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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ____________________ to __________________
Commission file number 33-18521-NY
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CREATIVE MASTER INTERNATIONAL, INC.
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(Exact name of small business issuer in its charter)
DELAWARE 11-2854355
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Casey Ind. Bldg., 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong Not applicable
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011 8522 396-0147
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $16,211,000
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 31, 1998 was $999,456 based upon
the average of the bid and asked price of the Common Stock of $2.00 as of March
31, 1998.
The number of shares outstanding of the issuer's classes of Common
Stock as of March 31, 1998:
Common Stock, $.001 Par Value 4,999,746 shares
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED "DESCRIPTION OF
BUSINESS - RISK FACTORS" BEGINNING ON PAGE 9 OF THIS FORM 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND OF THE COMPANY
Creative Master International, Inc. (the "Company"), through its
operating subsidiaries, is a manufacturer of premium die-cast replica racing and
classic cars. All of the Company's operations, including the design engineering
(including tooling and model making) and manufacture of its products, sales,
marketing, and other corporate activities are conducted through the Company's
wholly-owned or majority-owned subsidiaries or joint ventures.
Creative Master Limited, a Hong Kong corporation ("Creative Master - Hong
Kong"), the Company's primary operating subsidiary, was co-founded in 1986 by
Carl Ka Wing Tong, the Company's Chief Executive Officer with Leo Sheck Pui
Kwok, the Company's Chief Operating Officer and has focused from its inception
on the manufacture of collectible replica cars. The Company's customers are
marketing and collectible companies that have received licenses to produce and
market scale model replicas of specific products, such as race cars and classic
cars. The Company makes products for many leading licensees, including the
Danbury Mint, Action Performance, Brookfield Collectors Guild, Paul's Model Art,
and Mattel(R) Toys (see "The Company's Business - Markets, Products and
Customers"). Currently, the major markets for such products is the US and
Europe. In January, 1995, the Company moved its factory operations to Dongguan,
China, 60 miles from Hong Kong, to reduce production costs and increase
capacity.
Creative Master International, Inc. was incorporated on April 8, 1987 in
the state of Delaware under the name of "Davin Enterprises, Inc." a development
stage company seeking acquisitions. As of December 30, 1997, the Company
consummated a transaction, whereby the Company acquired all of the issued and
outstanding shares of Creative Master - Hong Kong in exchange for the issuance
by the Company of 48,060,000 pre-split shares of restricted common stock to
Creative Master - Hong Kong shareholders pursuant to the Share Exchange
Agreement (the "Agreement"), dated as of December 15, 1997, by and between the
Company and Creative Master - Hong Kong. As a result of the acquisition, there
were approximately 49,997,452 pre-reverse split shares of common stock issued
and outstanding. In March, 1998, a 1- for -10 reverse split reduced the
outstanding shares to 4,999,746. At that time, the Company's name was changed to
"Creative Master International, Inc.", to reflect the new business operations of
the Company. Prior to the acquisition of Creative Master - Hong Kong, the
Company had no operations but owned a 9% of a privately-owned Rochester, N.Y.
based computer software company. Neither Creative Master -Hong Kong or the
shareholders of Creative Master -Hong Kong were parties affiliated with the
Company prior to or at the time of the acquisition of Creative Master - Hong
Kong. After the acquisition, the then current management of the Company resigned
and was replaced by the current management of the Company. See "Management."
The Company maintains its executive and administrative office in Hong
Kong at: Casey Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui, Kowloon, Hong
Kong.
The telephone number of the Company in Hong Kong is 011-(852) 2396-0147
and its and its fax number is 011-(852) 2789-1737.
Unless the context requires otherwise, as used herein, any reference to
the Company includes the Company's subsidiaries Creative Master Ltd., a Hong
Kong corporation, Excel Master Limited, a Hong Kong corporation, Carison
Limited, a Hong Kong corporation, Techtime Industries Limited, a Hong Kong
corporation, Queenex Enterprises Limited, a Hong Kong corporation and Dongguan
Chuangying Toys Factory Co., Ltd., a Chinese joint venture.
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THE COMPANY'S BUSINESS
General
The Company is a mass manufacturer of high-quality die-cast replicas, in
particular, racing and classic cars. These products are collectibles and require
a substantial degree of engineering, quality control and hand-assembly expertise
to produce.
The Company's operating subsidiary, Creative Master - Hong Kong was
founded in 1986 and its first customer was Danbury Mint ("DM"), a division of
MBI, Inc. which coincided with DM's entry into the collectible, replica cars
market.
The Company's customers require the Company to provide them with
consistently high-quality products in the desired volumes and in a timely and
cost-effective manner. The Company provides a comprehensive manufacturing
service that enables it to satisfy customers' requirements at every stage in the
production of its products, including raw material sourcing, product development
and engineering, tool making, model making, computer-aided mold design and
production, and manufacturing and packaging of the finished product. This
comprehensive, one-stop production process reduces customer lead time and
administrative expense since customers do not have to deal with multiple
factories.
The Company's primary strategy is to be the price/quality/service leader
in premium, artisan-level collectibles. The Company believes that it offers
products of fine quality, with high standards of customer service, at
competitive prices. The Company seeks to expand by increasing production of
existing product lines and by broadening its product mix. In combining western
systems of management, efficiency, and quality control, with the inexpensive
labor and factory costs of China, the Company has been able to assist its
customers to offer increasingly higher quality products without major increases
in price.
The Company's customers fall into two main categories. One category
includes a variety of widely-recognized specialized collectibles marketers of
die-cast replica racing and classic cars. The other category includes large toy
companies which have collectible brand names such as Matchbox and Legend of
Mattel(R). The specialized collectibles market differs from the toy market in
the following respects: price, buyers and channels of distribution. The typical
buyers in the specialty collectibles markets are adults willing to pay a premium
price over US$30 per item. In the specialty collectibles markets the products
are distributed by specialty marketers through direct mail marketing or hobby
and gift stores. In the toy markets the products are usually distributed through
major department stores and toy chain stores at lesser price points. The Company
primarily focuses on the manufacture and marketing of premium replica products
and it believes that such emphasis gives the Company a competitive edge over
most competitors that do not specialize.
In January, 1995, the Company completed the construction of a new
facility in Dongguan, China to house its entire production operations. This new
location encompasses approximately 285,000 square feet of production support
space as well as approximately 168,000 square feet of dormitory space designated
for the Company's employees. The Dongguan Facility is located approximately 60
miles from Hong Kong.
Organization
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The Company's operations are conducted through its subsidiaries in Hong
Kong and the Sino-foreign joint venture in China. Set forth below is the
Company's organizational chart and the description of the Company's subsidiaries
and their respective roles in the organizational structure of the Company.
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CREATIVE MASTER INTERNATIONAL, INC.
(A Delaware Corporation)
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|
100%
|
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CREATIVE MASTER LIMITED
(Hong Kong Corporation)
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| | | | |
55% 100% 70% 100% 100%
| | | | |
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Techtime Industries Queenex Carison Excel Master Dongguan
Limited Enterprises Limited Limited Chuangying Toys
(Hong Kong Limited (Hong Kong (Hong Kong Factory Co. Ltd.
Corporation) (Hong Kong Corporation Corporation) (PRC Joint
Corporation) Venture)
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<TABLE>
<CAPTION>
CREATIVE MASTER INTERNATIONAL, INC.- DESCRIPTION OF SUBSIDIARIES
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Date of Place Equity Principal
acquisition/ of interest activities
Name of Company formation incorporation owned by the
Company
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Direct Indirect
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<S> <C> <C> <C> <C> <C>
Creative Master Limited October 10, 1986 Hong Kong 100% - Manufacturing/Trading
of die-cast collectibles
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Excel Master Limited November 10, 1987 Hong Kong 100% - Trading of collectible cars
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Carison Limited March 17, 1987 Hong Kong 70% - Manufacturing of molds
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Techtime Industries December 5, 1995 Hong Kong 55% - Manufacturing of collectible
Limited replica cars
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Dongguan Chuangying September 10, 1994 PRC 100%* - Manufacturing of collectibles
Toys Factory Co., Ltd.
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Queenex Enterprises September 19, 1996 Hong Kong 100% - Manufacturing of die-cast
Limited collectibles
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</TABLE>
* See Note 3(a) to the Company's Financial Statements.
Development of the Company
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Creative Master - Hong Kong was founded in 1986 by Mr. Carl Ka Wing Tong
and Mr. Leo Sheck Pui Kwok in Hong Kong, with DM as its first customer.
Management believes that Creative Master - Hong Kong is unique in that it
started as a premium collectibles manufacturer from the very inception and over
the years has established a reputation as having set the "Gold Standard" in
premium replica car manufacturing. Originally, Creative Master - Hong Kong's
entire operations were in Hong Kong, at 8/F Casey Industrial Building, the
Company's current address. In 1989, in response to rising production costs in
Hong Kong, Creative Master - Hong Kong moved its manufacturing operations to
Guangzhou in Guangdong Province. By 1994, due to growing sales and lack of space
to expand in the rented Guangzhou factory, Creative Master - Hong Kong decided
to build the Dongguan Facility in order to expand its manufacturing operations
and move closer to Hong Kong. Relocation of the workers and production lines
from Creative Master - Hong Kong's Guangzhou facility to the Dongguan Facility
began in December 1, 1994 and was completed in January, 1995. Creative Master -
Hong Kong maintains its head office in Hong Kong where it coordinates sales and
marketing, product development, purchasing and administrative functions. In
February, 1996, Acma Strategic Holdings Limited ("ASHL"), a subsidiary of
Singapore listed conglomerate Acma Ltd., acquired a majority interest in
Creative Master - Hong Kong.
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The Company's Approach
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The Company's customers are seeking a source primarily focused on the
production of quality die-cast collectibles, as opposed to a typical Original
Equipment Manufacturer ("OEM") die cast manufacturer. Furthermore, the Company's
customers seek vendors that can offer a comprehensive, one stop manufacturing of
high-quality, collectible die-cast and injection-molded replica racing and
classic cars in desired volume (i.e., both in large quantities and limited runs)
and in a timely and cost-effective manner. The Company's customers seek to
eliminate the management complexity and costs of identifying and managing
multiple vendors required to develop and produce these products. The Company
believes it addresses customer needs as follows:
COMPREHENSIVE, ONE-STOP PRODUCTION
The Company provides value to customers in part by offering full service,
one-stop production. Starting with photographs, Creative Master can create all
the tooling and design, produce all the parts, and hand-produce the finished
product - with minimal outsourcing. Having all the functions in-house enables
the Company to maintain consistent lead times and better quality and cost
control. To the customer, the significant complexity and costs of managing
multiple vendors for various steps of production are eliminated. For example, it
is not unusual for a licensee seeking to produce a die-cast collectible to hire
separate companies to complete product engineering, tooling, model making,
manufacturing, and packaging. The need to coordinate these activities, maintain
timetables, and insure responsibility can be a daunting challenge to customers.
The Company believes that its one-stop comprehensive services are a significant
component of the Company's success.
SPECIALIZATION IN PREMIUM COLLECTIBLES
The Company specializes in collectibles. The Company believes that
specialization is the key component to the Company's ability to best serve the
needs of customers that seek premium collectible products. In not producing
inexpensive toy products, the Company is able to develop systems that focus on
quality and precision, as opposed to pure mass production. The Company believes
that many of its competitors that are toy manufacturers first and collectibles
manufacturers second, face internal difficulties in juggling the very different
needs and requirements of high-quality premium products in limited production
runs versus low-quality toys in mass production runs. Specialization allows the
Company to minimize defects, minimize lead times, and to focus on quality.
PRODUCTION IN CHINA
The Company's success in the U.S. and European collectibles' industry is
intimately tied to its China operations. While the Company uses Western
technology, systems, and equipment, significant skilled labor is required - both
in machine operation and in hand assembly operation. The Company currently
employs 3,300 workers, over 95% of which are in China. The major savings of
producing in China are shared by the Company, its customers, and the end-user
collectors. The Company has been able to make a reasonable profit while offering
its customers quality products at competitive prices, and with little or no
price increases.
EFFICIENCY
The logistical requirements of producing premium collectibles can be very
significant. Many products have two or three hundred different parts - all of
which must be designed and manufactured and then assembled. Each part must be
produced on time, or the entire production line may be delayed. Likewise, each
part must fit together properly or the entire production line may be delayed.
Failure to meet the logistical demands can result in significant cost overruns
and delays in customer shipments. While total elimination of such possibilities
is impossible, the Company is among the industry leaders in efficiency. Using
Western systems for quality control, production engineering, and raw materials
supply, combined with worker training and supervisory teams, the Company
believes that its production is highly efficient by any standard. In September,
1997, Mr. Tung Chee Wah, government leader of Hong Kong, presented Creative
Master- Hong Kong with an award ("Certificate of Merit") in the Productivity
Category, as selected by the Hong Kong Productivity Council. The Company
believes that such award reflects the international standard of efficiency the
Company has developed in its factory operations. This efficiency is a key
attribute of the Company's success since low labor costs alone would not result
in fast delivery or low overall costs if sources were not deployed efficiently.
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COMMITMENT TO QUALITY
At each step of the production process, the Company and its staff are
focused on precision, accuracy and detail. The quality of the finished product
is directly correlated to the care and concern afforded each individual step in
the production process. To achieve its premium quality, the Company employs many
of the finest model-makers and tool makers in the industry. The Company deems
some of the master-craftsmen so valuable that the Company has structured
substantial equity sharing in certain subsidiaries to ensure long term
relationships (see "Organizational Chart"). At the general worker level,
substantial training, supervisory functions, and quality control systems have
been put in place to assure quality. For premium collectibles, meeting customer
requirements of quality and time frame, require an attitude not of working fast
but rather in getting each step right. Fast delivery is less a factor of working
through each step quickly but rather working through each step with care and
precision, and doing it right the first time.
COMMITMENT TO EFFICIENCY
The Company continually strives to increase efficiency and reduce costs
for the benefit of the Company and its customers. The Company has been able to
achieve efficiency by placing a particular emphasis on working very closely with
its customers, locating its production facilities in China, vertically
integrating its production processes and a continual improvement training
program.
Markets, Products and Customers
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THE MARKET
According to Unity Marketing's THE COLLECTIBLES INDUSTRY REPORT 1997
("Unity Marketing"), the fastest growing segment in the United States' die-cast
market today is die-cast collectibles, that are replicas of cars, trucks and
farm machinery that is intended for collecting rather than playing. The die-cast
collectibles segment grew 29% in 1996 rising from US$399 million in 1995 to
US$514 million in 1996. In 1996, U.S. consumers spent US$1.234 billion on
purchases of die-cast cars and models, an increase of 18% from 1995 sales of
US$1.048 billion.
THE PRODUCTS
The Company manufactures a wide range of metal die-cast collectible scale
model replicas of automobiles, including most of the U.S. classic cars and
trucks, as well as European cars such as Ferrari, Mercedes Benz and BMW. These
replicas, which come in various scales from 1/12th to 1/64th of the size of the
original product, are medium-and high-feature products that must meet exacting
standards. These die-cast replicas have complex designs which require
high-quality workmanship and decorative details, with pad printing of as many as
150 imprints. The most complex of these models incorporate up to 450 component
parts. The die-cast scale model replicas manufactured by the Company are sold
through direct mailing, hobby shops, collectors' clubs, car and equipment
dealers, toy and gift stores, internet sites and other channels . These products
typically retail in the U.S. for between $90 and $200 for the high-feature
products, between $40 and $90 for the medium-feature products and between $20
and $40 for the small scale products. Many of these products have nostalgic
appeal to adult consumers. In addition, some of these products, especially the
automobile replicas, have attracted a following of devoted collectors and are
traded on a secondary market. The Company believes, based upon the secondary
market and sales experience, that many die-cast collectibles have enduring
consumer appeal across a broad age range. For example, the Company manufactures
on an annual basis several products for which molds were made between five and
ten years ago. These include the 1959 Cadillac Series 62, the 1934 Hispano Suiza
J-12 and the 1934 Packard V-12 LeBaron Speedster.
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CUSTOMERS
The Company's largest customer for die-cast collectibles is Danbury Mint
("DM"). DM, a division of MBI, Inc., is a leading U.S. developer and marketer of
1/24 scale high quality die-cast collectible replicas. DM was the Company's
first customer in 1987. Sales to DM constituted a significant portion of the
Company's net sales for the fiscal year 1997. See the Company's Consolidated
Financial Statements.
In 1998, Creative Master - Hong Kong started a long term business
relationship with Paul's Model Art ("PMA") a leading German developer and
marketer of die-cast collectible replicas cars. PMA is a market leader in the
die-cast collectibles industry in Europe and has over 60% of the European
market. Over the years, PMA has won many awards in Europe for producing the best
replica cars. PMA has the world wide exclusive license to produce quality
replica cars for most of the top Formula One racing teams and Super Touring
European sports car teams. See "Risk Factors --Dependence on Major Customers."
The Company's other major customers include Brookfield Collectors Guild
("Brookfield") of the USA, a division of Action Performance, and First Gear
("First") also of the USA. The Company is currently finalizing manufacturing
agreements with PMA, Brookfield and First. Other customers include Hallmark
Cards ("Hallmark"), Mattel(R) Toys ("Mattel(R)"), Road Champ ("Champ") of the
USA and Corgi Classic Cars ("Corgi") of the United Kingdom.
Manufacturing and Quality Assurance Manufacturing
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The Company offers a comprehensive, fully-integrated manufacturing
service. With this service, the Company integrates component sourcing,
computer-aided product engineering, model-making and mold-making, as well as
manufacturing, assembling and packing of finished product. This enables the
Company to meet all of a customer's design engineering and manufacturing needs
and eliminating the need for intermediaries. By coordinating product development
and process design with production and packaging, the Company is able to shorten
the lead time from conceptual design to product delivery and to lower product
cost while maintaining high quality and reliability.
The Company's die-cast and injection-molded production facilities are
located in Dongguan, approximately 60 miles from Hong Kong. The Dongguan
facilities have an aggregate of 285,000 square feet manufacturing space with the
capacity for up to approximately 3,800 workers in its manufacturing facility.
The Company believes that this space together with the anticipated increase in
efficiency for which the Dongguan Facility was designed, will allow the Company
to significantly increase its production capacity and meet anticipated demand
for the next two years. As there has been a significant increase in new
customers during 1998, the Company expects to increase space and purchase
additional equipment in the latter part of 1998. The Dongguan Facility includes
(i) a product engineering area, (ii) model-making and mold-making areas, (iii)
die-casting and injection-molding areas, (iv) hand-spray and electrostatic
painting and pad printing areas, (v) assembly and packing areas, (vi) warehouse
area, and (vii) dormitory, dining and recreational facilities. The Company's
product engineering staff makes extensive use of state-of-the-art computer-aided
design systems for the development of prototype-scale models. The die-casting,
injection-molding and electrostatic painting areas operate on a two-shift basis.
The hand-spray, pad printing and assembly and packing areas also run on a
multi-shift basis. Assembly and hand painting areas account for most of the
total work force and production area.
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. See "Risk Factors--Dependence on Raw
Materials."
The plants and equipment owned and operated or leased by the Company are
subject to comprehensive PRC laws and regulations that involve substantial
risks. See "Risk Factors -Environmental Matters" and "Production Facilities;
Capacity Limitations" and "-Dependence on PRC Parties" as well as "PRC Risks."
HIGH -QUALITY PRODUCTION
The Company's Quality Assurance ("QA") and Quality Control ("QC")
programs are designed specifically for quality die-cast collectibles, not toys.
The Company uses state-of-the-art computer-aided design and manufacturing
equipment to produce high-quality collectibles. The Company also places a strong
emphasis on the training of its employees, particularly at the quality,
engineering and production level. As a result, the Company employs a
highly-trained workforce, including skilled, technically trained craftsmen and
other capable but relatively inexpensive laborers for its manufacturing and
assembly operations under the direction of experienced management. The Company
ensures quality through rigorous quality control procedures at each step of the
production process. The Company has an employee training program with strong
emphasis on inspection and quality control.
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Competition
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The Company faces significant competition in its die-cast collectibles
business, primarily from toy factories companies with production facilities
located in the PRC. The Company believes that the basis of competition in the
manufacturing of all of its products is price, quality, technical capabilities
and the ability to produce in required volumes and to timely meet delivery
schedules. The Company expects increased competition from other industry
participants that may seek to enter the Company's high margin product segments.
Many of the existing and potential competitors have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
The Company believes its strengths with respect to its competitors are its
one-stop production, its premium quality, and its specialization in premium
replica products.
The Company does not characterize its business as proprietary and does
not own any patents or copyrights or possess any material trade secrets.
Accordingly, additional participants may enter the market at any time. No
assurance can be given as to the ability of the Company to compete successfully
with its current or future competitors, and the inability to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, two of the Company's customers, Mattel(R)
and Champ, manufacture a substantial portion of their products internally. A
principal customer's decision to manufacture new products internally or to move
manufacturing from the Company to another third party would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Backlog and Seasonality
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The Company's die-cast product customers generally contact the Company
nine to eighteen months in advance of product delivery in order that the Company
engineer and make the molds for the products. Thereafter, these customers place
production orders two to six months in advance of target delivery dates. The
Company's policy is that purchase orders may be canceled by the customer upon
reimbursement of actual costs incurred and payment of a portion of lost profits,
as determined on a case-by-case basis.
The Company closes its facilities for two weeks during the months of
January and February in celebration of the Chinese New Year holidays as is
customary in the PRC. As a result, the Company's first fiscal quarter production
and revenues have in the past been lower than in other quarters and are expected
to be lower than in future years. Except as attributable to the observance of
the New Year, the Company has not experienced seasonality in its die-cast
products business operations, although they could show quarterly fluctuations
based on the timing of orders placed by its customers.
Trademarks and Other Proprietary Rights
- ---------------------------------------
The Company has no registered trademarks. The Company's key employees
have entered into confidentiality agreements with the Company.
Employees
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As of March 31, 1998, the Company employed approximately 3,300 persons,
of whom approximately 2,920 were production workers, 380 were administrative
staff of which 200 were engineers and technicians and 30 are managers. As is
customary for employers in the PRC, the Company's production facilities include
housing facilities for workers. The Company is committed to providing good
working and living conditions for its employees in the PRC. To that end, the
Company has adopted a code of conduct relating to worker conditions, including a
prohibition on use of child labor, and guidelines regarding worker safety, wages
and hours. The Company also provides on-site medical and recreational facilities
for its labor force in the PRC.
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The Company places a strong emphasis on the ongoing training of employees
at all levels and has instituted a Continual Improvement Program. At the
supervisor level, the Company does leadership training and staff evaluations.
The Company also provides training to its managers and executives in its Hong
Kong headquarters through courses conducted by industry professionals engaged by
the Company as well as by senior management. The courses cover management
skills, total quality management and the technical aspects of the Company's
operations. In addition, the Company sponsors a number of technical staff to
attend night classes, and in-house seminars for workers are held semi-annually
by the quality control staff or the factory managers on quality requirements.
See "Risk Factors-- Reliance on Key Personnel."
Research and Development
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The Company did not have significant expenses in the area of research and
development in fiscal years 1997, 1996 or 1995 in that the Company does not
develop proprietary technology and all development costs associated with
producing a certain replica collectible are expenses as a cost of sales.
Risk Factors
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US AND EUROPEAN MARKET. The U.S. collectors market for die cast products
has been growing significantly and industry sources such as Unity Marketing have
projected continued growth. However, there can be no assurance that the US
and/or European market will continue to grow, or, will not contract. Any
material decrease in general consumption levels in the US or Europe, the
Company's major markets, could result in diminished demand to acquire premium
collectibles.
DEPENDENCE ON RAW MATERIALS. The Company uses zinc alloy, various plastic resins
and paper in its manufacturing operations. The Company's financial performance
is dependent to a substantial extent on the cost of such raw materials. The
supply and demand for paper, zinc alloy and for both plastic resins and the
petrochemical intermediates from which plastic resins are produced are subject
to cyclical and other market factors and may fluctuate significantly. As a
result, the cost of raw materials to the Company is subject to substantial
increases and decreases over which the Company has no control except by seeking
to time its purchases in order to take advantage of favorable market conditions.
In the past, the Company has experienced significant increases in the price of
certain raw materials, which increases the Company was not able to pass on fully
to its customers. To the extent that future increases in the cost of raw
materials cannot be passed on to customers, such increases could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company purchases its raw materials from a limited number of suppliers. The
Company has no formal written agreements with any of its suppliers. The Company
is not dependent upon any single supplier for key materials. The Company has not
experienced any difficulty in obtaining needed materials and thus believes that
the lack of written agreements with its suppliers does not present a risk to its
business, but no assurance can be given that the Company will be able to obtain
sufficient quantities of such raw materials to meet its needs. Any lack of
sufficient raw materials for its needs would have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company believes that it could continue to obtain needed raw materials in the
event that it experiences significant rapid growth, in light of the current
availability of such raw materials on the world markets. However, to the extent
the Company is unable to obtain needed raw materials in such circumstances in
sufficient quantities or at affordable prices, such inability would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends, to a significant
extent, upon a number of key employees. The loss of services of one or more of
these employees could have a material adverse effect on the business of the
Company. The Company believes that its future success will also depend in part
upon its ability to attract, retain and motivate qualified personnel, and the
maintenance of employment agreements with certain key officers. Competition for
such personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company maintains
"key person" life insurance on its key employees in the amount of $HK6,000,000.
The Company's success, to a large extent, depends upon the continued services of
certain executive officers, particularly Messrs. Carl Ka Wing Tong and Leo Sheck
Pui Kwok. See "Management."
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The Company intends to continue to hire additional personnel as necessary to
meet its management, marketing, operating and administrative service needs from
time to time. Although the Company believes that, as of this date, it has been
successful in attracting and retaining highly qualified professionals and other
personnel as required by its business, there can be no assurance that the
Company will continue to be successful in this regard. The Company believes that
the future success and development of its business is dependent to a significant
degree on its ability to continue to attract such individuals.
POTENTIAL PRODUCT LIABILITY. The Company is engaged in businesses that could
result in possible claims for injury or damage resulting from its products. The
Company is not currently, nor has it been in the past, a defendant in any
product liability lawsuit. The Company does not maintain product liability
insurance. A successful claim brought against the Company by a customer of the
Company or a consumer and the adverse publicity that could accompany any harm
caused to a consumer by a product manufactured by the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATIONS. U.S. customers of the Company are subject to the
provisions of, among other laws, the Federal Hazardous Substances Act and the
Federal Consumer Product Safety Act. These laws empower the Consumer Product
Safety Commission (the "CPSC") to protect consumers from hazardous toys and
other articles. The CPSC has the authority to exclude from the market articles
that are found to be unsafe or hazardous, and can require a recall of such
products under certain circumstances. Similar laws exist in some states and
cities in the U.S., as well as in Canada and Europe. The Company relies on its
customers to design products that comply with such safety standards and to test
the products to ensure compliance with applicable regulatory safety standards.
While the Company believes that its customers design and test the products the
Company manufactures for compliance with regulatory standards, and the Company
itself maintains quality assurance, there can be no assurance that the Company's
products will not be found to violate applicable laws, rules and regulations,
which could have a material adverse effect on the business, financial condition
and results of operations of the Company. In addition, there can be no assurance
that more restrictive laws, rules and regulations will not be adopted in the
future, or that the Company's products will not be marketed in the future in
countries with more restrictive laws, rules and regulations, either of which
could make compliance more difficult or expensive, and which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELATED PARTY TRANSACTIONS. In the past, the Company has entered into business
transactions with certain affiliates and may continue to enter into such
transactions in the future, however, the policy of the Company is that such
transactions with related persons shall have the terms thereof are at least as
favorable to the Company as those that could be obtained from unaffiliated third
parties. See "Certain Transactions."
DIVIDENDS. Creative Master Limited paid dividends of US$322,000 in 1997 and
Carison Limited paid dividends of US$215,000 in 1997. The Company does not
anticipate paying any cash dividends in the future. The Company currently
intends to retain future earnings, if any, to fund the development and growth of
its business.
LIMITATIONS OF SINO-FOREIGN JOINT VENTURES. The Company conducts its
manufacturing operations in China through the joint venture with the Chinese
partner, as such form of business entity is preferred by the Chinese
authorities. The term of Dongguan Chuangying Toys Factory Co., Ltd. Joint
Venture expires in 2006. There can be no assurances given that the joint venture
will be extended to continue their operations. See "Company - Organization."
YEAR 2000 COMPLIANCE. The Company is currently in the process of updating its
internal management information systems so that they will have the capability to
manage and utilize data involving the transition of dates from 1999 to 2000
without functional or data abnormality and without inaccurate results relating
to such dates. The Company is updating its current systems to be Year 2000
compliant, but expects to replace its management information systems before
2000. Any new systems implemented by the Company would be Year 2000 compliant.
TARIFFS AND QUOTAS. Most of the Company's products are shipped to customers in
the U.S. The U.S. may, from time to time, impose new quotas, duties, tariffs, or
other charges or restrictions, or adjust presently prevailing quota, duty or
tariff levels, which could adversely affect the Company's ability to continue to
export products to the U.S. at current or increased levels. The Company cannot
predict what regulatory changes may occur, if any, or the type or extent of any
financial impact on the Company that such changes may have in the future. In
addition, various forms of protectionist trade legislation have been proposed in
the U.S. Adverse changes in tariff structures or other trade policies could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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ENVIRONMENTAL MATTERS. The Company's operations involve the use of certain toxic
substances, including plastic resins, oil-based paints and cleaning solvents.
The Company is, and is likely to continue to be, subject to PRC national,
provincial and local environmental protection laws and regulations. Such laws
and regulations currently impose a uniform fee on industrial wastewater
discharges and a graduated schedule of pollution fees for the discharge into the
environment of waste substances in excess of applicable standards, require the
payment of fines for violations of laws, regulations or decrees, and provide for
possible closure by the central, provincial or local government of any facility
which fails to comply with orders requiring it to cease or cure certain
activities deemed by such authorities to be causing environmental damage. The
Company currently disposes of its waste substances in a manner it believes is
consistent with similarly-situated companies operating in the PRC. Such disposal
practices may not be consistent with those of companies operating in the U.S.
There can be no assurance that the Company will be in compliance with applicable
laws and regulations and will avoid incurring the consequences of
non-compliance, or that PRC authorities will not impose additional regulatory
requirements that would necessitate additional expenditures for environmental
compliance. Any such occurrence could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES. Substantially all of the Company's manufacturing and assembly workers
are young women who come from various rural provinces in the PRC for the purpose
of working for wages higher than are available in such rural regions. These
employees typically work for the Company for two to five years and then return
to their communities. In addition, approximately 20%-30% of the factory
employees do not return to the Company each year after the Chinese New Year
holiday, and the Company must hire replacements. If these employees were able to
earn similar wages in their home provinces or higher wages in other industries,
the Company could experience labor shortages or could be required to increase
salaries to meet its labor needs, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's employees are not unionized, and the Company has not experienced
any labor strike. Union organizing and worker unrest are not common in the PRC.
No assurance can be given that labor conflicts will not develop. Any labor
conflicts could have a material adverse effect on the Company's business,
financial condition and results of operations.
PRC RISKS. The Company conducts all of its product engineering, model-making,
mold-making and manufacturing operations in the PRC. In addition, some of the
Company's product development, administrative, finance and accounting,
marketing, and MIS activities are located in Hong Kong. As a result, the
Company's business, financial condition and results of operations may be
influenced by the general political, social and economic situation in Hong Kong
and the PRC. Accordingly, the Company may be subject to political and economic
risks, including political instability, currency controls and exchange rate
fluctuations, and changes in import/ export regulations, tariffs, duties and
quotas.
INTERNAL POLITICAL RISKS. The Company's interests may be adversely affected by
the political environment in China. China is a communist country which since
1949 has been, and is expected to continue to be, controlled by the Communist
Party of China. Changes in the top political leadership of the Chinese
government may have a significant impact on policy and the political and
economic environment in China. Moreover, economic reforms and growth in China
have been more successful in certain provinces than in others, and the
continuation or increase of such disparities could affect political or social
stability. China only recently has permitted greater flexibility in its economic
sector, however, the government of China has exercised and continues to exercise
substantial control over virtually every section of the Chinese economy through
regulation and state ownership. Accordingly, government actions in the future,
including any decision not to continue to support the economic reform program
that commenced in the late 1970's and possibly to return to the more
centrally-planned economy that existed prior thereto, could have a significant
effect on economic conditions in China and on the operations of the Company.
INTERNAL ECONOMIC RISKS. The Company's interests may be adversely affected by
the economic environment in China. The economy of China differs significantly
from the economies of the United States and Western Europe in such respects as
structure, level of development, gross national product, growth rate, capital
reinvestment, resource allocation, self-sufficiency, rate of inflation (see
"Inflation" below), and balance of payments position, among others. Only
recently has the Chinese government encouraged substantial private economic
activities.
The Chinese economy has experienced significant growth in the past five years,
but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of China in the future could have a
significant adverse effect on economic conditions in China and the economic
prospects of the Company.
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MARKET DECLINE IN SOUTHEAST ASIA. Several countries in Southeast Asia, including
Korea, Thailand and Indonesia, have experienced a significant devaluation of
their currencies and a decline in the value of their capital markets. In
addition, these countries have experienced a number of bank failures and
consolidations. Because virtually all of the Company's products are sold into
developed countries not experiencing these declines, the Company does not
believe that the declines in Southeast Asia will affect the demand for the
Company's products. Furthermore, because most of the Company's products are, or
at the Company's request may be, paid for in U.S. dollars, the Company believes
that it is less susceptible to the effects of a devaluation, if subsequently
experienced, in the Hong Kong dollar or the PRC Renminbi. The decline in the
currencies of these countries may, however, render the Company's products less
competitive if competitors in Southeast Asia are able to manufacture competitive
products at a lower effective cost. No assurance can be given as to the ability
of the Company's products to continue to compete with the products of
competitors from these countries or that currency or other effects of the
decline in Southeast Asia will not have a material adverse effect on the
Company's business, financial condition and results of operations.
INFLATION. The annual inflation rate in Hong Kong was approximately 8.8%, 8.2%
and 6% in 1995, 1996 and 1997, respectively. The annual inflation rate in the
PRC was approximately 14.8%, 8.3% and 8% in 1995, 1996 and 1997, respectively.
The Company does not consider that inflation in Hong Kong or the PRC has had a
material impact on its results of operations in recent years. No assurance can
be given that inflation in Hong Kong or the PRC will not have a material adverse
effect on the business, financial condition and results of operations of the
Company in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LEGAL SYSTEM. China's legal system is a civil law system which is based on
written statutes and in which decided legal cases have little precedential
value. China does not have a well developed, consolidated body of laws governing
enterprises with foreign investments. As a result, the administration of laws
and regulations by government agencies may be subject to considerable
discretion. As legal systems in China develop, foreign business entities may be
adversely affected by new laws, changes to existing laws (or interpretations
thereof) and preemption of provincial or local laws by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement thereof.
MFN STATUS. The PRC currently enjoys Most-Favored-Nation ("MFN") status granted
by the U.S., pursuant to which the U.S imposes the lowest applicable tariffs on
PRC exports to the U.S. The U.S. annually reconsiders the renewal of MFN trading
status for the PRC. No assurance can be given that the PRC's MFN status will be
renewed in future years. The PRC's loss of MFN status could adversely affect the
Company's business by raising prices for its products in the U.S. which could
result in a reduction in demand for the Company's products by its U.S customers.
LOSS OF PRC FACILITIES; NATIONALIZATION; EXPROPRIATION. If for any reason the
Company were required to move its manufacturing operations outside of the PRC,
the Company's profitability, competitiveness and market position could be
materially jeopardized, and there could be no assurance that the Company could
continue its manufacturing operations. The Company's business and prospects are
dependent upon agreements with various entities controlled by PRC governmental
instrumentalities. Not only would the Company's operations and prospects be
materially and adversely affected by the failure of such entities to honor these
contracts, but it might be difficult to enforce these contracts in the PRC. The
Company's investment in property, facilities and improvements in the PRC,
particularly at the Dongguan Facility, are significant and comprise
substantially all the Company's assets. There can be no assurance that assets
and business operations in the PRC will not be nationalized, which could result
in the total loss of the Company's investments in that country, or that the
Company's ownership interest in its properties and facilities will not otherwise
be impaired, which could result in a significant loss, or depreciation in the
value of, such assets. Following the formation of the PRC in 1949, the PRC
government renounced various debt obligations incurred by predecessor
governments, which obligations remain in default, and expropriated assets
without compensations. Accordingly, an investment in the Company involves a risk
of total loss.
GOVERNMENT CONTROL OVER ECONOMY. The PRC only recently has permitted greater
provincial and local economic autonomy and private economic activities. The PRC
central government has exercised and continues to exercise substantial control
over virtually every sector of the PRC economy. Accordingly, PRC government
actions in the future, including any decision not to continue to support current
economic reform programs and to return to a more centrally planned economy, or
regional or local variations in the implementation of economic reform policies,
could have a significant effect on economic conditions in the PRC or particular
regions thereof. Any such developments could affect current operations of any
property ownership by foreign investors.
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PRC LAW; EVOLVING REGULATIONS AND POLICIES. The PRC's legal system is a civil
law system based on written statutes in which decided legal cases have little
value as precedents, unlike the common law system in the U.S. The PRC does not
have a well-developed, consolidated body of law governing foreign investment
enterprises. As a result, the administration of law and regulations by
government agencies may be subject to considerable discretion and variation. In
addition, the legal system of the PRC relating to foreign investments is both
new and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances. Definitive
regulations and policies with respect to such matters as the permissible
percentage of foreign investment and permissible rates of equity returns have
not yet been published, statements regarding these evolving policies have been
conflicting, and any such policies, as administered, are likely to be subject to
broad interpretation and discretion and to be modified, perhaps on a
case-by-case basis. As the legal system in the PRC develops with respect to
these new types of enterprises, foreign investors may be adversely affected by
new laws, changes to existing laws (or interpretations thereof) and the
preemption of provincial or local laws by national laws. In circumstances where
adequate laws exist, it may not be possible to obtain timely and equitable
enforcement thereof. The Company's activities in the PRC are by law subject, in
some circumstances, to administrative review and approval by various national
and local agencies of the PRC government. Although the Company believes that the
present level of support from local, provincial and national governmental
entities enjoyed by the Company benefits the Company's operations in connection
with administrative review and the receipt of approvals, there is no assurance
that such approvals, when necessary or advisable in the future, will be
forthcoming. The inability to obtain such approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FOREIGN CURRENCY EXCHANGE. All of the Company's sales are denominated either in
U.S. Dollars or Hong Kong Dollars. The largest portion of the Company's expenses
are denominated in Hong Kong Dollars, followed by Renminbi and U.S. Dollars. The
Company is subject to a variety of risks associated with changes among the
relative values of the U.S. Dollar, the Hong Kong Dollar and Renminbi. The
Company does not currently hedge its foreign exchange positions. Any material
increase in the value of the Hong Kong Dollar or Renminbi relative to the U.S.
Dollar would increase the Company's expenses and therefore would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Since 1983, the Hong Kong government has maintained a policy of linking the U.S.
Dollar and the Hong Kong dollar at an exchange rate of approximately HK$7.80 to
US$1.00. There can be no assurance that this link will be continued, although
the Company is not aware of any intention of the Hong Kong government or the PRC
to abandon the link. There has been significant volatility in the exchange rates
of Renminbi to U.S. Dollars in recent years. Over the last five years, the
Renminbi has experienced significant devaluation against most major currencies.
The January 1, 1994 establishment of the current floating exchange rate system
produced a significant devaluation of the Renminbi from $1.00 to Rmb 5.7 to
approximately $1.00 to Rmb 8.3 as of December 31, 1997. The rates at which
exchanges of Renminbi into U.S. Dollars may take place in the future may vary.
Pursuant to the Sino-British Joint Declaration, with effect from July 1, 1997,
Hong Kong became a Special Administrative Region of China ("SAR"). The Basic Law
of the Hong Kong SAR provides that the Hong Kong dollar will remain the legal
tender in the Hong Kong SAR after June 30, 1997. The Basic Law also provides
that no exchange control policies shall be applied in the Hong Kong SAR and that
the Hong Kong dollar shall be freely exchangeable.
HONG KONG RISKS. The Company is headquartered in Hong Kong and conducts some of
its business operations there. Accordingly, the Company may be materially
adversely affected by factors affecting Hong Kong's political situation and its
economy or in its international political and economic relations. Hong Kong was
a British Crown Colony, but sovereignty over Hong Kong was transferred to China
on July 1, 1997 and Hong Kong became a Special Administrative Region ("SAR") of
the PRC. As provided in the Sino-British Joint Declaration on the Question of
Hong Kong and the Basic Law of the Hong Kong SAR of the PRC (the "Basic Law"),
the Hong Kong SAR shall have a high degree of autonomy except in foreign affairs
and defense. Under the Basic Law, the Hong Kong SAR is to have its own
legislature, legal and judicial system and economic autonomy for 50 years.
Although, based on the current political conditions and the Company's
understanding of the Basic Law, the Company does not believe that the transfer
of sovereignty over Hong Kong will have a material adverse effect on the
Company's business, financial condition or results of operations of the Company
in the future, there can be no assurance as to the continued stability of
political, economic or commercial conditions in Hong Kong.
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DEPENDENCE ON MAJOR CUSTOMERS. For the year ended December 31,1997 sales to two
customers -- DM and Mattel(R) account for a majority of the Company's total pro
forma net sales. See Notes to Financial Statements. However, significant steps
were taken by the Company in 1997 to diversify its customer base, which resulted
in commencement of relationship with: Hallmark Cards, USA, Road Champ (USA), PMA
(Germany), and Corgi (UK). As a result of new business from these additional
customers, DM's percentage of fiscal 1998 sales is expected to fall below 60% of
the total 1998 sales. The Company's dependence on these customers is expected to
continue in the foreseeable future. Although management believes that any one of
its customers could be replaced eventually, the loss of any one of its major
customers, particularly DM, would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
sales transactions with all of its customers are based on purchase orders
received by the Company from time to time that are subject to cancellation.
INTRODUCTION OF NEW PRODUCTS BY CUSTOMERS; MARKET ACCEPTANCE; ECONOMIC FACTORS.
The Company's long-term operating results depend substantially upon its
customers' ability to continue to conceive of, design and market new products
and upon continuing market acceptance of its customers' existing and future
products. In the ordinary course of their businesses, the Company's customers
continuously develop new products and create additions to their existing product
lines. Significant delays by the Company's customers in the introduction of, or
their failure to introduce or market, new products or additions to their
respective product lines would impair the Company's results of operations. The
die-cast collectible markets are affected by changing consumer tastes and
interests, which are difficult to predict and over which the Company's customers
have little, if any, control. These products in any event have limited life
cycles and may be discontinued by the customer at any time. Accordingly, there
can be no assurance that existing or future products of the Company's customers
will maintain or receive substantial market acceptance. In addition, since most
of the products manufactured by the Company are sold in the U.S., the Company's
profitability will also depend on the strength of the U.S. economy, which can
affect U.S. consumers' spending habits on such items as die-cast collectibles.
Any downturn in the U.S. economy could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION. The Company faces significant competition in the manufacturing of
die-cast collectibles. Company competes with several toy companies with die-cast
capabilities located primarily in the PRC. The Company believes that the basis
of competition in the manufacturing of all of its products is price, quality,
technical capabilities and the ability to produce in required volumes and to
timely meet delivery schedules. The Company expects increased competition from
other industry participants that may seek to enter one or more of the Company's
high margin product segments. Many of the existing and potential competitors
have significantly greater financial, technical, manufacturing and marketing
resources than the Company.
Other than capital expenditures for factory equipment and training, the Company
does not believe that there are any significant barriers to entry into the
manufacture of its products, although the Company believes that it currently
holds certain competitive advantages. The Company does not characterize its
business as proprietary and does not own any patents or copyrights or possess
any material trade secrets. Accordingly, additional participants may enter the
market at any time. No assurance can be given as to the ability of the Company
to compete successfully with its current or future competitors, and the
inability to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, certain of
the Company's customers, including Mattel(R) Toys, manufacture a substantial
portion of their products internally. Any determination by a principal customer
to manufacture its products internally or to move manufacturing from the Company
to another third party would have a material adverse effect on the Company's
business, financial condition and results of operations.
ABILITY TO MANAGE GROWTH AND FLUCTUATIONS. The Company has experienced
significant growth over the past few years and is expanding its manufacturing
operations. The management of the Company's growth or fluctuations in levels of
operations, as appropriate, will require continued improvement and refinement of
the Company's operating, management and financial control systems, as well as a
significant increase in the Company's manufacturing, quality control, marketing,
logistics and service capabilities, any of which could place a significant
strain on the Company's resources. If the Company's management is unable to
manage its operations effectively, the quality of the Company's products, its
ability to retain key customers and its business, financial condition and
results of operations could be adversely affected. As part of its expansion, the
Company will have to hire additional management personnel and other employees.
The expenses associated with hiring, training and integrating such employees may
be incurred prior to the generation of any associated revenues, with a
corresponding adverse effect on the Company's business, financial condition and
results of operations. In addition, the failure to integrate new personnel on a
timely basis could have an adverse effect on the Company's business, financial
condition and results of operations.
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PRODUCTION FACILITIES; CAPACITY LIMITATIONS. The Company's manufacturing
operations are conducted in the Dongguan Facility. The Company currently
estimates that it may exceed its manufacturing capacity in all of its
manufacturing facilities by the third quarter of calendar 1998. As a result, the
Company will need to build or acquire additional manufacturing capacity in the
near future. The inability of the Company to obtain such capacity on a timely
basis and on commercially reasonable terms would have a material adverse effect
on the Company's business, financial condition and results of operations.
If a natural disaster, such as a typhoon, fire or flood, were to destroy or
significantly damage any of the Company's facilities or if any such facility
were to otherwise become unavailable or inoperable, the Company would need to
obtain alternative facilities from which to conduct its operations, which would
result in significantly increased operating costs and significant delays in the
fulfillment of customer orders. No assurance can be given that alternative
facilities could be obtained at an affordable price or at all. Such increased
costs or delays, or inability to obtain alternative facilities, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is headquartered in approximately 10,000 square feet in Hong
Kong. The facilities in Hong Kong are rented by the Company, and the land on
which such facilities are located is subject to long-term leases.
The Company's manufacturing operations are conducted in the Dongguan
Facility. The Company's manufacturing facilities have an aggregate of
approximately 285,000 square feet of manufacturing space and approximately
168,000 square feet of dormitory space. Virtually all land in the PRC is
state-owned, but can be leased from the government on a long-term basis. The
Company operates three factories in the Dongguan Facility which are subject to
separate leases. Manufacturing facilities having an aggregate of approximately
226,000 square feet of manufacturing space and approximately 152,000 square feet
of dormitory space are leased by the Company through its wholly-owned
subsidiary, Creative Master Ltd. The total manufacturing and dormitory space
leased by Creative Master Ltd. is subject to several lease and tenant agreements
which terms vary. Manufacturing facilities having an aggregate of approximately
58,000 square feet of manufacturing space and approximately 16,000 square feet
of dormitory space are leased by the Company through its majority-owned
subsidiary, Techtime Industries Limited, and are subject to two separate lease
agreements. The Company provided financing to the local landowner, Dongguan Heng
Li Zhen for building the facilities in Dongguan Facility and believes that such
relationship would ensure the Company's extension, if needed, of its leases in
the Dongguan Facility. The plants and equipment owned and operated or leased by
the Company are subject to comprehensive PRC laws and regulations that involve
substantial risks. See "Risk Factors."
The Company believes that its current facilities are adequate for its
current needs and that suitable additional or substitute space will be available
as needed to accommodate expansion.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
any of its properties is subject, nor to the knowledge of the Company, are any
such legal proceedings threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded in the over-the-counter since
November, 1996 under the symbol DAVN. In March, 1998, in connection with the
change of the Company's name to "Creative Master International, Inc.", the
Company changed its symbol to "CVMI". The following table shows the range of
high and low bid quotations reported by NASDAQ in each fiscal quarter from
January , 1996 to March, 31, 1998.
High Low
---- ---
FISCAL 1996
Quarter Ended March 31, 1996 $N/A $N/A
Quarter Ended June 30, 1996 $N/A $N/A
Quarter Ended September 30, 1996 $N/A $N/A
Quarter Ended December 31, 1996 $1.7687 $1.7687
FISCAL 1997
Quarter Ended March 31, 1997 $N/A $N/A
Quarter Ended June 30, 1997 $2.00 $2.00
Quarter Ended September 30, 1997 $N/A $N/A
Quarter Ended December 31, 1997 $1.10 $1.10
FISCAL 1998
Quarter Ended March 31, 1998 $2.00 $2.00
- -------------------------------
* As adjusted to give retroactive effect to a one for ten reverse split which
was effected on March 12, 1998.
The number of beneficial holders of Common Stock as of March 31, 1998 was
approximately 1,500. On February 18, 1998, the low bid and high asked prices for
the Common Stock were $2.00 and $2.00, respectively (post reverse-split).
In 1997, Creative Master - Hong Kong paid dividends of US$322,000 and
Carison Limited paid dividends of US$215,000, however, the Company has no
present intention of paying cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings to provide for
the growth of the Company. Payment of cash dividends in the future will depend,
among other things, upon the Company's future earnings, requirements for capital
improvements and financial condition.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this report.
Overview
- --------
The Company, through its operating subsidiaries, is a manufacturer of
high quality die-cast replica racing and classic cars. These products are
collectibles and require a substantial degree of engineering,quality control and
hand-assembly expertise to produce. All of the Company's operations, including
the design engineering and manufacture of its products, sales, marketing, and
other corporate activities are conducted through the Company's wholly-owned or
majority-owned subsidiaries or joint ventures. See "Business of the Company -
Organization." The Company's executive and administrative headquarters are in
Hong Kong and its manufacturing operations are located in the neighboring
Guangdong Province of the People's Republic of China (the "PRC").
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The Company provides a comprehensive manufacturing service that enables
it to satisfy customers' requirements at every stage in the production of its
products, including raw material sourcing, product, development and engineering,
tool making, model making, computer-aided mold design and production, and
manufacturing and packaging of the finished product. This comprehensive,
one-stop production process allows the Company to effectively, act as an
in-house manufacturing division for its customers. The Company is dependent on
sales to certain key customers, including DM, Brookfield and Mattel(R), see
"Risk Factors"- "Dependence on Major Customers."
In the recent years, the Company added the following additional
production facilities:
In July 1994, Carison Limited was incorporated to hold the Company's
investment in its own tooling manufacturing factory in Guangzhou. The tooling
factory was moved to Dongguan in 1995 and now occupies 15,000 square feet of
production space with 100 tooling technicians.
In April 1996, Techtime Industries Limited was incorporated to hold the
Company's investment in its second Dongguan factory with over 30,000 square feet
of production space and dormitory space that can accommodate up to 600 workers.
In October 1996, Queenex Enterprises Limited was incorporated to hold the
Company's investment in its third Dongguan factory with over 60,000 square feet
of production space and dormitory space that can accommodate up to 900 workers.
In July 1997, a model making division was established which now engages
over 60 model making technicians.
All the above factories are located within 10 minutes walking distance of
each other. The Company completed its move of the production facilities from
Guangzhou to Dongguan in December, 1995. See "Description of Properties."
The Company's operating results in the past have fluctuated and those
results may fluctuate in the future. The Company ceases production for a
two-week period during January or February of each year due to the Chinese New
Year holiday, which has caused revenues during the first fiscal quarter of each
year to be lower than revenues during the other three quarters. The Company may
also experience fluctuations in quarterly sales and related net income compared
with other quarters due to the timing of receipt of orders from customers and
the shipment of products.
The Company may experience annual and quarterly variations in operating
results and, accordingly, the trading price of the common shares may be subject
to fluctuations in response to such variations. It is likely that the Company's
operating results from time to time, will not meet the expectations of the
Company's public market analysts, which will have an adverse effect on the
trading price of the common shares. See "Risk Factors - Ability to Manage Growth
and Fluctuations."
RESULTS OF OPERATIONS
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
SUMMARY FINANCIAL INFORMATION FISCAL YEAR ENDED DECEMBER 31,
- ----------------------------- ----------------------------
1997 1996
-------- --------
US$ US$
(AMOUNTS IN THOUSANDS)
SALES $16,211 $14,054
GROSS PROFIT 3,508 4,272
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (2,006) (2,552)
OPERATING INCOME 1,502 1,720
INCOME BEFORE INCOME TAXES 1,199 969
PROVISION FOR INCOME TAXES (130) (154)
MINORITY INTERESTS (82) -
NET INCOME 987 815
17
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
- --------------------------------------------------------------------------------
NET SALES. Company's net sales in fiscal 1997 were $16.211 million, an
increase of $2.157 million, or 15%, from $14.054 million in fiscal 1996. The
Company added a third manufacturing plant consisting of 60,000 sq. ft. of
production space in the fourth quarter of 1996. That new facility began
production as new customers placed orders during the year.
GROSS PROFIT. Company's gross profit totaled $3.508 million in fiscal
1997, a decrease of $764,000, or 18%, from $4.272 million in fiscal 1996.
Gross margin was 22% in fiscal 1997 and 30% in fiscal 1996. The gross margin
decrease in fiscal 1997 was caused mainly by start-up inefficiencies associated
with the new factory and new customers orders.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Company's selling, general
and administrative expenses totaled $2.006 million in fiscal 1997, a decrease of
$546,000, or 21%, from $2.552 million in fiscal 1996. Selling, general and
administrative expenses constituted 12% of net sales in fiscal 1997 and 18% in
fiscal 1996. The decrease was mainly the result of lower repair costs of reduced
customer rejects and reduced air freight charges. These reduced expenses reflect
better quality control and improvement in schedule compliance.
OPERATING INCOME. Company's income from operations was $1.502 million in
fiscal 1997, a decrease of $218,000, or 13%, from $1.720 million in fiscal
1996.
INTEREST INCOME (EXPENSE), NET. Company's interest income (expense), net
resulted in a net expense of $104,000 in fiscal 1997 as compared to a net
expense of $140,000 in fiscal 1996. The decrease in net interest expenses was
caused by an increase in interest income.
OTHER INCOME (EXPENSE), NET. Company's other income (expense), net,
resulted in net expense of $137,000 in fiscal 1997 as compared to a net expense
of $567,000 in fiscal 1996. Other income net, was mostly related to foreign
exchange difference which was reduced in 1997.
AMORTIZATION OF GOODWILL. The amortization of goodwill for the Company in
fiscal 1997 and fiscal 1996 was $62,000 and $44,000, respectively.
PROVISION FOR INCOME TAXES. The effective income tax rate for the Company
was 11% in fiscal 1997 and 16% in fiscal 1996. The decrease in the Company's
effective tax rate was due to profit contributions from off-shore subsidiaries
that had lower effective income tax rates than other subsidiaries. See "Risk
Factors -- Taxation."
NET INCOME. Based on the factors described above, Company's net income
was $987,000 in fiscal 1997,an increase of $172,000, or 21%, from $815,000 in
fiscal 1996. Net income as a percentage of sales of the Company for fiscal 1997
and fiscal 1996 was 6% and 6%, respectively. The increase in net income as a
percentage of sales in fiscal 1997 as compared to fiscal 1996 was caused mainly
by the reduction of selling, general and administrative expenses noted above,
and offset by minority interests not applicable in 1996.
EBITDA. Company's EBITDA for fiscal 1997 was $1.365 million, as compared
to $1.153 million in fiscal 1996.
18
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
- --------------------------------------------------------------------------------
NET SALES. Company's net sales in fiscal 1996 totaled $14.054 million, an
increase of $4.072 million, or 41%, from $9.982 million in fiscal 1995. This
growth resulted from an increase in sales of the Company's products supported by
increased production capacity at the Company's new Dongguan plant. A second
factory was added in April 1996 to produce initial orders from Mattel(R).
GROSS PROFIT. Company's gross profit totaled $4.272 million in fiscal
1996, an increase of $2.168 million, or 103%, from $2.104 million in fiscal
1995. Gross margin was 30% in fiscal 1996 compared to 21% in fiscal 1995. The
gross margin increased substantially because of increased operational efficiency
associated with the new Dongguan plant. The annual average prices of the
Company's primary raw material, zinc (approximately 5% of net sales) increased
by approximately 6.5% over the annual average price in fiscal 1995, but the
Company was able to maintain its gross profit margin by reduction of wastage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Company's selling, general
and administrative expenses totaled $2.552 million in fiscal 1996 compared to
$2.394 million in fiscal 1995, an increase of $158,000 or 7%, as a result of
increased administrative needs and manufacturing capacity. Selling, general and
administrative expenses were 18% of net sales in fiscal 1996 as compared to 24%
of net sales in fiscal 1995, a decrease of 6%. The decrease reflects increased
sales and the consolidation of the Company's PRC operations to the Dongguan
plant from the Guangzhou plant.
OPERATING INCOME/(LOSS). Company's income from operations totaled $1.72
million in fiscal 1996 compared to the operating loss of $290,000 in fiscal
1995, an increase of $2.01 million, or 693%. The operating margin was increased
from negative 3% of net sales in fiscal 1995 to 12% of net sales in fiscal 1996.
The increase in operating income was the direct result of the consolidation of
the Company's PRC operations to the Dongguan plant from the Guangzhou plant
prior to the start of fiscal 1996 and increased sales of the Company's products.
INTEREST INCOME (EXPENSE), NET. Company's interest income (expense), net
was a net expense of $140,000 in fiscal 1996 as compared to a net expense of
$88,000 in fiscal 1995. The increase in interest expenses was mainly due to
increased borrowings to purchase additional machinery and equipment for the
Dongguan plant.
OTHER INCOME (EXPENSE), NET. Company's other income (expense), net, was a
net expense of $567,000 for fiscal 1996 compared to a net expense of $96,000 in
fiscal 1995, an increase of $471,000. The increase was due partially to a
difference of $104,000 associated with losses from foreign currency transactions
in fiscal 1996, versus a smaller aggregate loss from foreign currency
transactions in fiscal 1995.
PROVISION FOR INCOME TAXES. Company's effective income tax rate was 16%
in fiscal 1996 and 10% in fiscal 1995. The effective rate increased because a
higher portion of profit contributions from subsidiaries of the Company were
taxable.
NET INCOME/(LOSS). Company's net income totaled $815,000 in fiscal 1996,
an increase of $1.374 million, or 246%, from a net loss of $559,000 in fiscal
1995. Net income as a percentage of sales for fiscal 1996 was 6%. Net loss as a
percentage of sales for fiscal 1995 was 6%. The increase in net income as a
percentage of sales in fiscal 1996 as compared to fiscal 1995 reflects increased
sales and the consolidation of the Company's PRC operations to the Dongguan
plant from the Guangzhou plant.
EBITDA. Company's EBITDA for fiscal 1996 was $1.153 million, as compared
to negative $386,000 in fiscal 1995. The increase in EBITDA in fiscal 1996 as
compared to fiscal 1995 reflects an increase in sales volume of the Company's
products, production efficiency and decreased selling, general and
administrative expenses achieved by operating at only the Dongguan production
facility during 1996.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through internally
generated funds, the Company's credit facilities and private equity
transactions. Net cash provided by (used in) operating activities was $696,000
and $1.048 million, for the fiscal years ending December 31, 1997 and 1996,
respectively.
Net cash provided by (used in) investing activities was $16,000 and
($854,000), for the fiscal years ending December 31, 1997 and 1996,
respectively.
Net cash provided by (used in) financing activities was ($672,000) and
$115,000, for the fiscal years ending December 31, 1997 and 1996, respectively.
Cash and bank deposits, as of December 31, 1997 and 1996, were $471,000
and $435,000, respectively.
As of December 31, 1997, the aggregate outstanding amount under all
capital leases was $1.03 million.
Company repaid short-term of $1.643 million in fiscal 1997. In fiscal
1997, Company obtained equipment lease financing in the aggregate amount of
$954,000 from Trilease equipment lessors. The Company also obtained another loan
from the financial institution in the total amount of $1,290,000 against the
Company's orders and receivable invoices of Mattel(R), which loan has been
guaranteed by Messrs. Tong and Kwok and by Acma Ltd.
Company has revolving lines of credit with Hang Seng Bank, Banque
Nationale de Paris and Bank of China. As of December 31, 1997, these lines of
credit allowed for aggregate borrowings of up to $561,000. As of December 31,
1997, Company had $179,000 outstanding under these revolving lines of credit.
Consistent with practice in the die-cast collectibles industry, Company
offers accounts receivable terms to its customers. This practice has created
working capital requirements that Company generally has financed with net cash
balances, internally generated cash flow and loans.
Company's accounts receivable balance at December 31, 1997 was $2.827
million. Company actively monitors the credit worthiness of its customers and
has not experienced any significant problems with collection of accounts
receivable from its customers.
Company's capital expenditures in fiscal 1997 and fiscal 1996 were $1.226
million and $947,000, respectively.
The annual inflation rate in Hong Kong was approximately 8.8%, 8.2%
and 6% in 1995, 1996 and 1997, respectively. The annual inflation rate in the
PRC was approximately 14.8%, 8.3% and 8% in 1995, 1996 and 1997, respectively.
The Company believes that inflation has not had a material impact on its
business in recent years. No assurance can be given that this will continue to
be the case. See "Risk Factors -- Inflation Risk."
The Company's liquidity needs are expected to arise primarily from debt
service, working capital requirements and the funding of capital expenditures
and investments. As of December 31, 1997, the Company had no capital commitments
in respect of purchase of machinery and tools. The Company anticipates that its
capital expenditures will increase substantially in the event that the Company
elects to build an expansion to the Dongguan Facility starting from second
quarter of 1998. See "Risk Factors --Production Facilities; Capacity
Limitations."
The Company's principal source of cash to fund its liquidity needs will
be net cash from operating activities and borrowings under existing lines of
credit and short-term borrowings. The Company believes that these sources will
be adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and interest payments on its existing indebtedness
for at least the next 18 months. However, there can be no assurance that these
resources will be adequate to meet the Company's needs, particularly in the
event that the Company elects to expand the Dongguan Facility. In the event that
the Company requires additional capital, it may be required to issue additional
equity securities, which could result in additional dilution to existing
stockholders, or to borrow such funds, which could adversely affect operating
results. No assurance can be given that such capital will be available. See
"Risks Relating to the Company -- Production Facilities; Capacity Limitations."
20
<PAGE>
YEAR 2000 DISCLOSURE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Based on a recent internal assessment,
the Company does not anticipate that the cost of any needed modifications will
have a material effect on results of operations.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company required to be
included in Item 7 are set forth in the Financial Statements Index.
FINANCIAL STATEMENTS INDEX
CREATIVE MASTER INTERNATIONAL, INC.
Report of independent auditors as of December 31, 1997 and December 31, 1996,
and for each of the years ended December 31, 1997, December 31, 1996 and
December 31, 1995 ...........................................................F-1
Consolidated Balance Sheets, as of December 31, 1997 and December 31, 1996...F-2
Consolidated Statements of Operations, Years Ended December 31, 1997,
December 31, 1996, and December 31, 1995.....................................F-3
Consolidated Statements of Cash Flows Years Ended December 31, 1997,
December 31, 1996 and December 31, 1995......................................F-4
Consolidated Statement of Stockholders' Equity for Years Ended
December 31, 1997, December 31, 1996 and December 31, 1995...................F-6
Notes to Consolidated Financial Statements...................................F-7
22
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC.
==================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
TOGETHER WITH AUDITORS' REPORT
--------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders 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 shareholders'
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.
/Arthur Andersen & Co./
Certified Public Accountants
Hong Kong
Hong Kong,
March 31, 1998.
F-1
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1996 AND 1997
--------------------------------
(Amounts expressed in United States dollars)
<CAPTION>
Note 1996 1997
-------- ---------------- ----------------
$'000 $'000
ASSETS
- ------
<S> <C> <C> <C>
Current assets:
Cash and bank deposits 18 435 471
Accounts receivable, net 5 1,733 2,827
Deposits and prepayments 6 204 307
Inventories, net 7 1,544 2,928
Due from a related company 19 41 -
---------------- ----------------
Total current assets 3,957 6,533
Machinery, equipment and capital leases, net 8 2,398 3,155
Long-term investment 9 1 1
Goodwill 10 395 810
Deferred taxation 14 1 -
---------------- ----------------
Total assets 6,752 10,499
================ ================
LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY
- -----------------------------------
Current liabilities:
Short-term bank borrowings 11 782 1,290
Capital lease obligations, current portion 12 258 764
Accounts payable 1,512 1,908
Deposits from customers - 560
Accrued liabilities 13 979 1,579
Due to directors 19 879 861
Due to parent company 19 - 9
Taxation payable 14 18 68
Dividend payable - 323
---------------- ----------------
Total current liabilities 4,428 7,362
Capital lease obligations, non-current portion 12 245 266
Deferred taxation 14 - 57
---------------- ----------------
Total liabilities 4,673 7,685
---------------- ----------------
Minority interests - 75
---------------- ----------------
Shareholders' equity:
Common stock, par value $0.0001;
authorized - 60,000,000 shares;
outstanding and fully paid - 15 1 1
4,999,746 shares
Additional paid-in capital 1,202 1,202
Retained earnings 872 1,536
Cumulative translation adjustments 4 -
---------------- ----------------
Total shareholders' equity 2,079 2,739
---------------- ----------------
Total liabilities, minority
interests and shareholders' equity 6,752 10,499
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts expressed in United States dollars)
<CAPTION>
Note 1995 1996 1997
-------- --------------- --------------- ---------------
$'000 $'000 $'000
<S> <C> <C> <C> <C>
Net sales 20 9,982 14,054 16,211
Cost of goods sold (7,878) (9,782) (12,703)
--------------- --------------- ---------------
Gross profit 2,104 4,272 3,508
Selling, general and
administrative expenses (2,394) (2,552) (2,006)
Interest income - - 112
Interest expenses (88) (140) (216)
Other expenses, net (96) (567) (137)
Amortization of goodwill (33) (44) (62)
--------------- --------------- ---------------
Income (Loss) before income
taxes (507) 969 1,199
Provision for income taxes 14 (52) (154) (130)
--------------- --------------- ---------------
Income (Loss) before
minority interests (559) 815 1,069
Minority interests - - (82)
--------------- --------------- ---------------
Net income (loss) (559) 815 987
=============== =============== ===============
Earnings (Loss) per common share
$ (0.11) $ 0.16 $ 0.20
=============== =============== ===============
Weighted average number of
common shares outstanding 4,999,746 4,999,746 4,999,746
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts expressed in United States dollars)
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
$'000 $'000 $'000
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income (loss) (559) 815 987
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities-
Depreciation of machinery and
equipment 320 448 469
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 -
Amortization of goodwill 33 44 62
Minority interests - - 82
Deferred income taxes (3) 96 58
(Increase) Decrease in operating assets-
Accounts receivable, net (471) (766) (1,094)
Deposits and prepayments (15) (130) 7
Inventories, net 200 (980) (1,161)
Increase (Decrease) in operating liabilities-
Accounts payable 143 598 234
Deposits from customers - - 560
Accrued liabilities 64 600 439
Due to parent company - - 9
Taxation payable (161) (28) 50
-------------- -------------- --------------
Net cash provided by (used in)
operating activities (208) 1,048 696
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Acquisition of machinery and
equipment (474) (804) (24)
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
Decrease in due from directors 303 - -
-------------- -------------- --------------
Net cash provided by (used in)
investing activities (35) (854) 16
-------------- -------------- --------------
</TABLE>
(To be continued)
F-4
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Continued)
(Amounts expressed in United States dollars)
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
$'000 $'000 $'000
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Increase (Decrease) in bank overdrafts - 25 (28)
Increase in short-term bank loans 356 96 272
Increase in import trust receipts
bank loans 2 166 77
Repayment of capital element of
capital lease obligations (203) (206) (605)
(Decrease) Increase in due to directors 238 34 (18)
Decrease in due to a related company - - (363)
Dividends paid to minority
interests of subsidiaries (370) - (7)
-------------- -------------- --------------
Net cash (used in) provided by
financing activities 23 115 (672)
-------------- -------------- --------------
Effect of cumulative translation
adjustments (1) - (4)
-------------- -------------- --------------
Net increase (decrease) in cash and
bank deposits (221) 309 36
Cash and bank deposits, as of
beginning of year 347 126 435
-------------- -------------- --------------
Cash and bank deposits, as of end of year 126 435 471
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts expressed in United States dollars)
<CAPTION>
Common stock
-------------------------- Additional Cumulative
Number of paid-in Retained translation
shares Amount capital earnings adjustments
------------ ------------ ------------ ------------ ------------
`000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C>
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 - - - 987 -
Dividends - - - (323) -
Translation adjustments - - - - (4)
------------ ------------ ------------ ------------ ------------
Balance as of
December 31, 1997 5,000 1 1,202 1,536 -
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<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 February 23, 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 is 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 15) to Acma Strategic
Holdings Limited ("ASHL"; a company incorporated in Hong Kong), Mr. 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
recapitalization. On this basis, the historical financial statements prior to
December 30, 1997 represent the consolidated financial statements of CML. The
historical shareholders' 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
15) in connection with the acquisition.
F-7
<PAGE>
3. SUBSIDIARIES
- ----------------
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Company") as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Place of Percentage of equity
Name incorporation interest held Principal activities
- ------------------------------------------- --------------------- ---------------------- ------------------------------
<S> <C> <C> <C>
Creative Master Limited Hong Kong 100% Manufacturing and trading of
collectible replica cars
Excel Master Limited Hong Kong 100% Trading of collectible
replica cars
Queenex Enterprises Limited Hong Kong 100% Manufacturing of collectible
replica cars
Carison Limited Hong Kong 70% Manufacturing of moulds
Techtime Industries Limited Hong Kong 55% Manufacturing of collectible
replica cars
Dongguan Chuangying Toys Factory Co., Ltd. The PRC Note a Manufacturing of collectible
replica cars
</TABLE>
Note -
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 contract dated September 10,
1994 and the supplemental contract dated April 1, 1996, the Company'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
effective from September 10, 1994. In view of their profit sharing
arrangement, the joint venture is regarded as 100% owned by the
Company.
F-8
<PAGE>
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. Accumulated amortization
as of December 31, 1996 and 1997 was approximately $77,000 and
$139,000, respectively. Management assesses 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 labour and an attributable
portion of production overheads.
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.
F-9
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
e. Machinery, equipment and capital leases (Cont'd)
---------------------------------------
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. Long-term investment
--------------------
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/moulds supplied
to customers, net of sales returns and allowances. Sales are
recognised 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 of merchandise/moulds 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.
F-10
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
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 shareholders' equity separately as
cumulative translation adjustments. Aggregate losses 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.
k. Earnings (Loss) per common share
--------------------------------
Earnings (Loss) per common share is computed in accordance with
Statement of Financial Accounting Standards No. 128 by dividing net
income (loss) for each year by the weighted average number of shares
of common stock outstanding during the years, as if the common stock
issued for the acquisition of CML (see Note 1) and the reverse stock
splits and the redenominations of par value (see Note 15) had been
consummated prior to the years presented. The weighted average number
of shares used to compute earnings (loss) per common share is
approximately 4,999,746, 4,999,746 and 4,999,746 for the years ended
December 31, 1995, 1996 and 1997, respectively.
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 consist of cash, cash equivalents,
trade receivables, short-term borrowings, capital leases and trade
payables. The book values of these instruments are considered to be
representative of their fair values.
F-11
<PAGE>
<TABLE>
5. ACCOUNTS RECEIVABLE
- -----------------------
<CAPTION>
Accounts receivable comprised:
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Trade receivables 1,857 2,966
Less: Allowance for doubtful accounts (124) (139)
--------------- ---------------
Accounts receivable, net 1,733 2,827
=============== ===============
</TABLE>
<TABLE>
6. DEPOSITS AND PREPAYMENTS
- ----------------------------
Deposits and prepayments comprised:
<CAPTION>
1 9 9 6 1 9 9 7
-------------- ---------------
$'000 $'000
<S> <C> <C>
Deposits for acquisition of moulds 105 149
Rental and utility deposits 38 69
Prepayments 32 83
Others 29 6
-------------- ---------------
204 307
============== ===============
</TABLE>
<TABLE>
7. INVENTORIES
- ---------------
<CAPTION>
Inventories comprised:
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Raw materials 911 1,358
Work-in-process 229 722
Finished goods 431 959
--------------- ---------------
1,571 3,039
Less: Allowance for slow-moving and obsolete
inventories (27) (111)
--------------- ---------------
Inventories, net 1,544 2,928
=============== ===============
</TABLE>
F-12
<PAGE>
<TABLE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
- -------------------------------------------
<CAPTION>
Machinery, equipment and capital leases comprised:
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Machinery and equipment:
Machinery and tools 1,170 769
Leasehold improvements 899 1,033
Furniture and office equipment 330 455
Motor vehicles 19 21
Capital leases:
Machinery and tools 1,060 2,412
Furniture and office equipment - 14
--------------- ---------------
Cost 3,478 4,704
Less: Accumulated depreciation
Machinery and equipment (863) (1,066)
Capital leases (217) (483)
--------------- ---------------
Machinery, equipment and capital leases, net 2,398 3,155
=============== ===============
</TABLE>
<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
is principally engaged in the trading of communication systems. The carrying
cost of the long-term investment represented:
<CAPTION>
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Long-term investment 685 685
Less: Write down of investment cost (684) (684)
--------------- ---------------
Long-term investment, net 1 1
=============== ===============
</TABLE>
The carrying cost of the long-term investment approximated its market value.
F-13
<PAGE>
<TABLE>
10. GOODWILL
- ------------
<CAPTION>
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Goodwill 472 949
Less: Accumulated amortization (77) (139)
--------------- ---------------
Goodwill, net 395 810
=============== ===============
</TABLE>
<TABLE>
11. SHORT-TERM BANK BORROWINGS
- ------------------------------
Short-term bank borrowings comprised:
<CAPTION>
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Overdrafts 25 -
Short-term loans 452 908
Import trust receipts loans 305 382
--------------- ---------------
782 1,290
=============== ===============
</TABLE>
Short-term bank borrowings are denominated in Hong Kong dollars and bear
interest at the Hong Kong prime lending rate plus 1.0% to 4.3%, which ranged
from 9.5% to 13.0% per annum as of December 31, 1997. They were collaterized by
the Group's bank deposits of approximately $72,000 as of December 31, 1997, and
personal guarantees provided by Mr. Sheck-pui Kwok and Mr. Carl Ka-wing Tong.
They were drawn for working capital purposes and are renewable with the consent
of the relevant banks.
F-14
<PAGE>
<TABLE>
11. SHORT-TERM BANK BORROWINGS (Cont'd)
- ------------------------------
Supplemental information with respect to short-term bank borrowings for the
years ended December 31, 1996 and 1997 are as follows:
<CAPTION>
Maximum amount Average amount
Weighted average Weighted average
outstanding during outstanding during interest rate at interest rate
the year the year the end of year during the year
-------------------- -------------------- ------------------- --------------------
$'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%
==================== ==================== =================== ====================
Year ended
December 31, 1996
- ---------------------------------
Overdrafts 42 12 12.8% 12.1%
==================== ==================== =================== ====================
Short-term loans 560 353 10.5% 11.6%
==================== ==================== =================== ====================
Import trust receipts loans
305 197 10.0% 10.0%
==================== ==================== =================== ====================
</TABLE>
<TABLE>
12. CAPITAL LEASE OBLIGATIONS
- ------------------------------
Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments, are:
<CAPTION>
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Payable during the following period
- Within one year 299 830
- Over one year but not exceeding two years 211 195
- Over two years but not exceeding three years 50 91
--------------- ---------------
Total minimum lease payments 560 1,116
Less: Amount representing interest (57) (86)
--------------- ---------------
Present value of minimum lease payments 503 1,030
Less: Current portion (258) (764)
--------------- ---------------
Non-current portion 245 266
=============== ===============
</TABLE>
F-15
<PAGE>
<TABLE>
13. ACCRUED LIABILITIES
- ------------------------
Accrued liabilities comprised:
<CAPTION>
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Accruals for operating expenses
- Salaries, wages and bonus 360 575
- Subcontracting charges 230 463
- Rentals 39 41
- Others 214 120
Accruals for purchases of loose tools and consumables
64 269
Others 72 111
--------------- ---------------
979 1,579
=============== ===============
</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%.
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 it 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 exist, 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.
F-16
<PAGE>
<TABLE>
14. INCOME TAXES (Cont'd)
- -----------------------
Provision for income taxes for the years ended December 31, 1995, 1996 and 1997
represented provision for current Hong Kong profits tax. The reconciliation of
the United States federal income tax rate to the effective income tax rate based
on income (loss) before income taxes stated in the consolidated statements of
operations is as follows:
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
-------------------- ------------------- --------------------
<S> <C> <C> <C>
United States federal income tax rate 35.0% 35.0% 35.0%
Non-taxable income arising from activities which
qualified as offshore
21.9% (6.5%) (6.0%)
Non-taxable/non-deductible activities
(7.2%) (4.8%) (5.8%)
Tax losses not recognised (93.3%) 15.8% 7.7%
Effect of different tax rates in foreign jurisdictions
33.3% (23.6%) (20.1%)
-------------------- ------------------- --------------------
Effective income tax rate (10.3%) 15.9% 10.8%
==================== =================== ====================
</TABLE>
<TABLE>
Components of deferred tax assets (liabilities) as of December 31, 1996 and 1997
are as follows:
<CAPTION>
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
<S> <C> <C>
Cumulative tax losses 77 42
Accumulated differences between taxation allowance
and depreciation expenses of machinery and equipment
(76) (99)
--------------- ---------------
Deferred taxation 1 (57)
=============== ===============
</TABLE>
F-17
<PAGE>
15. 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, 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 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 shareholders of CML in connection with its acquisition of CML as described
in Note 1 to the accompanying financial statements. 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, 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 have been reflected
retroactively in the financial statements and all earnings per share
computations.
16. 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. Future minimum rental payments as of December 31, 1997,
under agreements classified as operating leases with non-cancellable terms, are
as follows:
1 9 9 7
---------------
$'000
Payable during the following period
- Within one year 563
- Over one year but not exceeding two years 487
- Over two years but not exceeding three years 427
- Over three years but not exceeding four years 448
- Over four years but not exceeding five years 390
- Thereafter 977
---------------
3,292
===============
F-18
<PAGE>
17. RETIREMENT PLAN
- --------------------
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
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 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 approximately $50,000.
The Group has no other post-retirement or post-employment benefit plans.
18. BANKING FACILITIES
- -----------------------
As of December 31, 1997, the Group had banking facilities of approximately
$1,421,000 for overdrafts, loans and trade financing. Unused facilities as of
the same date amounted to approximately $99,000. These facilities were secured
by the Group's bank deposits of approximately $72,000 as of December 31, 1997,
and personal guarantees provided by Mr. Sheck-pui Kwok and Mr. Carl Ka-wing
Tong.
F-19
<PAGE>
<TABLE>
19. RELATED PARTY TRANSACTIONS
- -------------------------------
a. The Group entered into the following transactions with related
companies:
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
-------------------- ------------------- --------------------
$'000 $'000 $'000
<S> <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
Rental expenses paid to Wellholding
Limited** - 59 -
==================== =================== ====================
</TABLE>
* Carl Tong & Associate Management Consultancy Limited is
beneficially owned by Mr.Carl Ka-wing Tong.
** Wellholding Limited is beneficially owned by Mr. Sheck-pui
Kwok.
b. Details of amounts due to directors of the Company as of December
31, 1996 and 1997 are as follows:
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
Mr. Sheck-pui Kwok 614 612
Mr. Carl Ka-wing Tong 265 249
--------------- ---------------
879 861
=============== ===============
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 as of December 31, 1996
and 1997 are as follows:
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
Queenex Enterprises Limited 41 -
=============== ===============
Queenex Enterprises Limited is a company in which Mr. 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
Queenex Enterprises Limited for approximately $1,000. The amount due
from the related company was unsecured, non-interest bearing and
without pre-determined repayment terms.
F-20
<PAGE>
19. RELATED PARTY TRANSACTIONS (Cont'd)
- -----------------------------
d. Details of amount due to parent company as of December 31, 1996 and
1997 are as follows:
1 9 9 6 1 9 9 7
--------------- ---------------
$'000 $'000
Acma Strategic Holdings Limited - 9
=============== ===============
The amount due to the parent company was unsecured, non-interest
bearing and without pre-determined repayment terms.
e. As of December 31, 1997, the Group's banking facilities were secured
by personal guarantees provided by Mr. Sheck-pui Kwok and Mr. Carl
Ka-wing Tong.
<TABLE>
20. SEGMENTAL ANALYSIS
- -----------------------
a. Net sales
---------
<CAPTION>
Net sales comprised:
1 9 9 5 1 9 9 6 1 9 9 7
-------------- -------------- ---------------
$'000 $'000 $'000
<S> <C> <C> <C>
Sales of merchandise 9,648 12,358 13,438
Sales of moulds 333 1,667 2,678
Others 1 29 95
-------------- -------------- ---------------
9,982 14,054 16,211
============== ============== ===============
</TABLE>
A substantial portion of Group's sales are made to the United States
of America.
b. Assets
------
Substantially all of the Group's assets are located in Hong Kong and
the PRC.
F-21
<PAGE>
20. SEGMENTAL ANALYSIS (Cont'd)
- -----------------------
<TABLE>
c. Major customers
---------------
Details of individual customers accounting for more than 5% of the
Group's sales are as follows:
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
-------------------- ------------------- --------------------
$'000 $'000 $'000
<S> <C> <C> <C>
MBI Inc. 80.8% 81.3% 63.2%
Mattel Vendor Operations Asia Ltd.
- - 14.6%
Tyco Hong Kong Limited - - 5.6%
Brookfield Collectors Guild - 7.4% 4.7%
==================== =================== ====================
</TABLE>
<TABLE>
d. Major suppliers
---------------
Details of individual suppliers accounting for more than 5% of the
Group's purchases are as follows:
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
-------------------- ------------------- --------------------
$'000 $'000 $'000
<S> <C> <C> <C>
Manfield Coatings Co., Ltd. 12.6% 8.1% 9.0%
Genesis Off-set Printing Co., Ltd.
- 5.4% 8.5%
Zinamet Co. Ltd. 8.7% 2.7% 6.9%
Lee Kee Metal Co. Ltd. - 0.7% 6.1%
Camelpaint Marketing Co., Ltd.
11.8% 10.0% 3.8%
Yee Fung Polyfoam Ltd. 5.7% 6.4% 2.7%
Hung Kee Rubberware Fty 5.3% - 2.6%
Shing Tung Transportation Company
- 5.6% -
Foundation Plastic Electroplating Co., Ltd.
9.4% - -
Paper-Maker Limited 6.2% - -
==================== =================== ====================
</TABLE>
F-22
<PAGE>
21. 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 as of December 31, 1996 and 1997
is as follows:
1 9 9 6 1 9 9 7
--------------- ---------------
Five largest accounts receivable 94.2% 92.1%
=============== ===============
The Group performs ongoing credit review 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-23
<PAGE>
22. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -----------------------------------------------------
a. In October 1997, CML acquired a 100% interest in Queenex Enterprises
Limited for a cash consideration of $1,000. Details of assets
acquired and liabilities assumed were as follows:
$'000
-----------
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
===========
b. Cash paid for interest and income taxes comprised:
1 9 9 5 1 9 9 6 1 9 9 7
-------------- -------------- --------------
$'000 $'000 $'000
Interest 88 140 216
============== ============== ==============
Income taxes 217 94 75
============== ============== ==============
c. Supplemental disclosure of investing activities:
During the years ended December 31, 1995, 1996 and 1997, 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.
F-24
<PAGE>
<TABLE>
23. OTHER SUPPLEMENTAL INFORMATION
- -----------------------------------
<CAPTION>
The following items were included in the consolidated statements of operations:
1 9 9 5 1 9 9 6 1 9 9 7
-------------- -------------- --------------
$'000 $'000 $'000
<S> <C> <C> <C>
Depreciation of machinery and equipment
- owned assets 242 275 122
- assets held under capital leases 78 173 347
Allowance for 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
- capital lease obligations 32 55 109
Operating lease rentals for rented premises
447 509 602
Repairs and maintenance expenses 157 251 266
Net foreign exchange loss 20 104 47
============== ============== ==============
</TABLE>
F-25
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective April 30, 1998, Greenberg & Company, LLC. ("Greenberg") resigned
as the principal 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, or was modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
with Greenberg on any matter of accounting principles, or financial statements
or auditing scope or procedure.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The members of the Board of Directors of the Company serve until the next
annual meeting of stockholders, or until their successors have been elected. The
officers serve at the pleasure of the Board of Directors. The directors and
executive officers of the Company are set forth in the table below.
NAME AGE POSITIONS WITH THE COMPANY
Carl Ka Wing Tong 48 President, Chief Executive Officer, Secretary and
Director
Leo Sheck Pui
Kwok 42 Chief Operating Officer and Director
Shing Kam Ming 37 Senior Vice-President and Chief Financial Officer
Chou Kong Sang 43 Director
Paul Mo 46 Senior Vice-President - Marketing Services
K.T. Yiu 43 Vice-President - Mould Engineering and Production
Denny Cheng 37 Vice-President - Customer Service and Engineering
Albert Chui 48 Assistant Vice President - Quality Assurance
John Wong 46 Assistant Vice President - Planning
Eva Au 35 Senior Manager - Procurement and Shipping
N.H. Cheung 56 Senior Manager - Human Resources and Training, China
Operations
The following is a brief summary of the background of each director,
executive officer and key employees of the Company:
CARL KA WING TONG - President, Chief Executive Officer, Secretary and Director.
Mr. Tong has been the President, Secretary and a Director of the Company since
December, 1997 and its Chief Executive Officer since January 15, 1998. Mr. Tong
co-founded Creative Master Limited, a Hong Kong corporation, in 1986 and has
managed its collectibles business since 1986. Mr. Tong is responsible for the
day-to-day operations of, and the long-term planning for the Company in the area
of strategic planning, marketing, financing and general operations. Mr. Tong was
Vice President of Citibank N.A.'s Institutional Bank with responsibilities for
their Specialized Finance Group from 1985 to 1987. Prior to joining Citibank,
Mr. Tong worked in the audit division of Arthur Andersen & Co. in London and
Hong Kong from 1976 to 1985, and qualified as a U.K. Chartered Accountant in
1981. Mr. Tong studied Accounting in the Polytechnic of Wales From 1975 to 1976.
In 1971, Mr. Tong qualified as an automobile engineer after servicing four years
apprenticeship with British Leyland Motors, Birmingham, UK. Mr. Tong received a
Diploma of Automobile Engineering from Bromsgrove College, U.K. in 1972. Since
1995, Mr. Tong has been the Managing Director of Acma Strategic Holdings Limited
(a Hong Kong investment company).
25
<PAGE>
LEO SHECK PUI KWOK, Chief Operating Officer and Director. Mr. Kwok has been the
Chief Operating Officer and a Director of the Company since December, 1997. Mr.
Kwok co-founded Creative Master Limited in 1986 and is responsible for
overseeing the engineering, product development and quality controls areas of
the Company. Prior to co-founding Creative Master Limited, Mr. Kwok worked for
the Hallmark Group in Asia from 1980 to 1987, where he was the Chief Merchandise
Manager from 1986 to 1987. During Mr. Kwok's tenure at Hallmark, he was
responsible for the set-up and management of its only Asia-based mold shop. Mr.
Kwok was the Quality Control and Quality Assurance Manager of Louis Marx Toys in
Hong Kong from 1976 to 1980. Mr. Kwok qualified as an Engineer with the Hong
Kong Polytechnic University in 1976 and received a High Certificate in
Management in 1980.
KAM MING SHING, Senior Vice-President, Chief Financial Officer. Mr. Shing has
been the Chief Financial Officer and of the Company since January 15, 1998. Mr.
Shing joined Creative Master Limited in June, 1993 as Manager - Finance and
Administration. Mr. Shing is also head of the Company's Electronic Data
Processing Steering Committee. Prior to joining the Company, Mr. Shing gained
extensive experience in management and cost accounting in the light
manufacturing industry.
CHOU KONG SANG, Director. Mr. Chou has been a director of the Company since
December 31,1997. Mr. Chou is an associate member of the Institute of Chartered
Accountants in England and Wales and a Certified Public Accountant of Singapore
since 1981. He has been with the Acma Limited, a company listed on the main
board of the Stock Exchange of Singapore since 1994. Acma Limited is the holding
company of Acma Strategic Holdings Limited, the majority shareholder of the
Company. He is the Finance Director of Acma Limited, and also on the board of
directors of Acma Strategic Holdings Limited. Prior to joining Acma Limited, he
was a senior manager with an international public accounting firm in Singapore.
PAUL MO, Senior Vice President - Marketing Services. Mr. Mo has served as the
Company's Senior Vice President - Marketing Services since August 1996. Mr. Mo
joined the Company as Director of Engineering in November, 1994 and helped to
set-up the Company's first Dongguan factory. Prior to joining the Company, Mr.
Mo had been in general management positions with various large Hong Kong toy
manufacturers. In particular, Mr. Mo has extensive experience in the planning,
start-up and management of production operations in foreign countries including
China, Thailand and Mexico. Mr. Mo qualified as an Engineer with the Hong Kong
Polytechnic University in 1976 and received a High Certificate in Plastics in
1980.
DENNY CHENG, Vice President - Customer Service and Engineering. Mr. Cheng served
as Vice President - Customer Service and Engineering since November 1996. Prior
to joining the Company, he held engineering and project management positions
with several large toy manufacturers in Hong Kong. Mr. Cheng obtained his Higher
Diploma in Production & Industrial Engineering in 1983 from the Hong Kong
Polytechnic and received B.A Honors Degree in Qualitative Analysis for Business
in 1993 from the City University of Hong Kong.
K.T. YIU, Vice President - Mold Engineering & Production. Mr. Yiu has served as
Vice President of Mold Engineering at Creative Master Limited since 1994 and is
responsible for the Company's mold operations at its Carison Limited subsidiary.
Prior to joining the Company, Mr. Yiu has acquired over 28 years of mold-making
experience, out of which 12 years was as an owner-operator of his own
mold-making business. Mr. Yiu has a 30% minority interest in Carison Limited.
ALBERT CHUI, Assistant Vice President - Quality Assurance. Mr. Chui has served
as Assistant Vice President - Quality Assurance & Training since December, 1994.
He is also the Chairman of the ISO9000 Steering Committee. Mr. Chui has over 20
years of experience in quality assurance and control with various international
toy companies including Matchbox and Kenner of USA and Aero Technology of
Canada. Mr. Chui received a degree in Mechanical Engineering from The Hong Kong
Polytechnic University in 1971.
JOHN WONG, Assistant Vice President - Planning. Mr. Wong has served as
Assistant Vice President - Planning since March, 1998. Prior to joining the
Company, he held production planning and project management positions with
several large toy manufacturers in Hong Kong including Marchon Toys and Thinkway
Toy of Canada. Mr. Wong graduated Textile Technology from The Hong Kong
Polytechnic University in 1978.
EVA AU, Senior Manager - Procurement & Shipping. Ms. Au served as Senior
Manager - Procurement and Shipping since January 1991. Ms. Au joined the Company
as Executive Assistant to Mr. Leo Kwok in 1986. Prior to joining the Company,
Ms. Au was employed by Hallmark Cards in Hong Kong.
26
<PAGE>
N.H. CHEUNG, Senior Manager - Human Resources and Training, China Operations.
Ms. Cheung, has served as Senior Manager - Personnel & Administration, China
Operations since 1997. Ms. Cheung joined the Company in October, 1996 as
Manager, Material Planning & Control and was promoted to her current position in
1997. Prior to joining the Company, Ms Cheung has over 18 years of experience in
customer service, engineering and production management in Chinese toy
factories. Ms Cheung graduated form the Changsha Railway College, Hunan, China
in 1964 and has worked with the China Railway Designing Institute from 1964 to
1980.
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company during the fiscal year ended
December 31, 1997 ("Fiscal 1997"), the fiscal year ended, 1996 ("Fiscal 1996")
and the fiscal year ended December 31, 1995 ("Fiscal 1995") by those persons who
served as Chief Executive Officer and any Named Executive Officer who received
compensation in excess of $100,000 during such years.
SUMMARY COMPENSATION TABLE (US$)
- --------------------------------------------------------------------------------
Name and Principal Year Annual Salary Awards(2)
Position (1)
---------------------------
Other
Bonus(3) Compensation(4)
- --------------------------------------------------------------------------------
Carl Ka Wing Tong, CEO, 1995 $0 (4)
President
- -------------------------------------------------------------------------------
1996 $0 (4)
- -------------------------------------------------------------------------------
1997 $0 (4)
- -------------------------------------------------------------------------------
Leo Sheck Pui Kwok, COO 1995 $0 (4)
- -------------------------------------------------------------------------------
1996 $34,000 (4)
- -------------------------------------------------------------------------------
1997 $11,000 (4)
- -------------------------------------------------------------------------------
- ------------------------------------
(1) No officers received or will receive any bonus or other annual
compensation other than salaries during fiscal 1997, other than stated
above. The table does not include any amounts for personal benefits
extended to officers of the Company, such as the cost of automobiles,
life insurance and supplemental medical insurance, because the specific
dollar amounts of such personal benefits cannot be ascertained.
Management believes that the value of non-cash benefits and compensation
distributed to executive officers of the Company individually or as a
group during fiscal year 1995 did not exceed the lesser of US$50,000 or
ten percent of such officers' individual cash compensation or, with
respect to the group, US$50,000 times the number of persons in the group
or ten percent of the group's aggregate cash compensation.
(2) No officers received or will receive any long term incentive plan (LTIP)
payouts or other payouts during fiscal year 1997.
(3) Bonus awarded based on performance.
(4) Messrs. Tong and Kwok received other compensation as beneficial owners
of their respective consulting companies. See "Certain Relationships and
Related Transactions".
Compensation of Directors
-------------------------
The Company reimburses each Director for reasonable expenses (such as
travel and out-of -pocket expenses) in attending meetings of the Board of
Directors. Directors are not separately compensated for their services as
Directors.
Employment and Related Agreements
- ---------------------------------
Messrs. Tong and Kwok do not currently have employment agreements with
the Company.
28
<PAGE>
Limitation of Liability of Directors
- ------------------------------------
The laws of the State of Delaware and the Company's By-laws provide for
indemnification of the Company's directors for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful.
The Company has been advised that in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, the stock ownership of
all persons known to own beneficially five percent or more of the Company's
Common Stock and all directors and officers of the Company, individually and as
a group. Each person has sole voting and investment power over the shares
indicated, except as noted.
AMOUNT OF
NAME AND BENEFICIAL PERCENT OF
ADDRESS OWNERSHIP(1) CLASS
-------- ------------ ----------
Carl Ka Wing Tong(2)(4) 344,195 6.88%
President, CEO, Secretary and Director
Chou Kong Seng(3) 0 0.0%
Director
Acma Strategic Holdings Limited (3) 2,450,876 49.02%
Acma Investments Pte., Ltd. (3) 951,697 19.03%
Leo Sheck Pui Kwok (2) 753,250 15.06%
COO and Director
Shing Kam Ming (2) 0 0.0%
Chief Financial Officer
- --------------------------------------------------------------------------------
All Directors and Officers
as a Group (4 persons) 1,097,445 21.94%
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed below, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage of
the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other
person.
(2) The address of this person is 8/F Casey Ind. Bldg., 18 Bedford Rd.,
Taikoktsui, Kowloon, Hong Kong.
(3) The address of this person is 17 Jurong Port Road , Singapore 619092
(4) Carl Ka Wing Tong is a 10% shareholder of Acma Strategic Holdings
Limited and as such has beneficial ownership of 10% of the Company's
shares owned by Acma Strategic Holdings Limited.
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Board of Directors of the Company is of the opinion that, even
though the transactions described below were not the result of arms'-length
negotiations, the terms of each of these transactions were at least as favorable
to the Company as could have been obtained from unaffiliated parties. All
ongoing and future transactions with affiliates will be on terms no less
favorable than those which could be obtained from unaffiliated parties.
The Company entered into the following transactions with related companies:
1995 1996 1997
------ ------ ------
$'000 $'000 $'000
Consultancy/management
fees paid to Carl Tong
& Associate Management
Consultancy Limited* 12 - -
Management fee paid to
Acma Strategic
Holdings Limited - 88 115
Rental expenses paid
to Wellholding
Limited** - 59 -
====== ====== ======
* 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.
Details of amounts due to Messrs. Tong and Kwok, respectively, as of December
31, 1996 and 1997 are as follows:
1996 1997
------ ------
$'000 $'000
Leo Sheck Pui Kwok 614 612
Carl Ka Wing Tong 265 249
------ ------
879 861
====== ======
The amounts due to directors are unsecured, non-interest bearing and
without pre-determined repayment terms.
Set forth below are amount due from a related company as of December 31, 1996
and 1997:
1996 1997
------ ------
$'000 $'000
Queenex Enterprises Limited 41 -
====== ======
Queenex Enterprises Limited is a company in which Mr. Kwok and Mr. Tong
are directors. During the year ended December 31, 1997, the Company
acquired 100% equity interest in Queenex Enterprises Limited for
approximately $1,000. The amount due from the related company was
unsecured, non-interest bearing and without pre-determined repayment
terms.
31
<PAGE>
Set forth is the amount due to the parent company as of December 31,
1996 and 1997:
1996 1997
------ ------
$'000 $'000
Acma Strategic Holdings Limited - 9
====== ======
The amount due to the parent company was unsecured, non-interest bearing
and without pre-determined repayment terms.
As of December 31, 1997, the Company's banking facilities were secured
by personal guarantees provided by Mr. Kwok and Mr. Tong.
32
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits of the Company are included
herein.
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession
2.1 Share Exchange Agreement, dated December 15, 1997, between
the Company and Creative Master Limited.(1)
3. Articles of Incorporation and Bylaws
3.1 Amendment to the Articles of Incorporation.(3) 3.2 Bylaws(2).
10. Material Contracts
10.1 Consultancy Agreement by and between Acma Strategic Holdings
Limited and Carl Tong & Associates Management Consultancy Limited
10.2 Consultancy Agreement by and between Acma Strategic Holdings
Limited and Creative Master Limited.
22. Subsidiaries of the Registrant(8)
(1) Filed with Current Report on Form 8-K, dated December 30, 1997, File
No. 033-14521-NY.
(2) Filed with the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
(3) Filed herewith.
(b) Reports on Form 8-K
-------------------
During the quarter ended March 31, 1998, the Company filed two reports on
Form 8-K, as follows: Form 8-K for the event dated December 30, 1997 with
respect to Items 1 and 2, and Form 8-K for the event dated December 31, 1997
with respect to Item 6.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on August 31, 1998.
CREATIVE MASTER INTERNATIONAL, INC.
By: /s/ Carl Ka Wing Tong
------------------------------------------
Carl Ka Wing Tong,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Carl Ka Wing Tong
- ------------------------ Chief Executive Officer, President Date: 8/31/98
Carl Ka Wing Tong (principal executive officer)
and Director
/s/ Shing Kam Ming
- ------------------------ Chief Financial Officer Date: 8/31/98
Shing Kam Ming (principal accounting and
financial officer )
/s/ Leo Sheck Pui Kwok
- ------------------------ Chief Operating Officer and Director Date: 8/31/98
Leo Sheck Pui Kwok
/s/ Chou Kong Seng
- ------------------------ Director Date: 8/31/98
Chou Kong Seng
34
<PAGE>
DATED the 19th Day of January 1996
ACMA STRATEGIC HOLDINGS LIMITED
(the "Company")
and
CARL TONG & ASSOCIATES MANAGEMENT
CONSULTANCY LIMITED
(the "Consultant")
CONSULTANCY AGREEMENT
Angela Wang & Co
15 A/B Entertainment Building
30 Queen's Road Central
Hong Kong
Tel: 2525 0500
Fax 2268 0702
Ref AW960090.com
<PAGE>
CONSULTANCY AGREEMENT
---------------------
Dated the 19th day of January 1996
PARTIES: -
1. ACMA STRATEGIC HOLDINGS LIMITED (the "Company") a company incorporated
with limited liability in Hong Kong whose registered office is at 15 A/B
Entertainment Building, 30 Queen's Road Central, Hong Kong.
2. CARL TONG & ASSOCIATES MANAGEMENT CONSULTANCY LIMITED (the "Consultant") a
company incorporated with limited liability in Hong Kong whose registered
office is at 123 Thomson Commercial Building, 4-10 Thomson Road, Wanchai,
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;
"CML" means Creative Master Limited ( ), a company
incorporated in Hong Kong having Companies
registration number 176189;
"Executive" means Tong Ka Wing, Carl of 65 Bisney Road, 3/F
Pokfulam, Hong Kong;
"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;
"Services" means the duties of the Managing Director as set
out in this Agreement;
"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 Consultant and the Consultant agrees to procure
that the Executive acts as Managing Director of the Company.
<PAGE>
2.2 The appointment shall commence on 1 February 1996 and shall continue
(subject to earlier termination as provided in this Agreement) for a
fixed period of one year from then provided that on each anniversary of
the commencement the appointment shall automatically be renewed until
terminated by either party giving to the other three months' notice in
writing.
2.3 The Consultant shall procure that the Services shall be performed
exclusively by the Executive.
3. DUTIES OF THE CONSULTANT
------------------------
3.1 The Consultant shall at all times during the period of this Agreement: -
3.1.1 provide the Services of the Executive tot he Company on an
exclusive basis unless otherwise agreed;
3.1.2 not without the prior written consent of the Board itself carry
out or permit the Executive to carry out any business activities
or provide any services similar to the Services for any company
other than the Company or any of its Subsidiaries or accept any
appointments for any other company, individual, partnership,
project or joint venture or state entity or governmental
organisation or any political appointments;
3.1.3 faithfully and diligently perform those Services and exercise such
powers consistent with them which are from time to time assigned
to or vested in it;
3.1.4 obey all lawful and reasonable directions of the Board;
3.1.5 use its best endeavours to promote the interests of the Company
and its Group companies;
3.1.6 keep the Board promptly and fully informed (in writing if so
requested) of its 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;
3.1.7 not at any time make any untrue or misleading statement relating
to the Company or any Group company.
3.2 The Consultant 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 Services on behalf of any Group company;
3.2.2 procure that the Executive shall 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 it on behalf
of the Company.
4. CONSULTANCY FEE
---------------
4.1 During its appointment the Company shall pay to the Consultant a
consultancy fee at the rate of
2
<PAGE>
HK$2,019,000 per annum (or such amount as may be agreed with the Company
from time to time) Subject to Clauses 4.2, 4.3 and 4.4 of this Agreement,
the consultancy fee 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.
4.2 In the event of the Company receiving any management fees in respect of
Services provided by the Consultant to companies or projects which the
Company acquires or participates in, the Company shall pay 20% of such
management fees to the Consultant.
4.3 If the Company invests in any company or project introduced by the
Consultant, the Company shall pay to the Consultant a finder's fee at
completion equal to 1% of the purchase consideration payable by the
Company and a further 1% of such purchase consideration one year after
completion provided that agreed project targets have been met during such
year.
4.4 In addition, the Company shall at the discretion of the Board pay to the
Consultant an annual performance fee of up to 2.5% of the net profits
after tax of CML and its Subsidiaries on a consolidated basis as
determined by the Board of CML and received from CML pursuant to the
Consultancy Agreement dated 19 January 1996 between CML and the Company.
5. EXPENSES
--------
The Company shall reimburse to the Consultant all travelling, hotel,
entertainment and other expenses reasonably incurred by it in the proper
performance of the Services 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.
6. TERMINATION OF AGREEMENT
------------------------
6.1 This Agreement shall automatically terminate: -
6.1.1 if the Executive becomes prohibited by law from being a director;
or
6.1.2 if the Executive resigns his office as director of the Company; or
6.1.3 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.
6.2 The Company may by notice terminated the Agreement with immediate effect
if the Bxecutive: -
6.2.1 commits any act of gross misconduct or repeats or continues (after
written warning) any other serious breach of his obligations under
this Agreement; or
6.2.2 is guilty of any conduct which in the opinion of the Board brings
him, the Company or any Group company into disrepute, or
6.2.3 is convicted of any criminal offence punishable with 6 months or
more imprisonment; or
3
<PAGE>
6.2.4 commits any act of dishonesty whether relating to the Company, any
Group company, any of its or their employees or otherwise; or
6.2.5 becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
6.2.6 is in the opinion of the Board incompetent in the performance of
his duties.
6.3 On the termination of this Agreement for whatever reason, the Consultant
shall at the request of the Company procure that the Executive shall
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.
7. GENERAL
-------
7.1 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.
7.2 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.
7.3 The validity construction and performance of this Agreement shall be
governed by Hong Kong law.
7.4 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.
7.5 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.
4
<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 )
<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 )
ACMA STRATEGIC HOLDINGS )
LIMITED in the presence of: - )
SIGNED BY TONG KA WING, CARL )
for and on behalf of CARL TONG & )
ASSOCIATES MANAGEMENT ) /s/ Carl Tong
CONSULTANCY LIMITED )
in the presence of:- )
5
<PAGE>
DATED the 19th Day of January 1996
----------------------------------
CREATIVE MASTER LIMITED
( )
("CML")
and
ACMA STRATEGIC HOLDINGS LIMITED
(the "Consultant")
-------------------------------------
CONSULTANCY AGREEMENT
-------------------------------------
Angela Wang & Co
15 A/B Entertainment Building
30 Queen's Road Central
Hong Kong
Tel: 2525 0500
Fax 2268 0702
Ref AW960090.com
<PAGE>
1.1 CML engages the Consultant to provide consultancy services to CML
relating to management of manufacturing facilities, production, design,
and personnel matters and the Consultant agrees to provide such services
upon the terms and conditions set out below.
1.2 The Consultant shall devote so much time and effort to providing its
services as it shall consider reasonably necessary.
1.3 The Consultant shall provide its services with reasonable skill and care
and to the best of its ability.
2. DURATION
--------
This Agreement shall commence on 1 February 1996 and shall continue until
terminated by either party giving to the other 3 months notice in
writing.
3. CONSULTANCY FEE
---------------
3.1 CML shall pay to the Consultant a consultancy fee of HK$819,000.00 per
annum plus, at the discretion of the Board of CML, a performance bonus of
up to 2.5% of the net profits after tax of CML and its subsidiaries on a
consolidated basis as determined by the Board of CML provided that the
amount of such bonus shall not exceed the highest bonus paid to any other
executive of CML at such times and in such installments as may be agreed
between CML and the Consultant.
3.2 The level of the consultancy fee shall be subject to annual review.
4. TERMINATION
-----------
Without limitation CML may by notice in writing immediately terminate
this Agreement if the Consultant shall:-
4.1 be in breach of any terms of this Agreement which is not remedied within
one month of receipt of a written notice specifying such breach and
requiring its remedy;
<PAGE>
4.2 be incompetent, guilty of gross misconduct and/or any serious or
persistent negligence in the provision of its services.
4.3 fail or refuse after receiving a written warning to provide the services
reasonably required hereunder.
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 ) /s/ Carl Tong
LIMITED in the presence of: - )
SIGNED BY )
for and on behalf of )
ACMA STRATEGIC HOLDINGS )
LIMITED )
in the presence of:- )
EXHIBIT 22
----------
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Creative Master Ltd, a Hong Kong corporation
Excel Master Limited, a Hong Kong corporation
Carison Limited, a Hong Kong corporation
Techtime Industries Limited, a Hong Kong corporation
Queenex Enterprises Limited, a Hong Kong corporation
Dongguan Chuangying Toys Factory Co., Ltd., a Chinese joint venture
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0
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