<PAGE>
------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K FOR REPORT DATED
DECEMBER 30, 1997
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
------------------------------
Creative Master International, Inc., formerly Davin Enterprises, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
33-18521-NY 11-2854355
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
Casey Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui, Kowloon, Hong Kong
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
461 Beach 124 Street, Belle Harbor , New York 11694
- --------------------------------------------------------------------------------
(Former name or former address) (Zip Code)
Registrant's telephone number, including area code: (852) 2396-0147
- --------------------------------------------------------------------
Page 1 of 3 pages
<PAGE>
The Registrant has previously filed its Current Report on Form 8-K,
dated December 30, 1997, without certain financial information required by Item
7 of such Form 8-K. The Registrant hereby amends the Current Report on Form 8-K
to file such financial information. Item 7, subparagraph (a) of the Report dated
December 30, 1997, is hereby amended to read as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
- ------- -------------------------------------------------------------------
(a) The Consolidated Financial Statements of Creative Master
International, Inc. and Subsidiaries as of December 31, 1995,
1996 and 1997.
(i) Creative Master International, Inc. and its Subsidiaries.
Report of Arthur Andersen & Co., Certified Public Accountants
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 (audited).
Consolidated Balance Sheets as of December 31, 1996 and 1997
(audited).
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 (audited).
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1996 and 1997 (audited).
Notes to Consolidated Financial Statements.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 1, 1998 CREATIVE MASTER INTERNATIONAL, INC.
By: /s/ Carl Ka Wing Tong
-------------------------------------
Carl Ka Wing Tong
Chief Executive Officer and President
3
<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.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
March 31, 1998
-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 12 258 764
portion
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 12 245 266
portion
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.
-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.
-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)
-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 - 25 (28)
overdrafts
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 238 34 (18)
directors
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.
-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 - - - - 1
adjustments
------------ ------------ ------------ ------------ ------------
Balance as of
December 31, 1995 5,000 1 1,202 57 7
Net income - - - 815 -
Translation - - - - (3)
adjustments
------------ ------------ ------------ ------------ ------------
Balance as of
December 31, 1996 5,000 1 1,202 872 4
Net income - - - 987 -
Dividends - - - (323) -
Translation - - - - (4)
adjustments
------------ ------------ ------------ ------------ ------------
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.
-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") was 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 an 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 selling 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 redominations 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 redenomination of par value as described in Note
15) in connection with the acquisition.
-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>
Percentage of
Place 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 The PRC Note a Manufacturing of
Factory Co., Ltd. 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.
-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 labor 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.
-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 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 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.
-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
redenomination 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.
-11-
<PAGE>
5. ACCOUNTS RECEIVABLE
- -----------------------
Accounts receivable comprised:
1996 1997
--------------- ---------------
$'000 $'000
Trade receivables 1,857 2,966
Less: Allowance for doubtful accounts (124) (139)
--------------- ---------------
Accounts receivable, net 1,733 2,827
=============== ===============
6. DEPOSITS AND PREPAYMENTS
- ----------------------------
Deposits and prepayments comprised:
1996 1997
--------------- ---------------
$'000 $'000
Deposits for acquisition of moulds 105 149
Rental and utility deposits 38 69
Prepayments 32 83
Others 29 6
--------------- ---------------
204 307
=============== ===============
7. INVENTORIES
- ---------------
Inventories comprised:
1996 1997
--------------- ---------------
$'000 $'000
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
=============== ===============
-12-
<PAGE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
- -------------------------------------------
Machinery, equipment and capital leases comprised:
1996 1997
--------------- ---------------
$'000 $'000
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
=============== ===============
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 development and selling of communication systems.
The carrying cost of the long-term investment represented:
1996 1997
--------------- ---------------
$'000 $'000
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.
-13-
<PAGE>
10. GOODWILL
- ------------
1996 1997
--------------- ---------------
$'000 $'000
Goodwill 472 949
Less: Accumulated amortization (77) (139)
--------------- ---------------
Goodwill, net 395 810
=============== ===============
11. SHORT-TERM BANK BORROWINGS
- -------------------------------
Short-term bank borrowings comprised:
1996 1997
--------------- ---------------
$'000 $'000
Overdrafts 25 -
Short-term loans 452 908
Import trust receipts loans 305 382
--------------- ---------------
782 1,290
=============== ===============
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.
-14-
<PAGE>
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:
<TABLE>
<CAPTION>
Maximum Average Weighted Weighted
amount amount average average
outstanding outstanding interest interest
during the during the rate at the rate during
year year end of year the year
-------------- -------------- -------------- --------------
$'000 $'000
<S> <C> <C> <C> <C>
Year ended
December 31, 1997
- ------------------------
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>
12. CAPITAL LEASE OBLIGATIONS
- ------------------------------
Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments, are:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
$'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>
-15-
<PAGE>
13. ACCRUED LIABILITIES
- ------------------------
<TABLE>
Accrued liabilities comprised:
<CAPTION>
1996 1997
--------------- ---------------
$'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.
-16-
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<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 recognized (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>
Components of deferred tax assets (liabilities) as of December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
$'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>
-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 250,000 shares of common stock, par value $0.0001
each, authorized, and 1,937,452 shares of common stock, par value $0.0001 each,
outstanding. Also, on May 29, 1996, the authorized share capital 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, a redenomination of par value and an increase in authorized share
capital, resulting in 60,000,000 shares of common stock, par value $0.0001 each,
authorized, and 4,999,746 shares of common stock, par value $0.0001 each,
outstanding.
The effects of the one-for-one hundred reverse stock split, and the one-for-ten
reverse stock split and the redenomination 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-cancelable terms, are
as follows:
1997
---------------
$'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
===============
-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.
-19-
<PAGE>
19. RELATED PARTY TRANSACTIONS
- -------------------------------
a. The Group entered into the following transactions with related companies:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
$'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:
1996 1997
--------------- ---------------
$'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.
-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:
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.
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.
20. SEGMENTAL ANALYSIS
- -----------------------
a. Net Sales
---------
Net sales comprised:
1995 1996 1997
-------------- -------------- --------------
$'000 $'000 $'000
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
============== ============== ==============
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.
-21-
<PAGE>
20. SEGMENTAL ANALYSIS (Cont'd)
- -----------------------
c. Major Customers
---------------
Details of individual customers accounting for more than 5% of the
Group's sales are as follows:
1995 1996 1997
-------------- -------------- --------------
$'000 $'000 $'000
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%
============= ============== ==============
d. Major Suppliers
---------------
Details of individual suppliers accounting for more than 5% of the
Group's purchases are as follows:
1995 1996 1997
-------------- -------------- --------------
$'000 $'000 $'000
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% - -
============== ============== ==============
-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:
1996 1997
--------------- ---------------
Five largest accounts receivable 94.2% 92.1%
=============== ===============
The Group 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.
-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:
1995 1996 1997
-------------- -------------- --------------
$'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.
-24-
<PAGE>
23. OTHER SUPPLEMENTAL INFORMATION
- -----------------------------------
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
$'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>
-25-
