly, but only with effect from the next Contract Year after
providing 8 months' notice.
6.3 In addition to the Charges specified in Schedule C you shall be liable to
pay an amount equal to any costs that have been incurred in respect of
policies of the class to which this Policy belongs for the purpose:
(a) of ensuring compliance with the Occupational Retirement Schemes
Ordinance; or
(b) of facilitating the operation of such policies in accordance with that
Ordinance.
This shall be recovered by us in a way which is considered equitable and
practicable by our Actuary. In this Clause 6.3 "Costs" means expenses,
charges or fees of any nature whatsoever paid by us to a third party and
includes, but is not limited to, fees or charges paid to the Hong Kong
Government or any trustee, auditor or lawyer who is not our employee.
7. INFORMATION
7.1 Within thirty (30) days of the commencement of each Contract Year you will,
if so requested by us, provide to us the following information in respect
of each Member:
(a) name;
(b) Hong Kong Identity Card Number or the serial number of such other
document of identity as is acceptable to us;
(c) date of birth;
(d) sex;
(e) the date on and from which person ranks for benefits under the Scheme;
<PAGE>
(f) current monthly salary ("salary" having the same meaning as defined in
the Scheme); and
(g) such further or other information as we may require from time to time
in respect of the Member.
7.2 When a material change occurs in respect of any of the matters listed in
Clause 7.1 you will provide us with written notice of such change.
7.3 We will, as soon as practicable after each Contract Year, provide to you:
(a) the Scheme's Balance Sheet;
(b) a Revenue Account for that Contract Year;
(c) a Summary of each Member's Scheme Account, Hang Seng Return Guaranteed
Fund Balance, CAF Balance and Unitized Funds Balance as at the end of
that Contract Year showing those parts of such Account or Balance
attributable to Employer's Contributions and Member's Contributions;
and
(d) a Statement of the Forfeitures Balance at the end of that Contract
Year.
8. SPECIAL CIRCUMSTANCES
8.1 We have the right to withhold any payment under Clause 2, 3 or 4 if we have
reasonable grounds for believing that such payment is connected with a
breach of any relevant laws, regulations or the Scheme rules. We do not,
however, have the responsibility to enforce or inform you about such laws,
regulations or rules and we will make payment in good faith that you are
abiding by them.
8.2 (a) We have the right, notwithstanding your instructions, to make payment
under Clause 2 directly to the Members and/or to suspend Clauses 4 and
11, if we have reasonable grounds for believing that the Members'
interests would be materially better served by doing so.
(b) In making any payment outside Hong Kong or in a currency other than
Hong Kong Dollars, the rate of currency exchange and the transaction
costs will be as charged by The Hongkong and Shanghai Banking
Corporation Limited on the relevant day. Such costs will be deducted
by us from the payment proceeds.
8.3 If we decide to exercise any of the rights which we have under this Clause
8, we will advise you in writing as soon as is practicable thereafter.
9. GOVERNING LAW AND JURISDICTION
This Policy will be governed by and construed according to the laws of Hong
Kong.
10. VALUATION OF ASSETS
For the purpose of this Policy the value of any asset will be determined by
us in accordance with any applicable "valuation regulations" (as defined in
the Insurance Companies Ordinance). If no such valuation regulations are
applicable in determining the value of any asset we will follow the
principles of valuation otherwise used by us in valuing our Long Term
Business Fund for the purposes of the Insurance Companies Ordinance.
<PAGE>
11. CURRENCY
Subject to Clause 8, all payments to and by us will be made in Hong Kong
Dollars in Hong Kong.
12. TERMINATION
This policy will terminate immediately once we have made all payments under
Clauses 2, 3 and 4.
13. TRANSFERS
13.1 Future Contributions - In respect of Contributions which we have not yet
received, you may request us to Transfer all or part of those Contributions
from the Scheme Account to the Hang Seng Return Guaranteed Fund Balance,
CAF Balance or to the Unitized Fund Balance or part to one and part to
another or others provided that,
(a) the request must be written in a manner and form specified by us; and
(b) subject to the terms and conditions of this Policy and your request,
we will put your request into effect on the first Business Day in the
calendar quarter which commences at least one calendar month after we
receive it and your request shall remain in effect in respect of
future contributions until any further such request takes effect in
accordance with this Policy; and
(c) any Transfer made by us pursuant to this Clause 13.1 shall be made as
soon as practicable after we receive the relevant Contribution.
13.2 Existing Balances - You may otherwise request us to effect a Transfer
provided that,
(a) the request must be written in a manner and form specified by us;
(b) subject to the terms and conditions of this Policy we will put your
request into effect on the first Business Day in the calendar quarter
which commences at least one calendar month after we receive it;
(c) the Amounts Transferred shall include Return calculated in accordance
with Clause 14 or Schedule B(II) or (IV) as the case may be; and
(d) any such request, once made, shall be irrevocable.
13.3 Member Termination - As soon as practicable after we receive notification
that a Member shall terminate or has terminated employment, we will
Transfer to the Scheme Account an amount equal to the Member's Hang Seng
Return Guaranteed Fund Balance, CAF Balance and Unitized Funds Balance
thereby reducing those Balances to zero.
13.4 Forfeitures Balance - Subject to the terms and conditions of this Policy,
after receiving your written request in a manner and form specified by us,
we will Transfer the amount which you specify plus Return calculated in
accordance with Clause 14 from the Forfeitures Balance to the Scheme
Accounts of the Members effective on a date agreed between us.
13.5 Policy Termination - After we receive your written request in accordance
with Clause 4, we will Transfer to the Scheme Account, an amount equal to
the Hang Seng Return Guaranteed Fund Balance, CAF Balance and Unitized
Funds Balance of every Member, thereby reducing those Balances to zero. The
exact timing of such Transfer shall be carried out as soon as practicable
after the expiry of the notice.
<PAGE>
13.6 A Scheme Account, Hang Seng Return Guaranteed Fund Balance, CAF Balance or
Unitized Funds Balance or the Forfeitures Balance may never, in consequence
of any Transfer or otherwise, become a negative amount and we will not
execute any Transfer that would have that effect.
13.7 If the Scheme's rules permit Members to request Transfers the following
provisions will apply:
(a) Any request for a Transfer made in accordance with Clause 13.1 will be
deemed to have been made with the relevant Member's consent.
(b) Any request for a Transfer purporting to be made on behalf of a Member
will be deemed to have been made at that Member's request.
13.8 Separate accounts will be kept for the Scheme Account, Hang Seng Return
Guaranteed Fund Balance, CAF Balance and Unitized Funds Balance to show
funds representing the Member's Contributions and funds representing the
Employer's Contributions. There shall be no Transfer between the funds
representing the Employer's and Members' Contributions.
13.9 Unitized Funds - Notwithstanding anything to the contrary herein, but
subject to Clause 13.2, the following shall apply to all requests for
Transfers to or from the Unitized Funds Balance (or a particular unitized
fund participating in the Unitized Funds Balance):
(a) the request must specify from which unitized fund units are to be
purchased or redeemed to effect the Transfer;
(b) the request must specify the percentage of units held that are to be
Transferred.
(c) we shall not be liable to effect a request to Transfer if the relevant
Member has no units in the unitized fund specified for sale to effect
the Transfer;
(d) all purchases and redemptions of units in funds which have been
approved by the Securities and Futures Commission shall be made on the
terms and conditions specified in the constitutive documentation of
the particular fund as approved by the Securities and Futures
Commission; and
(e) We shall use our best endeavors to effect all purchases and
redemptions of units as expeditiously as reasonably practicable but we
shall not be liable for any loss, damages or other claim whatsoever
arising or allegedly arising from any negligent act or omission
relating to the purchase or redemption of a particular unit. You
undertake to indemnify us and to keep us indemnified from all claims
and suits (including costs thereof) arising in relation to such loss,
damages or other claims.
14. RETURN ON SCHEME ACCOUNTS
All monies held in a Scheme Account, shall be credited with interest
calculated at the rate payable on savings deposits at The Hongkong and
Shanghai Banking Corporation Limited in Hong Kong.
15. NON-ASSIGNMENT
Your rights or benefits or those of a Member, if any, arising under this
Policy cannot be assigned, charged, attached or pledged. We will disregard
any transaction purporting to do so.
<PAGE>
16. OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE
(a) Any terms or conditions that are or may be required by the Occupational
Retirement Schemes Ordinance (as amended from time to time) to be included
in this Policy so as to enable this Policy or the Scheme to be registered
(or to continue to be registered) under that Ordinance shall be implied in
this Policy unless expressed herein.
(b) In the event of a conflict between the requirements of the Occupational
Retirement Schemes Ordinance (as amended from time to time) and this
Policy, those requirements shall prevail and this Policy shall be void to
the extent of any such inconsistency.
(c) This Policy shall be interpreted as if the obligations imposed upon you and
us by the Occupational Retirement Schemes Ordinance (as amended from time
to time) form part of this Policy.
(d) Unless this Policy has been issued to you as the trustee of the Scheme, the
intention is that is shall be an "insurance arrangement" (as defined in the
Occupational Retirement Schemes Ordinance) and all requirements specified
in the Occupational Retirement Schemes (Insurance Arrangement) Rules shall
be implied in the Policy unless expressed herein.
(e) In this Policy references to the Occupational Retirement Schemes Ordinance
shall include any subsidiary legislation made thereunder.
********************************************************************************
<PAGE>
SCHEDULE A
----------
EXCEL MASTER LIMITED
DEFINED CONTRIBUTION SCHEME RULES
---------------------------------
These rules apply to a defined contribution scheme known as the EXCEL MASTER
LIMITED DEFINED CONTRIBUTION SCHEME which is the subject of an insurance
arrangement made with Hang Seng Life Limited dated 1st January 1997 ("the
Policy").
Benefits shall be provided in accordance with the following Rules:
(1) DEFINITIONS
-----------
In these Rules -
(a) "ADMINISTRATOR" means Hang Seng Life Limited.
(b) "BENEFICIARIES" means:
(i) any person whom the Member has nominated in writing to the
Employer during his lifetime, or if no such person is nominated;
(ii) the Member's spouse, children, parents, brothers or sisters,
failing which the spouse or any child of such children, parents,
brothers or sisters;
(iii) if no Beneficiary can be identified, the Member's legal personal
representative;
(c) "COMPULSORY PAYMENT" means the long service payment or severance
payment payable by the Employer to employees in accordance with the
Employment Ordinance, or any other payment which the Employer is
liable to make on cessation of employment as a result of any
legislation in Hong Kong.
(d) "EMPLOYER" means EXCEL MASTER LIMITED or such other associated company
or companies of EXCEL MASTER LIMITED as have been invited to
participate subject to their agreeing in respect of their employees to
adhere to these Rules.
(e) "EMPLOYER'S BALANCE" means the sum of the Employer's contributions
made in respect of a Member together with accumulated interest or
investment return due in accordance with the Policy, less any charges
due.
<PAGE>
(f) "ILL HEALTH" means such state of health, certified by the Employer's
medical adviser, as renders a Member substantially unable to carry out
the work for which the Member is currently employed, or where
continuance of such employment is, in the Employer's medical adviser's
opinion, prejudicial to the Member's health or well-being.
(g) "MEMBER" means an employee of the Employer who has joined the Scheme
in accordance with Rule (2) and, at any relevant time, continues to
participate in the Scheme.
(h) "MEMBER'S BALANCE" means the sum of the Member's contributions
together with accumulated interest or investment return due in
accordance with the Policy, less any charges due.
(i) "NORMAL RETIREMENT DATE" means the sixty-fifth birthday of a Member,
or such later date as is mutually agreed by the Employer and the
Member.
(j) "RESIGNATION" means cessation of employment with the Employer at the
request of the Member prior to Normal Retirement Date.
(k) "SALARY" means the basic monthly salary payment due to a Member
pursuant to his terms of employment with the Employer, excluding any
bonus, commission, allowance or other amounts which are or may be due
to the Member by the Employer at any time.
(l) "SCHEME" means the EXCEL MASTER LIMITED DEFINED CONTRIBUTION SCHEME.
(m) "SCHEME COMMENCEMENT DATE" means 1st January 1997.
(n) "YEARS OF SERVICE" means the total period of continuous employment
with the Employer measured from the date of employment to the date of
cessation of employment in complete years and months. This may include
any period of employment in respect of a Member transferred under the
provisions of Rule (10). Periods of absence pursuant to Rule (3)(d)
may be excluded.
In these Rules words importing the singular shall include the plural and
vice versa and words importing the masculine gender shall include the
feminine and vice versa.
(2) ELIGIBILITY
-----------
All full time permanent employees of the Employer are eligible to join this
Scheme on the first day of the month following the completion of the
required period of probationary service.
<PAGE>
(3) REGULAR CONTRIBUTIONS
---------------------
(a) Each Member shall make monthly contributions equal to 5% of his Salary
to the Scheme, such contributions being deducted monthly from the
Member's Salary by the Employer.
(b) The Employer shall make monthly contributions equal to 5% of the
Member's Salary in respect of each Member.
(c) The Employer shall pay the Employer's and Members' contributions to
the Administrator within one month from the date that Member's
salaries are paid.
(d) Contributions may be discontinued by the Member and the Employer in
the event of a Member being absent for a period in excess of thirty
days due to sickness or on unpaid leave. Contributions shall be
resumed on the Employee's return to work.
(e) Contributions shall cease when the Member ceases employment and if
that date does not coincide with the last day of the month then
contributions shall cease on the last day of the preceding month.
(f) Members may specify in which of the funds available to the Scheme
their contributions are to be invested. From time to time, Members may
give instructions to the Employer for transfer of the Member's Balance
between such funds. The Employer may issue rules about how and when
such instructions can be given.
(4) CHARGES
-------
Charges to administer the Scheme shall be paid by the Employer in addition
to the Employer's contributions.
(5) BENEFITS
--------
On cessation of Scheme membership due to one of the following causes, the
benefit payable is:
(a) Normal Retirement or Ill Health
-------------------------------
On Normal Retirement Date or in the event of Ill Health, a Member shall
be entitled to receive a lump sum from the Scheme equal to the total of
the Member's Balance and the Employer's Balance.
<PAGE>
(b) Resignation
-----------
On Resignation, a Member shall be entitled to receive a lump sum from
the Scheme equal to the Member's Balance plus a percentage of the
Employer's Balance determined in accordance with the scale set out
below:
Years of Services Percentage
----------------- ----------
Less than 3 Nil
3 or more, but less than 4 30%
4 or more, but less than 5 40%
5 or more, but less than 6 50%
6 or more, but less than 7 60%
7 or more, but less than 8 70%
8 or more, but less than 9 80%
9 or more, but less than 10 90%
10 or more 100%
(c) Death
-----
In the event of a Member's death in employment, a lump sum calculated
in accordance with Rule (5)(a) shall be paid to such of the
Beneficiaries as the Employer thinks fair. Any benefit shall be paid
in accordance with the provisions of Occupational Retirement Schemes
Ordinance.
(d) Dismissal or Redundancy
-----------------------
(i) Notwithstanding anything contained in these rules, on dismissal
of a Member on the grounds that the Member is guilty of fraud or
dishonesty, or on any other grounds on which the Employer would
be entitled to terminate the Member's employment without notice
under Hong Kong law, the Member shall be entitled to the Member's
Balance only.
(ii) On termination of a Member's employment by the Employer on
grounds other than those stated in sub-clause (i) above, such as
redundancy or severance, or in circumstances in which no reason
is given by the Employer, the Member shall be entitled to a lump
sum calculated in accordance with Rule 5(b) above.
(e) Compulsory Payment
------------------
Any Compulsory Payment due to a Member may be deducted from the
Employer's Balance of the benefit payable to that Member under Rules
5(a), (b), (c) or (d).
<PAGE>
(6) FAILURE TO CLAIM
----------------
(a) No person entitled to receive a benefit under the Scheme shall be
entitled to claim such benefit more than twenty-four months after the
same became due, if the reason for such non-payment within the period
of twenty-four months was:
(i) the failure of that person to claim the same; as
(ii) the lack of knowledge by the Employer of the existence or
whereabouts of that person;
(iii) the lack of knowledge by the Employer that such person had or
claimed to have a right thereto
but the Employer may pay any such benefit or any part of it to such
Beneficiaries of the Member as it thinks fair.
(b) Any part of any benefit which is not claimed within twenty-four months
of the date when it was payable shall be credited to the Forfeiture
Account under Rule (7). The person entitled shall cease to have any
further claim to or interest in such benefit.
(7) FORFEITURE ACCOUNT
------------------
A forfeiture account shall be maintained by the Administrator, to which the
unvested portion of ex-Member's benefits under Rule (5) above, and any
unclaimed benefits specified under Rule (6) above, shall be credited. The
balance of the forfeiture account may be offset against future
contributions to the Scheme or refunded to the Employer pursuant to the
requirements of the Occupational Retirement Schemes Ordinance.
(8) WITHHOLDING OF BENEFITS
-----------------------
The Employer shall be entitled to set-off against any benefit to which a
Member is entitled under this Scheme, or withhold such benefit, for the
purpose of paying:
(a) a loss suffered by the Employer due to a dishonest act committed by
that Member; or
(b) a debt acknowledged in writing by that Member as owing to the
Employer.
<PAGE>
(9) BANKRUPTCY, INSOLVENCY, INCAPACITY, ALIENATION OF BENEFITS
----------------------------------------------------------
Any Member who becomes bankrupt or insolvent, or who the Employer
determines to be incapable of managing his own affairs, or who shall
purport to alienate or charge any amount which may now or in the future be
due to him under the Scheme shall immediately cease to be a Member. An
amount equal to the benefit payable to the Member pursuant to Rule (5)(b)
shall immediately vest in the Employer on trust to be paid to such of the
Beneficiaries as the Employer thinks fair.
(10) TRANSFER
--------
(a) In the event of a Member's transfer to this Scheme from the membership
of another scheme, a sum equal to the existing fund balances of that
person at the date of transfer may be accepted under this Rule.
(b) Notwithstanding anything contained in Rule (5), in the event of a
Member's transfer from this Scheme to the membership of another scheme,
a sum equal to the Member's Balance at the date of transfer may be
transferred under this Rule, and a sum equal to a proportion or the
whole of the Employer's Balance may be transferred, subject to the
consent of the Employer and the transferring employee.
(c) All transfers to or from this Scheme will be subject to the Employer's
and the transferring employee's consent.
(11) DISCHARGE OF LIABILITIES
------------------------
The receipt of benefits calculated in accordance with these Rules by the
Member or any of his Beneficiaries shall constitute a full and sufficient
discharge of all liabilities of the Employer towards the Member.
(12) PROHIBITION OF WITHDRAWAL
-------------------------
Withdrawal by any Member from the Scheme prior to Normal Retirement Date or
to the date of his termination of employment, if earlier, will not be
permitted.
<PAGE>
(13) AMENDMENTS TO SCHEME RULES
--------------------------
EXCEL MASTER LIMITED may at any time alter, vary, modify or add to all or
any of these Rules PROVIDED THAT no such alteration, variation,
modification or addition shall be made if it will prejudice the accrued
rights or vested benefits of any Member under this Scheme for the time
being. In this section "accrued rights" and "vested benefits" have the
meaning assigned to those terms by the Occupational Retirement Schemes
Ordinance.
(14) TERMINATION OR REINSTATEMENT OF SCHEME
--------------------------------------
(a) Upon the Employer giving each Member one calendar month's prior notice
in writing, the Scheme shall determine with the following effect at
the expiration of such notice:
(i) all contributions shall immediately cease;
(ii) benefits will be paid to Members on the date of retirement or
cessation of employment in accordance with Rule (5) above.
(b) The Scheme, if terminated, may be reinstated subject to agreement
between the Members and the Employer on the contributions in default.
(c) In the event of the Employer being wound up or adjudicated bankrupt,
the Employer shall be deemed to have given notice of discontinuance of
the Scheme on commencement of the winding up or the date of the
bankruptcy order. However, in the event of the Employer being wound up
for the purpose of reconstruction, reconstitution or amalgamation with
any other company, the Employer may in its discretion enter into an
agreement for the continuance of the Scheme as if such reconstructed,
reconstituted or amalgamated company was in fact the Employer.
(d) Immediately upon:
(a) the Employer giving notice of the discontinuance of the Scheme;
or
(b) the High Court ordering, pursuant to Section 48 of the
Occupational Retirement Schemes Ordinance, that the Scheme be
wound-up -
the assets of the Scheme including the accounts of the Members shall
vest in and be held on trust by the Insurer to be paid -
(A) in accordance with the order, or any subsequent order, of the
High Court; or, if no such order is made,
<PAGE>
(B) directly to the Members in accordance with Rule (14)(a)(ii)
PROVIDED THAT, if Rule (14)(a)(ii) conflicts with the requirement
for the payment of benefits stated in Section 18(1)(c) of the
Occupational Retirement Schemes Ordinance, the requirement stated
in that Section shall prevail.
(15) CURRENCY
--------
All payments to and from the Scheme shall be made in Hong Kong dollars.
(16) GOVERNING LAW
-------------
This Scheme shall be governed by and construed in accordance with Hong Kong
law.
(17) OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE
-----------------------------------------
(a) Any terms or rules that are or may be required by the Occupational
Retirement Schemes Ordinance (as amended from time to time) to be
included in this Scheme so as to enable this Scheme to be or remain
registered (or to continue to be registered) under that Ordinance shall
be implied in this Scheme unless expressed herein.
(b) In the event of a conflict between the requirements of the Occupational
Retirement Schemes Ordinance and this scheme, those requirements shall
prevail and the provisions of this Scheme shall be void to the extent
of any inconsistency.
(c) This Scheme shall be interpreted as if the obligations imposed upon the
Employer and the Members by the Occupational Retirement Schemes
Ordinance form part of this Scheme.
********************************************************************************
<PAGE>
SCHEDULE B (I)
GLOBAL GROWTH FUND AND GGF BALANCE
This Global Growth Fund is constituted as follows:
A. CONSTITUTION - The Global Growth Fund ("GGF") has been created by Hang Seng
Life Limited as a separate fund within its Class H Long Term Business Fund
established pursuant to the Insurance Companies Ordinance. The GGF is
unitized in that the GGF is nominally divided into units each representing
a share in the GGF.
B. INVESTMENT STRATEGY AND RESTRICTIONS - The GGF shall be invested in a very
wide international spread of securities with usually between 50 and 75% of
the fund in equities. There are no restrictions on the asset classes in
which investments may be made and in addition to stocks, bonds and cash,
the managers may invest in property and derivative instruments like
futures, options and swaps to hedge or enhance yields.
C. PRICES AND VALUATIONS - On each Valuation Day we shall calculate the net
asset value of the GGF which shall be divided by the number of issued units
to determine the net asset value of each unit which shall be the price of
units. The net asset value of the GGF shall be the value of the assets less
all charges, costs and expenses.
D. ACQUISITION AND REDEMPTION OF UNITS - Units will be purchased and sold at
the price applying when a request to Transfer into or from the GGF Balance
is executed by us. The price applying at the date of execution will be the
price determined at the next Valuation Day.
E. CHARGES - There shall be a fund charge of not more than 1.125% per annum of
the average asset value of the GGF as calculated by us. The charge shall be
calculated and deducted in arrears on each Valuation Day.
F. COSTS AND EXPENSES - All expenses of investment including (without limiting
the generality of "expenses of investment") all costs of realizing assets
and safe keeping of assets, fees, charges, taxes and duties incurred in the
course of investment of the assets underlying the Global Growth Fund shall
be charged against the Global Growth Fund.
G. VALUATION DAY - Each 7th, 14th, 21st and 28th day of each month (or such
other days at shorter intervals as we may specify from time to time) shall
be a Valuation Day provided that if any such day is a Saturday or public
holiday the relevant Valuation Day shall be the next day that we are open
for business.
********************************************************************************
<PAGE>
SCHEDULE B (II)
RETURN ON CAF BALANCE
A. This Policy is of our Capital Assurance Fund class of polices. The Return
payable in respect of the CAF Balance of this Policy will be determined in
the same way as for those of all other policies of that class.
At the end of the Contract Year our Actuary will determine the Declared
Interest Rate to be applied to all of the Capital Assurance Fund class of
policies. The Declared Interest Rate will never be negative. Return will
then be calculated as follows:
Declared Interest Rate x Average of the daily balance of the Fund for the
whole Contract Year.
B. No Return will be credited in respect of any CAF Balance which has already
been Transferred.
C. When a Transfer is to be made from the CAF Balance we will credit Return to
the Amount Transferred. The calculation of Return will be based on an
interim rate, which will never be negative, to be determined by our
Actuary. Such interim rate will be applied only for the period between the
last date to which Return was credited and the date of Transfer.
********************************************************************************
<PAGE>
SCHEDULE B (III)
HANG SENG HONG KONG EQUITY INVESTMENT FUND AND HSHKEIF BALANCE
The Hang Seng Hong Kong Equity Investment Fund is constituted as follows:
A. CONSTITUTION - The Hang Seng Hong Kong Equity Investment Fund ("HSHKEIF")
has been created by Hang Seng Life Limited as a separate fund within its
Class H Long Term Business Fund established pursuant to the Insurance
Companies Ordinance. The HSHKEIF is unitized in that the HSHKEIF is
nominally divided into units each representing a share in the HSHKEIF.
B. INVESTMENT STRATEGY AND RESTRICTIONS - The HSHKEIF shall invest directly or
indirectly in the stocks of companies listed on the Stock Exchange of Hong
Kong ("Hong Kong Stocks"). There are no restrictions on the asset classes
in which investments may be made, and in addition to stocks, the managers
may invest in derivative instruments like futures, options, warrants and
swaps to gain or hedge exposure to the Hong Kong Stocks. The managers may
hold part of the fund in cash if they consider it appropriate.
C. PRICES AND VALUATIONS - On each Valuation Day we shall calculate the net
asset value of the HSHKEIF which shall be divided by the number of issued
units to determine the net asset value of each unit which shall be the
price of units. The net asset value of the HSHKEIF shall be the value of
assets less all charges, costs and expenses.
D. ACQUISITION AND REDEMPTION OF UNITS - Units will be purchased and sold at
the price applying when a request to Transfer into or from the HSHKEIF
Balance is executed by us. The price applying at the date of execution will
be the price determined at the next Valuation Day.
E. CHARGES - There shall be a fund charge of not more than 1.125% per annum of
the average asset value of the HSHKEIF as calculated by us. The charge
shall be calculated and deducted in arrears on each Valuation Day.
F. COSTS AND EXPENSES - All expenses of investment including (without limiting
the generality of "expenses of investment") all costs of realizing assets
and safe keeping of assets, fees, charges, taxes and duties incurred in the
course of investment of the assets underlying the HSHKEIF shall be charged
against the HSHKEIF.
G. VALUATION DAY - Each 7th, 14th, 21st and 28th day of each month shall be a
Valuation Day provided that if any such day is a Saturday or public holiday
the relevant Valuation Day shall be the next day that we are open for
business.
********************************************************************************
<PAGE>
SCHEDULE B (IV)
RETURN ON HANG SENG RETURN GUARANTEED FUND BALANCE
A. This Policy is of our Hang Seng Return Guaranteed Fund class of policies.
Subject to sub-clause D below, the Return payable in respect of the Hang
Seng Return Guaranteed Fund Balance of this Policy will be determined in
the same way as for all other policies of that class.
At the end of the Contract Year an Actuary will determine the Declared
Interest Rate to be applied to all of the Hang Seng Return Guaranteed Fund
class of policies. The Declared Interest Rate will never be less than 5%.
Return will than be calculated as follows:
Declared Interest Rate x Average of the daily balance of the Fund for
the whole Contract Year.
B. No Return will be credited in respect of any Hang Seng Return Guaranteed
Fund Balance which has already been Transferred.
C. Subject to Sub-Clause D below, when a Transfer is to be made from the Hang
Seng Return Guaranteed Fund we will include Return in the Amount
Transferred. The calculation of Return will be based on an interim rate,
not less than 5% per annum, to be determined by our Actuary, but will
reflect only the period between the last date to which Return was credited
and the most recent month end as at which we can practicably calculate
Return for the year to date.
D. If a Transfer is to be made from the Hang Seng Return Guaranteed Fund
within 36 months from the Policy Effective Date, other than to pay a
Member's Benefit, the following shall apply in calculating the amount to be
deducted from the Hang Seng Return Guaranteed Fund Balance and the amount
to be Transferred:
(i) the amount to be deducted from the Hang Seng Return Guaranteed Fund
Balance (the "Deducted Amount") shall include Return calculated using
the Declared Interest Rates from the Policy Effective Date to the date
of Transfer; and then,
(ii) the amount Transferred (which may be less than the Deducted Amount)
shall be determined by re-calculating the Return included in the
Deducted Amount to reflect the difference between the Declared
Interest Rate(s) and the Initial Period Rate(s) from the Policy
Effective Date to the date of Transfer.
The Initial Period Rate shall be determined by our Actuary in his absolute
discretion, to reflect the actual investment return of the Hang Seng Return
Guaranteed Fund over the relevant period. The Initial Period Rate may be
less than 5% per annum and may be negative.
********************************************************************************
<PAGE>
SCHEDULE B (V)
HANG SENG INDEX INVESTEMENT FUND
The Hang Seng Index Investment Fund is constituted as follows:
A. CONSTITUTION - The Hang Seng Index Investment Fund ("HSIIF") has been
created by Hang Seng Life Limited as a separate fund within its Class H
Long Term Business Fund established pursuant to the Insurance Companies
Ordinance. The HSIIF is unitized in that the HSIIF is nominally divided
into units each representing a share in the HSIIF.
B. INVESTMENT STRATEGY AND RESTRICTIONS - The HSIIF shall invest exclusively
in the Hang Seng Index Fund ("Index Fund"), a unit trust approved by the
Securities and Futures Commission that is managed by Hang Seng Investment
Management Limited. The Hang Seng Index Fund tracks the movements in the
Hang Seng Index, an index of the leading stocks quoted on the Stock
Exchange of Hong Kong.
C. PRICES AND VALUATIONS - On each Valuation Day we shall calculate the net
asset value of the HSIIF which shall be divided by the number of issued
units to determine the net asset value of each unit which shall be the
price of units. The net asset value of the HSIIF shall be the value of
assets less all charges, costs and expenses.
D. ACQUISITION AND REDEMPTION OF UNITS - Units will be purchased and sold at
the price applying when a request to Transfer into or from the HSIIF
Balance is executed by us. The price applying at the date of execution will
be the price determined at the next Valuation Day.
E. CHARGES - There shall be a fund charge of not more than 1.125% per annum of
the average asset value of the HSIIF as calculated by us. The charge shall
be calculated and deducted in arrears one each Valuation Day. The
preliminary charge and management fee of the underlying Index Fund will be
waived but the Index Fund bears its trustee fee, audit fee and expenses of
investment as defined below. The Index Fund's trustee fee will not be more
than 0.15% p.a. on its net asset value, accrued on each dealing day and be
paid monthly in arrear.
F. COSTS AND EXPENSES - All legal expenses and other expenses incurred in the
operations or administration of the HSIIF and expenses of investment
including (without limiting the generality of "expenses of investment") all
costs of realizing assets and safe keeping of assets, fees, charges, taxes
and duties incurred in the course of investment of the assets underlying
the Hang Seng Index Investment Fund shall be charged against the Hang Seng
Index Investment Fund.
G. VALUATION DAY - Each 7th, 14th, 21st and 28th day of each month shall be a
Valuation Day provided that if any such day is a Saturday or public holiday
the relevant Valuation day shall be the next day that we are open for
business.
********************************************************************************
<PAGE>
EXHIBIT 10.21
HANG SENG LIFE LIMITED
36/F Sun Hung Kei Centre, 30 Harbour Road, Wanchai, Hong Kong
HANG SENG POOLED PROVIDENT PLAN
-------------------------------
DEFINED CONTRIBUTION POLICY
---------------------------
POLICY HOLDER: CARISON LIMITED
POLICY NUMBER: 3039390H2
Policy Issue Date: 19TH MARCH 1997
Policy Effective Date: 1ST JANUARY 1997
To the Policyholder:
This Policy is issued by HANG SENG LIFE LIMITED which will make the payments and
provide the services stated in this Policy subject to its conditions.
___________________________
Authorized Officer
HANG SENG LIFE LIMITED
<PAGE>
INDEX OF TERMS AND CONDITIONS
<TABLE>
<CAPTION>
CONDITIONS HEADING PAGE
- ---------- ------- ----
<S> <C> <C>
1 INTERPRETATION 1-4
2 BENEFITS 4
3 DEFERRED BENEFITS AND 4
FORFEITURE AMOUNTS
4 POLICY SURRENDER 4-5
5 CONTRIBUTIONS 5
6 CHARGES 5
7 INFORMATION 5-6
8 SPECIAL CIRCUMSTANCES 6
9 GOVERNING LAW AND 6
JURISDICTION
10 VALUATION OF ASSETS 6
11 CURRENCY 7
12 TERMINATION 7
13 TRANSFERS 7-8
14 RETURN ON SCHEME ACCOUNTS 8
15 NON-ASSIGNMENT 8
16 OCCUPATIONAL RETIREMENT 9
SCHEMES ORDINANCE
SCHEDULE A SCHEME RULES
SCHEDULE B (I) GLOBAL GROWTH FUND AND GGF BALANCE
</TABLE>
(II) RETURN ON CAF BALANCE
(III) HANG SENG HONG KONG EQUITY INVESTMENT FUND AND
HSHKEIF BALANCE
(IV) RETURN ON HANG SENG RETURN GUARANTEED FUND BALANCE
(V) HANG SENG INDEX INVESTMENT FUND AND HSIIF BALANCE
SCHEDULE C CHARGES
<PAGE>
The terms and conditions of this Policy are as follows:
1. INTERPRETATION
1.1 Throughout this Policy Hang Seng Life Limited is referred to as "we",
"our", or "us" and the Policyholder is referred to as "you" or "your".
1.2 In this Policy -
"ACTUARY" means a qualified actuary appointed by us who may be our employee
or the employee of a related company;
"APPROPRIATE AUTHORITY" means any officer or department of the Government
of Hong Kong whose consent or approval is required before we may undertake
the acts or transactions contemplated in this Policy;
"APPLICATION" means your application for this Policy;
"AUTHORIZED INSURER" means an insurer authorized in accordance with the
Insurance Companies Ordinance;
"BUSINESS DAY" means any day which is not a Saturday and on which we are
open for business in Hong Kong;
"CAF BALANCE" at any particular time with respect to any Member, means the
balance as calculated by us, separately as regards the Employer's
Contributions and the Member's Contributions, of amounts held on behalf of
the Member in the Capital Assurance Fund plus Return credited to the
Capital Assurance Fund as calculated in accordance with Schedule B(II).
"CAPITAL ASSURANCE FUND" means the fund of which the CAF Balance is a part;
"CHARGE" means the charge payable as a percentage of Contributions
calculated in accordance with Schedule C;
"CONTRACT YEAR" means the period from the Policy Effective Date until the
next 31 December and each calendar year thereafter;
"CONTRIBUTIONS" means the amount specified in the Scheme payable to us each
month or at such other intervals as we may agree;
"DEFERRED BENEFIT" means any amount held by us to the credit of a former
Member when Clause 3 applies;
"DEFERRED BENEFIT CERTIFICATE" means a certificate issued by us to a former
Member in accordance with Clause 3;
"EMPLOYER'S CONTRIBUTIONS" means that part of the Contributions that has
been paid by the employer pursuant to the Scheme;
"FORFEITURES BALANCE" at any particular time means the balance as
calculated by us of:
(a) Forfeiture Amounts Transferred from Members' Scheme Accounts in
accordance with the Scheme rules;
less (b) Amounts Transferred to Members' Scheme Accounts in accordance
with the Scheme rules;
<PAGE>
less (c) Amounts paid by us to you in accordance with Clause 3.2;
plus (d) Amounts of interest credited to such balance;
"HSHKEIF BALANCE" at any particular time with respect to any particular
Member means the value as calculated by us, separately as regards the
Employer's Contributions and the Member's Contributions, of all units held
in the Hang Seng Hong Kong Equity Investment Fund described in Schedule
B(III);
"HSIIF BALANCE" at any particular time means the value as calculated by us
of all units held in the Hang Seng Index Investment Fund described in
Schedule B(V);
"GGF BALANCE" at any particular time with respect to any particular Member
means the value as calculated by us, separately as regards the Employer's
Contributions and the Member's Contributions, of all units held in the
Global Growth Fund described in Schedule B(I);
"INSURANCE COMPANIES ORDINANCE" means Chapter 41 of the Laws of Hong Kong
as amended from time to time;
"MEMBER" means a person who is at any relevant time a member of the Scheme
and, where the context so permits, includes any person or persons nominated
by such Member as a beneficiary or any former Member;
"MEMBER'S BENEFIT" means (a) the amount of the benefit or Deferred Benefit
to which a Member becomes entitled pursuant to the Scheme on his
retirement, death, disability or other termination of employment, but not
exceeding (b) his Scheme Account at the time the benefit or Deferred
Benefit is calculated. "FORFEITURE AMOUNT" means the excess of (b) over
(a);
"MEMBER'S CONTRIBUTIONS" means that part, if any, of the periodic
Contributions that has been paid by a particular Member pursuant to the
Scheme;
"OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE" means Chapter 426 of the Laws
of Hong Kong as amended from time to time;
"POLICY" and "THIS POLICY" mean this document, any Endorsement, any
Schedule and your Application;
"POLICY EFFECTIVE DATE" means the date specified as such on the first page
of this Policy being the date of which this Policy will be deemed to have
come into effect;
"RETURN" means any amount or amounts credited to:
(a) the Scheme Account in accordance with Clause 14;
(b) the Hang Seng Return Guaranteed Fund in accordance with Schedule
B(IV); and
(c) the Capital Assurance Fund in accordance with Schedule B(II);
"SCHEME" means that Scheme, the rules of which are set out in Schedule A,
as amended from time to time;
"SCHEME ACCOUNT" at any particular time with respect to any particular
Member means the balance, as calculated by us, separately as regards the
portion attributable to the Employer's Contributions and the Member's
Contributions, of:
<PAGE>
(a) Contributions received by us in respect of that Member;
plus (b) Amounts Transferred to the Scheme Account from the Hang Seng
Return Guaranteed Fund Balance, the CAF Balance, the Unitized
Funds Balance and the Forfeitures Balance;
less (c) Charges due;
less (d) Amounts Transferred from the Scheme Account to the Hang Seng
Return Guaranteed Fund Balance, the CAF Balance, the Unitized
Funds Balance and the Forfeitures Balance;
less (e) Amounts paid by us as Member's Benefits or in accordance with
Clause 4 or set aside as Deferred Benefits;
plus (f) Interest credited to the Scheme Account in accordance with Clause
14.
"TRANSFER" and its grammatical variations mean a transaction effected in
accordance with Clause 13 whereby any one of the Scheme Account, the Hang
Seng Return Guaranteed Fund Balance, the CAF Balance, the Unitized Funds
Balance or the Forfeitures Balance is increased and one other of them is
decreased and "AMOUNT TRANSFERRED" means the said amount in any particular
case and shall include any Return or interest credited or debited as the
case may be in accordance with Clause 14 or the Schedules;
"UNITIZED FUNDS BALANCE" at any particular time with respect to any
particular Member means the value as calculated by us, separately as
regards the portion attributable to the Employer's Contributions and the
Member's Contributions, of all units held on behalf of the Member in:
(a) the Global Growth Fund, the Hang Seng Hong Kong Equity Investment
Fund, the Hang Seng Index Investment Fund and such other unitized
funds as may be established by us from time to time; and
(b) such other unit trusts and mutual funds, authorised by the Securities
and Futures Commission of Hong Kong, as may be made available to you
for investment pursuant to this Policy from time to time;
and "UNITIZED FUND' means any such fund, unit trust or mutual fund; and
"HANG SENG RETURN GUARANTEED FUND BALANCE" at any particular time with
respect to any Member, means the balance as calculated by us, separately as
regards the Employer's Contributions and the Member's Contributions, of
amounts held on behalf of the Member in the Hang Seng Return Guaranteed
Fund plus Return credited to the Hang Seng Return Guaranteed Fund as
calculated in accordance with Schedule B(IV). The "HANG SENG RETURN
GUARANTEED FUND" means the fund of which the Hang Seng Return Guaranteed
Fund Balance is a part.
1.3 In this Policy -
(a) References to this Policy, to the terms and conditions of this Policy
or the Schedules to this Policy includes any variation, amendment or
replacement to this Policy or its Schedules. After providing to you
not less than 8 months' written notice we may unilaterally amend this
Policy with effect from the beginning of the next Contract Year;
(b) A word denoting the singular includes the plural and vice versa;
(c) A word denoting either gender includes both genders; and
(d) Headings are inserted for convenience and do not affect the
interpretation of this Policy.
<PAGE>
1.4 This Policy, as defined above, constitutes the entire contract(s) between
you and us. Your participation in any guaranteed fund pursuant to this
Policy shall constitute a separate contract from your participation in any
non-guaranteed fund pursuant to this Policy.
2. BENEFITS
2.1 While this Policy is in force we will provide the Member's Benefit and
Deferred Benefit of each Member payable under the Scheme from the Scheme
Account held in respect of that Member.
2.2 Each Member's Benefits will be paid by us to the relevant Member or to his
nominee in accordance with the Occupational Retirement Schemes (Payment of
Benefit) Rules, if applicable, provided that, if the Scheme is terminated,
each Member's Benefit will be paid directly to the relevant Member or his
nominee notwithstanding your instructions to the contrary.
2.3 The receipt of any Member's Benefit by you, by the relevant Member or by an
authorized recipient will discharge us from all further liability in
respect of that Member.
2.4 We will not be liable to pay any Member's Benefit unless and until we have
received proof establishing that, in our opinion, such Benefit is due and
payable pursuant to the Scheme.
3. DEFERRED BENEFITS AND FORFEITURE AMOUNTS
3.1 (a) If under the Scheme a Member becomes entitled to a benefit or part of
a benefit not receivable immediately, we will set aside and hold such
amount as a Deferred Benefit. We will issue a Deferred Benefit
Certificate to the Member and he must collect and acknowledge receipt
of that Certificate.
(b) When it becomes payable we will pay the Deferred Benefit to the Member
or his nominee, on receipt of satisfactory proof of his identity and
entitlement and the surrender of his Deferred Benefit Certificate.
(c) At the written request of a former Member we may pay his Deferred
Benefit to the retirement scheme of his new employer. Before doing so
we will require satisfactory proof of his identity, the surrender of
his Deferred Benefit Certificate, and the consent of the Appropriate
Authorities. We will only make the Transfer directly to the trustees
or to the Authorized Insurer responsible for the administration of the
new employer's retirement scheme.
(d) Until a Deferred Benefit is paid it will be treated as a Scheme
Account and may be Transferred.
---
3.2 After any Member's Benefit has been paid (Clause 2) or his Deferred Benefit
has been set aside (Clause 3), the relevant Forfeiture Amount may in
accordance with Clause 13.4 be offset against future Contributions,
Transferred to the remaining Members' Scheme Accounts if allowed by the
Scheme rules or refunded to the Employer. Such Transfer will take place at
the end of the Contract Year or earlier if requested by you and permitted
by us, and will be treated as Employer's Contributions. Forfeiture Amounts
shall be treated as a Scheme Account and may be Transferred.
4. POLICY SURRENDER
4.1 You may surrender this Policy only by providing to us 6 months' written
notice of your intention to do so and such surrender will take effect on
the 31 December next occurring on the expiration of that notice period.
<PAGE>
4.2 On surrender of the Policy we will pay to the Scheme's trustee or the
Authorized Insurer who will hold the Scheme's assets an amount equal to the
sum of the Scheme Accounts (and the Forfeitures Balance) as soon as
practicable after we have calculated and credited Return for the Contract
Year. Such payment will include interest calculated pursuant to Clause 14
from 1 January to the day preceding the date of payment and we will be
liable to pay no other interest or Return in respect of that period.
4.3 Before paying any such amount we must be satisfied that it will be used for
the purposes of the Scheme and that the Appropriate Authority, if required
to do so, consents to such payment
5. CONTRIBUTIONS
5.1 You will pay Contributions to us every month or at such other intervals as
we may agree.
5.2 For the purposes of this Policy any payment of Contributions will be deemed
not to have been paid until it is credited to our bank account.
6. CHARGES
6.1 You are liable to us for Charges that will be due monthly on the same date
as that on which we receive your Contributions for the month.
6.2 We may change the way in which Charges are calculated and amend Schedule C
accordingly, but only with effect from the next Contract Year after
providing 8 months' notice.
6.3 In addition to the Charges specified in Schedule C you shall be liable to
pay an amount equal to any costs that have been incurred in respect of
policies of the class to which this Policy belongs for the purpose:
(a) of ensuring compliance with the Occupational Retirement Schemes
Ordinance; or
(b) of facilitating the operation of such policies in accordance with that
Ordinance.
This shall be recovered by us in a way which is considered equitable and
practicable by our Actuary. In this Clause 6.3 "Costs" means expenses,
charges or fees of any nature whatsoever paid by us to a third party and
includes, but is not limited to, fees or charges paid to the Hong Kong
Government or any trustee, auditor or lawyer who is not our employee.
7. INFORMATION
7.1 Within thirty (30) days of the commencement of each Contract Year you will,
if so requested by us, provide to us the following information in respect
of each Member:
(a) name;
(b) Hong Kong Identity Card Number or the serial number of such other
document of identity as is acceptable to us;
(c) date of birth;
(d) sex;
(e) the date on and from which person ranks for benefits under the Scheme;
<PAGE>
(f) current monthly salary ("salary" having the same meaning as defined in
the Scheme); and
(g) such further or other information as we may require from time to time
in respect of the Member.
7.2 When a material change occurs in respect of any of the matters listed in
Clause 7.1 you will provide us with written notice of such change.
7.3 We will, as soon as practicable after each Contract Year, provide to you:
(a) the Scheme's Balance Sheet;
(b) a Revenue Account for that Contract Year;
(c) a Summary of each Member's Scheme Account, Hang Seng Return Guaranteed
Fund Balance, CAF Balance and Unitized Funds Balance as at the end of
that Contract Year showing those parts of such Account or Balance
attributable to Employer's Contributions and Member's Contributions;
and
(d) a Statement of the Forfeitures Balance at the end of that Contract
Year.
8. SPECIAL CIRCUMSTANCES
8.1 We have the right to withhold any payment under Clause 2, 3 or 4 if we have
reasonable grounds for believing that such payment is connected with a
breach of any relevant laws, regulations or the Scheme rules. We do not,
however, have the responsibility to enforce or inform you about such laws,
regulations or rules and we will make payment in good faith that you are
abiding by them.
8.2 (a) We have the right, notwithstanding your instructions, to make payment
under Clause 2 directly to the Members and/or to suspend Clauses 4 and
11, if we have reasonable grounds for believing that the Members'
interests would be materially better served by doing so.
(b) In making any payment outside Hong Kong or in a currency other than
Hong Kong Dollars, the rate of currency exchange and the transaction
costs will be as charged by The Hongkong and Shanghai Banking
Corporation Limited on the relevant day. Such costs will be deducted
by us from the payment proceeds.
8.3 If we decide to exercise any of the rights which we have under this Clause
8, we will advise you in writing as soon as is practicable thereafter.
9. GOVERNING LAW AND JURISDICTION
This Policy will be governed by and construed according to the laws of Hong
Kong.
10. VALUATION OF ASSETS
For the purpose of this Policy the value of any asset will be determined by
us in accordance with any applicable "valuation regulations" (as defined in
the Insurance Companies Ordinance). If no such valuation regulations are
applicable in determining the value of any asset we will follow the
principles of valuation otherwise used by us in valuing our Long Term
Business Fund for the purposes of the Insurance Companies Ordinance.
<PAGE>
11. CURRENCY
Subject to Clause 8, all payments to and by us will be made in Hong Kong
Dollars in Hong Kong.
12. TERMINATION
This policy will terminate immediately once we have made all payments under
Clauses 2, 3 and 4.
13. TRANSFERS
13.1 Future Contributions - In respect of Contributions which we have not yet
received, you may request us to Transfer all or part of those Contributions
from the Scheme Account to the Hang Seng Return Guaranteed Fund Balance,
CAF Balance or to the Unitized Fund Balance or part to one and part to
another or others provided that,
(a) the request must be written in a manner and form specified by us; and
(b) subject to the terms and conditions of this Policy and your request,
we will put your request into effect on the first Business Day in the
calendar quarter which commences at least one calendar month after we
receive it and your request shall remain in effect in respect of
future contributions until any further such request takes effect in
accordance with this Policy; and
(c) any Transfer made by us pursuant to this Clause 13.1 shall be made as
soon as practicable after we receive the relevant Contribution.
13.2 Existing Balances - You may otherwise request us to effect a Transfer
provided that,
(a) the request must be written in a manner and form specified by us;
(b) subject to the terms and conditions of this Policy we will put your
request into effect on the first Business Day in the calendar quarter
which commences at least one calendar month after we receive it;
(c) the Amounts Transferred shall include Return calculated in accordance
with Clause 14 or Schedule B(II) or (IV) as the case may be; and
(d) any such request, once made, shall be irrevocable.
13.3 Member Termination - As soon as practicable after we receive notification
that a Member shall terminate or has terminated employment, we will
Transfer to the Scheme Account an amount equal to the Member's Hang Seng
Return Guaranteed Fund Balance, CAF Balance and Unitized Funds Balance
thereby reducing those Balances to zero.
13.4 Forfeitures Balance - Subject to the terms and conditions of this Policy,
after receiving your written request in a manner and form specified by us,
we will Transfer the amount which you specify plus Return calculated in
accordance with Clause 14 from the Forfeitures Balance to the Scheme
Accounts of the Members effective on a date agreed between us.
13.5 Policy Termination - After we receive your written request in accordance
with Clause 4, we will Transfer to the Scheme Account, an amount equal to
the Hang Seng Return Guaranteed Fund Balance, CAF Balance and Unitized
Funds Balance of every Member, thereby reducing those Balances to zero. The
exact timing of such Transfer shall be carried out as soon as practicable
after the expiry of the notice.
<PAGE>
13.6 A Scheme Account, Hang Seng Return Guaranteed Fund Balance, CAF Balance or
Unitized Funds Balance or the Forfeitures Balance may never, in consequence
of any Transfer or otherwise, become a negative amount and we will not
execute any Transfer that would have that effect.
13.7 If the Scheme's rules permit Members to request Transfers the following
provisions will apply:
(a) Any request for a Transfer made in accordance with Clause 13.1 will be
deemed to have been made with the relevant Member's consent.
(b) Any request for a Transfer purporting to be made on behalf of a Member
will be deemed to have been made at that Member's request.
13.8 Separate accounts will be kept for the Scheme Account, Hang Seng Return
Guaranteed Fund Balance, CAF Balance and Unitized Funds Balance to show
funds representing the Member's Contributions and funds representing the
Employer's Contributions. There shall be no Transfer between the funds
representing the Employer's and Members' Contributions.
13.9 Unitized Funds - Notwithstanding anything to the contrary herein, but
subject to Clause 13.2, the following shall apply to all requests for
Transfers to or from the Unitized Funds Balance (or a particular unitized
fund participating in the Unitized Funds Balance):
(a) the request must specify from which unitized fund units are to be
purchased or redeemed to effect the Transfer;
(b) the request must specify the percentage of units held that are to be
Transferred.
(c) we shall not be liable to effect a request to Transfer if the relevant
Member has no units in the unitized fund specified for sale to effect
the Transfer;
(d) all purchases and redemptions of units in funds which have been
approved by the Securities and Futures Commission shall be made on the
terms and conditions specified in the constitutive documentation of
the particular fund as approved by the Securities and Futures
Commission; and
(e) We shall use our best endeavors to effect all purchases and
redemptions of units as expeditiously as reasonably practicable but we
shall not be liable for any loss, damages or other claim whatsoever
arising or allegedly arising from any negligent act or omission
relating to the purchase or redemption of a particular unit. You
undertake to indemnify us and to keep us indemnified from all claims
and suits (including costs thereof) arising in relation to such loss,
damages or other claims.
14. RETURN ON SCHEME ACCOUNTS
All monies held in a Scheme Account, shall be credited with interest
calculated at the rate payable on savings deposits at The Hongkong and
Shanghai Banking Corporation Limited in Hong Kong.
15. NON-ASSIGNMENT
Your rights or benefits or those of a Member, if any, arising under this
Policy cannot be assigned, charged, attached or pledged. We will disregard
any transaction purporting to do so.
<PAGE>
16. OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE
(a) Any terms or conditions that are or may be required by the
Occupational Retirement Schemes Ordinance (as amended from time to
time) to be included in this Policy so as to enable this Policy or the
Scheme to be registered (or to continue to be registered) under that
Ordinance shall be implied in this Policy unless expressed herein.
(b) In the event of a conflict between the requirements of the
Occupational Retirement Schemes Ordinance (as amended from time to
time) and this Policy, those requirements shall prevail and this
Policy shall be void to the extent of any such inconsistency.
(c) This Policy shall be interpreted as if the obligations imposed upon
you and us by the Occupational Retirement Schemes Ordinance (as
amended from time to time) form part of this Policy.
(d) Unless this Policy has been issued to you as the trustee of the
Scheme, the intention is that is shall be an "insurance arrangement"
(as defined in the Occupational Retirement Schemes Ordinance) and all
requirements specified in the Occupational Retirement Schemes
(Insurance Arrangement) Rules shall be implied in the Policy unless
expressed herein.
(e) In this Policy references to the Occupational Retirement Schemes
Ordinance shall include any subsidiary legislation made thereunder.
********************************************************************************
<PAGE>
SCHEDULE A
----------
CARISON LIMITED
DEFINED CONTRIBUTION SCHEME RULES
---------------------------------
These rules apply to a defined contribution scheme known as the CARISON LIMITED
DEFINED CONTRIBUTION SCHEME which is the subject of an insurance arrangement
made with Hang Seng Life Limited dated 1st January 1997 ("the Policy").
Benefits shall be provided in accordance with the following Rules:
(1) DEFINITIONS
-----------
In these Rules
(a) "ADMINISTRATOR" means Hang Seng Life Limited.
(b) "BENEFICIARIES" means:
(i) any person whom the Member has nominated in writing to the
Employer during his lifetime, or if no such person is
nominated;
(ii) the Member's spouse, children, parents, brothers or sisters,
failing which the spouse or any child of such children,
parents, brothers or sisters;
(iii) if no Beneficiary can be identified, the Member's legal
personal representative;
(c) "COMPULSORY PAYMENT" means the long service payment or severance
payment payable by the Employer to employees in accordance with the
Employment Ordinance, or any other payment which the Employer is
liable to make on cessation of employment as a result of any
legislation in Hong Kong.
(d) "EMPLOYER" means CARISON LIMITED or such other associated company or
companies of EXCEL CARISON LIMITED as have been invited to participate
subject to their agreeing in respect of their employees to adhere to
these Rules.
(e) "EMPLOYER'S BALANCE" means the sum of the Employer's contributions
made in respect of a Member together with accumulated interest or
investment return due in accordance with the Policy, less any charges
due.
<PAGE>
(f) "ILL HEALTH" means such state of health, certified by the Employer's
medical adviser, as renders a Member substantially unable to carry out
the work for which the Member is currently employed, or where
continuance of such employment is, in the Employer's medical adviser's
opinion, prejudicial to the Member's health or well-being.
(g) "MEMBER" means an employee of the Employer who has joined the Scheme
in accordance with Rule (2) and, at any relevant time, continues to
participate in the Scheme.
(h) "MEMBER'S BALANCE" means the sum of the Member's contributions
together with accumulated interest or investment return due in
accordance with the Policy, less any charges due.
(i) "NORMAL RETIREMENT DATE" means the sixty-fifth birthday of a Member,
or such later date as is mutually agreed by the Employer and the
Member.
(j) "RESIGNATION" means cessation of employment with the Employer at the
request of the Member prior to Normal Retirement Date.
(k) "SALARY" means the basic monthly salary payment due to a Member
pursuant to his terms of employment with the Employer, excluding any
bonus, commission, allowance or other amounts which are or may be due
to the Member by the Employer at any time.
(l) "SCHEME" means the CARISON LIMITED DEFINED CONTRIBUTION SCHEME.
(m) "SCHEME COMMENCEMENT DATE" means 1st January 1997.
(n) "YEARS OF SERVICE" means the total period of continuous employment
with the Employer measured from the date of employment to the date of
cessation of employment in complete years and months. This may
include any period of employment in respect of a Member transferred
under the provisions of Rule (10). Periods of absence pursuant to
Rule (3)(d) may be excluded.
In these Rules words importing the singular shall include the plural and
vice versa and words importing the masculine gender shall include the
feminine and vice versa.
(2) ELIGIBILITY
-----------
All full time permanent employees of the Employer are eligible to join this
Scheme on the first day of the month following the completion of the
required period of probationary service.
<PAGE>
(3) REGULAR CONTRIBUTIONS
---------------------
(a) Each Member shall make monthly contributions equal to 5% of his Salary
to the Scheme, such contributions being deducted monthly from the
Member's Salary by the Employer.
(b) The Employer shall make monthly contributions equal to 5% of the
Member's Salary in respect of each Member.
(c) The Employer shall pay the Employer's and Members' contributions to
the Administrator within one month from the date that Member's
salaries are paid.
(d) Contributions may be discontinued by the Member and the Employer in
the event of a Member being absent for a period in excess of thirty
days due to sickness or on unpaid leave. Contributions shall be
resumed on the Employee's return to work.
(e) Contributions shall cease when the Member ceases employment and if
that date does not coincide with the last day of the month then
contributions shall cease on the last day of the preceding month.
(f) Members may specify in which of the funds available to the Scheme
their contributions are to be invested. From time to time, Members may
give instructions to the Employer for transfer of the Member's Balance
between such funds. The Employer may issue rules about how and when
such instructions can be given.
(4) CHARGES
-------
Charges to administer the Scheme shall be paid by the Employer in addition
to the Employer's contributions.
(5) BENEFITS
--------
On cessation of Scheme membership due to one of the following causes, the
benefit payable is:
(a) Normal Retirement or Ill Health
-------------------------------
On Normal Retirement Date or in the event of Ill Health, a Member
shall be entitled to receive a lump sum from the Scheme equal to the
total of the Member's Balance and the Employer's Balance.
<PAGE>
(b) Resignation
-----------
On Resignation, a Member shall be entitled to receive a lump sum from
the Scheme equal to the Member's Balance plus a percentage of the
Employer's Balance determined in accordance with the scale set out
below:
<TABLE>
<CAPTION>
Years of Services Percentage
----------------- ----------
<S> <C>
Less than 3 Nil
3 or more, but less than 4 30%
4 or more, but less than 5 40%
5 or more, but less than 6 50%
6 or more, but less than 7 60%
7 or more, but less than 8 70%
8 or more, but less than 9 80%
9 or more, but less than 10 90%
10 or more 100%
</TABLE>
(c) Death
-----
In the event of a Member's death in employment, a lump sum calculated
in accordance with Rule (5)(a) shall be paid to such of the
Beneficiaries as the Employer thinks fair. Any benefit shall be paid
in accordance with the provisions of Occupational Retirement Schemes
Ordinance.
(d) Dismissal or Redundancy
-----------------------
(i) Notwithstanding anything contained in these rules, on dismissal
of a Member on the grounds that the Member is guilty of fraud or
dishonesty, or on any other grounds on which the Employer would
be entitled to terminate the Member's employment without notice
under Hong Kong law, the Member shall be entitled to the Member's
Balance only.
(ii) On termination of a Member's employment by the Employer on
grounds other than those stated in sub-clause (i) above, such as
redundancy or severance, or in circumstances in which no reason
is given by the Employer, the Member shall be entitled to a lump
sum calculated in accordance with Rule 5(b) above.
(e) Compulsory Payment
------------------
Any Compulsory Payment due to a Member may be deducted from the
Employer's Balance of the benefit payable to that Member under Rules
5(a), (b), (c) or (d).
<PAGE>
(6) FAILURE TO CLAIM
----------------
(a) No person entitled to receive a benefit under the Scheme shall be
entitled to claim such benefit more than twenty-four months after the
same became due, if the reason for such non-payment within the period
of twenty-four months was:
(i) the failure of that person to claim the same; or
(ii) the lack of knowledge by the Employer of the existence or
whereabouts of that person;
(iii) the lack of knowledge by the Employer that such person had or
claimed to have a right thereto
but the Employer may pay any such benefit or any part of it to such
Beneficiaries of the Member as it thinks fair.
(b) Any part of any benefit which is not claimed within twenty-four months
of the date when it was payable shall be credited to the Forfeiture
Account under Rule (7). The person entitled shall cease to have any
further claim to or interest in such benefit.
(7) FORFEITURE ACCOUNT
------------------
A forfeiture account shall be maintained by the Administrator, to which the
unvested portion of ex-Member's benefits under Rule (5) above, and any
unclaimed benefits specified under Rule (6) above, shall be credited. The
balance of the forfeiture account may be offset against future
contributions to the Scheme or refunded to the Employer pursuant to the
requirements of the Occupational Retirement Schemes Ordinance.
(8) WITHHOLDING OF BENEFITS
-----------------------
The Employer shall be entitled to set-off against any benefit to which a
Member is entitled under this Scheme, or withhold such benefit, for the
purpose of paying:
(a) a loss suffered by the Employer due to a dishonest act committed by
that Member; or
(b) a debt acknowledged in writing by that Member as owing to the
Employer.
<PAGE>
(9) BANKRUPTCY, INSOLVENCY, INCAPACITY, ALIENATION OF BENEFITS
----------------------------------------------------------
Any Member who becomes bankrupt or insolvent, or who the Employer
determines to be incapable of managing his own affairs, or who shall
purport to alienate or charge any amount which may now or in the future be
due to him under the Scheme shall immediately cease to be a Member. An
amount equal to the benefit payable to the Member pursuant to Rule (5)(b)
shall immediately vest in the Employer on trust to be paid to such of the
Beneficiaries as the Employer thinks fair.
(10) TRANSFER
--------
(a) In the event of a Member's transfer to this Scheme from the membership
of another scheme, a sum equal to the existing fund balances of that
person at the date of transfer may be accepted under this Rule.
(b) Notwithstanding anything contained in Rule (5), in the event of a
Member's transfer from this Scheme to the membership of another
scheme, a sum equal to the Member's Balance at the date of transfer
may be transferred under this Rule, and a sum equal to a proportion or
the whole of the Employer's Balance may be transferred, subject to the
consent of the Employer and the transferring employee.
(c) All transfers to or from this Scheme will be subject to the Employer's
and the transferring employee's consent.
(11) DISCHARGE OF LIABILITIES
------------------------
The receipt of benefits calculated in accordance with these Rules by the
Member or any of his Beneficiaries shall constitute a full and sufficient
discharge of all liabilities of the Employer towards the Member.
(12) PROHIBITION OF WITHDRAWAL
-------------------------
Withdrawal by any Member from the Scheme prior to Normal Retirement Date or
to the date of his termination of employment, if earlier, will not be
permitted.
<PAGE>
(13) AMENDMENTS TO SCHEME RULES
--------------------------
CARISON LIMITED may at any time alter, vary, modify or add to all or any of
these Rules PROVIDED THAT no such alteration, variation, modification or
addition shall be made if it will prejudice the accrued rights or vested
benefits of any Member under this Scheme for the time being. In this
section "accrued rights" and "vested benefits" have the meaning assigned to
those terms by the Occupational Retirement Schemes Ordinance.
(14) TERMINATION OR REINSTATEMENT OF SCHEME
--------------------------------------
(a) Upon the Employer giving each Member one calendar month's prior notice
in writing, the Scheme shall determine with the following effect at
the expiration of such notice:
(i) all contributions shall immediately cease;
(ii) benefits will be paid to Members on the date of retirement or
cessation of employment in accordance with Rule (5) above.
(b) The Scheme, if terminated, may be reinstated subject to agreement
between the Members and the Employer on the contributions in default.
(c) In the event of the Employer being wound up or adjudicated bankrupt,
the Employer shall be deemed to have given notice of discontinuance of
the Scheme on commencement of the winding up or the date of the
bankruptcy order. However, in the event of the Employer being wound
up for the purpose of reconstruction, reconstitution or amalgamation
with any other company, the Employer may in its discretion enter into
an agreement for the continuance of the Scheme as if such
reconstructed, reconstituted or amalgamated company was in fact the
Employer.
(d) Immediately upon:
(a) the Employer giving notice of the discontinuance of the Scheme;
or
(b) the High Court ordering, pursuant to Section 48 of the
Occupational Retirement Schemes Ordinance, that the Scheme be
wound-up -
the assets of the Scheme including the accounts of the Members shall
vest in and be held on trust by the Insurer to be paid -
(A) in accordance with the order, or any subsequent order, of the
High Court; or, if no such order is made,
<PAGE>
(B) directly to the Members in accordance with Rule (14)(a)(ii)
PROVIDED THAT, if Rule (14)(a)(ii) conflicts with the requirement
for the payment of benefits stated in Section 18(1)(c) of the
Occupational Retirement Schemes Ordinance, the requirement stated
in that Section shall prevail.
(15) CURRENCY
--------
All payments to and from the Scheme shall be made in Hong Kong dollars.
(16) GOVERNING LAW
-------------
This Scheme shall be governed by and construed in accordance with Hong Kong
law.
(17) OCCUPATIONAL RETIREMENT SCHEMES ORDINANCE
-----------------------------------------
(a) Any terms or rules that are or may be required by the Occupational
Retirement Schemes Ordinance (as amended from time to time) to be
included in this Scheme so as to enable this Scheme to be or remain
registered (or to continue to be registered) under that Ordinance
shall be implied in this Scheme unless expressed herein.
(b) In the event of a conflict between the requirements of the
Occupational Retirement Schemes Ordinance and this scheme, those
requirements shall prevail and the provisions of this Scheme shall be
void to the extent of any inconsistency.
(c) This Scheme shall be interpreted as if the obligations imposed upon
the Employer and the Members by the Occupational Retirement Schemes
Ordinance form part of this Scheme.
********************************************************************************
<PAGE>
SCHEDULE B (I)
GLOBAL GROWTH FUND AND GGF BALANCE
This Global Growth Fund is constituted as follows:
A. CONSTITUTION - The Global Growth Fund ("GGF") has been created by Hang Seng
Life Limited as a separate fund within its Class H Long Term Business Fund
established pursuant to the Insurance Companies Ordinance. The GGF is
unitized in that the GGF is nominally divided into units each representing
a share in the GGF.
B. INVESTMENT STRATEGY AND RESTRICTIONS - The GGF shall be invested in a very
wide international spread of securities with usually between 50 and 75% of
the fund in equities. There are no restrictions on the asset classes in
which investments may be made and in addition to stocks, bonds and cash,
the managers may invest in property and derivative instruments like
futures, options and swaps to hedge or enhance yields.
C. PRICES AND VALUATIONS - On each Valuation Day we shall calculate the net
asset value of the GGF which shall be divided by the number of issued units
to determine the net asset value of each unit which shall be the price of
units. The net asset value of the GGF shall be the value of the assets less
all charges, costs and expenses.
D. ACQUISITION AND REDEMPTION OF UNITS - Units will be purchased and sold at
the price applying when a request to Transfer into or from the GGF Balance
is executed by us. The price applying at the date of execution will be the
price determined at the next Valuation Day.
E. CHARGES - There shall be a fund charge of not more than 1.125% per annum of
the average asset value of the GGF as calculated by us. The charge shall
be calculated and deducted in arrears on each Valuation Day.
F. COSTS AND EXPENSES - All expenses of investment including (without limiting
the generality of "expenses of investment") all costs of realizing assets
and safe keeping of assets, fees, charges, taxes and duties incurred in the
course of investment of the assets underlying the Global Growth Fund shall
be charged against the Global Growth Fund.
G. VALUATION DAY - Each 7th, 14th, 21st and 28th day of each month (or such
other days at shorter intervals as we may specify from time to time) shall
be a Valuation Day provided that if any such day is a Saturday or public
holiday the relevant Valuation Day shall be the next day that we are open
for business.
********************************************************************************
<PAGE>
SCHEDULE B (II)
RETURN ON CAF BALANCE
A. This Policy is of our Capital Assurance Fund class of polices. The Return
payable in respect of the CAF Balance of this Policy will be determined in
the same way as for those of all other policies of that class.
At the end of the Contract Year our Actuary will determine the Declared
Interest Rate to be applied to all of the Capital Assurance Fund class of
policies. The Declared Interest Rate will never be negative. Return will
then be calculated as follows:
Declared Interest Rate x Average of the daily balance of the Fund for the
whole Contract Year.
B. No Return will be credited in respect of any CAF Balance which has already
been Transferred.
C. When a Transfer is to be made from the CAF Balance we will credit Return to
the Amount Transferred. The calculation of Return will be based on an
interim rate, which will never be negative, to be determined by our
Actuary. Such interim rate will be applied only for the period between the
last date to which Return was credited and the date of Transfer.
********************************************************************************
<PAGE>
SCHEDULE B (III)
HANG SENG HONG KONG EQUITY INVESTMENT FUND AND HSHKEIF BALANCE
The Hang Seng Hong Kong Equity Investment Fund is constituted as follows:
A. CONSTITUTION - The Hang Seng Hong Kong Equity Investment Fund ("HSHKEIF")
has been created by Hang Seng Life Limited as a separate fund within its
Class H Long Term Business Fund established pursuant to the Insurance
Companies Ordinance. The HSHKEIF is unitized in that the HSHKEIF is
nominally divided into units each representing a share in the HSHKEIF.
B. INVESTMENT STRATEGY AND RESTRICTIONS - The HSHKEIF shall invest directly or
indirectly in the stocks of companies listed on the Stock Exchange of Hong
Kong ("Hong Kong Stocks"). There are no restrictions on the asset classes
in which investments may be made, and in addition to stocks, the managers
may invest in derivative instruments like futures, options, warrants and
swaps to gain or hedge exposure to the Hong Kong Stocks. The managers may
hold part of the fund in cash if they consider it appropriate.
C. PRICES AND VALUATIONS - On each Valuation Day we shall calculate the net
asset value of the HSHKEIF which shall be divided by the number of issued
units to determine the net asset value of each unit which shall be the
price of units. The net asset value of the HSHKEIF shall be the value of
assets less all charges, costs and expenses.
D. ACQUISITION AND REDEMPTION OF UNITS - Units will be purchased and sold at
the price applying when a request to Transfer into or from the HSHKEIF
Balance is executed by us. The price applying at the date of execution
will be the price determined at the next Valuation Day.
E. CHARGES - There shall be a fund charge of not more than 1.125% per annum of
the average asset value of the HSHKEIF as calculated by us. The charge
shall be calculated and deducted in arrears on each Valuation Day.
F. COSTS AND EXPENSES - All expenses of investment including (without limiting
the generality of "expenses of investment") all costs of realizing assets
and safe keeping of assets, fees, charges, taxes and duties incurred in the
course of investment of the assets underlying the HSHKEIF shall be charged
against the HSHKEIF.
G. VALUATION DAY - Each 7th, 14th, 21st and 28th day of each month shall be a
Valuation Day provided that if any such day is a Saturday or public holiday
the relevant Valuation Day shall be the next day that we are open for
business.
***************************************************************************
<PAGE>
SCHEDULE B (IV)
RETURN ON HANG SENG RETURN GUARANTEED FUND BALANCE
A. This Policy is of our Hang Seng Return Guaranteed Fund class of policies.
Subject to sub-clause D below, the Return payable in respect of the Hang
Seng Return Guaranteed Fund Balance of this Policy will be determined in
the same way as for all other policies of that class.
At the end of the Contract Year an Actuary will determine the Declared
Interest Rate to be applied to all of the Hang Seng Return Guaranteed Fund
class of policies. The Declared Interest Rate will never be less than 5%.
Return will than be calculated as follows:
Declared Interest Rate x Average of the daily balance of the Fund for the
whole Contract Year.
B. No Return will be credited in respect of any Hang Seng Return Guaranteed
Fund Balance which has already been Transferred.
C. Subject to Sub-Clause D below, when a Transfer is to be made from the Hang
Seng Return Guaranteed Fund we will include Return in the Amount
Transferred. The calculation of Return will be based on an interim rate,
not less than 5% per annum, to be determined by our Actuary, but will
reflect only the period between the last date to which Return was credited
and the most recent month end as at which we can practicably calculate
Return for the year to date.
D. If a Transfer is to be made from the Hang Seng Return Guaranteed Fund
within 36 months from the Policy Effective Date, other than to pay a
Member's Benefit, the following shall apply in calculating the amount to be
deducted from the Hang Seng Return Guaranteed Fund Balance and the amount
to be Transferred:
(i) the amount to be deducted from the Hang Seng Return Guaranteed Fund
Balance (the "Deducted Amount") shall include Return calculated using
the Declared Interest Rates from the Policy Effective Date to the
date of Transfer; and then,
(ii) the amount Transferred (which may be less than the Deducted Amount)
shall be determined by re-calculating the Return included in the
Deducted Amount to reflect the difference between the Declared
Interest Rate(s) and the Initial Period Rate(s) from the Policy
Effective Date to the date of Transfer.
The Initial Period Rate shall be determined by our Actuary in his absolute
discretion, to reflect the actual investment return of the Hang Seng Return
Guaranteed Fund over the relevant period. The Initial Period Rate may be
less than 5% per annum and may be negative.
***************************************************************************
<PAGE>
SCHEDULE B (V)
HANG SENG INDEX INVESTEMENT FUND
The Hang Seng Index Investment Fund is constituted as follows:
A. CONSTITUTION - The Hang Seng Index Investment Fund ("HSIIF") has been
created by Hang Seng Life Limited as a separate fund within its Class H
Long Term Business Fund established pursuant to the Insurance Companies
Ordinance. The HSIIF is unitized in that the HSIIF is nominally divided
into units each representing a share in the HSIIF.
B. INVESTMENT STRATEGY AND RESTRICTIONS - The HSIIF shall invest exclusively
in the Hang Seng Index Fund ("Index Fund"), a unit trust approved by the
Securities and Futures Commission that is managed by Hang Seng Investment
Management Limited. The Hang Seng Index Fund tracks the movements in the
Hang Seng Index, an index of the leading stocks quoted on the Stock
Exchange of Hong Kong.
C. PRICES AND VALUATIONS - On each Valuation Day we shall calculate the net
asset value of the HSIIF which shall be divided by the number of issued
units to determine the net asset value of each unit which shall be the
price of units. The net asset value of the HSIIF shall be the value of
assets less all charges, costs and expenses.
D. ACQUISITION AND REDEMPTION OF UNITS - Units will be purchased and sold at
the price applying when a request to Transfer into or from the HSIIF
Balance is executed by us. The price applying at the date of execution
will be the price determined at the next Valuation Day.
E. CHARGES - There shall be a fund charge of not more than 1.125% per annum of
the average asset value of the HSIIF as calculated by us. The charge shall
be calculated and deducted in arrears one each Valuation Day. The
preliminary charge and management fee of the underlying Index Fund will be
waived but the Index Fund bears its trustee fee, audit fee and expenses of
investment as defined below. The Index Fund's trustee fee will not be more
than 0.15% p.a. on its net asset value, accrued on each dealing day and be
paid monthly in arrear.
F. COSTS AND EXPENSES - All legal expenses and other expenses incurred in the
operations or administration of the HSIIF and expenses of investment
including (without limiting the generality of "expenses of investment") all
costs of realizing assets and safe keeping of assets, fees, charges, taxes
and duties incurred in the course of investment of the assets underlying
the Hang Seng Index Investment Fund shall be charged against the Hang Seng
Index Investment Fund.
G. VALUATION DAY - Each 7th, 14th, 21st and 28th day of each month shall be a
Valuation Day provided that if any such day is a Saturday or public holiday
the relevant Valuation day shall be the next day that we are open for
business.
***************************************************************************
<PAGE>
SCHEDULE C
CHARGES
Charges shall be calculated as follows:
Not more than 3.13 per cent of the total Contributions payable by you and
the Members.
***************************************************************************
<PAGE>
EXHIBIT 10.22
ANNEXURE "F"
------------
DATED the Day of January 1996
----------------------------------------
CREATIVE MASTER LIMITED
(the "Company")
And
KWOK SHECK PUI
(the "Executive")
------------------------
SERVICE AGREEMENT
------------------------
Angela Wang & Co.
15A/B Entertainment Building
30 Queen's Road Central
Hong Kong
Tel: 2525 0500
Fax: 2868 0708
Ref: AW960090.ser
<PAGE>
Dated the day of January 1996
PARTIES:
- --------
(1) CREATIVE MASTER LIMITED ( ) (the "Company") a company
incorporated with limited liability in Hong Kong whose registered office is
at 8/F, Casey Industrial Building, 18 Bedford Road, Tai Kok Tsui, Kowloon.
(2) KWOK SHECK PUI ( ) (the "Executive") of Flat E, 28/F
Ngan Sing Mansion, Taikoo Shing, Hong Kong.
AGREEMENT:
- ----------
1. INTERPRETATION
--------------
1.1 The following expressions shall, unless the context otherwise requires,
have the following meanings
"Board" means the Board of Directors of the Company and
includes any committee of the Board duly appointed by
it;
"Managing Director" means any person holding such office of the Company
from time to time and includes any person exercising
substantially the functions of a managing director or
chief executive officer of the Company;
"Group" means the Company and its Subsidiaries from time to
time;
"Subsidiary" bears the meaning given to it by Sections 2(4), (5)
and (6) of the Companies Ordinance.
1.2 The headings and marginal headings to the clauses are for convenience only
and have no legal effect.
1.3 Any reference in this Agreement to any Ordinance or delegated legislation
includes any statutory modification or re-enactment of it or the provision
referred to.
2. APPOINTMENT AND DURATION
------------------------
2.1 The Company appoints the Executive and the Executive agrees to serve as
Managing Director of the Company. The Consultant accepts that the Company
may at its discretion require him to perform other duties or tasks not
within the scope of his normal duties and the Executive agrees to perform
other duties or undertake those tasks as if they were specifically required
under this Agreement.
2.2 The appointment shall commence on 1 February 1996 and shall continue
(subject to earlier termination as provided in this Agreement) for a period
of three years provided that the Company may
2
<PAGE>
terminate this Agreement during such period by giving three months notice
in writing. After the initial period of three years the appointment shall
be automatically renewed on each anniversary of the date of this Agreement
and shall continue (subject to earlier termination as provided in this
Agreement) until terminated by either the Company or the Executive giving
six months notice in writing.
3. DUTIES OF THE EXECUTIVE
-----------------------
3.1 The Executive shall at all times during the period of this Agreement:
3.1.1 devote the whole of his time, attention and ability as is reasonably
necessary to the duties of his appointment;
3.1.2 faithfully and diligently perform those duties and exercise such
powers consistent with them which are from time to time assigned to
or vested in him;
3.1.3 obey all lawful and reasonable directions of the Board;
3.1.4 use his best endeavours to promote the interests of the Company and
its Group companies;
3.1.5 keep the Board promptly and fully informed (in writing if so
requested) of his conduct of the business or affairs of the Company
and its Group companies and provide such explanations reports and
records as the Board may require;
3.1.6 not at any time make any untrue or misleading statement relating to
the Company or any Group company.
3.2 The Executive shall (without further remuneration) if and for so long as
the Company requires during the period of this Agreement:
3.2.1 carry out the duties of his appointment on behalf of any Group
company;
3.2.2 act as an officer of any Group company or hold any other appointment
or office as nominee or representative of the Company or any Group
company;
3.2.3 carry out such duties and the duties attendant on any such
appointment as if they were duties to be performed by him on behalf
of the Company.
4. PAY
---
4.1 During his appointment the Company shall pay to the Executive a salary at
the rate of HK$27,923.00 per month which shall accrue day-to-day and be
payable in arrears on or about the 30th day of each month. The salary shall
be deemed to include any fees receivable by the Executive as a Director of
the Company or any Group company, or of any other company or unincorporated
body in which he holds office as nominee or representative of the Company
or any Group company.
3
<PAGE>
4.2 The Company shall in addition pay a thirteenth month's salary of
HK$27,923.00 (or pro rated amount) on or before the Chinese New Year of
each calendar year.
4.3 The Company shall in addition pay the Executive's rent of HK$38,000.00 per
month directly to the specified landlord.
4.4 The Executive shall also be entitled to an annual performance bonus of up
to 2.5% of the net profits after tax of the Company and its Subsidiaries on
a consolidated basis as determined by the Board provided that no such bonus
shall be paid if the net profits after tax of the Company and its
Subsidiaries on a consolidated basis as determined by the Board are less
than HK$9,226,000 for each of the years ending 31 March 1996 and 31 March
1997 or thereafter are less than such profit target as may be agreed from
time to time between the Company and Executive.
4.5 The Executive's salary, bonus and benefits shall be subject to review by
the Board on 31 March each year commencing in 1997.
5. EXPENSES
--------
The Company shall reimburse to the Executive all travelling, hotel,
entertainment and other expenses reasonably incurred by him in the proper
performance of his duties and provide the use of a corporate credit card
subject to the production to the Company of such vouchers or other evidence
of actual payment of the expenses as the Company may reasonably require and
the approval thereof by the Executive Chairman.
6. HOLIDAYS
--------
6.1 In addition to all public holidays in Hong Kong the Executive is entitled
to twenty-two working days annual leave in each year to be taken at such
time or times as are agreed with the Board. The Executive shall not carry
forward any unused part of his leave entitlement to a subsequent year.
6.2 On the termination of his appointment for whatever reason, the Executive
shall not be entitled to pay in lieu of outstanding holiday entitlement and
shall be required to repay to the Company any salary received for holiday
taken in excess of his actual entitlement.
7. SICKNESS
--------
7.1 If the Executive is absent because of sickness (including mental disorder)
or injury he shall report this fact forthwith to the Board and if the
Executive is so prevented for two or more consecutive days he shall provide
a medical practitioner's statement on the third day and weekly thereafter
so that the whole period of absence is certified by such statements.
7.2 If the Executive shall be absent due to sickness (including mental
disorder) or injury duly certified in accordance with the provisions of
sub-clause 7.1 hereof, he shall be paid his full remuneration hereunder for
up to 20 working days absence in any period of 12 consecutive months and
thereafter such remuneration, if any, as the Board shall determine from
time to time.
4
<PAGE>
8. TERMINATION OF AGREEMENT
------------------------
8.1 This Agreement shall automatically terminate:
8.1.1 if the Executive becomes prohibited by law from being a director, or
8.1.2 if the Executive resigns his office as director of the Company; or
8.1.3 if the office of director of the Company held by the Executive is
vacated pursuant to the Company's Articles of Association save if
the vacation shall be caused by sickness (including mental disorder)
or injury.
8.2 The Company may be notice terminate this Agreement with immediate effect if
the Executive:
8.2.1 commits any act of gross misconduct or repeats or continues (after
written warning) any other serious breach of his obligations under
this Agreement; or
8.2.2 is guilty of any conduct which in the opinion of the Board brings
him, the Company or any Group company into disrepute; or
8.2.3 is convicted of any criminal offence punishable with 6 months or
more imprisonment; or
8.2.4 commits any act of dishonesty whether relating to the Company, any
Group company, any of its or their employees or otherwise; or
8.2.5 becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
8.2.6 is in the opinion of the Board incompetent in the performance of his
duties; or
8.2.7 the annual net profits after tax of the Company and its Subsidiaries
as determined by the Board are more than 20% less than HK$9,226,000
for each of the years ending 31 March 1996 and 31 March 1997 and
thereafter are more than 20% less than such profit target as may be
agreed from time to time between the Company and the Executive.
8.3 On the termination of this Agreement for whatever reason, the Executive
shall at the request of the Company resign (without prejudice to any claims
which the Executive may have against any company arising out of this
Agreement or the termination thereof) from all and any offices which he may
hold as a Director of the Company or of any Group company and from all
other appointments or offices which he holds as nominee or representative
of the Company or any Group company.
9. GENERAL
-------
9.1 This Agreement sets out the entire agreement and understanding of the
parties and is in substitution for any previous contracts of employment or
for services between the Company or any of its Group companies and the
Executive which shall be deemed to have been terminated by mutual consent.
5
<PAGE>
9.2 The expiration or termination of this Agreement however arising shall not
operate to affect such of the provisions of this Agreement as are expressed
to operate or have effect after then and shall be without prejudice to any
accrued rights or remedies of the parties.
9.3 The validity construction and performance of this Agreement shall be
governed by Hong Kong law.
9.4 All disputes claims or proceedings between the parties relating to the
validity construction or performance of this Agreement shall be subject to
the non-exclusive jurisdiction of the High Court of Hong Kong to which the
parties irrevocably submit.
9.5 Any notice to be given by a party under this Agreement must be in writing
in the English language and must be given by delivery at or post facsimile
transmission or other means of telecommunication in permanent written form
to the last known address or relevant telecommunication number of the other
party. Where notice is given by sending in a prescribed manner it shall be
deemed to have been received which in the ordinary course of the means of
transmission it would be received by the addressee. To prove the giving of
a notice it shall be sufficient to show it was despatched. A notice shall
have effect from the sooner of its actual or deemed receipt by the
addressee.
6
<PAGE>
IN WITNESS WHEREOF the parties or their duly authorised representatives
------------------
have set their hands to this Agreement the day and year first before
written.
SIGNED BY )
for and on behalf of )
CREATIVE MASTER LIMITED )
( ) )
in the presence of: )
SIGNED BY KWOK SHECK PUI )
in the presence of: )
)
7
<PAGE>
EXHIBIT 10.34
THIS AGREEMENT is made the 31st day of January 1996
BETWEEN:
1. KWOK SHECK PUI of Flat E, 28/F, Ngan Sing Mansion, Tai Koo Shing, Hong
Kong (hereinafter called "the First Lender");
2. TONG KA WING, CARL of 3/F, 65 Bisney Road, Pokfulam, Hong Kong
(hereinafter called "the Second Lender"); and
3. CREATIVE MASTER LIMITED, a company incorporated with limited liability
under the laws of Hong Kong with its registered office at 8/F, Casey
Industrial Building, 18 Bedford road, Tai Kok Tsui, Kowloon, Hong Kong
(hereinafter called "the Borrower").
WHEREAS:
A. The First and Second Lenders agree at the request of the Borrower to
lend to the Borrower an unsecured sum of Hong Kong Dollars Five
Hundred Thousand (HK$500,000) each upon the terms and conditions
hereinafter appearing.
NOW IT IS HEREBY AGREED as follows:
1. LOAN
The First and Second Lenders shall lend Hong Kong Dollars Five Hundred
Thousand (HK$500,000) each and the Borrower shall borrow a total sum
of Hong Kong Dollars One Million (HK$1,000,000) (hereinafter called
"the loan").
2. TERMS OF LOAN
The Borrower shall repay the loan or any part thereof and all other
moneys or part thereof which may at any time be due and payable to the
Lenders hereunder upon receiving the Lenders' notice to do so. The
Borrower shall also be entitled to repay any part of the loan at any
time hereafter upon giving the Lenders not less than one week's notice
of the Borrower's intention.
3. INTEREST
The Loan shall be interest-free.
4. GOVERNING LAW
The construction, validity and performance of this Agreement shall in
all respects be governed by the laws of Hong Kong.
<PAGE>
AS WITNESS the parties have hereunto set their hands the day and year first
above written.
Signed, Sealed and Delivered by )
TONG Ka Wing, Carl )
in the presence of: )
)
Signed, Sealed and Delivered by )
KWOK Sheck Pui )
in the presence of: )
)
The Common Seal of )
Creative Master Limited )
was hereunto affixed )
in the presence of: )
)
<PAGE>
EXHIBIT 10.35
THIS AGREEMENT is made the 18th day of April 1995
BETWEEN:
1. KWOK SHECK PUI of Flat E, 28/F, Ngan Sing Mansion, Tai Koo Shing, Hong
Kong (hereinafter called "the Lender");
2. TONG KA WING, CARL of 3/F, 65 Bisney Road, Pokfulam, Hong Kong
(hereinafter called "the Second Lender"); and
3. CREATIVE MASTER LIMITED, a company incorporated with limited liability
under the laws of Hong Kong with its registered office at 8/F, Casey
Industrial Building, 18 Bedford Road, Tai Kok Tsui, Kowloon, Hong Kong
(hereinafter called "the Borrower").
WHEREAS:
A. The First and Second Lenders agree at the request of the Borrower to
lend to the Borrower an unsecured sum of Hong Kong Dollars One Million
(HK$1,000,000) each upon the terms and conditions hereinafter
appearing.
NOW IT IS HEREBY AGREED as follows:
1. LOAN
The First and Second Lenders shall lend Hong Kong Dollars One Million
(HK$1,000,000) each and the Borrower shall borrow a total sum of Hong
Kong Dollars Two Million (HK$2,000,000) (hereinafter called "the
loan").
2. TERMS OF LOAN
The Borrower shall repay the loan or any part thereof and all other
moneys or part thereof which may at any time be due and payable to the
Lenders hereunder upon receiving the Lenders' notice to do so. The
Borrower shall also be entitled to repay any part of the loan at any
time hereafter upon giving the Lenders not less than one week's notice
of the Borrower's intention.
3. INTEREST
The Loan shall be interest-free.
4. GOVERNING LAW
The construction, validity and performance of this Agreement shall in
all respects be governed by the laws of Hong Kong.
<PAGE>
AS WITNESS the parties have hereunto set their hands the day and year first
above written.
Signed, Sealed and Delivered by )
TONG Ka Wing, Carl )
in the presence of: )
)
Signed, Sealed and Delivered by )
KWOK Sheck Pui )
in the presence of: )
)
The Common Seal of )
Creative Master Limited )
was hereunto affixed )
in the presence of: )
)
<PAGE>
EXHIBIT 10.38
THIS AGREEMENT is made the 2nd day of January 1996
BETWEEN:
1. WELLHOLDING LIMITED, a company incorporated with limited liability
under the laws of Hong Kong with its registered office at 606 Bank of
America Tower, 12 Harcourt Road, Central, Hong Kong (hereinafter called
"the Landlord"); and
2. CREATIVE MASTER LIMITED, a company incorporated with limited liability
under the laws of Hong Kong with its registered office at 8/fl., Casey
Industrial Bldg., 18-20, Bedford Road, Taikoktsui, Kowloon (hereinafter
called "the tenant").
WHEREAS:
A. The Landlord shall let and the Tenant shall take all that Property at
Flat E, 28th Floor and the roof, Ngan Sing Mansion, Taikooshing, Hong
Kong (hereinafter called "the Property") at an agreed monthly rental of
H.K.$38,000.00 commencing on 2 January 1996.
B. The Landlord shall be responsible for paying the following charges:
i) rates and management fees; and
ii) repair and maintenance charges for the Property.
iii) repair and maintenance charges for the furnished electric
supplies.
C. The Landlord shall also pay and discharge punctually all charges
incurred for water, gas, electricity, and local telephone services
supplied, used or consume in the Property including meter rents (if
any) during the said term.
D. The Tenant shall not store gunpowder, saltpetre, kerosene or other
explosive of combustible substance in any part of the Property and
shall be answerable and responsible for he consequence of any breach of
local ordinances by lessee, tenant or person occupying the premises.
The Tenant shall not underlet or part with the Property to any other
person or make any alteration of additions to the Property, without
first obtaining the written consent of the Landlord thereto. Such
consent shall not be unreasonably witheld by the Landlord.
<PAGE>
E. The Tenant shall not use the Property for any purpose other than for
residential use and shall not do or suffer, or permit to be done any
act of thing which may become a nuisance, or cause annoyance to persons
occupying the premises adjoining the Property.
F. The agreement may be terminated by either party giving the other three
months' notice in writing.
IN WITNESS whereof the parties have hereunto set their hands the day and
year first above written.
Signed by the Landlord ) For and on behalf of
Wellholding Limited ) WELLHOLDING LTD.
in the presence of: )
) ____________________________
Authorized Signature(s)
For and on behalf of
Signed by the Tenant )
Creative Master Limited ) CREATIVE MASTER LIMITED
in the presence of: )
) ____________________________
Authorized Signature(s)
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
<TABLE>
<C> <S>
1. Creative Master Limited, a Hong Kong corporation.
2. Excel Master Limited, a Hong Kong corporation.
3. Carison Engineering Limited, a Hong Kong corporation.
4. Techtime Industries Limited, a Hong Kong corporation.
Mastercraft Engineering Limited (formerly Queenex Enterprises Limited), a
5. Hong Kong corporation.
6. Dongguan Changying Toys Factory Co. Ltd., a Chinese joint venture.
</TABLE>
<PAGE>
EXHIBIT 23.5
I hereby consent to all references to me as a nominated director in the
Registration Statement of Creative Master International, Inc. and the
Prospectus constituting a part thereof.
/s/ Steve Gordon
_____________________________________
Steve Gordon
Date: October 14, 1998
<PAGE>
EXHIBIT 23.6
I hereby consent to all references to me as a nominated director in the
Registration Statement of Creative Master International, Inc. and the
Prospectus constituting a part thereof.
/s/ Clayton K. Trier
_____________________________________
Clayton K. Trier
Date: October 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 (AUDITED) AND FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 471 877
<SECURITIES> 0 0
<RECEIVABLES> 2,966 3,837
<ALLOWANCES> 139 139
<INVENTORY> 2,928 3,407
<CURRENT-ASSETS> 6,533 8,445
<PP&E> 4,704 5,955
<DEPRECIATION> 1,549 1,832
<TOTAL-ASSETS> 10,499 13,333
<CURRENT-LIABILITIES> 7,362 8,228
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 2,738 4,149
<TOTAL-LIABILITY-AND-EQUITY> 10,499 13,333
<SALES> 16,211 14,325
<TOTAL-REVENUES> 16,211 14,325
<CGS> 12,703 10,258
<TOTAL-COSTS> 14,624 12,251
<OTHER-EXPENSES> 137 48
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104 106
<INCOME-PRETAX> 1,000 1,951
<INCOME-TAX> 130 228
<INCOME-CONTINUING> 870 1,723
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 788 1,409
<EPS-PRIMARY> 0.158 0.282
<EPS-DILUTED> 0 0
</TABLE>
