<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 33-18521-NY
CREATIVE MASTER INTERNATIONAL, INC.
------------------------------------------------------------
(Exact name of small business as specified in its charter)
Delaware 11-2854355
- --------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Casey Ind. Bldg., 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
-----------------------------------------------------
(Address of principal executive offices)
(852) 2396-0147
-----------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable dated : September 15, 1998, 4,999,746
shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income (unaudited) for
the three and six months ended June 30, 1997 and 1998 3
Consolidated Condensed Balance Sheets (unaudited) at
December 31, 1997 and June 30, 1998 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the six months ended June 30, 1997 and 1998 5
Notes to Consolidated Condensed Financial Statements
(unaudited) for the six months ended June 30, 1997 and
1998 6-22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 23-29
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 30
ITEM 2 - CHANGES IN SECURITIES 30
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 30
ITEM 5 - OTHER INFORMATION 30
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 30
2
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(Amounts in thousands, except number of shares and per share data )
<CAPTION>
Three months ended June 30 Six months ended June 30
1997 1998 1998 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ----------
HK$ HK$ US$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Net Sales 28,433 68,479 8,836 59,853 111,019 14,325
Cost of goods sold (22,809) (50,708) (6,543) (47,422) (79,500) (10,258)
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 5,634 17,771 2,293 12,431 31,519 4,067
Selling, general and
Administrative expenses (5,386) (8,843) (1,141) (9,277) (15,446) (1,993)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (248) 8,928 1,152 3,154 16,073 2,074
Interest Income (expenses), net (186) (388) (50) (388) (822) (106)
Other Income(expenses),net 78 271 35 (186) (372) (48)
Gain on dilution of equity
interest in subsidiary - - - - 597 77
Amortization of goodwill (78) (178) (23) (202) (356) (46)
---------- ---------- ---------- ---------- ---------- ----------
Income(loss)before incomes tax 62 8,633 1,114 2,378 15,120 1,951
Provision for income taxes (178) (1,000) (129) (434) (1,767) (228)
---------- ---------- ---------- ---------- ---------- ----------
Income(loss)before minority interest (116) 7,633 985 1,944 13,353 1,723
Minority interests 163 (1,418) (183) - (2,434) (314)
---------- ---------- ---------- ---------- ---------- ----------
Net income(loss) 47 6,215 802 1,944 10,919 1,409
========== ========== ========== ========== ========== ==========
Earnings per common share $ 0.001 $ 1.24 $ 0.16 $ .39 $ 2.18 $ 0.28
========== ========== ========== ========== ========== ==========
Weight average common
Shares outstanding 4,999,746 4,999,746 4,999,746 4,999,746 4,999,746 4,999,746
========== ========== ========== ========== ========== ==========
</TABLE>
Translations of amounts from Hong Kong Dollars (HK$)into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on June 30, 1998 of US$1.00=HK$7.75. No
representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars at that rate on June 30, 1997 or
at any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
income.
3
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
DECEMBER 31, 1997 and June 30, 1998
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
December 31, 1997 June 30, 1998
HK$ US$ HK$ US$
---------- ---------- ---------- ----------
ASSETS
- ------
<S> <C> <C> <C> <C>
Current assets
Cash and bank deposits 3,650 471 6,797 877
Accounts receivable, net 21,909 2,827 28,660 3,698
Deposits and prepayment 2,379 307 3,588 463
Inventories, net 22,692 2,928 26,404 3,407
---------- ---------- ---------- ----------
Total current assets 50,630 6,533 65,449 8,445
Machinery, equipment and capital leases 24,451 3,155 31,953 4,123
Goodwill 6,278 810 5,921 764
Long-term investment 8 1 8 1
Deferred taxation - - - -
---------- ---------- ---------- ----------
Total assets 81,367 10,499 103,331 13,333
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Short-term bank loans 9,998 1,290 10,664 1,376
Capital lease obligations, current portion 5,921 764 4,131 533
Accounts payable 14,787 1,908 20,840 2,689
Accrued expenses and other payables 12,237 1,579 17,949 2,316
Deposits from customers 4,340 560 - -
Due to directors 6,673 861 6,448 832
Due to parent company 70 9 62 8
Taxation payable 527 68 1,170 151
Dividend payable 2,503 323 2,503 323
---------- ---------- ---------- ----------
Total current liabilities 57,056 7,362 63,767 8,228
Capital lease obligations, non-current portion 2,062 266 3,705 478
Deferred Taxation 442 57 1,132 146
---------- ---------- ---------- ----------
Total liabilities 59,560 7,685 68,604 8,852
---------- ---------- ---------- ----------
Minority interests 581 75 2,565 331
---------- ---------- ---------- ----------
Shareholders'
equity:
Common stock, par value $0.0001;authorized -
60,000,000 shares; outstanding and fully
paid 4,999,746 shares 8 1 8 1
Additional paid-in capital 9,316 1,202 9,316 1,202
Retained earning 11,904 1,536 22,824 2,945
Cumulative translation adjustment 2 - 14 2
---------- ---------- ---------- ----------
Total shareholders' equity 21,226 2,739 32,162 4,150
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity 81,367 10,499 103,331 13,333
========== ========== ========== ==========
</TABLE>
Translations of amounts from Hong Kong Dollars (HK$)into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on June 30, 1998 of US$1.00=HK$7.75. No
representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars at that rate on June 30, 1997 or
at any other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(Amounts in thousands)
<CAPTION>
1997 1998 1998
---------- ---------- ----------
HK$ HK$ US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income
Income from continuing operations 1,944 10,919 1,409
Net loss (gain) on disposal of
Machinery and equipment 0 0 --
Minority interests 0 2,434 314
Depreciation and amortization 1,976 2,193 283
Amortization of goodwill 202 357 46
Deferred income taxes (295) 690 89
(Increase) decrease in assets :
Accounts receivable, net 527 (6,750) (871)
Deposits and prepayments (3,666) (1,209) (156)
Inventories, net (4,557) (3,712) (479)
Increase (decrease) in liabilities :
Accounts payable (1,341) 6,053 781
Deposits from customers 16 (4,340) (560)
Accrued expenses and other payables 1,356 5,712 737
Due to related company 0 (8) (1)
Taxation payable 496 643 83
---------- ---------- ----------
Net cash used in operating activities (3,342) 12,982 1,675
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (116) (6,177) (797)
Net cash outflow from acquisition of a
Subsidiary -- -- --
Decrease (increase) in due from a related
Company 318 -- --
Decrease (increase) in due from directors (310) -- --
---------- ---------- ----------
Net cash (used in) provided by investing activities (108) (6,177) (797)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts (186) 8 1
New short-term bank loans 5,603 14,996 1,935
Repayment of short-term bank loans (1,457) (15,097) (1,948)
Increase (Decrease) in import trust receipts
Bank loans 791 760 98
Repayment of capital element of capital
Lease obligations (1,759) (3,666) (473)
(Decrease) increase in due to directors (333) (225) (29)
Finance from minority interest of a subsidiary -- 8 1
Decrease in due to a related Company (651) 0 0
Dividends paid to minority interests of
Subsidiaries 0 (450) (58)
---------- ---------- ----------
Net cash provided by (used in) financing activities 2,008 (3,666) (473)
---------- ---------- ----------
Effect of cumulative translation adjustments 0 8 1
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (1,442) 3,147 406
Cash and cash equivalents, at beginning of period 3,371 3,650 471
---------- ---------- ----------
Cash and cash equivalents, at end of period 1,929 6,797 877
========== ========== ==========
</TABLE>
Translations of amounts from Hong Kong Dollars (HK$)into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on June 30, 1998 of US$1.00=HK$7.75. No
representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars at that rate on June 30, 1997 or
at any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
cash flows.
5
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
The accompanying notes are an integral part of these financial statements.
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. On March 2, 1998, the Company changed its
name from Davin Enterprises, Inc. to Creative Master International, Inc., its
current name.
Unless the context otherwise stated, as used herein, any reference to the
Company includes the Company's subsidiaries.
During the period from January 1, 1995 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 development and sales 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 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. The
Company, through its subsidiaries is principally engaged in the manufacturing of
premium collectible replica racing and classic cars for sale to customers in the
United States of America and Europe. The Company 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.
6
<PAGE>
The accompanying consolidated financial statements are unaudited but, in the
opinion of management of the Company, contain all adjustments necessary to
present fairly the financial position at June 30, 1998, the results of
operations for the six months ended June 30, 1997 and 1998, and the changes in
cash flows for the six months ended June 30, 1997 and 1998. These adjustments
are of normal recurring nature. The consolidated balance sheet as of December
31, 1997 is derived from the Company's audited financial statements. The
accompanying consolidated financial statements include the operations of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"), although
management of the Company believes that the disclosures contained in these
financial statements are adequate to make the information presented herein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's report on Form 10-KSB for
the fiscal year ended December 31, 1997, as filed with the SEC.
The results of operations for the three months and six months ended June 30,
1998 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1998.
7
<PAGE>
3. SUBSIDIARIES
<TABLE>
The Company's subsidiaries as of June 30, 1998 were as follows:
<CAPTION>
Percentage of
Place of equity interest
Name incorporation held Principal activities
- ------------------------------------- -------------------- -------------------- --------------------------
<S> <C> <C> <C>
Creative Master Limited Hong Kong 100% Manufacturing and
trading of collectible
replica products
Excel Master Limited Hong Kong 100% Trading of collectible
replica products
Mastercraft Engineering Limited Hong Kong 70% Manufacturing of moulds
(formerly Queenex Enterprises Note b
Limited)
Carison Engineering Limited Hong Kong 70% Manufacturing of moulds
(formerly Carison Limited) Note c
Techtime Industries Limited Hong Kong 55% Manufacturing of
collectible replica
products
Dongguan Chuangying Toys Factory The PRC Note a Manufacturing of
Co., Ltd. collectible replica
products
</TABLE>
Notes -
a. Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006. Under the
joint venture 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.
b. Effective from April 15, 1998, Queenex Enterprises Limited changed its name
to Mastercraft Engineering Limited ("MEL"), the present one. Prior to April 14,
1998, MEL was 100% owned by the Company. On April 14, 1998, MEL issued 9,000
shares of common stock of par value $0.129 each (equivalent of HK$1 each) to
three parties not involved in management of the Company at par and 11,000 shares
of common stock to the Group at par. As a result, the Company's equity interest
in MEL was diluted from 100% to 70%, and recognized a gain on dilution of
approximately $77,000.
c. Effective from May 20, 1998, Carison Limited changed its name to Carison
Engineering Limited, the present one.
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 Company's
share of net assets of subsidiaries acquired, is amortized on a
straight-line basis over ten years. The amortization recorded during
the year ended December 31, 1997 was approximately $62,000,and during
the six months ended June 30, 1997 and 1998 was approximately $26,000
and $46,000, respectively. Accumulated amortization as of December 31,
1997 and June 30, 1998 was approximately $139,000 and $185,000,
respectively. Management assesses the carrying amount and the remaining
life of the goodwill annually, taking into consideration current
operating results and future prospects of the subsidiaries.
c. Contractual joint venture
A contractual joint venture is an entity established between the
Company and one or more other parties, with the rights and obligations
of the joint venture partners governed by a contract. If the Company
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.
The Company 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 investments
Investments held for the long-term are stated at market value. Income
from investments is accounted for to the extent of dividends received
and receivable.
9
<PAGE>
g. Net sales
Net sales represent the invoiced value of merchandise/moulds supplied
to customers, net of sales returns and allowances. Sales are recognized
upon delivery of goods and passage of title to customers.
Deposits or advanced payments from customers prior to delivery of goods
and passage of title are recorded as deposits from customers.
h. Income taxes
The Company accounts for income tax under the provisions of Statement
of Financial Accounting Standards No. 109, which requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred income taxes are provided using the
liability method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax
and financial statement bases of assets and liabilities.
i. Operating leases
Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expense
on the straight-line basis over the period of the relevant leases.
j. Foreign currency translation
The translation of the financial statements of subsidiaries into United
States dollars is performed for balance sheet accounts using the
closing exchange rate in effect at the balance sheet dates and for
revenue and expense accounts using an average exchange rate during each
reporting period. The gains or losses resulting from translation are
included in shareholders' equity separately as cumulative translation
adjustments. Aggregate losses from foreign currency transactions
included in the results of operations for the year ended December 31,
1997 was $47,000, and for the six months ended June 30, 1997 and 1998
were approximately $22,000 and $33,000, 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/period by the weighted average number of
shares of common stock outstanding during the year/period, as if the
common stock issued for the acquisition of CML (see Note 1) and the
reverse stock splits (see Note 15) had been consummated prior to the
years/periods presented. The weighted average number of shares used to
compute earnings (loss) per common share is 4,999,746 for the six
months ended June 30, 1997 and the six months ended June 30, 1998
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.
10
<PAGE>
m. Fair value of financial instruments
The Company's financial instruments are carried at cost, which
approximate their fair values.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Trade receivables 2,966 3,837
Less: Allowance for doubtful accounts (139) (139)
----------------- ------------------
Accounts receivable, net 2,827 3,698
================= ==================
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Deposits for acquisition of moulds 149 220
Rental and utility deposits 69 26
Prepayments 83 141
Others 6 76
----------------- -----------------
307 463
================= =================
7. INVENTORIES
Inventories comprised:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Raw materials 1,358 1,661
Work-in-process 722 967
Finished goods 959 890
----------------- -----------------
3,039 3,518
Less: Allowance for slow-moving and
obsolete inventories (111) (111)
----------------- -----------------
Inventories, net 2,928 3,407
================= =================
11
<PAGE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases comprised:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Machinery and equipment:
Machinery and tools 769 1,288
Leasehold improvements 1,033 1,100
Furniture and office equipment 455 552
Motor vehicles 21 21
Capital leases:
Machinery and tools 2,412 2,980
Furniture and office equipment 14 14
----------------- -----------------
Cost 4,704 5,955
Less: Accumulated depreciation
Machinery and equipment (1,066) (1,224)
Capital leases (483) (608)
----------------- -----------------
Machinery, equipment and capital leases, net 3,155 4,123
================= =================
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 sales of communication systems. The carrying cost
of the long-term investment represented:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Long-term investment 685 685
Less: Write down of investment cost (684) (684)
----------------- -----------------
Long-term investment, net 1 1
================= =================
The carrying cost of the long-term investment approximated its market value.
10. GOODWILL
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Goodwill 949 949
Less: Accumulated amortization (139) (185)
----------------- -----------------
Goodwill, net 810 764
================= =================
12
<PAGE>
11. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Overdrafts - 1
Short-term loans 908 895
Import trust receipts bank loans 382 480
----------------- -----------------
1,290 1,376
================= =================
Short-term bank borrowings are denominated in Hong Kong dollars and bear
interest at the Hong Kong prime lending rate plus 1.5% to 4.3%, which ranged
from 11.0% to 13.8% per annum as of December 31, 1997; and at the Hong Kong
prime lending rate plus 1.5% to 4.3% or at the United States prime lending rate
plus 2.3%, which ranged from 10.8% to 14.5% per annum as of June 30, 1998. They
were collateralized by the Company's bank deposits of approximately $72,000 and
$452,000 as of December 31, 1997 and June 30, 1998, respectively; personal
guarantees provided by Mr. Sheck Pui Kwok and Mr. Carl Ka Wing Tong; mortgage
over real estate property owned by Mr. Carl Ka Wing Tong; corporate guarantee
provided by Acma Strategic Holdings Limited; and a standby letter of credit
issued by Acma Ltd. They were drawn for working capital purposes and are
renewable with the consent of the relevant banks.
Supplemental information with respect to short-term bank borrowings for the year
ended December 31, 1997 and six months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Maximum amount Average amount Weighted Weighted
outstanding outstanding average average
during the during the interest rate interest rate
year/period year/period at the end of during the
year/period year/period
------------------ ----------------- ----------------- -----------------
$'000 $'000
Year ended
December 31, 1997
- -----------------------------
<S> <C> <C> <C> <C>
Overdrafts 111 17 12.5% 12.1%
================== ================= ================= =================
Short-term loans 908 686 10.7% 10.1%
================== ================= ================= =================
Import trust receipts loans
448 291 12.5% 11.9%
================== ================= ================= =================
Six months ended
June 30, 1998
(unaudited)
- -----------------------------
Overdrafts 49 12 13.9% 14.1%
================== ================= ================= =================
Short-term loans 1,298 1,159 10.7% 10.8%
================== ================= ================= =================
Import trust receipts loans
480 351 10.7% 11.4%
================== ================= ================= =================
</TABLE>
13
<PAGE>
12. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments, are:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Payable during the following period
- Within one year 830 632
- Over one year but not exceeding two
years 195 331
- Over two years but not exceeding
three years 91 203
----------------- -----------------
Total minimum lease payments 1,116 1,166
Less: Amount representing interest (86) (155)
----------------- -----------------
Present value of minimum lease payments 1,030 1,011
Less: Current portion (764) (533)
----------------- -----------------
Non-current portion 266 478
================= =================
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
Year ended, Six Months ended,
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Accruals for operating expenses
- Salaries, wages and bonus 575 1,096
- Subcontracting charges 463 606
- Rentals 41 20
- Others 120 64
Accruals for purchases of loose tools and
consumables 269 409
Others 111 121
----------------- -----------------
1,579 2,316
================= =================
14
<PAGE>
14. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
The Company is subject to the United States federal tax at a rate of 35%. The
Hong Kong subsidiaries are subject to Hong Kong profits tax at a rate of 16.5%
for the year ended December 31, 1997 and for the six months ended June 30, 1997;
and at a rate of 16% for the six months ended June 30, 1998.
The contractual joint venture established in the PRC (Dongguan Chuangying Toys
Factory Co., Ltd.) is subject to PRC income taxes at a rate of 33% (30% state
income tax and 3% local income tax). However, the joint venture is exempted from
state income tax and local income tax for two years starting from the first year
of profitable operations and is subject to a 50% reduction in state income tax
for the next three years. The first profitable year of operations for Dongguan
Chuangying Toys Factory Co., Ltd. was the year ended December 31, 1997. If the
tax holiday had not existed, the Company's income tax expenses would have been
increased by approximately $8,000 for the year ended December 31, 1997, and
approximately $3,000 and $6,000 for the six months ended June 30, 1997 and 1998,
respectively.
14. INCOME TAXES (Cont'd)
Provision for income taxes comprised:
Year ended Six months ended
December 31, June 30,
------------------------------
1 9 9 7 1 9 9 7 1 9 9 8
-------------- -------------- --------------
(unaudited) (unaudited)
Current taxes
- Hong Kong Profits Tax 72 94 139
Deferred taxes 58 (38) 89
-------------- -------------- --------------
130 56 228
============== ============== ==============
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:
Year ended Six months ended
December 31, June 30,
------------------------------
1 9 9 7 1 9 9 7 1 9 9 8
-------------- -------------- --------------
(unaudited) (unaudited)
United States federal income
tax rate 35.0% 35.0% 35.0%
Non-taxable income arising
from activities which
qualified as offshore (6.0%) (41.5%) (13.7)%
Non-taxable/non-deductible
activities (5.8%) 5.8% 6.1%
Tax losses not recognised 7.7% 39.2% 4.9%
Effect of different tax
rates in foreign (20.1%) (20.3%) (20.6)%
jurisdictions
-------------- -------------- --------------
Effective income tax rate 10.8% 18.2% 11.7%
============== ============== ==============
Components of deferred tax assets (liabilities) as of December 31, 1997 and June
30, 1998 are as follows:
December 31, June 30,
1 9 9 7 1 9 9 8
----------------- -----------------
$'000 $'000
(unaudited)
Cumulative tax losses 42 42
Accumulated differences between taxation
allowance and depreciation expenses of
machinery and equipment (99) (188)
----------------- -----------------
Deferred taxation (57) (146)
================= =================
15
<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 in authorized share capital, resulting in 1,937,452 shares of
common stock, par value $0.0001 each, outstanding. Also, on May 29, 1996, the
authorized share capital of the Company was decreased from 250,000,000 shares of
common stock, par value $0.0001 each, to 50,000,000 shares of common stock, par
value $0.0001 each. On December 30, 1997, the Company 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 Company has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2006. Rental expenses for the year ended
December 31, 1997 was approximately $602,000, and for the six months ended June
30, 1997 and 1998 were approximately $[70,000] and $344,000, respectively.
Future minimum rental payments as of December 31, 1997 and June 30, 1998, under
agreements classified as operating leases with non-cancellable terms, are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 June 30,
1998
------------------ ------------------
$'000
(unaudited)
<S> <C> <C>
Payable during the following period
- Within one year 563 614
- Over one year but not exceeding two years 487 467
- Over two years but not exceeding three years 427 434
- Over three years but not exceeding four years
448 428
- Over four years but not exceeding five years 390 381
- Thereafter 977 787
------------------ ------------------
3,292 3,111
================== ==================
</TABLE>
16
<PAGE>
17. RETIREMENT PLAN
The Company's employees in the PRC are all hired on a contractual basis and
consequently the Company 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 Company's defined contribution pension fund managed by an
independent trustee. Both the Company 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 Company, and 100% of the
Company's employer contribution and the accrued interest thereon upon retirement
or leaving the Company 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 Company and the accrued interest thereon are
used to reduce future employer's contributions. The aggregate amount of the
Company's employer contributions (net of forfeited contributions) for the year
ended December 31, 1997 was $50,000, and for the six months ended June 30, 1997
and 1998 were approximately $24,000 and $27,000, respectively.
The Company has no other post-retirement or post-employment benefit plans.
18. BANKING FACILITIES
As of December 31, 1997 and June 30, 1998, the Company had banking facilities of
approximately $1,421,000 and $1,864,000, respectively, for overdrafts, loans and
trade financing. Unused facilities as of December 31, 1997 and June 30, 1998
amounted to approximately $99,000 and $489,000, respectively. These facilities
were secured by :
a Pledges over the Company's bank deposits of approximately $72,000 and
$452,000 as of December 31, 1997 and June 30, 1998, respectively;
b Personal guarantees provided by Mr. Sheck Pui Kwok and Mr. Carl Ka Wing
Tong;
c Mortgage over real estate property owned by Mr. Carl Ka Wing Tong;
d Corporate guarantee provided by Acma Strategic Holdings Limited; and
e A standby letter of credit issued by Acma Ltd. of approximately Nil and
$388,000 as of December 31, 1997 and June 30, 1998, respectively.
17
<PAGE>
19. RELATED PARTY TRANSACTIONS
a The Company entered into the following transactions with related
companies:
<TABLE>
<CAPTION>
Year ended Six months ended June 30,
December 31,
-------------------------------
1 9 9 7 1 9 9 7 1 9 9 8
------------- --------------- ---------------
$'000 $'000 $'000
(unaudited) (unaudited)
<S> <C> <C> <C>
Consultancy/management fees paid to Carl
Tong & Associate Management
Consultancy Limited*
- - -
Management fee paid to Acma Strategic
Holdings Limited 115 53 68
Rental expenses paid to Wellholding
Limited** - - -
Purchases of machinery and tools from
Faithera Engineering Limited ***
- - 362
============= =============== ===============
</TABLE>
* Carl Tong & Associate Management Consultancy Limited is
beneficially owned by Mr. Carl Ka Wing Tong.
** Wellholding Limited is beneficially owned by Mr. Sheck Pui
Kwok.
*** Faithera Engineering Limited is beneficially owned by certain
minority shareholders of Mastercraft Engineering Limited.
b. Details of amounts due to directors of the Company are as follows:
December 31, June 30,
1 9 9 7 1 9 9 8
-------------- --------------
$'000 $'000
(unaudited)
Mr. Sheck Pui Kwok 612 611
Mr. Carl Ka Wing Tong 249 221
-------------- --------------
861 832
============== ==============
The amounts due to directors are unsecured, non-interest bearing and
without pre-determined repayment terms.
c. Details of amount due from a related company are as follows:
December 31,
-------------------------- June 30,
1996 1997 1998
------------ ------------ ------------
$'000 $'000 $'000
(unaudited)
Mastercraft Engineering 41 - -
============ ============ ============
Mastercraft Engineering 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
Mastercraft Engineering Limited for approximately $1,000. The amount
due from the related company was unsecured, non-interest bearing and
without predetermined repayment terms.
d. Details of amount due to parent company are as follows:
December 31, June 30,
1 9 9 7 1 9 9 8
-------------- --------------
$'000 $'000
(unaudited)
Acma Strategic Holdings Limited 9 8
============== ==============
The amount due to the parent company was unsecured, non-interest
bearing and without pre-determined repayment terms.
e. As of December 31, 1997 and June 30, 1998, the Company's banking
facilities were secured by personal guarantees provided by Mr.
Sheck Pui Kwok and Mr. Carl Ka Wing Tong; mortgage over real estate
property owned by Mr. Carl Ka Wing Tong; corporate guarantee provided
by Acma Strategic Holdings Limited; and a standby letter of credit
issued by Acma Ltd. of approximately $388,000.
18
<PAGE>
20. SEGMENTAL ANALYSIS
a. Net sales
Net sales comprised:
Year ended Six months ended June 30,
December 31,
--------------------------
1 9 9 7 1 9 9 7 1 9 9 8
------------ ------------ -----------
$'000 $'000 $'000
(unaudited) (unaudited)
Sales of merchandise 13,438 6,779 11,327
Sales of moulds 2,678 932 2,973
Others 95 12 25
------------ ------------ -----------
16,211 7,723 14,325
============ ============ ===========
A substantial portion of Company's sales are made to customers in the
United States of America.
b. Assets
Substantially all of the Company's assets are located in Hong Kong and
the PRC.
c. Major customers
Details of individual customers accounting for more than 5% of the
Company's sales are as follows:
<TABLE>
<CAPTION>
Year ended Six months ended June 30,
December 31,
-------------------------------
1 9 9 7 1 9 9 7 1 9 9 8
------------ --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
MBI Inc. 63.2% 75.7% 32.9%
Mattel Vendor Operations Asia Ltd. 14.6% - 28.1%
Drumwell Limited 4.2% 1.3% 6.6%
Brookfield Collectors Guild 4.7% 4.7% 5.9%
Hallmark Cards (Hong Kong) Ltd. 0.2% 0.8% 5.4%
Tyco Hong Kong Limited 5.6% 13.0% -
============ =============== ===============
</TABLE>
d. Details of individual suppliers accounting for more than 5% of the
Company's purchases are as follows:
<TABLE>
<CAPTION>
Year ended Six months ended June 30,
December 31,
--------------------------------
1 9 9 7 1 9 9 7 1 9 9 8
--------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Manfield Coatings Co., Ltd. 9.0% 9.6% 11.8%
Genesis Off-set Printing Co., Ltd. 8.5% 7.3% 9.2%
Lee Kee Metal Co. Ltd. 6.1% 7.2% 7.7%
=============== ============== ===============
</TABLE>
19
<PAGE>
21. OPERATING RISKS
a. Country risk
The Company's operations are conducted in Hong Kong and the PRC.
Accordingly, the Company'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 Company's management does not believe that
the transfer of sovereignty over Hong Kong will have an adverse impact
on the Company's financial and operating environment. There can be no
assurance, however, that changes in political or other conditions will
not result in such an adverse impact.
The Company'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 Company'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 Company 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
Company.
c. Concentration of credit risk
Concentration of accounts receivable is as follows:
December 31, June 30,
1 9 9 7 1 9 9 8
-------------- --------------
$'000 $'000
(unaudited)
Five largest accounts receivable 92.1% 78.2%
============== ==============
The Company performs ongoing credit evaluation of each customer's
financial condition. It maintains reserves for potential credit losses
and such losses in aggregate have not exceeded management's
projections.
20
<PAGE>
22. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. In March 1996, CML acquired an additional 19% equity interest in
Carison Engineering Limited for cash consideration of approximately
$29,000. The increase in the Company's equity interest in Carison
Engineering Limited from 51% to 70%, resulted in goodwill of
approximately $139,000.
b. In October 1997, CML acquired a 100% interest in Mastercraft
Engineering Limited for a cash consideration of $1,000. Details of
assets acquired and liabilities assumed were as follows:
Year ended
December 31, 1997
-----------------
$'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
=================
c. Cash paid for interest and income taxes comprised:
Year ended Six months ended June 30,
December 31,
--------------------------
1 9 9 7 1 9 9 7 1 9 9 8
------------ ------------ -----------
$'000 $'000 $'000
(unaudited) (unaudited)
Interest 216 54 120
============ ============ ===========
Income taxes 75 75 -
============ ============ ===========
d. Supplemental disclosure of investing activities:
During the year ended December 31, 1997 and six months ended June 30,
1997 and 1998, the Company entered into capital lease arrangements to
purchase machinery and equipment with a capital value of approximately
$835,000 and approximately $407,000 and $454,000, respectively.
21
<PAGE>
23. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
Year ended Six months ended June 30,
December 31,
-------------------------------
1 9 9 7 1 9 9 7 1 9 9 8
------------- --------------- ---------------
$'000 $'000 $'000
(unaudited) (unaudited)
<S> <C> <C> <C>
Depreciation of machinery and equipment
- owned assets 122 104 160
- assets held under capital leases 347 151 123
Provision for/write-off of doubtful accounts
15 - -
Provision for slow-moving and obsolete inventories
84 - -
Write down of long-term investment - - -
Interest expenses for
- bank overdrafts and loans 107 11 76
- capital lease obligations 109 43 44
Operating lease rentals for rented premises 602 283 344
Repairs and maintenance expenses 266 145 179
Net foreign exchange loss 47 22 33
============= =============== ===============
</TABLE>
24. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130,"Reporting Comprehensive Income", which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. This
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but are excluded from net income. Adoption of this statement is not
expected to have an impact on the Company's current disclosures and
presentation.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. This statement requires that public companies report certain
information about their major customers, operating segments, products and
services, and the geographic areas in which they operate. Adoption of this
statement is not expected to have an impact on the Company's current disclosures
and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement
No.132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", which is effective for financial statements issued for fiscal years
beginning after December 15, 1997. This statement revises employers' disclosures
about pension and other postretirement benefit plans. Adoption of this statement
is not expected to have an impact on the Company's current operations.
22
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALITY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THE 1995 ACT SHAREHOLDERS AND
PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER
ANY FORWARD LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY
ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED HEREIN. THESE FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS. INCLUDING PLANS AND OBJECTIVES
RELATING TO THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY.
ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG
OTHER THINGS, FUTURE ECONOMIC, COMPLETITIVE AND MARKET CONDITIONS, FUTURE
BUSINESS DECISIONS, AND THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE
DEVELOPMENT PROJECTS, ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT
ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE
COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING
STATEMENTS CONTAINED HEREIN ARE REASONABLE. ANY OF THOSE ASSUMPTIONS COULD PROVE
INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS
CONTEMPLATED IN ANY OF THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN WILL BE
REALISED. BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENT, THE IMPACT OF
WHICH MAY CAUSE THE COMPANY TO ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR
OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN
LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD - LOOKING
STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE
REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
Overview of Company's Business:
- -------------------------------
The Company is one of the world's leading independent producers of
collectible quality, die-cast replicas of cars, trucks and other vehicles. The
Company produces premium die-cast collectibles only, which are distinguishable
from die-cast toys by their authentic design, exacting engineering and attention
to detail, including abundant use of renowned brand names, logos and other
licensed marks. The 1/24 and 1/12 scale die-cast products manufactured by the
Company may include as many as 450 parts, including numerous moveable parts, and
are marketed and distributed by the Company's customers primarily to collectors,
hobbyists and enthusiasts at retail prices ranging from $35 to $250 or more.
The Company's diverse customers, including Danbury Mint, a division of
MBI, Inc. ("MBI"), Paul's Model Art ("PMA"), a subsidiary of Action Performance
Companies, Inc. ("Action Performance"), Hallmark Cards, Corgi Classic Cars,
First Gear and Road Champ, are leading marketers of collectible vehicle replicas
and other collectibles in the U.S. and Europe. According to Unity Marketing, an
independent research firm, 1997 U.S. sales of collectibles totaled $9 billion,
while sales of die-cast vehicles alone were approximately $750 million, an
increase of 47% over U.S. die-cast vehicle sales in 1996.
The Company strives to deliver the highest level of product quality
and customer service in the manufacturing and production of die-cast
collectibles. The Company offers toy companies and other marketers and
distributors of die-cast collectibles "turnkey" product development and
manufacturing capabilities. The Company's vertically integrated process affords
complete sourcing of raw materials, engineering, assembly, quality control and
final packaging of die-cast products in commercial quantities. Depending on the
customer's needs, the Company offers each customer dedicated production floor
space, full production lines and, in some cases, a complete
"factory-within-a-factory," which allows close customer control and input and
enhanced production according to the customer's design and engineering
specifications. The Company believes that, while most die-cast toy factories can
produce limited amounts of collectible-quality items, the Company's
factory-within-a-factory approach optimizes the production of high-quality
collectibles in commercial quantities.
23
<PAGE>
Customer commitment is exemplified by customer prepayment for product
development and tooling, the Company's retention of valuable customer-owned
tooling. As a result of its customer-centric approach and its exclusive focus on
the high-end market for collectible replicas, Creative Master has achieved
year-to-date sales growth of 95% and believes it is positioned to become the
largest single supplier of die-cast collectible vehicle replicas to each of its
key customers. The long lead time in developing new products and related tools
and molds, combined with each customer's financial commitment at the beginning
of the tooling process, provides the Company with an indication of prospective
orders for six to nine months in advance.
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. 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"). The Company's organizational structure as of June 30, 1998 is set
forth below:
----------------------------------------------
CREATIVE MASTER INTERNATIONAL, INC.
(A Delaware Corporation)
----------------------------------------------
|
100%
- -------------------------------------------------------------------------------
CREATIVE MASTER LIMITED
(Hong Kong Corporation)
- -------------------------------------------------------------------------------
| | | | |
55% 70% 70% 100% 100%
| | | | |
- ----------------- -------------- ------------- ------------- ----------------
Techtime Mastercraft Carison Excel Dongguan
Industries Engineering Engineering Master Chuangying Toys
Limited Limited Limited Limited Factory Co., Ltd.
(Hong Kong (Hong Kong (Hong Kong (Hong Kong (PRC Joint
Corporation) Corporation) Corporation Corporation) Venture)
- ----------------- -------------- ------------- ------------- ----------------
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.
24
<PAGE>
Results of operation
Summary financial information
- -----------------------------
Six months ended
June 30
1997 1998
---------- ----------
US$'000 US$'000
Net Sales 7,723 14,325
Cost of goods sold (6,119) (10,258)
---------- ----------
Gross Profit 1,604 4,067
Selling, general and
Administrative expenses (1,197) (1,993)
---------- ----------
Operating income 407 2,074
Interest Income (expenses), net (50) (106)
Other Income(expenses),net (24) (48)
Gain on dilution of equity
interest in a subsidiary - 77
Amortization of goodwill (26) (46)
---------- ----------
Income(loss)before incomes tax 307 1,951
Provision for income taxes (56) (228)
---------- ----------
Income(loss)before minority interest 251 1,723
Minority interests - (314)
---------- ----------
Net income(loss) 251 1,409
========== ==========
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
- -------------------------------------------------------------------------
Net Sales. Company's net sales in the six months ended June 30, 1998
were $14,325,000, an increase of $6,602,000, or 85%, from $7,723,000 in the six
months ended June 30, 1997. Such increase reflected an increased demand for the
Company's products and was a direct result of the increase in production
capacity. The top five customers accounted for approximately $3,927,000 of the
increase.
Gross Profit. Company's gross profit totaled $4,067,000 in the six
months ended June 30, 1998, an increase of $2,463,000, or 154 %, from $1,604,000
in the six months ended June 30, 1998. Gross margin was 28% in the six months
ended June 30, 1998 and 21% in the six months ended June 30, 1997.
During the initial start-up phase of production associated with new orders or
manufacturing facilities, the Company experiences higher than average overhead
before production efficiencies are realized and the gross margin stabilizes in
the 21% to 30% range. In October, 1996, the Company completed the addition of
60,000 sq. ft. of manufacturing space to accommodate increased demand for its
die-cast products.
The gross margin increase in the six months ended June 30, 1998 reflected the
normalization of operations and improvement of overhead coverage compared with
the start-up situation of new clients and new manufacturing facilities started
during the six months ended June 30, 1997.
Selling, General and Administrative Expenses. Company's selling,
general and administrative expenses totaled $1,993,000 in the six months ended
June 30, 1998, an increase of $796,000, or 67%, from $1,197,000 in the six
months ended June 30, 1997. Selling, general and administrative expenses
decreased as a percentage of sales, constituting 14% of net sales in the six
months ended June 30, 1998 and 16% in the six months ended June 30, 1997.
Selling, general and administrative expenses increased due to an increase in
administrative and personnel costs required to support the increase in sales and
manufacturing capacity.
25
<PAGE>
Operating Income. Company's income from operations was $2,074,000 in
the six months ended June 30, 1998, an increase of $1,667,000, or 410%, from
$407,000 in the six months ended June 30, 1997. The increase is caused by the
normalization of the gross margin in 1998.
Interest Income (Expense), Net. Company's interest income (expense),
net was ($106,000) in the six months ended June 30, 1998 as compared to
($50,000) in six months ended June 30, 1997. The increase in interest expenses
was attributed to increased finance costs associated with working capital needs.
Other Income (Expense), Net. Company's other income (expense), net,
totaled ($48,000) in the six months ended June 30, 1998 as compared to ($24,000)
in the six months ended June 30, 1997.
Amortization of Goodwill. The amortization of goodwill for the Company
for the six months ended June 30, 1998 and six months ended June 30, 1997 was
$46,000 and $26,000, respectively. The increase in goodwill reflects the
amortization of goodwill associated with the acquisition of Mastercraft
Engineering Limited in October, 1997.
Provision For Income Taxes. The effective income tax rate for the
Company was 12% in the six months ended June 30, 1998 and 18% in the six months
ended June 30, 1997. The decrease in the Company's effective tax rate was
basically due to the net effect of (i) increase in tax losses contributed by
certain subsidiaries and; (ii) increase in Hong Kong subsidiary income earned
and taxed in the PRC.
Net Income. Based on the factors described above, Company's net income
was $1,409,000 in the six months ended June 30, 1998, an increase of $1,158,000,
or 461%, from $ 251,000 in the six months ended June 30, 1997. Net income as a
percentage of sales for Company for the six months ended June 30, 1998 and the
six months ended June 30, 1997 was 10% and 3%, respectively. The primary reason
for the net profit improvement is due to the improvement in gross margin
described in the Gross Profit paragraph above.
EBITDA. Company's EBITDA for the six months ended June 30, 1998 was
$2,386,000, as compared to $638,000 in the six months ended June 30, 1997. The
increase in EBITDA in the six months ended June 30, 1998 as compared to the six
months ended June 30, 1997 reflects an increase in sales volume of the Company's
products and production efficiencies achieved with additional manufacturing
capability.
26
<PAGE>
Results of operation
Summary financial information
- -----------------------------
Three months ended
June 30
1997 1998
---------- ----------
US$'000 US$'000
Net Sales 3,670 8,836
Cost of goods sold (2,943) (6,543)
---------- ----------
Gross Profit 727 2,293
Selling, general and
Administrative expenses (695) (1,141)
---------- ----------
Operating income 32 1,152
Interest Income (expenses), net (24) (50)
Other Income(expenses),net 10 35
Amortization of goodwill (10) (23)
---------- ----------
Income(loss)before incomes tax 8 1,114
Provision for income taxes (23) (129)
---------- ----------
Income(loss)before minority interest (15) 985
Minority interests 21 (183)
---------- ----------
Net income(loss) 6 802
========== ==========
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
- -----------------------------------------------------------------------------
Net Sales. Company's net sales in the three months ended June 30, 1998
were $8,836,000, an increase of $5,166,000, or 141%, from $3,670,000 in the
three months ended June 30, 1997. Such increase reflected an increased demand
for the Company's products and was a direct result of the increase in production
capacity.
Gross Profit. Company's gross profit totaled $2,293,000 in the three
months ended June 30, 1998, an increase of $1,566,000, or 216%, from $727,000 in
the three months ended June 30, 1998. Gross margin was 26% in the three months
ended June 30, 1998 and 20% in the three months ended June 30, 1997.
The gross margin increase in the three months ended June 30, 1998 reflected the
normalization of operations and improvement of overhead coverage compared with
the start-up situation of new clients and new manufacturing facilities started
during the three months ended June 30, 1997.
Selling, General and Administrative Expenses. Company's selling,
general and administrative expenses totaled $1,141,000 in the three months ended
June 30, 1998, an increase of $446,000, or 64%, from $695,000 in the three
months ended June 30, 1997. Selling, general and administrative expenses
decreased as a percentage of sales, constituting 13% of net sales in the three
months ended June 30, 1998 and 19% in the three months ended June 30, 1997.
Selling, general and administrative expenses increased due to additional
administrative and personnel costs required to support the increase in sales and
capacity.
Operating Income (Loss). Company's income from operations was
$1,152,000 in the three months ended June 30, 1998, an increase of $1,120,000,
or 35 times, from $32,000 in the three months ended June 30, 1997. The increase
in operating income was caused by the normalization of the gross margin in the
three months ended June 30, 1998.
27
<PAGE>
Interest Income (Expense), Net. Company's interest income (expense),
net was ($50,000) in the three months ended June 30, 1998 as compared to
($24,000) in the three months ended June 30, 1997. The increase in interest
expenses was attributed to the increased finance costs associated with working
capital needs.
Other Income (Expense), Net. Company's other income (expense), net,
totaled $35,000 in the three months ended June 30, 1998 as compared to a net
income of $10,000 in the three months ended June 30, 1997.
Amortization of Goodwill. The amortization of goodwill for Company for
the three months ended June 30, 1998 and the three months ended June 30, 1997
was $23,000 and $10,000, respectively.
Provision For Income Taxes. The effective income tax rate for the
Company was 12%, in the three months ended June 30, 1998 and 288% in the three
months ended June 30, 1997. The decrease in the Company's effective tax rate was
due to increased profit contributions from off-shore subsidiaries that had lower
effective income tax rates than other subsidiaries.
Net Income (Loss). Based on the factors described above, the Company's
net income was $802,000 in the three months ended June 30, 1998, an increase of
$796,000, or 134 times, from $6,000 in the three months ended June 30, 1997. Net
income as a percentage of sales for the Company for the three months ended June
30, 1998 and the three months ended June 30, 1997 was 11% and 0.0016%,
respectively. The primary reason for the net profit improvement is due to the
improvement in gross margin described in the "Gross Profits" paragraph above.
EBITDA. Company's EBITDA for the three months ended June 30, 1998 was
$1,432,000, as compared to $263,000 in the three months ended June 30, 1997. The
increase in EBITDA in the three months ended June 30, 1998 as compared to the
three months ended June 30, 1997 reflects an increase in demand for the
Company's products and production efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, the Company's operations provided cash
resources of $1,409,000. The Company's cash balance increase by $406,000 to
$877,000 at the June 30, 1998, was compared to $471,000 at December 31, 1997,
The net working capital surplus increased by $1,046,000 to $217,000 at June 30,
1998, as compared to ($829,000) at December 31, 1997, and the current ratio at
June 30, 1998 was 1.03, as compared to 0.89 at December 31, 1997. Accounts and
bills receivable increased by $871,000 or 31% to $3,698,000 at June 30, 1998, as
compared to $2,827,000 at December 31, 1997 as result of increased sales.
Consistent with practice in the die-cast collectibles industry, the Company
offers 30 to 60 days accounts receivable terms to its customers. This practice
has created working capital requirements that the Company generally has financed
with net cash balances, internally generated cash flow and loans. Creative
Master has not experienced any significant problems with collection of its
account receivable balances.
The Company's inventories increased by $479,000 or 16% to $3,407,000 at June 30,
1998, as compared to $2,928,000 at December 31, 1997 as a result of increase in
purchase of materials for sales increase.
The Company's accounts payable and accrued liabilities increased by $1,518,000
or 44% to $5,005,000 at June 30, 1998, as compared to $3,487,000 at December 31,
1997. The increase in accounts payable was mainly to the increase in purchase of
raw materials and packing materials for anticipated sales and the increase in
accrued liabilities was a result of production expansion.
For the six months ended June 30, 1998, additions to property, plant equipment
aggregated $1,251,000 as compared to $1,226,000 for the year ended December 31,
1997. The Company anticipates that additional expenditures in connection with
the continuing expansion and improvement of production facilities at the
Dongguan facility during the remainder of 1998 will be approximately $2,000,000,
a portion of which is expected to be funded by capital lease financing.
The Company anticipates that its operating cashflow, combined with cash on hand,
bank lines of credit and other external credit sources, and the line of and
other credit facilities provided by affiliates or related parties, adequate to
satisfy the Company's working capital requirements for the year ending of
December 31, 1998. In addition, any additional expansion of the Dongguan
facility, the development or acquisition of additional support facilities may
require the use of debt or equity by the Company.
28
<PAGE>
FOREIGN 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 (an official currency
of PRC). 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. 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$7.75 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 to abandon the link.
The PRC government sets the exchange rate between the Renminbi and all other
currencies. Over the last five years, the Renminbi has experienced significant
devaluation against most major currencies. If the value of the Renminbi or the
Hong Kong dollar decreases relative to the US Dollar, such fluctuations may have
a positive effect on the Company's results of 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.
INFLATION RISK. The annual inflation rate in Hong Kong was approximately 8.2%
and 6% in 1996 and 1997, respectively. The annual inflation rate in the PRC was
approximately 8.3% and 8% in 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.
YEAR 2000 ISSUE. 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.
29
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
During the quarter ended June 30, 1998, the Company filed one report
respect to Items 4 for the event dated April 30, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CREATIVE MASTER INTERNATIONAL INC.
(Registrant)
Date: /s/ Carl Tong
------------------------------
Carl Tong, President
Date: /s/ Shing Kam Ming
------------------------------
Shing Kam Ming, Chief Financial Officer
31
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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0
0
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