<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1998
REGISTRATION NO. 333-65929
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CREATIVE MASTER INTERNATIONAL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(852) 2396-0147
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DELAWARE 3944 11-2854355
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
CARL KA WING TONG
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(852) 2396-0147
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
DALE E. SHORT, ESQ. MARK A. KLEIN, ESQ.
STEPHANIE GRANATO, ESQ. KATHERINE J. BLAIR, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION FRESHMAN, MARANTZ, ORLANSKI,
1801 CENTURY PARK EAST, 16TH FLOOR COOPER & KLEIN
LOS ANGELES, CALIFORNIA 90067 9100 WILSHIRE BLVD.
(310) 553-4441 EIGHTH FLOOR, EAST TOWER
FAX: (310) 201-4746 BEVERLY HILLS, CALIFORNIA 90212
(310) 273-1870
FAX: (310) 274-8293
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES OFFERING REGISTRATION
TO BE REGISTERED PRICE(1) FEE
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<S> <C> <C>
Common Stock, $.0001 par value ("Common Stock")(2)..................... $15,525,000
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Representative's Warrants(3)........................................... $ 150
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Common Stock issuable upon exercise of Representative's Warrants(4).... $ 1,620,000
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Total Registration Fee................................................. $17,145,150 $4,767(5)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes shares of common stock registered for the account of the
Registrant and shares of common stock which the Underwriters have the
option to purchase from a selling stockholder to cover over-allotments, if
any.
(3) To be issued to the Representative of the Underwriters.
(4) Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional indeterminate number of shares of
common stock as may become issuable by reason of stock splits, stock
dividends and similar anti-dilutive adjustments as set forth in the
Representative's Warrants.
(5) $4,871 was previously paid.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT YET COMPLETE, AND IT MAY +
+BE SUPPLEMENTED OR AMENDED IN THE FINAL VERSION. A REGISTRATION STATEMENT +
+RELATING TO THE SECURITIES DESCRIBED IN THIS PROSPECTUS HAS BEEN FILED WITH +
+THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SECURITIES, OR +
+ACCEPT OFFERS TO BUY THEM, UNTIL THE REGISTRATION STATEMENT BECOMES +
+EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE +
+ARE NOT SOLICITING OFFERS TO BUY THEM. THESE SECURITIES WILL NOT BE SOLD IN +
+ANY STATE WHERE THEIR OFFER OR SALE, OR SOLICITATIONS OF OFFERS TO BUY THEM, +
+WOULD BE UNLAWFUL PRIOR TO THEIR REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 25, 1998
PROSPECTUS
[LOGO OF CREATIVE MASTER
INTERNATIONAL, INC.]
1,500,000 SHARES OF COMMON STOCK
$ PER SHARE
----------------
Creative Master International, Inc. is a leading independent manufacturer of
collectible-quality, die-cast replicas of cars, trucks, buses and other items.
Our customers market and distribute the products we manufacture primarily to
collectors, hobbyists and other vehicle enthusiasts at retail prices ranging
from $20 to $200. We are offering 1,500,000 shares of common stock to raise
funds that will be used primarily to expand and improve our manufacturing
facilities in China.
Our common stock is listed on the OTC Electronic Bulletin Board under the
symbol "CVMI," but there is no active trading market for the common stock.
Before this offering we and Cruttenden Roth Incorporated will negotiate the
initial public offering price of the common stock. We currently estimate that
the initial public offering price for the common stock will range between $7.00
and $9.00 per share. We have applied to list the common stock on the Nasdaq
National Market under the proposed symbol "CMST."
Your investment in the common stock involves a high degree of risk. Before
investing in the common stock, you should consider carefully the risks
described under "Risk Factors" beginning on page 7.
<TABLE>
<CAPTION>
THE OFFERING PER SHARE TOTAL
------------ --------- -----
<S> <C> <C>
Public Offering Price.................
Underwriting Discounts and Commis-
sions................................
Proceeds to Creative Master...........
</TABLE>
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE COMMON STOCK OR DETERMINED THAT THIS
PROSPECTUS IS COMPLETE OR ACCURATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
One of our stockholders has granted the underwriters of this offering a 45-day
option to purchase an additional 225,000 shares of common stock to cover any
over-allotments. We will not receive any proceeds from the sale of common stock
by the selling stockholder in the event the over-allotment option is exercised.
----------------
CRUTTENDEN ROTH
INCORPORATED
----------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
INSIDE FRONT COVER
[Collage of magazine covers showing the Company's products.]
2
<PAGE>
GATE
[Foldout -- Replicas of classic cars.]
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and financial
statements appearing elsewhere in this prospectus. This summary is not complete
and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and financial statements.
CREATIVE MASTER INTERNATIONAL, INC.
<TABLE>
<S> <C>
Our Business............ We are a leading independent manufacturer of
collectible-quality die-cast replicas of cars, trucks
and buses and other items. We offer customers turnkey
product development and manufacturing capabilities.
When applied to a manufacturer, the term "turnkey"
means that the manufacturer assumes total
responsibility from design to completion of the
product. In our case, this includes complete sourcing
of raw materials, engineering, assembly, quality
control and final packaging of die-cast products in
commercial quantities.
Our Products ........... Die-cast collectibles are distinguishable from die-
cast toys by their authentic design, exacting
engineering and attention to detail, including
abundant use of identifiable brand names, logos and
other licensed marks. The die-cast replicas we
manufacture are 1/12th to 1/64th scale and include as
many as 450 parts, including numerous moveable parts.
They are marketed and distributed by our customers
primarily to collectors, hobbyists and other vehicle
enthusiasts at retail prices ranging from $20 to
$200.
Our Customers........... Our customers are leading U.S. and European marketers
and distributors of vehicle replicas and other
collectibles, including Danbury Mint, Mattel,
Hallmark Cards and Action Performance.
Our Industry............ According to Unity Marketing, an independent research
firm, U.S. consumer sales of die-cast collectibles
were approximately $753 million in 1997, which was
47% more than in 1996. The BIS Ltd., a European
market analysis company, estimates that the European
consumer retail market for die-cast collectibles was
approximately $200 million in 1997.
</TABLE>
3
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<TABLE>
<S> <C>
Our Strategy............ Our mission is to provide the highest level of
product quality and customer service among
independent manufacturers of collectible die-cast
replicas. Key elements of our strategy are to:
. Manufacture Collectible-Quality, Die-Cast Products.
. Carefully Manage Growth/Focus on Quality Customers.
. Increase the Diversity of Customers, Products and
Market Segments Served.
. Pursue Product Development Opportunities.
. Invest in Plant, Equipment and Employees.
Our Manufacturing
Operations.............. Our manufacturing operations are conducted through
Creative Master Limited, our wholly-owned Hong Kong
subsidiary, and its subsidiaries. Our production
facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles
northwest of Hong Kong.
Our Principal Offices... Our principal executive offices are located at Casey
Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui,
Kowloon, Hong Kong, and our telephone number is 852-
2396-0147. We are a Delaware corporation.
THE OFFERING
Shares Outstanding...... We have approximately 3,749,810 shares of common
stock outstanding.
Shares Offered.......... We are offering 1,500,000 shares of common stock, so
there will be a total of approximately 5,249,810
shares of common stock outstanding after this
offering. One of our stockholders has granted the
underwriters of this offering a 45-day option to
purchase 225,000 shares of common stock to cover
over-allotments.
Use of Proceeds......... We will use the net proceeds of this offering
primarily to expand and improve our Chinese
manufacturing facilities. See "Use of Proceeds" for a
more detailed and complete explanation. We will not
receive any proceeds from the sale of stock by the
selling stockholder if the over-allotment option is
exercised.
Proposed Trading
Symbol.................. We have applied to list the common stock on the
Nasdaq National Market under the proposed symbol
"CMST."
</TABLE>
4
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<TABLE>
<S> <C>
Financial Information
Presented in U.S.
Dollars................ All of our sales are denominated either in U.S.
dollars or Hong Kong dollars. Our expenses are
denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of
which is the yuan. All financial information in this
prospectus is presented in U.S. dollars.
Trademarks Not Owned by
Company................ This prospectus refers to certain trademarks or
servicemarks of other companies. We do not own or
have any rights to any of these marks.
Forward-Looking
Statements.............. This prospectus contains statements that we believe
are foward-looking statements within the meaning of
the federal securities laws. These include statements
about our expectations, beliefs, intentions or
strategies for the future, which we indicate by words
or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "the Company believes,"
"management believes" and similar language. The
forward-looking statements are based on our current
expectations and are subject to certain risks,
uncertainties and assumptions, including those set
forth in the risk factors and under "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Our actual
results may differ materially from results
anticipated in these forward-looking statements. We
base our forward-looking statements on information
currently available to us, and we assume no
obligation to update them.
</TABLE>
5
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The summary financial data set forth below have been derived from our audited
and unaudited financial statements included in this prospectus beginning on
page F-1. Since we had no outstanding stock options or convertible securities
during the periods shown, basic and diluted net income (loss) per common share
were the same for all periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Net sales.................. $ 9,982 $ 14,054 $ 16,211 $ 13,090 $ 24,129
Cost of goods sold......... 7,878 9,782 12,703 10,466 18,303
Gross profit............... 2,104 4,272 3,508 2,624 5,826
Selling, general and admin-
istrative expenses........ 2,394 2,552 1,921 1,964 3,070
Interest expense, net...... 88 140 104 84 191
Other expenses, net........ 96 567 137 231
Income (loss) before income
taxes and minority inter-
ests...................... (507) 969 1,000 689 2,803
Net income (loss).......... (559) 815 788 561 2,074
--------- --------- --------- --------- ---------
Net income (loss) per com-
mon share................. $ (0.16) $ 0.23 $ 0.22 $ 0.16 $ 0.55
========= ========= ========= ========= =========
Weighted average number of
common shares
outstanding............... 3,604,500 3,604,500 3,605,296 3,604,500 3,749,810
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, 1998
DECEMBER 31, ----------------------
1997 ACTUAL AS ADJUSTED(1)
------------ ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(2).............. $ 471 $ 889 $ 4,128
Working capital (deficit)................. (829) 238 4,933
Total assets.............................. 10,499 15,689 23,696
Long-term obligations--capital lease, non-
current portion.......................... 266 502 --
Stockholders' equity...................... 2,739 4,813 14,778
</TABLE>
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(1) As adjusted to reflect our sale of 1,500,000 shares of common stock at an
assumed initial public offering price of $8.00 per share and our
application of the estimated net proceeds. See "Use of Proceeds" for a more
detailed description of how we will use the net proceeds.
(2) Includes bank balances of approximately $72,000 at December 31, 1997 and
approximately $472,000 at September 30, 1998 that are pledged to secure our
bank credit facilities.
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. Before
deciding whether to invest, you should read and consider carefully the
following risk factors.
DEPENDENCE ON IMPORTANT CUSTOMERS
Our business is concentrated among a limited number of customers. In 1997,
sales to Danbury Mint, a subsidiary of MBI, accounted for approximately 64.2%
of our net sales and sales to Mattel Vendor Operations Ltd. and Tyco Hong Kong
Limited, subsidiaries of Mattel, totaled approximately 20.2% of net sales. In
1997, we sought to diversify our customer base and our efforts resulted in
several new customers in 1998, including Hallmark Cards. Despite our
diversification efforts, for the nine months ended September 30, 1998, sales to
Danbury Mint accounted for approximately 37.3% of our net sales and sales to
Mattel accounted for approximately 25.2% of our net sales. We expect that we
will continue to depend on sales to Danbury Mint and Mattel. If we lose any one
of our major customers, particularly Danbury Mint or Mattel, our business,
financial condition and results of operations would be materially adversely
affected.
CONDUCTING BUSINESS IN CHINA
Our manufacturing facilities are located in the Dongguan region of Guangdong
Province, China, approximately 60 miles northwest of Hong Kong. Therefore, we
are subject to certain inherent risks of doing business in China.
INTERNAL POLITICAL RISKS. Our manufacturing operations and assets in China are
subject to significant political and economic uncertainties. Changes in laws
and regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our business,
results of operations and financial condition. Under its current leadership,
the Chinese government has been pursuing economic reform policies that
encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
LOSS OF CHINESE FACILITIES. We conduct all of our manufacturing operations in
China through a Chinese limited liability company with a local Chinese partner.
The legal existence of this Chinese subsidiary expires in 2006, and we have no
assurance that it will be extended. If we cannot extend the legal existence, or
we were otherwise required to move our manufacturing operations outside of
China, our profitability, competitiveness and market position could be
materially adversely affected. Furthermore, there is no assurance that we could
continue our manufacturing operations.
FOREIGN CORRUPT PRACTICES ACT. We are subject to the U.S. Foreign Corrupt
Practices Act, which generally prohibits U.S. companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some that may
compete with us, are not subject to these prohibitions. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices are common in China. We
have attempted to implement
7
<PAGE>
safeguards to prevent losses from such practices and to discourage such
practices by our employees and agents. There is no assurance, however, that we
will not suffer such losses or that our employees or other agents will not
engage in such conduct for which we might be held responsible.
LACK OF REMEDIES AND IMPARTIALITY UNDER CHINESE LEGAL SYSTEM. Unlike the U.S.,
China has a civil law system based on written statutes in which judicial
decisions have little precedential value. The Chinese government has enacted
some laws and regulations dealing with matters such as corporate organization
and governance, foreign investment, commerce, taxation and trade. However,
their experience in implementing, interpreting and enforcing these laws and
regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. These matters may be subject to
the exercise of considerable discretion by agencies of the Chinese government,
and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination.
NON-RENEWAL OF BUSINESS LICENSES. Our activities in China require business
licenses. This requires a review and approval of our activities by various
national and local agencies of Chinese government. There can be no assurance
that the Chinese government will continue to approve of our activities or grant
or renew our licenses. Our inability to obtain needed approvals or licenses
would have a material adverse effect on our business, financial condition and
results of operations.
NEGATIVE EFFECTS OF TRADE DISPUTES BETWEEN THE U.S. AND CHINA. China currently
enjoys Most-Favored-Nation ("MFN") status from the U.S., under which the U.S
imposes the lowest applicable tariffs on Chinese exports to the U.S. The U.S.
annually reconsiders whether it should renew MFN trading status for China. In
the past, the U.S. has had disputes with China relating to trade and human
rights issues and has considered imposing trade sanctions against China,
including the non-renewal of MFN status. There can be no assurance that the
U.S. will renew the MFN status with China in future years or will not impose
trade sanctions against China that involve collectibles such as those we
manufacture. Either event would cause an increase in the cost of our products
to our customers. This, in turn, could result in lower demand for our
manufacturing services by our U.S. customers and materially adversely affect
our business, financial condition and results of operations.
NON-RENEWAL AND ENFORCEMENT OF LEASES OF CHINESE FACILITIES. We operate our
Chinese factories under tenancy agreements with local Chinese government
agencies that expire between May 1999 and June 2006. We also lease dormitory
facilities under similar tenancy agreements that expire between December 1998
and February 2000. The factories and dormitories that we are building will be
leased under similar agreements. The continuance and renewal of our tenancy
agreements and operations at our Chinese facilities depend on our relationship
with the local government. Our operations and prospects will be materially
adversely affected if the local government fails to honor the tenancy
agreements. We also may have difficulty enforcing our rights under the tenancy
agreements in China.
UNRECOVERABLE PROPERTY DAMAGE LOSSES. By U.S. standards, fire fighting,
disaster relief and assistance and other infrastructure is relatively
undeveloped in the Dongguan region of China, where our manufacturing facilities
are located. We currently maintain approximately $7,800,000 of property damage
insurance covering our manufacturing facilities. We have no business
interruption insurance. Material damage to, or the loss of, our manufacturing
facilities due to fire, severe weather, earthquake or other causes, even if
insured against, could have a material adverse effect on our
8
<PAGE>
business, financial condition and results of operations. Furthermore, we may
not be able to find suitable alternative facilities if any of our factories
were destroyed or become inoperable for any reason.
NEGATIVE CHANGES IN POLITICAL OR ECONOMIC CONDITIONS RESULTING FROM TRANSFER OF
SOVEREIGNTY OVER HONG KONG
We maintain headquarters in Hong Kong and conduct substantially all of our
administrative and sales operations there. The United Kingdom transferred
sovereignty over Hong Kong to China on July 1, 1997, and Hong Kong became a
Special Administrative Region of China. According to the Basic Law of Hong
Kong, Hong Kong will have a high degree of autonomy for 50 years, except as to
foreign affairs and defense. Given the lack of precedent for interpreting and
enforcing this new law, there is some uncertainty about its effect on our
business. There can be no assurance, that the political, economic or commercial
conditions in Hong Kong will remain stable or that the transfer of sovereignty
over Hong Kong will not have a material adverse effect on our business,
financial condition or results of operations.
INSTABILITY OF CUSTOMER BASE RESULTING FROM INDUSTRY CONSOLIDATION
The die-cast collectibles industry is fragmented and there appears to be a
trend toward consolidation among marketers and distributors of collectibles. In
the fourth quarter of 1997, Mattel acquired Tyco Hong Kong Limited, which
accounted for approximately 5.6% of our net sales in 1997. In 1998, Action
Performance Companies, Inc., a marketer and distributor of NASCAR die-cast
replicas and related products, acquired Brookfield Collectors Guild and a
controlling interest in Paul's Model Art, two of our customers. We believe that
both Mattel and Action Performance currently intend to continue the business
relationships we have developed with these customers. However, the change in
ownership of these customers may adversely affect our ongoing relationship with
them. Our loss of one or more important customers because of industry
consolidation would have a material adverse effect on our business, financial
condition and results of operations.
CONCENTRATION OF CREDIT RISK
Our five largest customers--Danbury Mint, Mattel (including Tyco), Brookfield
Collectors Guild, Corgi Classic Cars and Hallmark--accounted for approximately
78% of our accounts receivable at September 30, 1998. These same five customers
accounted for approximately 92% of our accounts receivable at December 31,
1997. Therefore, our working capital position, financial condition and results
of operations depend heavily on the creditworthiness of these customers. If one
or more of these customers does not pay us, our business, financial condition
and results of operations could be materially adversely affected.
DEPENDENCE ON INTRODUCTION OF NEW PRODUCTS BY CUSTOMERS; LACK OF MARKET
ACCEPTANCE
Our operating results and growth in net sales depend substantially upon our
customers' ability to develop and market new products and upon continuing
market acceptance of our customers' products. Our customers' failure or delay
in introducing new products could impair our results of operations and limit
our future growth. Changes in consumer tastes affect the market for die-cast
collectibles. Die-cast collectible products typically have limited life cycles
and our customers may discontinue them at any time. Accordingly, there can be
no assurance that our customers' products will achieve or maintain market
acceptance.
9
<PAGE>
INCREASED DIFFICULTIES IN COMPETING
We face significant competition from toy companies and other independent
manufacturers of die-cast products with manufacturing facilities located
primarily in China. There are no significant barriers to entering the die-cast
manufacturing business, and if the market for die-cast collectibles continues
to grow, we expect increased competition from other industry participants. Many
of our existing and potential competitors have significantly greater financial,
technical, manufacturing and marketing resources than we do. There can be no
assurance that we will be able to compete successfully.
LACK OF TRADE SECRET PROTECTION
Our executive officers and key employees are not subject to noncompetition
agreements or similar contractual obligations protecting the confidentiality of
our trade secrets or other information. Accordingly, we may not have adequate
protection in the event an officer or employee leaves our employ and goes into
competition with us.
LOSS OF CUSTOMERS RESULTING FROM CUSTOMER MANUFACTURING CAPABILITIES
Certain customers, including Mattel and Road Champ, manufacture and distribute
their own die-cast products in addition to marketing die-cast products that we
manufacture for them. Action Performance has a close business relationship with
a large, independent die-cast manufacturer that competes with us. There can be
no assurance that we will be able to continue our relationships with these
customers, or that other customers will not develop their own manufacturing
capabilities, thereby reducing or eliminating their need for our services. Such
events could have a material adverse effect on our business, financial
condition and results of operations.
OUR GROWTH MAY BE LIMITED BY CAPACITY AT PRODUCTION FACILITIES
Our ability to grow is a function of our manufacturing capacity. Our
manufacturing facilities are currently operating at or near capacity. We are in
the process of building two new factories, the first of which we expect to
become operational by the end of 1998. We intend to use a portion of the net
proceeds of this offering to pay for the cost of constructing and equipping
these new factories. We expect to continue to require additional manufacturing
capacity in the near future. If we were unable to increase capacity on a timely
basis and on commercially reasonable terms, our growth would be materially
adversely effected.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS
We use a variety of paints and oils in the manufacture and detailing of our
die-cast collectibles. We have established procedures for the proper storage,
use and disposal of such materials. To our knowledge, we have complied with all
environmental regulations applicable to our business. The failure to comply
with such regulations or to pass annual inspections at our facilities, however,
could materially adversely affect our business, results of operations and
financial condition.
CLOSING OF FACILITIES; FLUCTUATING RESULTS
In keeping with Chinese customs, each year we close our facilities for two
weeks during the month of January or February to celebrate the Chinese New Year
holidays. As a result, our production and net sales during the first quarter of
each year have historically been lower than in other quarters. We
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<PAGE>
expect this trend to continue in future years. The shutdown of our operations
for two weeks delays our responsiveness to customer orders and shipments in the
initial weeks of the year. The inability to meet certain time schedules, even
for short periods, could negatively impact our competitiveness for customer
business. The loss of customers for a single project increases the likelihood
of losing additional projects from such customers, which, if it occurred, could
have a material adverse affect on our business.
We experience quarterly fluctuation in our sales due to the timing of customer
orders and product shipments. In addition, we incur substantial tooling and
other costs relating to the manufacturing of new products from three to nine
months in advance of when we receive the first customer orders for new
products. This long lead-time can contribute to fluctuations in our quarterly
operating results.
FOREIGN CURRENCY EXCHANGE RATES
All of our sales are denominated either in U.S. dollars or Hong Kong dollars.
Our expenses are denominated primarily in Hong Kong dollars and renminbi, the
Chinese currency, the basic unit of which is the yuan. Since 1983, the Hong
Kong government has maintained a policy of linking the U.S. dollar and the Hong
Kong dollar at an exchange rate of approximately HK$7.80 to U.S.$1.00. There
can be no assurance that this link will be continued. In January 1994, the
Chinese government established its current floating exchange rate system, which
resulted in an approximately 35% devaluation of the renminbi against most major
currencies and the yuan-to-U.S. dollar exchange rate has largely stabilized
since that time. Any material increase in the value of the Hong Kong dollar or
yuan relative to the U.S. dollar would increase our expenses, and could have a
material adverse effect on our business, financial condition and results of
operations.
In 1997, China's finance minister stated that if China failed to achieve its
target 8% growth in 1998, this failure could affect the stability of the yuan
against other currencies. Estimates of China's growth for 1998 are now between
4% and 7%, and there can be no assurance that the yuan will not be devalued
against the U.S. dollar. A devaluation of the Hong Kong dollar or yuan relative
to the U.S. dollar would be likely to reduce our expenses. However, any
benefits we receive from a devaluation could be offset if the devaluation
results in inflation or political unrest. Furthermore, if our sales in Europe
increase, we may experience increased currency risk.
POTENTIAL SECONDARY EFFECTS OF MARKET DECLINE IN EAST ASIA
Several countries in East Asia, including Japan, South Korea, Thailand and
Indonesia, have experienced significant devaluations of their currencies and
declines in the value of their capital markets during the past twelve months.
In addition, these countries have experienced a number of bank failures and
consolidations. Hong Kong, where we conduct our sales and administrative
activities, is in a recession. Because virtually all of our products are sold
into the U.S. and Europe, which are not generally experiencing these declines,
we believe that the economic situation in East Asia will not materially affect
the demand for our products. Furthermore, because most of our products are, or
at our request may be, paid for in U.S. dollars, we believe that we are less
susceptible to the effects of a possible devaluation in the Hong Kong dollar or
the yuan. However, the decline in the currencies of East Asian countries may
render our products less competitive if
11
<PAGE>
competitors in East Asia are able to manufacture competing products at a lower
effective cost. There can be no assurance that our products will continue to be
competitive with the products of competitors from these countries. Currency
fluctuations or other effects of the economic downturn in East Asia also may
have a material adverse effect on our business, financial condition and results
of operations.
DETERMINATION OF INITIAL PUBLIC OFFERING PRICE; RISK OF STOCK PRICE VOLATILITY
Our common stock is quoted on the OTC Electronic Bulletin Board under the
symbol "CVMI," but there is no active trading market for our common stock. See
"Market Price for Common Stock and Dividend Policy" for a more detailed
explanation of the trading market of our common stock. The initial public
offering price for our common stock will be determined by negotiations with
Cruttenden Roth Incorporated. It will not necessarily bear any relationship to
prices of our common stock as quoted on the OTC Electronic Bulletin Board, our
book value or other established criteria of value. See "Underwriting" for a
more detailed explanation of how the offering price of the common stock will be
determined. In recent years and months, the stock market has experienced
significant price and volume fluctuations. These fluctuations, which are often
unrelated to the operating performances of specific companies, have had a
substantial effect on the market price of stocks, particularly stocks of
companies such as ours in the "small cap" category. It is also possible that
our operating results will not meet the expectations of our public market
analysts, which could have an adverse effect on the trading price of the common
stock. Accordingly, the market price of the common stock may fluctuate
substantially. There also is no assurance that the market price for the common
stock will ever exceed the initial public offering price.
ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK DUE TO SALE OF ADDITIONAL SHARES
There are approximately 3,749,810 shares of common stock outstanding before
this offering, of which approximately 3,375,012 shares were "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933.
All of these restricted shares of common stock will become eligible for resale
under Rule 144 commencing December 30, 1998. See "Shares Eligible for Future
Sale" for a more detailed description of the circumstances under which these
restricted shares may be sold. The holders of restricted shares and the holders
of an additional 229,488 outstanding shares have agreed not to sell any common
stock for six months following completion of this offering without the prior
written consent of Cruttenden Roth Incorporated. Sales of common stock in the
public market, or even the possibility of such sales, may adversely affect the
market price of the common stock.
DEPENDENCE ON CONTINUED SERVICES OF MESSRS. TONG AND KWOK.
Carl Ka Wing Tong and Leo Sheck Pui Kwok co-founded Creative Master Limited,
our wholly-owned Hong Kong subsidiary, in 1986 and have continuously served as
the Chief Executive Officer and Chief Operating Officer, respectively, since
that time. Accordingly, Messrs. Tong and Kwok have unique experience, knowledge
and expertise in the management and direction of the Company. Our success
depends to a significant extent upon the continued services of Messrs. Tong and
Kwok. If we lose the services of either of these executives, our business could
be materially adversely affected. We maintain "key person" life insurance of
approximately $2,000,000 on Mr. Tong and approximately $1,500,000 on Mr. Kwok.
However, there is no assurance that the proceeds of this insurance would be
sufficient to compensate us for their loss.
12
<PAGE>
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
Before this offering, our directors, executive officers and principal
stockholders beneficially owned approximately 90% of the outstanding shares of
our common stock. Following this offering, they will own approximately 64% of
our outstanding shares (or approximately 60% if the over-allotment option is
exercised in full). Therefore, these stockholders will have the ability to
control the election of our directors and most of our corporate actions.
IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the common stock. We
estimate this dilution to be approximately $5.33 per share, or approximately
67%, assuming an initial public offering price of $8.00 per share. See
"Dilution" for a description of how this dilution was calculated.
AUTHORIZED PREFERRED STOCK
Before this offering, we will amend and restate our Certificate of
Incorporation to authorize our Board of Directors to issue up to 5,000,000
shares of preferred stock. The restated certificate will also authorize our
board to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of
the holders of any preferred stock may adversely affect the rights of holders
of common stock. Our ability to issue preferred stock will give us flexibility
concerning possible acquisitions and financings, but it could make it more
difficult for a third party to acquire a majority of our outstanding voting
stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware
Anti-Takeover Law and Certain Charter Provisions" for a more detailed
description of provisions that could impede or prevent a change in our control
or management.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to Creative Master International, Inc. ("Creative Master" or
the "Company") from the sale of the 1,500,000 shares of common stock offered,
after deducting underwriting discounts and commissions, the Underwriters' non-
accountable expense allowance and other estimated offering expenses payable by
the Company, are estimated to be $9,965,000. This assumes an initial public
offering price of $8.00 per share. The Company will not receive any proceeds
from the sale of shares upon exercise of the over-allotment option, if it is
exercised. The Company expects to use the net proceeds of this offering as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Expansion and improvement of the Company's manufac-
turing facilities(1)............................... $4,900,000 49%
Payment of capital lease obligations(2)............. 958,000 10
Repayment of short-term bank debt(3)................ 1,000,000 10
Working capital and general corporate purposes(4)... 3,107,000 31
---------- ---
Total............................................. $9,965,000 100%
========== ===
</TABLE>
- --------
(1) Consists primarily of estimated costs of construction and build-out of the
Company's fifth factory and related dormitory facilities and estimated
capital expenditures for equipment, furniture and fixtures at the new
facilities. Also includes the $300,000 estimated cost of purchasing new
hand tools, jigs and fixtures. See "Business--Facilities and Planned
Expansion" for a description of our expansion plans.
(2) Represents the payment or prepayment of the Company's capital lease
obligations. See "Capitalization" and Note 12 of Notes to Consolidated
Financial Statements for more details regarding these obligations. The
Company does not expect to incur any significant premiums or penalties in
connection with such prepayments.
(3) Consists of debt incurred under the Company's credit facilities with its
bank lenders. See Note 11 of Notes to Consolidated Financial Statements for
additional information about the Company's credit facilities.
(4) Amounts expended for working capital and general corporate purposes may
include funding of research and development expenses as the Company expands
its product development efforts.
The Company has credit facilities from multiple lenders which aggregated
approximately $1,853,000 as of September 30, 1998. As of September 30, 1998,
the Company had an aggregate outstanding balance under the credit facilities of
$1,503,000. Borrowings under the facilities bear interest at rates ranging from
the Hong Kong "prime" lending rate, plus 1.5% to 4.3%, to the U.S. "prime"
lending rate, plus 2.3%. All of the Company's credit facilities may be
terminated by the respective lenders at any time. There are no regularly
scheduled repayments under the facilities, and the Company pays down the
facilities from time-to-time based upon its available cash and in consultation
with its lenders.
The Company secures its obligations under the credit facilities with its bank
deposits as well as personal guarantees by Messrs. Tong and Kwok, the corporate
guarantee of Acma Strategic Holdings Limited and a standby letter of credit
from its corporate parent, Acma Ltd., and a mortgage on certain property owned
by Mr. Tong. In addition, borrowings under certain of the facilities that are
used to finance the purchase of goods are secured by those goods. See "Certain
Transactions--Guarantees of Company Debt" and Note 19 to Notes of Consolidated
Financial Statements for more details regarding the guarantees and collateral
securing the Company's credit facilities.
The Company may use a portion of the proceeds allocated for working capital and
general corporate purposes to acquire compatible businesses or enter into
strategic alliances with other companies. Other than the planned expansion and
improvement of its Chinese manufacturing facilities and its
14
<PAGE>
recent product development arrangement with Alterscale, a company engaged in
the development of collectible marine replicas, the Company has no current
agreements, commitments or arrangements with respect to any proposed
acquisition, joint venture or strategic alliance, and there is no assurance
that any acquisitions, joint ventures or strategic alliances will be made in
the future.
Prior to their use, the Company will invest the net proceeds of this offering
in short-term, high-grade interest-bearing investments or accounts.
15
<PAGE>
MARKET PRICE FOR COMMON STOCK AND DIVIDEND POLICY
The Company's common stock is quoted on the OTC Electronic Bulletin Board under
the symbol "CVMI." Trading in the common stock has been limited and sporadic,
however, and there is no active trading market for the common stock. The
Company has applied to list the common stock on the Nasdaq National Market
under the proposed symbol "CMST."
As of November 24, 1998, there were approximately 1,200 record holders of the
common stock.
The Company has not paid any cash dividends on the common stock, and it
currently intends to retain any future earnings to fund the development and
growth of its business. The dividend payable reflected on the Company's
consolidated balance sheets included in this prospectus represent dividends
declared by Creative Master Limited, the Company's wholly-owned Hong Kong
subsidiary, prior to the exchange reorganization on December 30, 1997. For more
information about this exchange reorganization, see "Capitalization--Additional
Information About Financial Presentation." These dividends will be paid by the
Company in the future at the Company's discretion.
Dividends receive favorable tax treatment in Hong Kong and other non-U.S.
jurisdictions where the Company's principal stockholders reside, and the
Company may pay cash dividends in the future. Any future determination to pay
dividends will depend upon the Company's results of operations, financial
condition and capital requirements, applicable restrictions under any credit
facilities or other contractual arrangements and such other factors deemed
relevant by the Company's Board of Directors. The Company's existing bank
credit facilities restrict the payment of cash dividends.
16
<PAGE>
DILUTION
As of September 30, 1998, the net tangible book value of the Company was
approximately $4,073,000, or $1.09 per share of common stock. Net tangible book
value per share is determined by dividing the tangible net worth of the Company
(total assets, net of goodwill, less total liabilities) by the number of shares
of common stock outstanding. Without taking into account any change in the
Company's net tangible book value after September 30, 1998, assuming an initial
public offering price of $8.00 per share and after deducting underwriting
discounts and commissions, the underwriters' non-accountable expense allowance
and other estimated offering expenses, the pro forma net tangible book value of
the Company as of September 30, 1998 would have been approximately $14,038,000,
or $2.67 per share. This represents an immediate increase in the net tangible
book value of $1.58 per share to existing stockholders and an immediate
dilution of $5.33 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $8.00
Net tangible book value per share as of September 30, 1998.... $1.09
Increase per share attributable to this offering.............. $1.58
Pro forma net tangible book value per share after this
offering....................................................... $2.67
-----
Dilution to new investors....................................... $5.33
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30, 1998,
the number of shares of common stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors in this offering. The information in the
table assumes an initial public offering price of $8.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 3,749,810 71.4% $ 4,813,000 28.6% $1.28
New investors........... 1,500,000 28.6% $12,000,000 71.4% $8.00
--------- ----- ----------- -----
Total................. 5,249,810 100.0% $16,813,000 100.0%
========= ===== =========== =====
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of September 30, 1998, and as adjusted as of that date to give
effect to the Company's sale of 1,500,000 shares of common stock and its
application of the estimated net proceeds and after deducting the underwriting
discounts and estimated offering expenses payable by the Company. The
information in the table assumes an initial public offering price of $8.00 per
share. The information in the table should be read in conjunction with the more
detailed consolidated financial statements and notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
AS
ACTUAL ADJUSTED
-------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
SHORT-TERM DEBT:
Short-term bank borrowings................................ $ 1,503 $ 503
Capital lease obligations, current portion................ 456 --
-------- ---------
$ 1,959 $ 503
======== =========
LONG-TERM DEBT:
Capital lease obligations, non-current portion............ $ 502 $ --
Minority interests........................................ 387 387
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 25,000,000 shares autho-
rized, 3,749,810 shares issued and outstanding;
25,000,000 shares authorized, 5,249,810 shares issued and
outstanding.............................................. 1 1
Preferred stock, $.0001 per value, 5,000,000 shares
authorized, no shares issued and outstanding............. -- --
Additional paid-in capital................................ 1,401 11,366
Retained earnings......................................... 3,411 3,411
-------- ---------
Total stockholders' equity.............................. 4,813 14,778
-------- ---------
TOTAL CAPITALIZATION........................................ $ 5,702 $ 15,165
======== =========
</TABLE>
ADDITIONAL INFORMATION ABOUT FINANCIAL PRESENTATION
EXCHANGE REORGANIZATION The Company acquired all of the capital stock of
Creative Master Limited on December 30, 1997 in exchange for the issuance of
3,604,500 shares of its common stock to the shareholders of Creative Master
Limited. The acquisition has been treated as a reverse acquisition, since
Creative Master Limited is the continuing entity. On this basis, the Company's
historical financial statements prior to December 30, 1997 represent the
consolidated financial statements of Creative Master Limited. See Note 2 of
Notes to Consolidated Financial Statements for more information about the
exchange reorganization.
18
<PAGE>
REVERSE STOCK SPLITS The Company effected a 1-for-100 reverse stock split in
May 1996 and a 1-for-10 reverse stock split in March 1998. Prior to completion
of this offering, the Company will effect a 3-for-4 reverse stock split. All
share information in this prospectus gives retroactive effect to these reverse
stock splits.
OPTIONS AND WARRANTS Unless this prospectus indicates otherwise, all
information presented in this prospectus assumes no exercise of the
Underwriters' over-allotment option or the warrants to purchase 150,000 shares
of common stock to be issued by the Company to Cruttenden Roth Incorporated, as
more fully described under "Underwriting," or options outstanding or available
for grant under the Company's 1998 Stock Option Plan. See "Management--
Compensation Pursuant to Plans" for a more detailed description of the option
plan.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 1995, 1996 and 1997, and the following selected consolidated
balance sheet data as of December 31, 1995, 1996 and 1997 are derived from the
audited consolidated financial statements of the Company included elsewhere in
this prospectus that have been audited by Arthur Andersen & Co. The following
selected consolidated statement of operations data for the nine-month periods
ended September 30, 1997 and 1998, and the following selected balance sheet
data as of September 30, 1998 are derived from the unaudited consolidated
financial statements of the Company that, in the opinion of management, contain
all adjustments necessary for a fair presentation of such data. The following
selected consolidated financial data have been prepared in accordance with U.S.
generally accepted accounting principles. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto appearing elsewhere in the prospectus. The
selected interim consolidated financial data presented below do not necessarily
indicate the operating results or performance of the Company for the full year.
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 9,982 $ 14,054 $ 16,211 $ 13,090 $ 24,129
Costs of goods sold..... 7,878 9,782 12,703 10,466 18,303
---------- ---------- ---------- ---------- ----------
Gross profit............ 2,104 4,272 3,508 2,624 5,826
Selling, general and ad-
ministrative
expenses............... 2,394 2,552 1,921 1,964 3,070
Interest income......... -- -- 112 108 17
Interest expense........ 88 140 216 192 208
Other income, net....... 96 567 137 150 231
Gain on dilution of
equity interest in a
subsidiary............. -- -- -- -- 77
Reorganization ex-
pense(1)............... -- -- 284 -- --
Amortization of good-
will................... 33 44 62 37 70
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
minority interests..... (507) 969 1,000 689 2,803
Provision for income
taxes.................. 52 154 130 128 359
---------- ---------- ---------- ---------- ----------
Income (loss) before mi-
nority interests....... (559) 815 870 561 2,444
Minority interests(2)... -- -- 82 -- 370
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (559) $ 815 $ 788 $ 561 $ 2,074
========== ========== ========== ========== ==========
Net income (loss) per
common share(3)........ $ (0.16) $ 0.23 $ 0.22 $ 0.16 $ 0.55
========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding(3)......... 3,604,500 3,604,500 3,605,296 3,604,500 3,749,810
========== ========== ========== ========== ==========
</TABLE>
- --------
(1) Represents the value of 229,488 shares of common stock transferred by
Messrs. Tong and Kwok and Acma Strategic Holdings Limited to a consultant
to the Company and other professional fees incurred by the Company for
services rendered in connection with the exchange reorganization completed
on December 30, 1997. For a further description, see Note 15 of Notes to
Consolidated Financial Statements.
(2) Represents results of operations of certain of the Company's subsidiaries
attributable to minority interests in the subsidiaries.
(3) During the periods shown, the Company had no outstanding stock options or
convertible securities, and basic and diluted net income (loss) per common
share were the same.
20
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997 1998
------- ------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4).......... $ 126 $ 435 $ 471 $ 889
Working capital (deficit)............. (1,064) (471) (829) 238
Total assets.......................... 4,287 6,752 10,499 15,689
Capital lease obligations, non-current
portion(5)........................... 186 245 266 502
Stockholders' equity.................. 1,265 2,079 2,739 4,813
</TABLE>
- --------
(4) Includes bank balances of approximately $72,000 at December 31, 1997 and
approximately $472,000 at September 30, 1998 that the Company has pledged
to secure its obligations under its bank credit facilities.
(5) Except for capital lease obligations, the Company had no long-term
obligations as of the dates shown.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this prospectus that are not purely historical
statements that the Company believes to be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about the Company's expectations, beliefs, intentions or strategies
for the future, which are indicated by words or phrases such as "anticipate,"
"expect," "intend," "plan," "will," "the Company believes," "management
believes" and similar words or phrases. The forward-looking statements are
based on the Company's current expectations and are subject to certain risks,
uncertainties and assumptions, including factors set forth in the following
discussion and in the discussions under "Risk Factors" and "Business." The
Company's actual results could differ materially from results anticipated in
these forward-looking statements. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements.
OVERVIEW
The Company is a leading independent manufacturer of collectible-quality, die-
cast replicas of cars, trucks, buses and other items. All of the Company's
business and operations are conducted through Creative Master Limited, its
wholly-owned Hong Kong subsidiary ("CML"), and CML's subsidiaries. CML was co-
founded in 1986 by Carl Ka Wing Tong and Leo Sheck Pui Kwok to produce die-cast
replicas of cars and other vehicles primarily for the collectibles industry. On
December 30, 1997, CML completed an exchange reorganization with Davin
Enterprises, Inc., a public company that was incorporated in Delaware in April
1987. In March 1998, Davin Enterprises, Inc. changed its name to Creative
Master International, Inc.
Through the exchange reorganization, the Company acquired all of the
outstanding capital stock of CML from Messrs. Tong and Kwok and Acma Strategic
Holdings Limited in exchange for the Company's issuance to them of 3,604,500
shares of common stock, representing approximately 96% of the Company's
outstanding stock. Davin Enterprises, Inc. had no significant assets,
liabilities, business or operations prior to the exchange reorganization. The
acquisition of CML by the Company on December 30, 1997 has been treated as a
reverse acquisition since CML is the continuing entity as a result of the
exchange reorganization. On this basis, the historical financial statements
prior to December 30, 1997 represent the consolidated financial statements of
CML. See Note 2 of Notes to Consolidated Financial Statements.
The Company's manufacturing facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles northwest of Hong Kong. In
March 1987, the Company built its first tooling and manufacturing factory in
Guangzhou, China. The Company moved the factory to Dongguan in 1995, and in May
1996, the Company completed its second factory in Dongguan. In September 1996,
the Company built its third factory. An expansion of the third factory was
completed in November 1998. In July 1997, the Company established a model-
making division that is currently located in the Company's third factory. The
Company is in the process of building a fourth factory at the Dongguan site to
house this model-making division. Construction of this fourth
22
<PAGE>
factory is completed, and it is being fitted out with fixtures and equipment.
It will be operational by the end of 1998. This fourth factory contains
approximately 40,000 square feet of production area which will be dedicated
solely to model making and tool making and will accommodate up to 200
technicians. The Company is also building a fifth factory and related dormitory
facilities with approximately 120,000 square feet of manufacturing space and
accommodating up to 1,000 workers. Construction of this fifth factory began in
July 1998 and is expected to be completed in January 1999. The first phase of
this fifth factory is expected to be operational in March 1999. A portion of
the net proceeds of this offering will be used to pay the cost of constructing
and equipping these new factories. All the Company's factories are located
within a one-mile radius of each other. See "Business--Facilities and Planned
Expansion" for more information about the Company's expansion plans.
The Company's manufacturing operations in China are conducted through a Chinese
limited liability company established in October 1994 between CML and a local
Chinese partner. The Chinese subsidiary has a three-member board of directors,
two of whom are appointed by the Company and one of whom is appointed by CML's
local Chinese partner. Under the terms of the arrangement with the local
Chinese partner, the local Chinese partner is not entitled to any profits or
responsible for any losses from the subsidiary. Because of this profit-sharing
arrangement, the subsidiary is regarded for accounting purposes as if it were
wholly-owned by the Company.
Historically, the Company has paid no taxes in China. Under Chinese law, the
Company's operations in China are exempted from China state and local income
tax for a two-year period starting from the first year that the Company's
Chinese operations are profitable. Following the initial two-year tax
exemption, the Company will receive a 50% reduction in its Chinese state income
taxes for the next three years. The Company will become subject to taxation in
China beginning January 1, 1999. The Company is subject to tax in Hong Kong at
the statutory rate of 16% to 16.5%. However, under current interpretations of
Hong Kong tax law, a Hong Kong company which derives revenues exclusively from
manufacturing operations in China recognizes only 50% of its gross profit as
taxable income in Hong Kong.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ -----------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 79 70 78 80 76
Gross profit............ 21 30 22 20 24
Selling, general and
administrative
expenses............... 24 18 12 15 13
Interest expense, net... 1 1 1 1 1
Other expenses, net..... 1 4 1 1 1
Income (loss) before
income taxes and
minority interests..... (5) 7 6 5 12
Minority interests...... -- -- 1 -- 2
Provision for income
taxes.................. 1 1 1 1 1
Net income (loss)....... (6) 6 5 4 9
</TABLE>
23
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
NET SALES. The Company's net sales for the nine months ended September 30, 1998
were $24,129,000, an increase of $11,039,000, or 84%, from $13,090,000 for the
nine months ended September 30, 1997. The increase reflected higher sales to
existing customers. Sales to Mattel and Action Performance increased by
$5,910,000 and $2,008,000, respectively, for the nine months ended September
30, 1998 compared to the same period in 1997. In addition, sales to Corgi
increased by $932,000, sales to Hallmark increased by $1,266,000, sales to Road
Champs increased by $973,000, sales to Drumwell increased by $775,000 and sales
to First Gear increased by $655,000.
COST OF GOODS SOLD. The Company's cost of goods sold for the nine months ended
September 30, 1998 was $18,303,000, an increase of $7,837,000, or 75%, from
$10,466,000 for the nine months ended September 30, 1997. This increase
reflected an increase of $4,673,000 in materials cost and an increase of
$2,220,000 in salaries and other direct labor costs. Cost of goods sold
includes the cost of raw materials, subcontracting charges for production of
molds, direct labor costs, utilities and other energy costs and depreciation
and amortization of the Company's owned equipment and other depreciable
manufacturing assets. Cost of goods sold constituted 76% of net sales for the
nine months ended September 30, 1998, compared to 80% for the same period in
1997. The decrease was primarily a result of increased sales volume and
efficiencies from better utilization of manufacturing capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses totaled $3,070,000 for the nine months ended
September 30, 1998, an increase of $1,106,000, or 56%, from $1,964,000 for the
nine months ended September 30, 1997. Selling, general and administrative
expenses decreased as a percentage of net sales to 13% of net sales for the
nine months ended September 30, 1998, as compared to 15% of net sales for the
nine months ended September 30, 1997. This decrease as a percentage of sales
was due primarily to the fact that certain components of selling, general and
administrative expenses, including the number of general and administrative
employees and their salaries, did not increase proportionally with the increase
in sales.
Selling expenses consist primarily of shipping expenses and inspection charges.
General and administrative expenses consist of salaries and other employee
expenses for the Company's administrative and product development staffs, the
majority of which are located in Hong Kong, and overhead expenses of the Hong
Kong office. Shipping expenses increased by $98,000 to $412,000 for the nine
months ended September 30, 1998, compared to $314,000 for the nine months ended
September 30, 1997. This increase was primarily due to higher sales volume.
Salaries increased by $183,000 to $1,161,000 for the nine months ended
September 30, 1998, compared to $978,000 for the nine months ended September
30, 1997. This increase was primarily due to the addition of new employees to
the Company's administrative and development staff in Hong Kong and increases
in salaries of some existing employees. The Company also incurred total legal
and professional fees of $206,000 during the nine months ended September 30,
1998, as compared to $136,000 during the same period in 1997. The increase was
due primarily to legal fees and audit expenses associated with meeting the
Company's public reporting requirements.
INTEREST EXPENSE, NET. The Company's interest expense, net was $191,000 during
the nine months ended September 30, 1998, as compared to a net interest expense
of $84,000 during the nine months
24
<PAGE>
ended September 30, 1997. The increase was due to increased borrowings under
the Company's credit facilities to fund the expansion of the Company's
facilities.
MINORITY INTERESTS. Minority interests at September 30, 1998 totaled
approximately $370,000. The Company includes in net income before minority
interests all net income of its wholly-owned and majority-owned subsidiaries.
The portion of such net income attributable to minority interests in the
subsidiaries held by others is then eliminated.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
$359,000 for the nine months ended September 30, 1998, reflecting an effective
income tax rate of 13% for the nine months ended September 30, 1998. The
Company's provision for income taxes for the nine months ended September 30,
1997 was $128,000, reflecting an effective income tax rate of 19% for the nine
months ended September 30, 1997. The decrease in the effective tax rate to 13%
for the nine months ended September 30, 1998 was due primarily to the net
effect of (i) an increase in the recognized tax losses contributed by certain
of the Company's subsidiaries and (ii) an increase in taxable income of the
Company's Hong Kong subsidiaries earned from manufacturing activities in China.
Income earned by a Hong Kong company from manufacturing activities in China is
taxed at 50% of Hong Kong's statutory tax rate.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. The Company's net sales for 1997 increased $2,157,000, or 15%, to
$16,211,000 from $14,054,000 for 1996. The increase was primarily due to sales
to a new customer, Mattel, and increased sales to Drumwell Limited, the agent
for Corgi Classic Cars. Sales to Mattel and Corgi amounted to approximately
$2,400,000 and $683,000, respectively, in 1997. The increase in sales to these
customers was partially offset by a decline in sales to Danbury Mint, which
decreased to $10,402,000 in 1997 compared to $12,426,000 in 1996, primarily due
to delays in the Company's start-up of new projects associated with capacity
constraints.
COST OF GOODS SOLD. The Company's cost of goods sold for 1997 was approximately
$12,703,000, an increase of approximately $2,921,000, or 30%, from
approximately $9,782,000 for 1996. Such increase reflected higher sales volume,
as well as increases of approximately $949,000 in salaries and direct labor
costs, approximately $795,000 in sub-contracting charges for the production of
molds and approximately $233,000 in depreciation charges. Cost of goods sold
constituted 78% of net sales in 1997, compared to 70% in 1996. The increase was
primarily a result of staff increases and production inefficiencies associated
with the start-up of production of new customer orders and operations at the
Company's new manufacturing facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses totaled approximately $1,921,000 in 1997, a
decrease of $631,000, or 25%, from approximately $2,552,000 in 1996. The
decrease was primarily the result of a higher acceptance rate of products by
customers, which resulted in lower repair costs for the Company, and reduced
air freight charges resulting from better compliance with customer delivery
schedules. Air freight charges, which are a component of the Company's shipping
expenses, are typically incurred only when the Company fails to meet customer
delivery schedules. The higher acceptance rate resulted
25
<PAGE>
from better quality control and an improvement in meeting product delivery
schedules. Selling, general and administrative expenses constituted 12% of net
sales in 1997 and 18% in 1996. The decrease was due primarily to increased net
sales in 1997.
INTEREST EXPENSE, NET. The Company's net interest expense was $104,000 in 1997
compared to a net interest expense of $140,000 in 1996. The decrease in net
interest expenses resulted from an increase in interest income arising from
higher average bank balances and higher prevailing interest rates in 1997.
MINORITY INTERESTS. Minority interests were approximately $82,000 in 1997.
There were no minority interests in 1996.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 13% in
1997 and 16% in 1996. The decrease in 1997 was primarily due to an increase in
the recognized tax losses contributed by the Company's Hong Kong subsidiaries.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. The Company's net sales in 1996 totaled approximately $14,054,000,
an increase of approximately $4,072,000, or 41%, from approximately $9,982,000
for 1995. This growth resulted from increased sales to Danbury Mint and the
addition of two new customers, Tyco and Brookfield, a subsidiary of Action
Performance, and was supported by an increase in the Company's production
capacity. Sales to Danbury Mint increased to approximately $11,225,000 in 1996
from approximately $8,055,000 in 1995. New orders from Tyco and Brookfield
amounted to approximately $714,000 and $1,081,000, respectively.
COST OF GOODS SOLD. The Company's cost of goods sold for 1996 was approximately
$9,782,000, an increase of approximately $1,904,000 or 24% from approximately
$7,878,000 for 1995. This reflected an increase of approximately $986,000 in
materials cost and an increase of approximately $395,000 in direct labor costs.
Cost of goods sold constituted 70% of net sales in 1996, compared to 79% in
1995. The reduction was primarily a result of increased operating efficiencies
at the Company's Dongguan facilities and the shut down of its Guangzhou
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses totaled $2,552,000 in 1996 compared to $2,394,000
in 1995, an increase of $158,000 or 7%. The increase resulted primarily from
increased administrative costs related to the Company's increased manufacturing
capacity. Selling, general and administrative expenses decreased to 18% of net
sales in 1996 from 24% of net sales in 1995, a decrease of 6%. The decrease as
a percentage of sales resulted from costs the Company incurred in relocating
its manufacturing operations from Guangzhou to the Dongguan facilities in 1995,
which was not expensed in 1996.
INTEREST EXPENSE, NET. The Company's net interest expense was $140,000 in 1996
compared to a net interest expense of $88,000 in 1995. The increase in interest
expense was primarily due to increased borrowings to purchase additional
machinery and equipment.
MINORITY INTERESTS. There were no minority interests in 1996 or 1995.
26
<PAGE>
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 16% in
1996. In 1995, the Company paid approximately $52,000 of income taxes despite
having a consolidated net loss before income taxes and minority interests of
approximately $507,000 due to taxes on net income of certain of its Hong Kong
subsidiaries. The effective rate increased because the amount of net loss of
certain of the Company's subsidiaries substantially decreased in 1996. The net
loss incurred by those subsidiaries decreased to $472,000 in 1996 from $743,000
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through a combination of
cash from operations, bank financing and capital lease arrangements. For the
nine months ended September 30, 1998, the Company's operating activities
provided cash of $2,828,000. The Company's operations used cash of
approximately $1,002,000 for the nine months ended September 30, 1997.
Investing activities used approximately $1,532,000 during the nine months ended
September 30, 1998 and generated approximately $32,000 during the nine months
ended September 30, 1997. The Company used approximately $878,000 of cash in
financing activities during the nine months ended September 30, 1998. The
Company generated approximately $802,000 of cash in financing activities during
the nine months ended September 30, 1997.
At September 30, 1998, the Company had working capital of approximately
$238,000 as compared to a working capital deficit of approximately $829,000 at
December 31, 1997. The approximate $2,674,000 increase was primarily due to an
increase in inventories and accounts receivable. At September 30, 1998, net
accounts receivable totaled approximately $5,098,000, as compared to $2,827,000
at December 31, 1997. These increases were due primarily to 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 a combination of internally generated cash flow and short-term
borrowings under bank credit facilities.
At September 30, 1998, the Company's five largest accounts receivable accounted
for approximately 78% of its accounts receivable. Creative Master actively
monitors the creditworthiness of its customers, and to date it has not
experienced any significant problems with collection of its accounts
receivable. See Note 22 of Notes to Consolidated Condensed Financial
Statements.
The Company's accounts payable and accrued liabilities increased by
approximately $2,686,000, or 77%, to approximately $6,173,000 at September 30,
1998, as compared to approximately $3,487,000 at December 31, 1997. The
increase in accounts payable and accrued liabilities from December 1997 to
September 1998 was due primarily to the increase in the purchase of raw
materials and packing materials for anticipated sales.
The Company's inventories increased by approximately $403,000, or 14%, to
approximately $3,331,000 at September 30, 1998, as compared to
approximately$2,928,000 at December 31, 1997. Inventory increases resulted from
increases in the Company's purchase of materials to support increased sales.
27
<PAGE>
For the nine months ended September 30, 1998, additions to property, plant and
equipment were $2,163,000 as compared to $1,226,000 in 1997. In each of these
periods, the Company expanded its facilities and entered into capital leases
for plant and equipment. The Company anticipates that it will make
approximately $1,200,000 of additional capital expenditures during the
remainder of 1998 in connection with the ongoing expansion and improvement of
its manufacturing operations. As of September 30, 1998, the aggregate
outstanding amount under all capital leases was approximately $958,000 as
compared to approximately $1,030,000 at December 31, 1997.
The Company repaid short-term bank loans of approximately $825,000 in 1997 and
obtained equipment lease financing in the aggregate amount of approximately
$835,000. The Company also obtained additional short-term bank loans in the
total amount of approximately $1,097,000 secured by the individual guarantees
of Messrs. Tong and Kwok and by the corporate guarantee of Acma Strategic
Holdings Limited, its principal stockholder, and a standby letter of credit
from Acma Limited, the parent corporation of Acma Strategic Holdings Limited.
The Company has revolving lines of credit with Hang Seng Bank, Banque Nationale
de Paris, Bank of China and Commonwealth Finance Corporation Limited. The
credit agreement with Hang Seng Bank Ltd., which was renewed in July 1998,
provides for a $258,000 trust receipts letter of credit which has an overdraft
sub-limit of $26,000. The letter of credit bears interest at the Hong Kong
prime rate plus 1%. The settlement period for use of the letter of credit is 90
days. Overdue amounts bear interest at the prime rate plus 3%. As of September
30, 1998, there was approximately $303,000 outstanding under these facilities.
The credit agreement with Banque Nationale de Paris Hong Kong Branch, as
renewed from time to time, provides for a $194,000 trust receipts letter of
credit which has an overdraft sub-limit of $19,000. The letter of credit bears
interest at the Hong Kong prime rate plus 1.5%. The settlement period for use
of the letter of credit is 60 days. Overdue amounts bear interest at the Hong
Kong prime rate plus 2%. The letter of credit is secured by personal guarantees
of Messrs. Tong and Kwok. As of September 30, 1998, approximately $191,000 was
outstanding under this facility.
The credit agreement with Bank of China, as renewed periodically, provides for
a $39,000 trust receipts letter of credit and an overdraft sub-limit of
$26,000. The letter of credit bears interest at the Hong Kong prime rate plus
1%. The settlement period for use of the letter of credit is 90 days. Overdue
amounts bear interest at the Hong Kong prime rate plus 4.25%. As of September
30, 1998, there was approximately $35,000 outstanding under this facility.
The credit agreement with Commonwealth Finance Corporation Limited, as renewed
in December 1997, provides for a $1,290,000 line of credit, which includes a
$903,000 letter of credit against orders and a $387,000 letter of credit
against receivables which has an overdraft sub-limit of $200,000. The letter of
credit bears interest at the U.S. prime rate plus 2.25%. The settlement period
for use of the letter of credit is 60 days. Overdue amounts bear interest at
the prime rate plus 3.75%. As of September 30, 1998, there was outstanding
under this facility approximately $972,000.
28
<PAGE>
As of September 30, 1998, the foregoing lines of credit allowed for aggregate
borrowings of up to $1,853,000. As of September 30, 1998, the Company had
approximately $1,503,000 outstanding under these revolving lines of credit.
The Company expects that its cash needs for the foreseeable future will arise
primarily from working capital requirements, capital expenditures and debt
service requirements. The Company expects to spend approximately $1,200,000 to
purchase machinery, tools and other capital equipment during the remainder of
1998. The Company anticipates that its capital expenditures will increase
substantially in 1999 due to the planned expansion and improvement of its
manufacturing facilities. The Company expects that its principal sources of
cash will be the net proceeds of this offering, net cash from operating
activities and borrowings under existing lines of credit and potential new bank
lines. The Company believes that these sources will be adequate to meet the
Company's anticipated cash requirements for at least the next 12 months.
However, there can be no assurance that these resources will be adequate to
meet the Company's needs, particularly in the event that the Company elects to
further expand its manufacturing facilities beyond the currently planned
expansion. In the event that the Company requires additional capital, it may
issue additional equity securities, which could result in dilution to existing
stockholders, or borrow funds, which could adversely affect operating results.
INFLATION. The Company believes that inflation has not had a material impact on
its business in recent years.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 program aimed at ensuring that its
computer systems, applications and equipment will function properly beyond
1999. As a part of this program, the Company conducted an assessment of our
equipment and machinery during August 1998. The Company's machinery (such as
die-casting and plastic-injection equipment and tampo printing machines) do not
have timers or date counters and, therefore, are not subject to Year 2000
problems. The Company continuously seeks to upgrade and improve its computer
systems and software to better service customers and to support its growth. As
a result, all of the Company's computer systems and software have been recently
acquired or upgraded, and the Company believes they are already Year 2000
compliant, though there can be no assurance in this regard.
Because the Company replaced or upgraded its computer systems and software in
conjunction with its normal business practices, it has not allocated additional
resources or attributed additional costs to Year 2000 compliance. The Company
will continue to assess and test newly purchased machinery and computer-related
hardware and software to ensure such items comply with Year 2000.
Another part of the Company's Year 2000 program is an assessment of Year 2000
compliance among its trading partners. We are planning to conduct systems
testing with the Company's trading partners during 1999. Nevertheless, if any
trading partner or other entity upon which the Company relies fails to become
Year 2000 compliant, particularly its principal customers, the Company could be
materially adversely affected. In conjunction of the results of such systems
testing, the Company will prepare contingency plans to address the potential
material problems. The costs of such testing and contingency preparations are
difficult to estimate accurately and will greatly depend upon the
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<PAGE>
Year 2000 readiness of the Company's trading partners. At present, however, the
Company believes that Year 2000 issues will not have a material adverse effect
on the Company's business or results of operations.
CURRENCY EXCHANGE FLUCTUATIONS
All of the Company's sales are denominated either in U.S. dollars or Hong Kong
dollars, while its expenses are denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of which is the yuan. Given the
current Asian financial crisis, there can be no assurance that the yuan-to-U.S.
dollar rate will remain stable. Although a devaluation of the Hong Kong dollar
or renminbi relative to the U.S. dollar would be likely to reduce the Company's
expenses, any material increase in the value of the Hong Kong dollar or
renminbi relative to the U.S. dollar would increase the Company's expenses, and
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has never engaged in currency
hedging operations and has no present intention to do so.
SEASONALITY
Each year, the Company ceases production for a two-week period due to the
Chinese New Year holiday, which occurs during late January or early February.
This holiday shutdown has typically resulted in lower revenues during the first
quarter of each year than during the other three quarters. Certain fixed costs,
however, continue despite the Company's closing. This reduction in revenues,
without a corresponding reduction in costs, diminishes liquidity during the
first quarter.
The Company experiences fluctuations in quarterly sales due to the timing of
receipt of orders from customers and product shipments. The Company also incurs
substantial tooling and other costs of manufacturing new products from three to
nine months in advance of obtaining the first customer orders for the new
product. This long lead time may contribute to fluctuations in the Company's
quarterly results of operations.
INTERNATIONAL SALES
The Company sells substantially all of its products to customers in the U.S.
and Europe. During the nine months ended September 30, 1998, approximately 5.0%
of the Company's net sales arose from sales to European customers, and in 1997
approximately 6.2% of the Company's net sales were attributable to sales to
European customers. The U.S. and European governments may, from time to time,
impose new quotas, duties, tariffs, or other charges or restrictions, or adjust
presently prevailing quota, duty or tariff levels, which could adversely affect
the Company's ability to continue to export products to the U.S. and Europe at
current or increased levels.
ACCOUNTING FOR STOCK OPTIONS
The Board of Directors of the Company has adopted a 1998 Stock Option Plan
under which the Company has reserved a total of 420,000 shares of common stock
for issuance upon the exercise of options granted under the plan. Concurrently
with this offering, it intends to grant stock options under the plan to certain
directors, officers, employees and consultants to purchase approximately
304,500 shares of common stock at an exercise price equal to the initial public
offering price of the
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<PAGE>
common stock. See "Management--Compensation Pursuant to Plans" for a
description of the 1998 Stock Option Plan. The Company will be required to
account for option grants in accordance with the rules of the Financial
Accounting Standards Board ("FASB"). In October 1995, the FASB issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which established the "fair value" method of
accounting for stock-based compensation arrangements, under which compensation
cost is determined using the fair value of the stock option at the grant date
and the number of options vested, and is recognized over the period in which
the related services are rendered. For securities issuances to employees, SFAS
123 also permits the use of the "intrinsic value based" method as set forth in
the Statement of Financial Accounting Standards No. 116. At present, the
Company intends to report all issuance to employees using the intrinsic value
based method for issuances to employees, as allowed by SFAS 123. As further
provided in SFAS 123, the Company will disclose the pro forma effect of
adopting the fair value based method.
Under SFAS 123, any transaction involving non-employees for which goods or
services is the consideration received in exchange for the issuance of equity
instrument, such as options, is to be recorded using the fair value method. The
fair value method states that the amount recorded is to be based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is a more reliable measure.
31
<PAGE>
BUSINESS
OVERVIEW
Creative Master is a leading independent manufacturer of collectible-quality,
die-cast replicas of cars, trucks, buses and other items. Die-cast collectibles
are distinguishable from die-cast toys by their authentic design, exacting
engineering and attention to detail, including abundant use of identifiable
brand names, logos and other licensed marks. The die-cast products the Company
manufactures are 1/12th to 1/64th scale and include as many as 450 parts,
including numerous moveable parts. They are marketed and distributed by the
Company's customers primarily to collectors, hobbyists and enthusiasts at
retail prices ranging from $20 to $200 or more. The Company's customers are
leading U.S. and European marketers and distributors of vehicle replicas and
other collectibles, including Danbury Mint, Mattel, Hallmark Cards and Action
Performance.
The Company's mission is to provide the highest level of product quality and
customer service among independent manufacturers of die-cast collectibles. The
Company offers its customers turnkey product development and manufacturing
capabilities that are customized to meet their specific needs. The Company's
vertically integrated process affords complete sourcing of raw materials,
engineering, assembly, quality control and final packaging of die-cast products
in commercial quantities. Depending on the customer's needs, the Company
provides a self-contained production area within one of its factories with
tooling and other production functions dedicated to manufacturing the
customer's products according to its particular design, engineering and quality
requirements. This approach permits customers to closely supervise and control
all aspects of the production process and to protect the confidentiality of
their product design and engineering. The Company's turnkey process enables its
customers to shorten the lead time from conceptual design to product delivery
and to minimize production costs while maintaining high quality and
reliability.
All of the Company's manufacturing operations are conducted through CML, the
Company's wholly-owned Hong Kong subsidiary, and CML's subsidiaries. The
Company's manufacturing facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles northwest of Hong Kong. The
Dongguan facilities contain an aggregate of approximately 320,000 square feet
of manufacturing space and related housing for up to approximately 5,200
workers.
INDUSTRY
The U.S. collectibles industry comprises numerous market segments and
subsegments served by a variety of toy companies and other distributors. In
addition to die-cast items, including cars, trucks and other vehicles,
collectibles include such items as figurines, dolls, "plush" dolls, ceramic
cottages, prints, plates, glass, ornaments, steins, music boxes and trading
cards. According to the Collectibles Industry Report for 1997 published by
Unity Marketing, an independent market research firm, U.S. consumer sales of
collectibles totalled approximately $10 billion in 1997. According to Unity
Marketing, U.S. consumer sales of die-cast vehicle replicas totalled
approximately $753 million in 1997, which was 47% more than in 1996. The
Company believes that the aging of the so-called baby-boomers, with their
relatively higher discretionary spending on leisure goods such as collectibles,
is the principal reason for the increased demand for collectibles.
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The Company believes the total European consumer market for collectibles was
approximately $6 billion in 1997. The BIS Ltd., a European market research
firm, estimates that the European consumer retail market for die-cast
collectibles was approximately $200 million in 1997. The Company believes the
size and growth of the European collectibles market, the increasing influence
of American culture in collectibles and the growing use of sophisticated
marketing techniques all favor collectible products marketed by American and
European companies.
BUSINESS STRATEGY
Key elements of the Company's strategy are to:
. Manufacture Collectible-Quality, Die-Cast Products. Since CML's
inception, it has focused primarily on manufacturing collectible-quality,
die-cast products. While many of the Company's competitors manufacture die-
cast toys and other products, the Company has devoted itself exclusively to
collectible-quality products and to understanding the market for die-cast
collectibles, enhancing the quality and detail of its customers' designs
and improving and streamlining the production process. As a result,
although certain die-cast toy factories can produce limited amounts of
collectible-quality items, the Company believes that its approach optimizes
the production of high-quality collectibles in commercial quantities.
. Carefully Manage Growth/Focus on Quality Customers. The Company has
carefully managed its growth by selectively taking on additional customers.
From 1995 to 1997, the Company focused on building facilities and
developing a high-quality customer base to support long-term growth rather
than accepting all potential assignments. This disciplined approach to
growth has produced an 84% increase in the Company's net sales in the first
nine months of 1998 over the same period in 1997.
. Increase the Diversity of Customers, Products and Market Segments
Served. The Company's customers market and distribute products for diverse
segments of the collectibles industry representing different product
categories and prices. The Company is actively working to broaden its
customer base and reduce its reliance on its principal customers. The
Company intends to continue to expand its customer base by accelerating its
manufacture of die-cast replicas where there is a strong consumer market
for the product on which the replica is based. For example, the Company
recently began manufacturing die-cast replicas of vintage locomotives and
trains for Lionel Trains, a marketer and distributor of electric train sets
and model trains.
. Pursue Product Development Opportunities. The Company works closely with
its customers and others to develop new die-cast products for its customers
to market. For example, the Company recently developed a die-cast outboard
boat motor which is expected to be test-marketed by one of its principal
customers. The Company will continue to pursue product development as part
of its overall customer service. To bolster its product development
efforts, the Company recently appointed Henry Hai-Lin Hu as Executive Vice-
President-Marketing.
. Invest in Plant, Equipment & Employees. The Company currently employs
4,100 production workers and operates three factories comprising
approximately 320,000 square feet of manufacturing space. These facilities
currently operate at or near full capacity. The Company is in the process
of building two new factories to meet demand from existing customers. The
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Company's fourth factory is expected to be operational by the end of 1998,
and the first phase of construction of the fifth factory is expected to be
completed in the second quarter of 1999. The Company intends to use a
portion of the net proceeds of this offering to pay for the cost of
constructing and equipping these new factories.
PRODUCTS
The Company believes there are approximately 20 major marketers and
distributors of die-cast collectibles in the U.S. and Europe. The Company's
customers include many of the leading U.S. and European marketers and
distributors. The following sets forth certain information with respect to the
Company's customers:
<TABLE>
<CAPTION>
PERCENT OF NET SALES
-----------------------------------
NINE MONTHS ENDED
CUSTOMER YEAR ENDED SEPTEMBER 30,
CUSTOMER NAME PRINCIPAL PRODUCT CATEGORY SINCE DECEMBER 31, 1997 1998
------------- ---------------------------- -------- ----------------- -----------------
<S> <C> <C> <C> <C>
. Danbury Mint(1) U.S. classic cars and trucks 1986 64.2% 37.3%
. Tyco Hong Kong Limited Matchbox collectibles 1996 -- (2) -- (2)
. Action Performance(3) NASCAR racing cars
European Formula One and
Super Touring racing cars 1996 6.9% 12.4%
. Mattel(4) Matchbox collectibles 1997 20.4%(5) 25.2%(5)
. Corgi Classic Cars Hong Kong buses, United
Kingdom buses and airplanes 1997(6) 4.2% 8.1%
. First Gear Trucks 1998 -- 2.7%
. Road Champs(7) Police cars 1997 4.2 6.5%
. Lionel Trains Vintage trains 1998 -- --
. Hallmark Cards Pedal cars and ornaments 1997 0.20% 5.70%
</TABLE>
- --------
(1) Danbury Mint is a division of MBI, Inc.
(2) The percentages for Tyco Hong Kong Limited are included with Mattel's
percentages, since Mattel acquired Tyco in the fourth quarter of 1997.
(3) Action Performance Companies, Inc. owns 100% of Brookfield Collectors Guild
and a controlling interest in Paul's Model Art. Paul's Model Art became a
customer of the Company in 1998.
(4) Sales to Mattel are made indirectly through its Mattel Vendor Operations
Asia Ltd. subsidiary.
(5) Includes sales to Tyco Hong Kong Limited, which was acquired by Mattel in
the fourth quarter of 1997.
(6) Until mid-1998, sales to Corgi Classic Cars were made indirectly through
its agent, Drumwell Limited.
(7) Road Champs is a subsidiary of JAKKS Pacific, Inc.
Cars, Trucks and Buses. The Company produces a wide range of collectible die-
cast replicas of automobiles, including classic cars, European cars, Formula 1
racing cars, trucks and buses. These replicas are produced at various scales
from 1/12th to 1/64th of the original size. They typically retail from $90 to
$200, depending on the number of parts and the level of intricacy in the
design. The Company's replicas have between 200 and 450 parts and quality
finishing that results in an authentic look that appeals to collectors and
other enthusiasts.
While the Company does not manufacture "toy-grade" replicas, it does produce
some replicas that sell at lower retail prices. The price is determined by the
size of the replica, the number of parts and the intricacy of the design. The
Company's medium-feature products typically retail for $40 to $90 and its
small-scale products retail for $20 to $40.
34
<PAGE>
Vintage Trains and Locomotives. In April 1998, the Company began working on
tooling for die-cast replicas of six vintage locomotives and trains for Lionel
Trains, a U.S. marketer and distributor of electric train sets and model
trains. The Company expects to begin shipping finished goods for the six
initial models by the end of 1998. In October 1998, the Company received
purchase orders for tooling for an additional six Lionel train replicas. The
Company expects to begin shipping the related finished goods in the second and
third fiscal quarters of 1999. Depending on the success of the initial
products, the Company anticipates manufacturing additional locomotive and train
products in the future.
Outboard Motors and Marine Products. The Company is in the process of
formalizing an arrangement with Alterscale, a company engaged in the
development of collectible marine replicas, to co-develop die-cast collectible
replicas of outboard motors under license from the owner of the Johnson and
Evinrude brands. The Company has manufactured and sold a limited run of
approximately 1,000 of these replicas, and one of the Company's customers is
expected to test market these replicas. The Company also is engaged in
discussions with other owners of marks for marine related products to discuss
licensing opportunities.
PRINCIPAL CUSTOMERS
The Company's customers consist principally of specialty retailers, direct
marketers and other distributors of collectibles in the U.S. and Europe. The
Company's largest customer is Danbury Mint, a division of MBI, Inc. Danbury
Mint is a leading U.S. developer and marketer of 1/24th scale premium die-cast
replicas. It was the Company's first customer.
The Company's second largest customer is Mattel. In 1997, the Company began
manufacturing the popular Matchbox die-cast collectibles series for Mattel. In
the fourth quarter of 1997, Mattel purchased Tyco Hong Kong Limited, for which
the Company had been producing die-cast vehicle replicas since 1996.
The Company's other customers include Action Performance Companies, Inc.
("Action Performance"), which owns 100% of Brookfield Collectors Guild and has
a controlling interest in Paul's Model Art. They also include First Gear,
Hallmark Cards ("Hallmark"), Road Champs and Corgi Classic Cars. The Company
plans to reduce its dependence on its key customers by continuing to diversify
its customers, products and markets through new manufacturing arrangements such
as the arrangement with Lionel Trains and co-development efforts with Companies
such as Alterscale.
The Company's sales transactions with its customers are based on purchase
orders received by the Company from time to time which are subject to
cancellation. Although the Company does not have any long-term agreements with
any of its clients, it believes that its relationships with its customers are
excellent.
MARKETING AND SALES
The Company historically has not engaged in any significant marketing
activities, and has relied primarily on its reputation for quality and
efficiency among its customers to obtain new business. The Company's senior
executives work closely with its customers to develop new products to meet
consumer demand for die-cast collectibles. In September 1998, the Company hired
Henry
35
<PAGE>
Hai-Lin Hu to bolster its product development, marketing and sales efforts. Mr.
Hu has extensive experience in the collectible industry. The Company also
recently hired a Chief Financial Officer in order to permit Mr. Tong to focus
on customer service in his capacity as President and Chief Executive Officer.
See "Management--Executive Officers, Directors and Director Nominees" for more
information on these developments.
The Company generally has not sought to license the right to produce replicas
of particular classic cars or other products. The Company is in the process of
formalizing a joint product development agreement with Alterscale, a company
engaged in the development of collectible marine replicas, to develop and
manufacture outboard motors under license from the owner of the Johnson and
Evinrude brands. The Company may selectively license other marks in the future,
where such licensing would not compete with the licensing efforts of the
Company's customers. To the extent the Company obtains any licenses to
manufacture die-cast replicas, it will pursue arrangements with one or more of
its existing customers or others to market and distribute such replicas.
BACKLOG
The Company's customers generally contact the Company nine to eighteen months
in advance of product delivery, so that the Company can engineer and fabricate
the necessary molds for producing the die-cast product. Purchase orders are
typically received two to six months in advance of target delivery dates.
Purchase orders are subject to cancellation if the Company fails to meet its
production schedules. The Company has no significant backlog.
PRODUCT DEVELOPMENT AND MANUFACTURING
The Company offers turnkey manufacturing capabilities, including complete raw
materials sourcing, computer-aided product engineering, model-making, mold-
making, manufacturing, assembling and packaging of finished products. The
Company can meet all of a customer's design engineering and manufacturing
needs, thus eliminating the need for intermediaries. By coordinating product
development and process design with production and packaging, the Company is
able to shorten the lead time from conceptual design to product delivery and to
lower production costs while maintaining high quality and reliability.
The product production cycle occurs in four stages:
. Product development
. Model making
. Tooling
. Final production and assembly
The product development phase of the production cycle begins when a customer
provides the Company with photographs, drawings and other specifications for
the new product. The Company
36
<PAGE>
then works with the customer to design a product that meets the customer's
specifications and price point. For example, when building a classic car
replica the Company seeks to ensure that the product is properly proportioned
and historically correct. This means that the Company strives to precisely
reproduce the exterior and interior design, color schemes and accessories of
the original car. One example of this precision is the Company's 1/24th scale
Mercedes Benz SSKL, for which the Company holds a license. Among its many
authentic details, the Mercedes Benz SSKL includes wire wheels, rubber tires,
genuine leather seats, a working steering wheel and a hood that opens to reveal
the car's engine and a leather strap with a metal buckle to secure the hood.
The Company believes that model making is critical to producing the highest
quality collectibles. During the model-making stage of the production cycle,
the Company's engineering staff uses computer-aided design systems to develop a
prototype scale model. The Company will include as many functioning moving
parts as possible, given the Customer's desired price point. Examples of such
features are car doors, trunks and hoods that open, steerable wheels and
working suspension. The Company strives to ensure that the models it produces
also have an authentic build and finish. Once the prototype replica is ready,
it must be approved by the customer before the Company begins to fabricate the
molds and tools that will be used to manufacture the product in commercial
quantities. The Company can generally produce a prototype in one to three
months.
Once the customer has approved a prototype, the Company begins the tooling
process, which typically requires six to twelve months. The tooling process
occurs in two stages. First, the Company produces tooling and molds that will
be used to fabricate each component part of the product. Next, the Company
tests the components and the assembled product produced with the new tools and
molds. If necessary, the Company refines and modifies the molds and tools
before seeking customer approval to manufacture the product. Upon receiving
customer approval, the Company releases the molds and tools to produce final
products.
In the last stage of the production cycle, the Company produces the component
parts, then assembles, finishes, packages and ships the final products. The
die-casting, injection-molding and electrostatic painting areas of the
Company's facilities operate five days per week on a two-shift per day basis.
The finishing, assembly and packing areas also run on a multi-shift basis.
These areas account for most of the total work force and production area at the
Company's facilities.
Typically, customers pay 50% of the Company's tooling and mold-making costs
when the tooling and mold-making process commences and an additional 25% of
these costs when the initial test products are made using the new molds and
tools. The Company receives payment for the final 25% of the tooling costs when
the tools and molds are released for commercial production.
The Company usually insures the tools and molds until they are approved by the
customer for production. At that point, the customer takes ownership and
assumes the cost of insuring the molds and tools.
The long lead time required to develop new products and related tools and
molds, combined with each customer's financial commitment at the beginning of
the tooling process, provides the Company with an indication of prospective
orders for six to twelve months in advance.
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<PAGE>
PRINCIPAL SUPPLIERS AND SOURCES OF SUPPLY
The Company uses zinc alloy and various plastic resins in its die-cast and
injection-molded production operations. The supply and demand for zinc alloy
and for both plastic resins and the petrochemical intermediates from which
plastic resins are produced are subject to cyclical and other market factors
and can fluctuate significantly. The Company acquires raw materials for its
die-cast production primarily from Australia and the United Kingdom. The
Company's standard practice is to maintain a supply of raw materials sufficient
for approximately two months of production. The Company anticipates that it
will be able to obtain sufficient supplies of raw materials as it expands its
production capacity and output.
Three of the Company's suppliers accounted for more than 5% of its supplies in
1997 as shown in the following table:
<TABLE>
<CAPTION>
PERCENT OF TOTAL RAW MATERIAL
SUPPLIED
-----------------------------
YEAR ENDED NINE MONTHS
COMPONENT DECEMBER ENDED
SUPPLIER SUPPLIED 31, 1997 SEPTEMBER 30, 1998
-------- ------------------- ---------- ------------------
<S> <C> <C> <C>
. Manfield Coatings Co.,
Ltd.................... Paint 9.0% 10.9%
. Genesis Off-set
Printing Co., Ltd...... Packaging materials 8.5% 9.8%
. Zinamet Co., Ltd....... Zinc alloy 6.9% 2.7%
. Lee Kee Metal Co.,
Ltd.................... Zinc alloy 6.1% 6.8%
</TABLE>
The Company believes there are multiple sources of supply of these and other
raw materials used in the Company's business.
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<PAGE>
FACILITIES AND PLANNED EXPANSION
The Company's growth is closely related to its manufacturing capacity. At
present, the Company operates three factories in the Dongguan region of
Guangdong Province, China. Legal and administrative functions of these
factories are conducted through the Company's Chinese subsidiary. Following is
a summary of certain information regarding the Company's manufacturing
facilities as of November 20, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF APPROXIMATE
FACTORY WORKERS SQUARE FOOTAGE(1) PRINCIPAL OPERATIONS
------- ------------- ---------------------------------------------------------------
1998 1999(2) 1998 1999(2) 1998 1999(2)
----- ------- -------- ------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
CML No. 1 2,702 2,500 178,000 178,000 Production of Production of
products for Danbury products for Danbury
Mint, Corgi, Mint, First Gear and
Hallmark, First Gear Action Performance.
and Action Tooling and corporate
Performance. Also functions will be
includes tooling and continued.
certain corporate
functions such as
quality assurance
CML No. 2 885 900 69,000 69,000 Production of Production of
products for Tyco products for Tyco
(Matchbox) (Matchbox)
CML No. 3 1,388 1,600 70,000 100,000 Production of Production of
products for Action products for Action
Performance and Road Performance and Road
Champs Champs
CML No. 4(3) 184 400 3,000 40,000 Tooling and model Tooling and model
making making
CML No. 5(3) -- 1,300 -- 120,000 -- Production of
products for Hallmark
and Corgi
----- ----- -------- --------
Total 5,159 6,700 320,000 507,000
===== ===== ======== ========
</TABLE>
- --------
(1) Includes production space only.
(2) Estimated.
(3) Currently under construction.
Each of the Company's factories houses a self-contained manufacturing
operation. Each factory contains personnel and equipment to provide production
planning, engineering, management, decorative processes and final assembly and
packaging. In addition, as is the custom and practice in China, each factory
has adjacent dormitories to house the factory workers. The workers are provided
housing, meals, work clothes and medical care for which they pay only a nominal
monthly amount. The Company also pays for the cost of electricity, water supply
and housekeeping services for the dormitories. The Company's costs of providing
these services are included in cost of goods sold.
Within each factory, the Company provides customers a self-contained production
area with tooling and other production functions dedicated to manufacturing
each customer's products according to its particular design, engineering and
quality requirements. Quality assurance and certain technical functions are
centralized in CML No. 1. Certain other functions are centralized in the
Company's Hong Kong headquarters, including materials purchasing, customer
service, production scheduling among the factories, marketing, new product
development, shipment of finished goods and strategic planning.
39
<PAGE>
CML Nos. 1, 2 and 3 are located in space leased exclusively by the Company.
They are surrounded by perimeter walls or fencing and are generally accessible
only to the Company's employees. CML No. 4 is currently located in shared
rented space. All of these factories are located within a one-mile radius of
each other.
CML No. 1 and CML No. 2 are operating at near capacity, and the Company
believes that these facilities are operating at an efficient level. Currently,
the Company has no plans to expand or modify these facilities.
The Company is in the process of expanding CML No. 3 from approximately 70,000
square feet of production area to 100,000 square feet to meet an anticipated
increase in demand from existing customers. The Company is also building new
dormitory space to accommodate additional workers. Construction of the new
manufacturing area and dormitory space is substantially complete, and the
Company expects to commence initial operations in the new space by November
1998.
The Company recently completed construction of its new CML No. 4 facility. This
facility occupies 40,000 square feet of leased space accessible only to the
Company's employees and is designed to support the model making and tooling
needs for the Company. CML No. 4, also includes approximately 8,000 square feet
dedicated to research and development and in which approximately 50 technicians
will be employed. The new CML No. 4 facility also implements additional
security controls to provide customers enhanced confidentiality of their
product design and engineering. The expanded tool-making production area in the
new CML No. 4 facility, including workshop, engineering support and office
space, comprises approximately 20,000 square feet. The Company plans to
increase the number of tooling technicians to approximately 150 when CML No. 4
becomes operational by the end of 1998.
In July 1998, the Company began construction of its fifth factory, CML No. 5,
which the Company expects to complete in January 1999. A portion of the net
proceeds of this offering will be used for this purpose. CML No. 5 will become
operational in two phases, the first of which is expected to be completed in
March 1999. The total land area for these two phases is about 270,000 square
feet. The first phase will consist of workshop, office and paint warehouse
facilities in approximately 120,000 square feet. It is estimated that initially
CML No. 5 eventually will employ approximately 1,300 workers and that
construction of CML No. 5 will be completed in the second quarter of 1999. The
second phase will be built to provide excess capacity. Based on the Company's
current business expectations, this additional capacity will begin to be
employed in the second half of 1999. The maximum buildable area is
approximately 68,000 square feet for production and 60,000 square feet for
dormitories to accommodate up to approximately 1,300 workers.
The Company works closely with its customers in order to understand and plan
for the customers' anticipated production needs. Plans for the expansion of the
Company's manufacturing facilities are based largely on the anticipated needs
of its primary customers. Adequate undeveloped land adjacent to the Company's
facilities in China permit it to expand as necessary. Typically the Company can
complete new facilities within six months. This six-month time frame is within
with the normal product development cycle, and the Company historically has not
experienced any significant delays in bringing additional capacity on-line to
meet increased customer demand.
40
<PAGE>
COMPETITION
The Company faces significant competition from toy companies and other
independent manufacturers of die-cast products with production facilities
located in China. Certain of the Company's customers, including Mattel, Action
Performance and Road Champs, have their own die-cast manufacturing facilities
in China.
The Company competes primarily on the basis of quality, technical capabilities
and ability to meet customer delivery schedules. To a lesser extent, it
competes on the basis of price. Although some of the Company's competitors are
larger and have substantially more resources, based on the preceding criteria
the Company believes that it is the leading manufacturer of collectible-
quality, die-cast replicas. In addition, the Company believes that its
exclusive focus on manufacturing collectible-quality, die-cast replicas
distinguishes it from other competitors who manufacture both toy-grade products
and collectible-quality products.
The Company believes it possesses trade secrets relating to sourcing of raw
materials and other aspects of its production process that may represent a
competitive advantage. The Company does not characterize its business as
proprietary, however, and does not own any patents. The Company typically
relies on its customers to obtain licenses from manufacturer of the products on
which its replicas are based. The Company currently holds a license to its
Mercedes Benz SSKL replica, and it intends to selectively seek licenses for
certain new products, such as marine outboard motors and other products that do
not compete with the products of existing customers. Other than trade secrets
and the capital required for factory equipment and training, the Company
believes that there are no significant barriers to entry to the manufacture of
die-cast products. Accordingly, additional participants may enter the market at
any time. Many of the Company's existing or potential competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company.
GOVERNMENT REGULATION
The Company is not engaged in a regulated industry. The Company is subject to
import regulations in China, where it imports supplies to manufacture tools,
molds and finished die-cast collectibles. The Company also is subject to export
regulations in China, because it exports all of its product to customers
outside of China. The Company believes that its import and export practices
comply with applicable regulations and that its business and results of
operations are not significantly impacted by these regulatory requirements.
The Company uses a variety of paints and oils in the manufacture and detailing
of its die-cast collectibles, and has established procedures for the proper
storage, use and disposal of such materials. The Company believes that it has
complied with all environmental regulations applicable to its business.
EMPLOYEES
As of November 24, 1998, the Company had approximately 5,160 full-time
employees in China. Of these employees, approximately 4,182 were production
workers, 425 were administrative staff, 553 were engineers and technicians. In
addition, the Company employs approximately 90 people in Hong Kong. As is
customary for manufacturers in China, the Company's production facilities
includes housing facilities for its workers. The Company is committed to
providing good working and living
41
<PAGE>
conditions for its employees in China. The Company has experienced no
significant labor stoppages and believes that the relations with its employees
are satisfactory.
The Company anticipates hiring up to 1,500 new employees in connection with the
expansion of its manufacturing facilities. Historically, the Company has had no
difficulty in hiring additional employees, and it anticipates that it will be
able to hire additional employees in the future as needed in connection with
the growth of its business.
RESEARCH AND DEVELOPMENT
The Company did not incur research and development expenses during 1995, 1996
or 1997. Substantially all development costs associated with manufacturing
products for its customers are expensed as a cost of sales. The Company does
not rely on any proprietary technology. The Company intends to increase its
product development efforts, and may incur future research and development
expenses in connection with these efforts. The Company may use a portion of the
net proceeds of this offering to fund these efforts.
PROPERTIES
The Company's corporate and administrative offices occupy approximately 10,000
square feet of office space in Hong Kong. The Company subleases these
facilities at a cost of approximately $4,000 per month, pursuant to leases
which run through February 14, 1999 and May 15, 1999. The Company currently
expects to renew its existing leases as they expire.
The Company's manufacturing facilities contain an aggregate of approximately
320,000 square feet of manufacturing space and dormitory space that can
accommodate up to 5,200 workers. The Company leases the factories from local
Chinese government agencies under separate tenancy agreements expiring from May
1999 to June 2006. The aggregate monthly rent for its factories is
approximately $30,000. The Company also leases dormitory space to house its
factory workers under similar agreements which expire between December 1998 to
February 2000. The Company is currently in the process of negotiating a renewal
of one of its dormitory tenancy agreements which expired in September 1998. The
aggregate monthly rent for its dormitory facilities is approximately $15,000.
The Company financed the cost of constructing the Dongguan facilities and
believes that its willingness to do so will facilitate the extension of its
leases on such facilities.
The Company has recently undertaken the planned expansion of its manufacturing
facilities as described above under "--Facilities and Planned Expansion."
Through September 30, 1998, the Company had entered into three new tenancy
agreements for the land underlying the new facilities for terms ranging from
four to five years.
INSURANCE
The Company carries property, liability, and workers' compensation insurance
policies, which it believes are customary for businesses of its size and type.
However, there can be no assurance that the Company's insurance coverage will
be adequate or that insurance will continue to be available to the Company at
reasonable rates.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR NOMINEES AND KEY EMPLOYEE
The executive officers, directors, director nominees and key employee of
Creative Master and their ages and positions with Creative Master as of
November 24, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
---- --- -----------
<S> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND
DIRECTOR NOMINEES
Carl Ka Wing Tong.................. 48 President, Chief Executive Officer and
Chairman of the Board
Leo Sheck Pui Kwok................. 42 Chief Operating Officer and a Director
John Rempel........................ 43 Chief Financial Officer
Henry Hai-Lin Hu................... 53 Executive Vice-President--Marketing
Shing Kam Ming..................... 37 Senior Vice-President and Controller
Paul Mo............................ 46 Senior Vice-President--Marketing
Services and Secretary
Denny Cheng........................ 37 Vice-President--Marketing Services,
Engineering
Chou Kong Seng..................... 43 Director
Clayton K. Trier(2)................ 47 Director Nominee
Steve Gordon(2).................... 43 Director Nominee
KEY EMPLOYEE
Albert Chui........................ 48 Assistant Vice-President--Quality
Assurance
</TABLE>
- --------
(1) Each of the executive officers of the Company also serves in various
corresponding capacities with CML or its subsidiaries.
(2) Messrs. Trier and Gordon have indicated their willingness to serve as
directors of the Company following completion of this offering.
EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEES
Carl Ka Wing Tong is the Chairman, Chief Executive Officer and President of the
Company. He has served as Chairman, Chief Executive Officer and President since
December 1997. He also served as Secretary from December 1997 to September 1998
and as Chief Financial Officer from September 1998 to November 1998. He also
serves as a Director of Acma Strategic Holdings Limited. Mr. Tong co-founded
CML in 1986. From 1993 to 1995, he also served as Chief Financial Officer of
ZIC Holdings Limited, the holding company of Zindart Industrial Co. Ltd., a
manufacturer of toys and collectibles. Prior to founding CML, from 1985 to 1987
Mr. Tong was Vice President of Citibank N.A.'s Institutional Banking,
Specialized Finance Group. In addition, from 1977 to 1985 Mr. Tong was a
certified public accountant with Arthur Andersen & Co. in United Kingdom and
Hong Kong, where his last position was Senior Manager, Audit Division. He is a
certified public accountant in Hong Kong and a chartered accountant in the
United Kingdom. See "Principal Stockholders and Selling Stockholder."
Leo Sheck Pui Kwok has been the Chief Operating Officer and a Director of the
Company since December 1997. Mr. Kwok co-founded CML in 1986. Before founding
CML, Mr. Kwok worked for the Hallmark Group in Asia from 1980 to 1987, where
his last position was as the Chief Merchandise Manager.
John Rempel has been Chief Financial Officer of the Company since November
1998. Prior to joining the Company, from 1995 to November 1998, Mr. Rempel
founded and managed the
43
<PAGE>
consulting division of an information technology solution provider,
specializing in financial and material requirements planning system design and
implementation. Between 1990 and 1995, Mr. Rempel was the Chief Financial
Officer of a division of Lai Sun Properties, a publicly-listed company in Hong
Kong. He is a Canadian Chartered Accountant and a Fellow of the Hong Kong
Society of Accountants. Prior to 1981, Mr. Rempel served with Arthur Andersen &
Co. in Canada and Bermuda.
Henry Hai-Lin Hu has been Executive Vice-President--Marketing of the Company
since September 1998. Prior to joining the Company, from 1996 through 1998 Mr.
Hu served in executive management positions with various Hong Kong toy
manufacturers. Mr. Hu also served as the Chairman and Chief Executive Officer
of Zindart Industrial Co., Ltd. from 1993 until 1996.
Shing Kam Ming has been the Senior Vice-President of the Company since January
1998. He also served as Chief Financial Officer until September 1998, when he
was appointed Controller. Mr. Shing joined Creative Master Limited in March
1993 as Manager--Finance and Administration.
Paul Mo has served as the Company's Senior Vice-President--Marketing Services
since August 1996 and as Secretary of the Company since September 1998. Mr. Mo
joined the Company as Director of Engineering in November 1994 and helped
establish the Company's first Dongguan factory. Prior to joining the Company,
from 1992 to 1994 he was a General Manager of Sinomex (Hong Kong).
Denny Cheng has served as Vice-President--Marketing Services, Engineering since
November 1996. Before joining the Company, Mr. Cheng served as an Engineering
Manager with Sinomex (Hong Kong), a toy manufacturing company, from 1993 to
1996.
Chou Kong Seng has been a director of the Company since December 1997. Mr. Chou
has been the Finance Director of Acma Limited, a Company listed on the
Singapore stock exchange since 1994. He also serves as a Director of Acma
Strategic Holdings Limited, a principal stockholder of the Company. Before
joining Acma Limited, he was a senior manager with KPMG Peat Marwick LLP in
Singapore.
Clayton K. Trier has indicated his willingness to serve as a director of the
Company following completion of this offering. Since 1997, Mr. Trier has been a
private investor. From 1993 through 1997, Mr. Trier served as the Chairman and
Chief Executive Officer of U.S. Delivery Systems, a NYSE-listed local delivery
company with offices nationwide. He founded U.S. Delivery Systems in 1993. U.S.
Delivery Systems was aquired by Corporate Express Inc. in March 1996. From 1987
to 1991, Mr. Trier was co-Chief Executive Officer and President of Allwaste,
Inc., a NYSE-listed company engaged in waste management. Mr. Trier was a
Certified Public Accountant with Arthur Andersen & Co. in Houston, Texas and
Hong Kong from 1974 to 1987, and was a partner there from 1983 to 1987.
Steve Gordon has indicated his willingness to serve as a director of the
Company following the completion of this offering. Mr. Gordon has been a
principal of TFS Limited, a direct response marketing and fulfillment services
company, since 1995. Before joining TFS Limited, Mr. Gordon served as a
Division Director of MBI, Inc., from 1985 to 1995, where he was responsible for
certain die-cast products.
44
<PAGE>
KEY EMPLOYEE
The Company also considers the following person to be important to its
operations:
Albert Chui has served as Assistant Vice-President--Quality Assurance and
Training since 1996. Before joining the Company, Mr. Chui served as a plant
manager with Sunshine Toys Manufacturing Limited from 1995 to 1996. In
addition, Mr. Chui worked as a quality manager with Artin Industries Company
Limited from 1993 to 1994.
BOARD, BOARD COMMITTEES AND COMPENSATION
The Company intends to increase the number of directors to five and to appoint
Messrs. Gordon and Trier as directors following completion of this offering.
The Company reimburses each director for reasonable expenses incurred in
attending meetings of the Company's Board of Directors. Directors currently
receive no other compensation for their services as Directors. Following
completion of this offering, however, the Company intends to pay each
non-employee director fee of $1,300 for each meeting attended by such director.
Outside directors who serve on board committees will be paid a fee of $300 for
each committee meeting attended by such director. Directors also will be
eligible to receive grants of options under the Company's 1998 Stock Option
Plan. See "--Compensation Pursuant to Plans."
Following completion of this offering, the Board of Directors intends to
establish a two-person Audit Committee of the Board consisting of Messrs.
Gordon and Trier. The Audit Committee will make recommendations to the Board of
Directors regarding the selection of independent auditors, will review the
results and scope of the audit and other services provided by the Company's
independent certified public accountants and will review the Company's
financial statements.
A Compensation Committee of the Board of Directors also will be established
following completion of this offering, which will consist of Messrs. Gordon,
Trier and Tong. The Compensation Committee will make recommendations to the
Board of Directors concerning executive compensation and incentive compensation
for officers and employees, including the administration of the Company's 1998
Stock Option Plan.
The Board of Directors currently has no standing Nominating Committee.
EMPLOYMENT AGREEMENTS
The Company is party to a consulting agreement with Acma Strategic Holdings
Limited, which in turn has entered into a consulting agreement with Carl Tong &
Associates Management Consultancy Limited, a company beneficially owned by Carl
Ka Wing Tong ("Associates Management"), pursuant to which Mr. Tong acts as
Managing Director of Acma Strategic Holdings Limited and performs certain other
duties, including acting as the President and Chief Executive Officer of the
Company. The terms of these agreements are described under "Certain
Transactions--Tong Consulting Arrangement."
The Company also is party to a consulting agreement with Business Plus
Consultants Limited, which is beneficially owned by Henry Hai-Lin Hu, under
which Mr. Hu serves as Executive Vice-President --Marketing of the Company. See
"Certain Transactions--Hu Consulting Agreement" for a discussion of the terms
of Mr. Hu's agreement. Consulting arrangements such as the Company's
arrangements with Messrs. Tong and Hu are commonplace in Hong Kong.
45
<PAGE>
In January 1996, the Company entered into a service agreement with Leo Sheck
Pui Kwok pursuant to which he was appointed as an executive officer of the
Company, effective as of February 1, 1996, for a term of three years. The
appointment automatically renews for a one-year term on each anniversary
beginning on February 1, 2000, unless either party provides six months written
notice to terminate the agreement. Mr. Kwok receives a salary of $46,000 per
year and a bonus of up to 2.5% of the Company's net after-tax profits on a
consolidated basis, provided the Company achieves certain net income targets.
In addition, the Company provides Mr. Kwok with a residence allowance of
approximately $5,000 per month.
Other than Mr. Kwok as described above, the Company's executive officers and
key employees are not subject to any noncompetition agreements or other
contractual obligations regarding the confidentiality of this Company's trade
secrets or other information. However, the Company is in the process of
developing service contracts for all of its senior executives which will be
executed prior to completion of this offering and which are expected to include
certain restrictions against the executives' use of confidential information of
the Company.
The Company anticipates hiring a Chief Financial Officer following completion
of this offering in order to permit Mr. Tong to focus on his duties as
President and Chief Executive Officer.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain information
regarding compensation earned by each person who served as the Company's Chief
Executive Officer during the year ended December 31, 1997 and its one other
executive officer (the "Named Executive Officers") whose compensation exceeded
$100,000 for that year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
--------------------------
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ------ ------------ ----------
<S> <C> <C> <C>
Carl Ka Wing Tong--President, Chief Executive
Officer and Chief Financial Officer......... 1997 $ 115,000(2) $ --
1996 88,000(2) --
1995 12,000(3) --
Arthur Seidenfeld(4)......................... 1997 $ -- $ --
1996 -- --
1995 -- --
Leo Sheck Pui Kwok--Chief Operating Officer.. 1997 $ 46,000 $ 4,000
1996 43,200 --
1995 102,000(5) --
</TABLE>
- --------
(1) Does not include dividends paid to the Named Executive Officers with
respect to shares of stock of CML. See "Transactions Involving Officers,
Directors and Principal Stockholders--Dividends" for a more information on
these dividends.
(2) Represents compensation paid to Acma Strategic Holdings Limited for
consulting services as described under "Transactions Involving Officers,
Directors and Principal Stockholders--Tong Consulting Arrangement."
(3) Represents compensation paid to Carl Tong & Associates Management
Consultancy Limited, a Company beneficially owned by Mr. Tong, for Mr.
Tong's services. See "Transactions Involving Officers, Directors and
Principal Stockholders--Tong Consulting Arrangement" for further
information about these services.
(4) Mr. Seidenfeld served as Chief Executive Officer of the Company prior to
the exchange reorganization completed on December 30, 1997, when Mr. Tong
succeeded Mr. Seidenfeld as Chief Executive Officer. The Company was
largely inactive during the periods shown, and Mr. Seidenfeld received no
salary or bonuses during the periods shown.
(5) Represents compensation paid to Excel Master Limited, a company
beneficially owned by Mr. Kwok at such time.
46
<PAGE>
COMPENSATION PURSUANT TO PLANS
1998 STOCK OPTION PLAN. In September 1998, the Company's Board of Directors
adopted the Company's 1998 Stock Option Plan (the "1998 Plan"), which is
expected to be approved by the Company's stockholders in December 1998. The
purpose of the 1998 Plan is to enable the Company to attract and retain top-
quality employees, officers, directors and consultants and to provide such
employees, officers, directors and consultants with an incentive to enhance
stockholder return. The 1998 Plan provides for the grant to officers,
directors, or other key employees and consultants of the Company of options to
purchase up to an aggregate of 420,000 shares of common stock. Concurrently
with this offering, the Company intends to grant stock options under the 1998
Plan to certain directors, officers, employees and consultants to purchase an
aggregate of 340,500 shares of common stock at an exercise price per share
equal to the initial public offering price of common stock. It is expected that
these options will vest and become exercisable as to 25% of the shares covered
on the date six months from the date of grant. The remaining options will vest
and become exercisable monthly pro rata over a 42-month period. It is proposed
that Messrs. Tong and Kwok receive options to purchase 112,500 shares and
67,500 shares, respectively.
The 1998 Plan may be administered by the Board of Directors or a committee of
the Board (in either case, the "Committee"), which has complete discretion to
select the optionees and to establish the terms and conditions of each option,
subject to the provisions of the 1998 Plan. Options granted under the 1998 Plan
may be "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified options.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the common stock as of the date of grant (110% of the fair
market value if the grant is to an employee who owns more than 10% of the total
combined voting power of all classes of capital stock of the Company). The Code
currently limits to $100,000 the aggregate value of common stock that may be
acquired in any one year pursuant to incentive stock options under the 1998
Plan or any other option plan adopted by the Company. Nonqualified options may
be granted under the 1998 Plan at an exercise price of not less than 100% of
the fair market value of the common stock on the date of grant. Nonqualified
options also may be granted without regard to any restriction on the amount of
common stock that may be acquired pursuant to such options in any one year.
Subject to the limitations contained in the 1998 Plan, options become
exercisable at such times and in such installments (but not less than 20% per
year) as the Committee shall provide in the terms of each individual stock
option agreement. The Committee must also provide in the terms of each stock
option agreement when the option expires and becomes unexercisable, and may
also provide the option expires immediately upon termination of employment for
any reason. No option held by directors, executive officers or other persons
subject to Section 16 of the Securities Exchange Act of 1934, as amended, may
be exercised during the first six months after such option is granted.
Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then
exercisable would terminate three months (three years in the case of
termination by reason of death or disability) following termination of
employment. Any options which were not fully vested and exercisable on the date
of such termination would immediately be cancelled concurrently with the
termination of employment.
47
<PAGE>
Options granted under the 1998 Plan may not be exercised more than ten years
after the grant (five years after the grant if the grant is an incentive stock
option to an employee who owns more than 10% of the total combined voting power
of all classes of capital stock of the Company). Options granted under the 1998
Plan are not transferable and may be exercised only by the respective grantees
during their lifetime or by their heirs, executors or administrators in the
event of death. Under the 1998 Plan, shares subject to cancelled or terminated
options are reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in the
case of certain transactions such as mergers, recapitalizations, stock splits
or stock dividends. The 1998 Plan is effective for ten years, unless sooner
terminated or suspended.
PENSION PLAN. In January 1997, CML adopted a defined contribution pension plan
(the "Pension Plan") which is available to all of the Company's Hong Kong
employees with at least three months of continuous service. Participating
employees may make monthly contributions to the Pension Plan of up to 5% of
each employee's base salary, with matching contributions by the Company. The
Hong Kong employees (or their beneficiaries) are entitled to receive their
entire contribution and the Company's matching contributions, with accrued
interest thereon, upon retirement or death of the employee. Upon resignation or
termination (other than for serious misconduct), employees are entitled to
receive their entire contributions to the Pension Plan, with accrued interest
thereon, plus the vested portion of the Company's matching contributions. A
participating employee becomes fully vested with respect to 30% of the
Company's matching contributions to the Pension Plan after completing three
years of service with the Company and becomes vested with respect to an
additional 10% of the Company's matching contributions for each year of
continuous service thereafter through year ten. CML's subsidiaries, Excel
Master Limited and Carison Engineering Limited, have each adopted pension plans
for their employees which are identical to the Pension Plan.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company's Restated Certificate of Incorporation eliminates the liability of
directors of the Company for monetary damages for breach of their fiduciary
duty as directors, except (i) for breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption; and (iv) for transactions from which the director
derived an improper personal benefit. The Restated Certificate of Incorporation
also provides that the Company will indemnify its officers, directors and other
eligible persons to the fullest extent permitted under the laws of the State of
Delaware. The Company also intends to enter into indemnity agreements with each
of its current directors and executive officers which will provide for
indemnification of, and advancement of expenses to, such persons to the maximum
extent permitted under the laws of the State of Delaware, including by reason
of action or inaction occurring in the past and circumstances in which
indemnification and advancement of expenses are discretionary under Delaware
law.
The Company believes that it is the position of the Commission that, insofar as
the forgoing provisions may be invoked to disclaim liability for damages
arising under the Securities Act of 1933, as amended (the "Securities Act"),
the provisions are against public policy as expressed in the Securities Act and
are, therefore, unenforceable.
48
<PAGE>
TRANSACTIONS INVOLVING OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS
Prior to this offering, the Company entered into transactions and business
relationships with certain of its officers, directors and principal
stockholders. The Company believes that all of the transactions were on terms
no less favorable than the Company could have obtained from independent third
parties. Any future transactions between the Company and its officers,
directors or affiliates will be subject to approval by a majority of
disinterested directors or stockholders in accordance with Delaware law.
HU CONSULTING AGREEMENT. In August 1998, the Company entered into a consulting
agreement with Business Plus Consultants Limited ("Business Plus"), which is
beneficially owned by Henry Hai-Lin Hu, the Company's Executive Vice-
President--Marketing. For its services and the services of Mr. Hu, the Company
has agreed to pay Business Plus a commission equal to 7.5% of all additional
revenues of the Company generated by Business Plus, with a guaranteed monthly
minimum fee of approximately $5,000, and all out-of-pocket expenses. The
agreement has a two-year term and will continue thereafter unless terminated by
either party upon three months prior written notice.
TONG CONSULTING ARRANGEMENT. In January 1996, the Company entered into a
consulting agreement with Acma Strategic Holdings Limited ("Acma Strategic"),
the principal stockholder of the Company and the selling stockholder in this
offering. See "--Acma Consulting Arrangement" below. Mr. Tong is a Director and
10% shareholder of Acma Strategic. In turn, Acma Strategic entered into a
consulting agreement with Associates Management, a company beneficially owned
by Mr. Tong, pursuant to which Mr. Tong acts as a Director of Acma Strategic
and performs such other duties as requested by Acma Strategic, including acting
as President and Chief Executive Officer of the Company. Acma Strategic is a
private investment company whose only investment is its ownership of common
stock of the Company. Also, pursuant to the agreement between Associates
Management and Acma Strategic, Associates Management is entitled to receive the
entire amount of any bonus paid to Acma Strategic by the Company under the
consulting agreement between the Company and Acma Strategic as described below.
In 1996, 1997 and the nine months ended September 30, 1998, Acma Strategic paid
consulting fees to Associates Management in the amounts of $239,000, $261,000
and $114,000, respectively, including bonuses.
ACMA CONSULTING ARRANGEMENT. In January 1996, the Company entered into a
consulting agreement with Acma Strategic under which Acma Strategic is to
receive an annual consulting fee of approximately $106,000. In addition, under
the terms of the agreement the Company may, at its discretion, pay Acma
Strategic a performance bonus of up to 2.5% of the Company's consolidated net
after-tax profits (but not exceeding the highest bonus paid to any executive of
CML). During 1996, 1997 and the nine months ended September 30, 1998, the
Company paid consulting fees in the amounts of $88,000, $115,000 and $116,000,
respectively, to Acma Strategic for consulting services provided. Pursuant to a
consulting agreement between Acma Strategic and Associates Management, Acma
Strategic pays Associates Management the amount of any bonus it receives from
its consulting agreement with the Company. These services consisted primarily
of management of manufacturing facilities, production design and personnel
matters. The Company will discontinue its arrangement with Acma Strategic upon
completion of this offering and assume the duties previously performed by Acma
Strategic.
49
<PAGE>
LOANS TO CML. Messrs. Kwok and Tong had outstanding certain non-interest
bearing loans to CML in the amounts of $614,000 and $316,000, respectively as
of December 31, 1996 and $612,000 and $316,000, respectively, as of December
31, 1997. The loans were repayable on demand. As of September 30, 1998, the
outstanding balances of the loans were approximately $494,000 and $227,000,
respectively. As of October 1, 1998, the principal amount of the outstanding
loans from Messrs. Kwok and Tong were converted into non-interest bearing term
loans which will be due and payable in six equal semi-annual installments
commencing March 31, 1999 and ending September 30, 2001.
In addition, in 1997 Acma Strategic advanced $9,000 on CML's behalf, which was
repaid, without any interest, in January 1998.
LOANS FROM COMPANY. During 1995, 1996 and 1997, Mr. Tong borrowed certain
amounts from CML. The maximum balance of such loans at any one time was
$124,000. The loans were non-interest bearing and were repayable on demand by
CML. All loan transactions ceased upon the completion of the Company's exchange
reorganization. The remaining outstanding balance of the loans were repaid in
full in September 1998.
DIVIDENDS. During the year ended December 31, 1997, Carison Engineering
Limited, a subsidiary 70% owned by the Company, paid a dividend in the amount
of approximately $215,000. Mr. K.T. Yiu, Vice-President--Mold Engineering and
Production of the Company and a 30% shareholder of Carison Engineering Limited,
received approximately $64,500 of such dividend. For the year ended December
31, 1997, CML declared dividends in the amount of approximately $183,000 to
Acma Strategic, approximately $108,000 to Leo Sheck Pui Kwok and approximately
$32,000 to Carl Ka Wing Tong. These dividends were declared and will be paid
strictly in accordance with their respective share holdings in CML of Acma
Strategic and Messrs. Tong and Kwok.
GUARANTEES OF COMPANY DEBT. As of September 30, 1998, the Company had credit
facilities with Hang Seng Bank, Banque Nationale de Paris, Bank of China and
Commonwealth Finance Corporation Limited of $328,000, $258,000, $65,000 and
$1,291,000, respectively, which Messrs. Tong and Kwok personally guarantee. The
facilities also are secured by a mortgage on certain real property owned by Mr.
Tong. Additionally, Acma Strategic guarantees certain of the Company's debt and
Acma Ltd. has provided a standby letter of credit in favor of one of the
Company's lenders to further secure the Company's obligations. As of September
30, 1998, the Company has outstanding balances under such facilities of
approximately $303,000, $192,000, $36,000 and $972,000, respectively.
Approximately $1,000,000 of the net proceeds to the Company of this offering
will be used to repay outstanding indebtedness under these facilities. Amounts
repaid by the Company may be reborrowed from time-to-time in accordance with
the terms of the credit facilities. The Company has arranged to eliminate the
guarantees of Messrs. Tong and Kwok and Acma Strategic following completion of
this offering.
WELLHOLDING LEASE. During the year ended December 31, 1996, the Company entered
into a lease of a Hong Kong apartment from Wellholding Limited, a company
beneficially owned by Leo Sheck Pui Kwok, the Chief Operating Officer of the
Company. Mr. Kwok uses the apartment as his residence while in Hong Kong. The
lease calls for total annual rentals of $59,000 and expires in August 2000.
50
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
The following table sets forth the beneficial ownership of common stock as of
November 24, 1998, and as adjusted to reflect the sale of common stock offered
hereby, by (i) each person known by the Company to beneficially own 5% or more
of the outstanding shares of common stock, including the selling stockholder,
(ii) each director and director nominee of the Company, (iii) each Named
Executive Officer of the Company, and (iv) all directors, director nominees and
executive officers of the Company as a group. The information set forth in the
table and accompanying footnotes has been furnished by the named beneficial
owners.
<TABLE>
<CAPTION>
COMMON STOCK OWNED NUMBER OF COMMON STOCK OWNED
PRIOR TO THE OFFERING(2) SHARES TO AFTER TO THE OFFERING(2)
--------------------------- BE SOLD ------------------------------
NUMBER OF PERCENT OF IN THE NUMBER OF PERCENT OF
NAME AND ADDRESS(1) SHARES CLASS OFFERING SHARES CLASS
- ------------------- -------------- ------------ --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Carl Ka Wing Tong(3).... 258,147 6.9% -- 258,147 4.9%
Leo Sheck Pui Kwok(4)... 564,948 15.1 -- 564,938 10.8
Arthur Seidenfeld.......
Clayton K. Trier........ -- -- -- -- --
Steve Gordon............ -- -- -- -- --
Acma Ltd. (5)........... 2,551,930 68.0 225,000(7) 2,326,930(7) 44.3(8)
Quek Sim Pin(6)......... 2,551,930 68.0 225,000(7) 2,326,930(7) 44.3(8)
All directors, director
nominees and officers
as a group (10
persons)............... 823,084 22.0 -- 823,084 15.7
</TABLE>
- --------
(1) Except as otherwise indicated, the address of each principal stockholder is
c/o the Company at Casey Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui,
Kowloun, Hong Kong.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to the shares shown. Except as indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(3) Mr. Tong is a Managing Director and 10% shareholder of Acma Strategic
Holdings Limited. As such, Mr. Tong shares investment and voting power with
respect to the shares shown as beneficially owned by Acma Strategic
Holdings Limited, as to which he disclaims beneficial ownership. Acma
Strategic Holdings Limited guarantees a banking facility of the Company.
(4) The shares shown are held of record by Superego, Inc., a British Virgin
Islands company beneficially owned by Mr. Kwok.
(5) The shares shown as being owned by Acma Ltd. consist of 1,838,157 shares
held of record by Acma Strategic Holdings Limited and an additional 713,773
shares held of record by Acma Investments Pte., Ltd., a wholly-owned
subsidiary of Acma Ltd. Acma Investments Pte., Ltd., is a 90% shareholder
of Acma Strategic Holdings Limited. Acma Strategic Holdings Limited has
guaranteed the Company's indebtedness under its bank credit facilities and
Acma Ltd. has provided a standby letter of credit in favor of one of the
Company's lenders. Acma Ltd.'s address is 17 Turong Port Singapore 619092.
(6) The shares shown consist of shares owned beneficially by Acma Ltd., of
which Quek Sim Pin is a director and principal stockholder. As such, Mr.
Quek also may be deemed to beneficially own the shares owned beneficially
by Acma Ltd. Mr. Quek's address is c/o Acma Ltd., 17 Turong Port Singapore
619092.
(7) Acma Investments Pte., Ltd. will sell 225,000 shares of common stock if the
Underwriters' over-allotment option is exercised in full. See
"Underwriting" for more information regarding the over-allotment option.
(8) Assumes the Underwriters' over-allotment option is exercised in full.
51
<PAGE>
CHANGE IN ACCOUNTANTS
Effective April 30, 1998, Greenberg & Company, LLC ("Greenberg"), which had
been the Company's auditor prior to the exchange reorganization, resigned as
the independent accountants of the Company. The Company's Board of Directors
approved the appointment of Arthur Andersen & Co. as its new independent
accountants on April 30, 1998.
Greenberg's report on the Company's financial statements for the past two years
did not contain an adverse opinion or disclaimer, and was not modified as to
uncertainty, audit scope or accounting principles during that period. The
Company did not have any disagreements with Greenberg on any matter of
accounting principles, financial statements, auditing scope or procedure during
that period.
DESCRIPTION OF CAPITAL STOCK
The current authorized capital stock of the Company consists of 60,000,000
shares of common stock, par value $.0001 per share, 3,749,810 shares of which
were issued and outstanding as of November 24, 1998. Prior to completion of
this offering, the Company intends to amend and restate its Certificate of
Incorporation to reduce the authorized shares of Common Stock to 25,000,000
shares and to authorize 5,000,000 shares of preferred stock, $.0001 par value.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. The holders of common
stock are entitled to receive dividends ratably when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of common
stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are, and the
shares of common stock offered by the Company hereby, when issued against the
consideration set forth in this Prospectus, will be, validly issued, fully-paid
and nonassessable.
PREFERRED STOCK
Under the Company's Restated Certificate of Incorporation, the Board of
Directors will be authorized, subject to any limitations prescribed by the laws
of the State of Delaware, but without further action by the Company's
stockholders, to provide for the issuance of up to 5,000,000 shares of
preferred stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the designations,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. The Board of Directors may authorize and issue preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of common stock.
52
<PAGE>
The Company has no current plan or intention to issue any shares of preferred
stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "Delaware Law"), an anti-takeover law. In general, the
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer & Trust Company in Glendale, California, will serve as
transfer agent and registrar for the common stock.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADEABLE AFTER OFFERING. Upon completion of this
offering, the Company will have 5,249,810 shares of common stock outstanding.
The 1,500,000 shares to be sold by the Company in this offering (and any shares
sold by the Selling Stockholder) will be freely tradeable without restriction
or limitation under the Securities Act, except for any such shares held by
"affiliates" of the Company, as such term is defined under Rule 144 of the
Securities Act, which shares will be subject to the resale limitations under
Rule 144. Of the remaining outstanding shares, approximately 3,375,012 shares
are "restricted securities" within the meaning of Rule 144 and may be publicly
sold only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. All of these
restricted shares of common stock will become eligible for resale under Rule
144 commencing December 30, 1998. The Company's directors and officers and
certain of its stockholders who collectively hold an aggregate of 3,604,500
shares, have agreed not to sell, directly or indirectly, any shares owned by
them for a period of six months after the date of the completion of this
offering without the prior written consent of the Representative. Upon the
expiration of this six month lock-up period (or earlier upon the consent of the
Representative), all of these shares will become eligible for sale subject to
the restrictions of Rule 144.
RULE 144. In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year, including an affiliate of the Company, would be entitled to
sell, within any three-month period, that number of shares that does not exceed
the greater of 1% of the then-outstanding shares of common stock (approximately
52,500 shares after this offering) and the average weekly trading volume in the
common stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Commission, provided certain manner
of sale and notice requirements and requirements as to the availability of
current public information about the Company are satisfied. In addition,
affiliates of the Company must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of common stock. As defined in Rule 144, an "affiliate" of an issuer is
a person who, directly or indirectly, through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer. Under Rule 144(k), a holder of "restricted securities" who is not
deemed an affiliate of the issuer and who has beneficially owned shares for at
least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above.
FORM S-8 REGISTRATION OF OPTIONS. The Company intends to file a Registration
Statement on Form S-8 covering the shares of common stock that have been
reserved for issuance under the 1998 Plan, which would permit the resale of
such shares in the public market.
EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK. The Company is
unable to estimate the number of shares that may be sold in the future by its
existing stockholders or the effect, if any, that such sales will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of the common stock.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Underwriters named below, for whom
Cruttenden Roth Incorporated is acting as Representative, have agreed to
purchase from the Company and the Company has agreed to sell to the
Underwriters, the respective number of shares of common stock set forth
opposite each Underwriter's name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated........................................
Total........................................................... 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company's
counsel and independent public accountants. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of common stock if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of common stock directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such selected dealers may
reallow, a discount not in excess of $ per share to certain brokers and
dealers. After the public offering of the shares, the public offering price and
other selling terms may be changed by the Representative. No change in such
terms shall change the amount of proceeds to be received by the Company as set
forth on the cover page of this Prospectus.
Acma Investments Pte., Ltd., a wholly-owned subsidiary of Acma Ltd., has
granted an option to the Underwriters, exercisable for a period of 45 days
after the date of this Prospectus, to purchase up to an additional 225,000
shares of common stock at the public offering price set forth on the cover page
of this Prospectus, less the underwriting discounts and commissions. The
Underwriters may exercise this option only to cover over-allotments, if any. To
the extent that the Underwriters exercise this option, each of the Underwriters
will be committed, subject to certain conditions, to purchase such additional
shares of common stock in approximately the same proportion as set forth in the
above table.
The Company's directors and officers and certain of its stockholders who own an
aggregate of 3,604,500 shares of common stock have agreed that they will not,
without the prior written consent of Cruttenden Roth Incorporated (which
consent may be withheld in its sole discretion) and subject to certain limited
exceptions, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, sell short, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or enter into
any swap or similar agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common stock, for a period of six
months after the date of completion this offering. Cruttenden Roth
Incorporated, on behalf of the Underwriters, may, in its sole discretion and at
any
55
<PAGE>
time without notice, release all or any portion of the securities subject to
these lock-up agreements. In addition, the Company has agreed that, for a
period of six months after the date of completion of this offering, it will
not, without the consent of Cruttenden Roth Incorporated, make any offering,
purchase, or sale or other disposition of any shares of common stock of the
Company or other securities convertible into or exchangeable or exercisable for
shares of common stock (or agreement for such) except for the grant of options
to purchase shares of common stock pursuant to the 1998 Plan and shares of
common stock issued pursuant to the exercise of options granted under such
plan, or the Company shall obtain the written consent of the holder thereof not
to transfer such shares, until the end of such six-month period. See
"Management--Compensation Pursuant to Plans" and "Shares Eligible for Future
Sale."
The Company has agreed to issue to the Representative, for a total of $150,
warrants to purchase up to 150,000 shares of common stock at an exercise price
per share equal to 120% of the initial public offering price of the shares in
this offering. The exercise price of the Representative's Warrants has been
determined by negotiations between the Company and the Representative. The
exercise price of the Representative's Warrants is one of the factors used by
the National Association of Securities Dealers, Inc. ("NASD") under its
Corporate Financing Rule to determine whether the total compensation paid to an
underwriter and its associated and related persons for services in connection
with a public offering is excessive. The sole factor considered by the Company
and the Representative in negotiating the exercise price of the
Representative's Warrants in this offering was to select an amount that would
not be considered excessive under the NASD's Corporate Financing Rule in light
of the total compensation payable by the Company in connection with this
offering. The Representative's Warrants will be exercisable for a period of
four years beginning one year after the date of this prospectus and will not be
transferable for a period of one year, except to officers of the Representative
or any successors thereof. The Representative's Warrants include a "net"
exercise provision permitting the holders to pay the exercise price by
cancellation of a number of shares with a fair market value equal to the
exercise price of the Representative's Warrants. The holders of the
Representative's Warrants will have no voting, dividend or other stockholder
rights until the Representative's Warrants are exercised. In addition, the
Company has granted certain rights to the holders of the Representative's
Warrants to register the common stock underlying the Representative's Warrants
under the Securities Act. The Company and the selling stockholder have agreed
to pay the Representative a non-accountable expense allowance of 3% of the
total offering proceeds from the sale of shares of common stock by them, of
which the Company has already paid $50,000.
The Representative has advised the Company that it does not expect any sales of
the shares of common stock offered hereby to be made to discretionary accounts
controlled by the Underwriters.
Although the Company's common stock has been traded on OTC Electronic Bulletin
Board prior to this offering, trading has been extremely limited and sporadic.
Moreover, there are less than 374,800 shares of common stock in the public
float. As there has been no active trading market for the common stock prior to
this offering, the Company and the Representative believe that prices for the
common stock on the OTC Electronic Bulletin Board do not reflect the trading
prices that the common stock would receive if an established and active trading
market existed. Accordingly, the Company is determining the price of the common
stock in this offering in the same manner that the price of common stock
offered in an initial public offering is determined -- through consultation and
negotiation with the Representative of the Underwriters. Among the factors to
be considered in such
56
<PAGE>
negotiations are the preliminary demand for the common stock, the prevailing
market and economic conditions, the Company's results of operations, estimates
of the business potential and earnings prospects of the Company, the present
state of the Company's business operations, an assessment of the Company's
management, the number of shares of common stock being offered and the total
number of shares to be outstanding upon completion of this offering, the price
that purchasers might be expected to pay for the common stock given the nature
of the Company and the general condition of the securities markets at the time
of the offering, the consideration of these factors in relation to the market
valuation of comparable companies in related businesses or whose operations are
conducted in the same geographic area as those of the Company and the current
condition of the markets in which the Company operates. The Company believes
that the primary factors justifying a higher price for the common stock in this
offering than that quoted on the OTC Electronic Bulletin Board are an
assessment of the market prices and price-earnings ratios of publicly-traded
companies engaged in activities considered comparable to the Company's business
and the sales and earnings of the Company in recent periods. There can be no
assurance that an active trading market will develop for the common stock after
this offering or that the common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
The Underwriting Agreement provides that the Company and the selling
stockholder will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof. The Company is generally obligated to indemnify the
Underwriters and their respective controlling persons in connection with losses
or claims arising out of any untrue statement of a material fact contained in
this prospectus or in related documents filed with the Securities and Exchange
Commission or with any state securities administrator or arising out of any
omission to state in any of such documents any material fact required to be
stated in such documents or necessary to make the statements made in such
documents, in light of the circumstances under which they were made, not
misleading. In addition, the Company is generally obligated to indemnify the
Underwriters and their respective controlling persons in connection with losses
or claims arising out of any breach of any representation, warrant, agreement
or covenant of the Company contained in the Underwriting Agreement. The selling
stockholder has similar indemnification obligations to the Underwriters and
their respective controlling persons in connection with losses or claims
arising out its representations, warranties, agreements, covenants, statements
and omissions.
The foregoing is a summary of the principal terms of the Underwriting Agreement
and the Representative's Warrants, does not purport to be complete and is
qualified in its entirety by reference to the form of Underwriting Agreement
and the form of Representative's Warrant which have been filed as exhibits to
the Company's Registration Statement of which this Prospectus is a part.
To facilitate this offering, the Underwriters may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock.
Specifically, the Underwriters may over-allot shares in connection with this
offering, thereby creating a short position in the Underwriters' syndicate
account. Additionally, to cover such over-allotments or to stabilize the market
price of the shares, the Underwriter may bid for, and purchase, shares in the
open market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment options described above. Any of
these activities may maintain the market price of the shares at a level above
that which might otherwise prevail in the open market. The Underwriters are not
required to engage in these activities, and, if commenced, any such activities
may be discontinued at any time.
57
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California. The
Fada Law Firm, Beijing, China, and Angela Wang & Co., Hong Kong, have acted as
counsel to the Company with respect to certain matters of Chinese law and Hong
Kong law, respectively. Freshman, Marantz, Orlanski, Cooper & Klein, a Law
Corporation, Beverly Hills, California, has acted as counsel to the
Underwriters in connection with certain legal matters related to this offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997 and
for the years ended December 31, 1995, 1996 and 1997 included in this
prospectus have been audited by Arthur Andersen & Co., independent public
accountants, as stated in their report appearing herein and are so included
herein in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy or information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following regional
offices: Seven World Trade Center, New York, New York 10048, and Citicorp
Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, the Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov.
The Company has filed with the Commission, a Registration Statement on Form SB-
2 under the Securities Act with respect to the common stock being offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the common stock offered hereby, reference is made
to the Registration Statement, and such exhibits and schedules. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at the addresses set forth above, and copies of all or any part of
the Registration Statement may be obtained from such offices upon payment of
the fees prescribed by the Commission. In addition, the Registration Statement
may be accessed at the Commission's Web site. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets--as of December 31, 1996 and 1997 (audited)
and as of September 30, 1998 (unaudited)................................ F-3
Consolidated Statements of Operations--for each of the three years ended
December 31, 1995, 1996 and 1997 (audited) and for each of the nine-
month periods ended September 30, 1997 and 1998 (unaudited)............. F-4
Consolidated Statements of Cash Flows--for each of the three years ended
December 31, 1995, 1996 and 1997 (audited) and for each of the nine-
month periods ended September 30, 1997 and 1998 (unaudited)............. F-5
Consolidated Statements of Changes in Stockholders' Equity--for each of
the three years ended December 31, 1995, 1996 and 1997 (audited) and for
the nine-month period ended September 30, 1998 (unaudited).............. F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
After the three-for-four reverse stock split and the reduction in authorized
share capital discussed in Note 16 to Creative Master International, Inc.'s
consolidated financial statements are effected, we expect to be in a position
to render the following auditors' report.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
September 30, 1998.
"REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Creative Master
International, Inc.:
We have audited the accompanying consolidated balance sheets of Creative Master
International, Inc. (a company incorporated in the State of Delaware, United
States of America; formerly known as Davin Enterprises, Inc.; "the Company")
and Subsidiaries ("the Group") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years ended December 31, 1995, 1996 and 1997.
These financial statements give retroactive effect, for all years presented, to
the acquisition of Creative Master Limited as a reverse acquisition as
described in Note 2 to the accompanying financial statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Master
International, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their 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."
F-2
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 (AUDITED)
AND SEPTEMBER 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
NOTE 1996 1997 1998
---- ----- ------ -------------
$'000 $'000 $'000
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and bank deposits....................... 19 435 471 889
Accounts receivable, net..................... 5 1,733 2,827 5,098
Deposits and prepayments..................... 6 204 307 644
Inventories, net............................. 7 1,544 2,928 3,331
Due from a related company................... 20 41 -- --
----- ------ ------
Total current assets....................... 3,957 6,533 9,962
Machinery, equipment and capital leases, net... 8 2,398 3,155 4,854
Long-term investment........................... 9 1 1 1
Deferred stock issuance costs.................. -- -- 132
Goodwill....................................... 10 395 810 740
Deferred taxation.............................. 14 1 -- --
----- ------ ------
Total assets............................... 6,752 10,499 15,689
===== ====== ======
LIABILITIES, MINORITY INTERESTS
AND STOCKHOLDERS' EQUITY
-------------------------------
Current liabilities:
Short-term bank borrowings................... 11 782 1,290 1,503
Capital lease obligations, current portion... 12 258 764 456
Accounts payable............................. 1,512 1,908 3,474
Deposits from customers...................... -- 560 438
Accrued liabilities.......................... 13 979 1,579 2,699
Due to directors............................. 20 879 861 670
Due to parent company........................ 20 -- 9 --
Taxation payable............................. 14 18 68 161
Dividend payable............................. -- 323 323
----- ------ ------
Total current liabilities.................. 4,428 7,362 9,724
Capital lease obligations, non-current
portion....................................... 12 245 266 502
Deferred taxation.............................. 14 -- 57 263
----- ------ ------
Total liabilities.......................... 4,673 7,685 10,489
----- ------ ------
Minority interests............................. -- 75 387
----- ------ ------
Stockholders' equity:
Common stock, par value $0.0001; authorized
25,000,000 shares; outstanding and fully
paid 3,749,810 shares....................... 16 1 1 1
Preferred stock, par value $0.0001;
authorized 5,000,000 shares; nil
outstanding................................. -- -- --
Additional paid-in capital................... 1,202 1,401 1,401
Retained earnings............................ 872 1,337 3,411
Cumulative translation adjustments........... 4 -- --
----- ------ ------
Total stockholders' equity................. 2,079 2,739 4,813
----- ------ ------
Total liabilities, minority interests and
stockholders' equity...................... 6,752 10,499 15,689
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
NOTE 1995 1996 1997 1997 1998
---- --------- --------- --------- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 21 9,982 14,054 16,211 13,090 24,129
Cost of goods sold...... (7,878) (9,782) (12,703) 10,466 (18,303)
--------- --------- --------- --------- ---------
Gross profit.......... 2,104 4,272 3,508 2,624 5,826
Selling, general and
administrative
expenses............... (2,394) (2,552) (1,921) (1,964) (3,070)
Interest income......... -- -- 112 108 17
Interest expense........ (88) (140) (216) (192) (208)
Other income (expenses),
net.................... (96) (567) (137) 150 231
Gain on dilution of
equity interest in a
subsidiary............. -- -- -- -- 77
Reorganization expense.. 15 -- -- (284) -- --
Amortization of
goodwill............... (33) (44) (62) (37) (70)
--------- --------- --------- --------- ---------
Income (Loss) before
income taxes and
minority interests... (507) 969 1,000 689 2,803
Provision for income
taxes.................. 14 (52) (154) (130) (128) (359)
--------- --------- --------- --------- ---------
Income (Loss) before
minority interests... (559) 815 870 561 2,444
Minority interests...... -- -- (82) -- (370)
--------- --------- --------- --------- ---------
Net income (loss)..... (559) 815 788 561 2,074
========= ========= ========= ========= =========
Net income (loss) per
common share........... 4.K $ (0.16) $ 0.23 $ 0.22 $ 0.16 $ 0.55
========= ========= ========= ========= =========
Weighted average number
of common shares
outstanding............ 3,604,500 3,604,500 3,605,296 3,604,500 3,749,810
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ------ ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ (559) 815 788 561 2,074
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation of machinery and
equipment..................... 320 448 469 317 473
Net (gain) loss on disposals of
machinery and equipment....... 20 12 (6) -- --
Net (gain) loss on disposal of
short-term investments........ (14) 2 -- -- --
Write-back of receivable from
minority interests............ -- (112) -- -- --
Write-down of long-term
investment.................... 235 449 -- -- --
Reorganization expense......... -- -- 199 -- --
Amortization of goodwill....... 33 44 62 37 70
Minority interests............. -- -- 82 -- 370
Deferred income taxes.......... -- 37 58 (29) 184
(Increase) Decrease in operating
assets--
Accounts receivable, net....... (471) (766) (1,094) (1,334) (2,271)
Deposits and prepayments....... (15) (130) 7 (1,050) (337)
Inventories, net............... 200 (980) (1,161) (478) (403)
Increase (Decrease) in operating
liabilities--
Accounts payable............... 143 598 234 (72) 1,566
Deposits from customers........ -- -- 560 -- (122)
Accrued liabilities............ 64 600 439 995 1,120
Due to parent company.......... -- -- 9 -- (9)
Taxation payable............... (164) 31 50 51 113
---- ----- ------ ------ ------
Net cash provided by (used
in) operating activities.... (208) 1,048 696 (1,002) 2,828
---- ----- ------ ------ ------
Cash flows from investing
activities:
Acquisition of machinery and
equipment..................... (474) (804) (24) (9) (1,532)
Proceeds from disposals of
machinery and equipment....... -- 8 -- -- --
Proceeds from disposal of
short-term investments........ 136 12 -- -- --
Net cash outflow from
acquisition of a subsidiary... -- (29) (1) -- --
Decrease (Increase) in due from
a related company............. -- (41) 41 41 --
Decrease (Increase) in due from
directors..................... 303 -- -- -- --
---- ----- ------ ------ ------
Net cash (used in) provided
by investing activities..... (35) (854) 16 32 (1,532)
---- ----- ------ ------ ------
</TABLE>
(To be continued)
F-5
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED) (CONT'D)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Increase (Decrease) in bank
overdrafts........................ -- 25 (28) (25) --
New short-term bank loans.......... 651 564 1,097 907 2,450
Repayment of short-term bank
loans............................. (295) (468) (825) (452) (2,386)
Increase (Decrease) in import trust
receipts bank loans............... 2 166 77 (76) 149
Repayment of capital element of
capital lease obligations......... (203) (206) (605) (279) (712)
Stock issuance costs paid.......... -- -- -- -- (132)
(Decrease) Increase in due to
directors......................... 238 34 (18) 727 (190)
Decrease in due to a related
company........................... -- -- (363) -- --
Finance from minority interests of
a subsidiary...................... -- -- -- -- 1
Dividends paid to minority
interests of a subsidiary......... (370) -- (7) -- (58)
---- ---- ----- ---- ------
Net cash (used in) provided by
financing activities............ 23 115 (672) 802 (878)
---- ---- ----- ---- ------
Effect of cumulative translation
adjustments....................... (1) -- (4) (2) --
---- ---- ----- ---- ------
Net increase (decrease) in cash and
bank deposits..................... (221) 309 36 (170) 418
Cash and bank deposits, as of
beginning of year/period.......... 347 126 435 435 471
---- ---- ----- ---- ------
Cash and bank deposits, as of end
of year/period.................... 126 435 471 265 889
==== ==== ===== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
----------------------- ADDITIONAL RETAINED TRANSLATION
NUMBER OF SHARES AMOUNT PAID-IN CAPITAL EARNINGS ADJUSTMENTS
---------------- ------ --------------- -------- -----------
<S> <C> <C> <C> <C> <C>
'000 $'000 $'000 $'000 $'000
Balance as of December
31, 1994............... 3,605 1 1,202 986 6
Net loss................ -- -- -- (559) --
Dividends............... -- -- -- (370) --
Translation
adjustments............ -- -- -- -- 1
----- ----- ----- ----- -----
Balance as of December
31, 1995............... 3,605 1 1,202 57 7
Net income.............. -- -- -- 815 --
Translation
adjustments............ -- -- -- -- (3)
----- ----- ----- ----- -----
Balance as of December
31, 1996............... 3,605 1 1,202 872 4
Effect of the exchange
reorganization 145 -- -- -- --
Reorganization expense
contributed by
stockholders (Note
15).................... -- -- 199 -- --
Net income.............. -- -- -- 788 --
Dividends............... -- -- -- (323) --
Translation
adjustments............ -- -- -- -- (4)
----- ----- ----- ----- -----
Balance as of December
31, 1997............... 3,750 1 1,401 1,337 --
Net income (unaudited).. -- -- -- 2,074 --
----- ----- ----- ----- -----
Balance as of September
30, 1998 (unaudited)... 3,750 1 1,401 3,411 --
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Creative Master International, Inc. ("the Company") is incorporated in the
State of Delaware, United States of America. With effect from March 2, 1998,
the Company changed its name from Davin Enterprises, Inc. to Creative Master
International, Inc., the present one.
During the period from January 1, 1995 (the earliest date covered by this
report) to December 30, 1997, the Company's sole asset was investment in a 9.6%
interest in Target Vision Inc., a company incorporated in the State of
Delaware, United States of America, which was principally engaged in the
trading of communication systems.
ACQUISITION OF CML
On December 30, 1997, the Company acquired 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing 3,604,500
shares of common stock of par value $0.0001 each (after the reverse stock
splits and the redenominations of par value as described in Note 16) to Acma
Strategic Holdings Limited ("ASHL"; a company incorporated in Hong Kong),
Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong. ASHL is 90% owned by Acma
Ltd., a company incorporated in Singapore and listed on the Singapore Stock
Exchange Limited, and 10% owned by Mr. Carl Ka-Wing Tong. CML and its
subsidiaries ("the CML Group") are principally engaged in the manufacturing of
collectible replica racing and classic cars for sale to customers in the United
States of America and Europe. The CML Group maintains its head office in Hong
Kong, where it coordinates sales and marketing, purchasing and administrative
functions. Its production facilities are located in Guangdong Province, the
People's Republic of China ("the PRC").
2. BASIS OF PRESENTATION
The acquisition of CML by the Company on December 30, 1997 has been treated as
a reverse acquisition since CML is the continuing entity as a result of the
exchange reorganization. On this basis, the historical financial statements
prior to December 30, 1997 represent the consolidated financial statements of
the CML Group. The historical stockholders' equity accounts of the Company as
of December 31, 1995 and 1996 represented 3,604,500 shares of common stock of
par value $0.0001 each (after the effect of the reverse stock splits and the
redenominations of par value as described in Note 16) issued in connection with
the acquisition. The original 145,310 shares of common stock of par value
$0.0001 each outstanding prior to the exchange reorganization (after the effect
of the reverse stock splits and the redenominations of par value as described
in Note 16) were reflected as an addition in the historical stockholders'
equity accounts of the Company on December 30, 1997.
F-8
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
PLACE OF EQUITY INTEREST
NAME INCORPORATION HELD PRINCIPAL ACTIVITIES
- ---- ------------- --------------- ----------------------
<S> <C> <C> <C>
Creative Master Limited.... Hong Kong 100% Manufacturing and
trading of collectible
replica products
Excel Master Limited....... Hong Kong 100% Trading of collectible
replica products
Mastercraft Engineering
Limited .................. Hong Kong 100% Manufacturing of
(formerly known as Queenex Note b molds
Enterprises Limited)
Carison Engineering Limited
.......................... Hong Kong 70% Manufacturing of
(formerly known as Carison molds
Limited)
(Note c)
Techtime Industries
Limited................... Hong Kong 55% Manufacturing of
collectible replica
products
Dongguan Chuangying Toys... The PRC Note a Manufacturing of
Factory Co., Ltd. collectible replica
products
</TABLE>
- --------
Notes
a Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006.
Under the joint venture agreement dated September 10, 1994 and the
supplemental agreement dated April 1, 1996, the Group's joint venture
partner is not entitled to any profit of the joint venture and is not
responsible for any loss of the joint venture. In view of the profit
sharing arrangement, the joint venture is regarded as 100% owned by the
Company.
b Effective from April 15, 1998, Queenex Enterprises Limited changed its name
to Mastercraft Engineering Limited ("MEL"), the present one. Prior to April
14, 1998, MEL was 100% owned by the Group. On April 14, 1998, MEL issued
9,000 shares of common stock of par value $0.129 each (equivalent of HK$1
each) to three parties which are not involved in management of the Company
at par and 11,000 shares of common stock to the Group at par. As a result,
the Group's equity interest in MEL was diluted from 100% to 70%, and
recognized a gain on dilution of approximately $77,000.
c Effective from May 20, 1998, Carison Limited changed its name to Carison
Engineering Limited, the present one.
F-9
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
subsidiaries and its contractual joint venture which is considered as a de
facto subsidiary. All material intra-group balances and transactions have been
eliminated on consolidation.
B GOODWILL
Goodwill, being the excess of cost over the fair value of the Group's share of
net assets of subsidiaries acquired, is amortized on a straight-line basis over
ten years. The amortization recorded during the years ended December 31, 1995,
1996 and 1997 was approximately $33,000, $44,000 and $62,000, respectively, and
during the nine months ended September 30, 1997 and 1998 was approximately
$37,000 and $70,000, respectively. Accumulated amortization as of December 31,
1996 and 1997 and September 30, 1998 was approximately $77,000, $139,000 and
$209,000, respectively. Management assesses the carrying amount and the
remaining life of the goodwill annually, taking into consideration current
operating results and future prospects of the subsidiaries.
C CONTRACTUAL JOINT VENTURE
A contractual joint venture is an entity established between the Group and one
or more other parties, with the rights and obligations of the joint venture
partners governed by a contract. If the Group owns more than 50% of the joint
venture and is able to govern and control its financial and operating policies
and its board of directors, such joint venture is considered as a de facto
subsidiary and is accounted for as a subsidiary.
D INVENTORIES
Inventories are stated at the lower of cost, on a first-in first-out basis, and
market value. Costs of work-in-process and finished goods are composed of
direct materials, direct labor and an attributable portion of production
overhead.
E MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases are recorded at cost. Gains or losses
on disposals are reflected in current operations. Depreciation for financial
reporting purposes is provided using the straight-line method over the
estimated useful lives of the assets as follows: machinery and tools 3 to 10
years, leasehold improvements 3 to 10 years, furniture and office equipment 3
to 5 years, and motor vehicles--3 to 4 years. All ordinary repair and
maintenance costs are expensed as incurred.
The Group recognizes an impairment loss on machinery and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through sale.
Measurement of the impairment loss is based on the fair value of the assets.
F-10
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F LONG-TERM INVESTMENTS
Investments held for the long-term are stated at lower of cost and net
realizable value. Income from investments is accounted for to the extent of
dividends received and receivable. Management assesses the carrying cost
annually, taking into account of operating results and future prospects of the
long-term investments. The write-downs recorded during the year ended December
31, 1995, 1996 and 1997, and the nine months ended September 30, 1997 and 1998
were $235,000, $449,000, nil, nil and nil, respectively. Accumulated write-down
as of December 31, 1996, 1997 and September 30, 1998 was $684,000.
G NET SALES
Net sales represent the invoiced value of merchandise/molds supplied to
customers, net of sales returns and allowances. Sales are recognized upon
delivery of goods and passage of title to customers.
Deposits or advanced payments from customers prior to delivery of goods and
passage of title are recorded as deposits from customers.
H INCOME TAXES
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
I OPERATING LEASES
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.
J FOREIGN CURRENCY TRANSLATION
The translation of the financial statements of subsidiaries into United States
dollars is performed for balance sheet accounts using the closing exchange rate
in effect at the balance sheet dates and for revenue and expense accounts using
an average exchange rate during each reporting period. The gains or losses
resulting from translation are included in stockholders' equity separately as
cumulative translation adjustments. Aggregate losses (gains) from foreign
currency transactions included in the results of operations for the years ended
December 31, 1995, 1996 and 1997 were approximately $20,000, $104,000 and
$47,000, respectively, and for the nine months ended September 30, 1997 and
1998 were approximately $29,000 and ($117,000), respectively.
F-11
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
K NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income (loss) for each
year/period by the weighted average number of shares of common stock
outstanding during the year/period, as if the common stock issued for the
acquisition of CML (see Note 1) and the reverse stock splits and the
redenominations of par value (see Note 16) had been consummated prior to the
years/periods presented. The weighted average number of shares used to compute
net income (loss) per common share for the year ended December 31, 1995, 1996
and 1997 was 3,604,500, 3,604,500 and 3,605,296, respectively, and for the nine
months ended September 30, 1997 and 1998 was 3,604,500 and 3,749,810,
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 are carried at cost, which approximate their
fair values.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables................................. 1,857 2,966 5,231
Less: Allowance for doubtful accounts............. (124) (139) (133)
------ ------ -----
Accounts receivable, net.......................... 1,733 2,827 5,098
====== ====== =====
</TABLE>
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Deposits for acquisition of molds................. 105 149 430
Rental and utility deposits....................... 38 69 115
Prepayments....................................... 32 83 76
Others............................................ 29 6 23
------ ------ ---
204 307 644
====== ====== ===
</TABLE>
F-12
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................... 911 1,358 1,548
Work-in-process................................. 229 722 877
Finished goods.................................. 431 959 1,007
------ ------ -----
1,571 3,039 3,432
Less: Allowance for slow-moving and obsolete
inventories.................................... (27) (111) (101)
------ ------ -----
Inventories, net................................ 1,544 2,928 3,331
====== ====== =====
</TABLE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1996 1997 1998
----- ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment:
Machinery and tools............................. 1,170 769 1,822
Leasehold improvements.......................... 899 1,033 1,158
Furniture and office equipment.................. 330 455 726
Motor vehicles.................................. 19 21 54
Capital leases:
Machinery and tools............................. 1,060 2,412 3,057
Motor vehicle................................... -- -- 32
Furniture and office equipment.................. -- 14 18
----- ------ ------
Cost.............................................. 3,478 4,704 6,867
Less: Accumulated depreciation
Machinery and equipment......................... (863) (1,066) (1,325)
Capital leases.................................. (217) (483) (688)
----- ------ ------
Machinery, equipment and capital leases, net...... 2,398 3,155 4,854
===== ====== ======
</TABLE>
9. LONG-TERM INVESTMENT
Long-term investment represented a 9.6% interest in Target Vision Inc. (a
company incorporated in the State of Delaware, United States of America), which
was principally engaged in the trading of communication systems. The carrying
cost of the long-term investment represented:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Long-term investment............................ 685 685 685
Less: Write down of investment cost............. (684) (684) (684)
------ ------ ----
Long-term investment, net....................... 1 1 1
====== ====== ====
</TABLE>
F-13
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying cost of the long-term investment approximated its market value.
10. GOODWILL
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Goodwill......................................... 472 949 949
Less: Accumulated amortization................... (77) (139) (209)
----- ------ ----
Goodwill, net.................................... 395 810 740
===== ====== ====
</TABLE>
11. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Overdrafts......................................... 25 -- --
Short-term loans................................... 452 908 972
Import trust receipts loans........................ 305 382 531
----- ------- -----
782 1,290 1,503
===== ======= =====
</TABLE>
Short-term bank borrowings are denominated in Hong Kong dollars and bear
interest at the Hong Kong prime lending rate plus 1.5% to 4.3%, which ranged
from 11.0% to 13.8% per annum as of December 31, 1997; and at the Hong Kong
prime lending rate plus 1.5% to 4.3% or the United States prime lending rate
plus 2.3%, which ranged from 10.8% to 14.3% per annum as of September 30, 1998.
They are collaterized by the Group's bank deposits of approximately $72,000 and
$472,000 as of December 31, 1997 and September 30, 1998, respectively, personal
guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong,
mortgage over real estate property owned by Mr. Carl Ka-Wing Tong, corporate
guarantee provided by Acma Strategic Holdings Limited, and a standby letter of
credit issued by Acma Ltd. (see Note 19). They were drawn for working capital
purposes and are renewable with the consent of the relevant banks.
F-14
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental information with respect to short-term bank borrowings for the
year ended December 31, 1997 and nine months ended September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
MAXIMUM AVERAGE AVERAGE WEIGHTED
AMOUNT AMOUNT INTEREST AVERAGE
OUTSTANDING OUTSTANDING RATE AT THE INTEREST RATE
DURING THE DURING THE END OF DURING THE
YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD
----------- ----------- ----------- -------------
$'000 $'000
YEAR ENDED DECEMBER 31, 1997
----------------------------
<S> <C> <C> <C> <C>
Overdrafts.................. 111 17 12.5% 12.1%
===== ===== ==== ====
Short-term loans............ 908 686 10.7% 10.1%
===== ===== ==== ====
Import trust receipts
loans...................... 448 291 12.5% 11.9%
===== ===== ==== ====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, 1998 (UNAUDITED)
---------------------------
<S> <C> <C> <C> <C>
Overdrafts.................. 49 8 0.0% 14.2%
===== ===== ==== ====
Short-term loans............ 1,427 1,113 11.5% 11.6%
===== ===== ==== ====
Import trust receipts
loans...................... 531 378 11.7% 11.8%
===== ===== ==== ====
</TABLE>
12. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments, are:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
--Within one year................................ 299 830 556
--Over one year but not exceeding two years...... 211 195 398
--Over two years but not exceeding three years... 50 91 180
----- ------ -----
Total minimum lease payments....................... 560 1,116 1,134
Less: Amount representing interest................. (57) (86) (176)
----- ------ -----
Present value of minimum lease payments............ 503 1,030 958
Less: Current portion.............................. (258) (764) (456)
----- ------ -----
Non-current portion................................ 245 266 502
===== ====== =====
</TABLE>
F-15
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Accruals for operating expenses
--Salaries, wages and bonus....................... 360 575 860
--Subcontracting charges.......................... 230 463 1,004
--Rentals......................................... 39 41 22
--Others.......................................... 214 120 248
Accruals for purchases of loose tools and
consumables........................................ 64 269 277
Accruals for purchases of machinery and tools....... -- -- 181
Others.............................................. 72 111 107
--- ----- -----
979 1,579 2,699
=== ===== =====
</TABLE>
14. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they
operate. The Company is subject to the United States federal tax at a rate of
35%. The Hong Kong subsidiaries are subject to Hong Kong profits tax at a rate
of 16.5% for the years ended December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1997, and 16% for the nine months ended
September 30, 1998.
The contractual joint venture established in the PRC (Dongguan Chuangying Toys
Factory Co., Ltd.) is subject to PRC income taxes at a rate of 33% (30% state
income tax and 3% local income tax). However, the joint venture is exempted
from state income tax and local income tax for two years starting from the
first year of profitable operations and is subject to a 50% reduction in state
income tax for the next three years. The first profitable year of operations
for Dongguan Chuangying Toys Factory Co., Ltd. was the year ended December 31,
1997. If the tax holiday had not existed, the Group's income tax expenses would
have been increased by approximately nil, nil and $8,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, and approximately $6,000 and
$9,000 for the nine months ended September 30, 1997 and 1998, respectively.
Provision for income taxes comprised:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current taxes
--Hong Kong Profits Tax................ 52 117 72 157 175
Deferred taxes........................... -- 37 58 (29) 184
--- --- --- --- ---
52 154 130 128 359
=== === === === ===
</TABLE>
F-16
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of the United States federal income tax rate to the
effective income tax rate based on income (loss) before income taxes and
minority interests stated in the consolidated statements of operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States federal income
tax rate..................... 35.0 % 35.0 % 35.0 % 35.0 % 35.0 %
Non-taxable income arising
from activities which
qualified as offshore........ 21.9 % (6.5)% (6.0)% (13.9)% (16.6)%
Non-taxable/non-deductible
activities................... (7.2)% (4.8)% (3.6)% 0.1 % 11.4 %
Tax losses not recognized..... (93.3)% 15.8 % 7.7 % 17.5 % 3.6 %
Effect of different tax rates
in foreign jurisdictions..... 33.3 % (23.6)% (20.1)% (20.1)% (20.6)%
----- ----- ----- ----- -----
Effective income tax rate..... (10.3)% 15.9 % 13.0 % 18.6 % 12.8 %
===== ===== ===== ===== =====
</TABLE>
Components of deferred tax assets (liabilities) as of December 31, 1996 and
1997 and September 30, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Cumulative tax losses................................ 77 42 42
Accumulated differences between taxation allowance
and depreciation expenses of machinery and
equipment........................................... (76) (99) (305)
--- --- ----
Deferred taxation.................................... 1 (57) (263)
=== === ====
</TABLE>
15.REORGANIZATION EXPENSE
The reorganization expense comprised (i) the valuation of $199,000 of the
229,488 shares of common stock of the Company (after the effect of reverse
stock splits and the redenominations of par value as described in Note 16)
transferred from Mr. Leo Sheck-Pui Kwok, Mr. Carl Ka-Wing Tong and Acma
Strategic Holdings Limited, three of the Company's stockholders, to a
consultant in return for his services in connection with Company's acquisition
of CML as described in Note 1 (note: these 229,488 shares are included in the
3,604,500 shares of common stock issued in connection with the Company's
acquisition of CML), and (ii) other professional fees for the acquisition of
CML.
16.SHARE CAPITAL
During the period from January 1, 1995 (the earliest date covered by this
report) to May 28, 1996, the Company had authorized share capital of
250,000,000 shares of common stock, par value $0.0001 each, and outstanding
share capital of 193,745,200 shares of common stock, par value $0.0001 each. On
May 29, 1996, the Company effected a one-for-one hundred reverse stock split
and a redenomination of par value in share capital, resulting in 1,937,452
shares of common stock, par value $0.0001 each, outstanding. Also, on May 29,
1996, the authorized share capital of the Company was decreased from
250,000,000 shares of common stock, par value $0.0001 each, to 50,000,000
shares of common stock, par value $0.0001 each. On December 30, 1997, the
Company
F-17
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
issued 48,060,000 shares of common stock (after the one-for-one hundred reverse
stock split as described above but before the one-for-ten reverse stock split
and the three-for-four reverse stock split as described below), par value
$0.0001 each, to the stockholders of CML in connection with its acquisition of
CML as described in Note 1. On March 2, 1998, the authorized capital of the
Company was increased to 60,000,000 shares of common stock, par value $0.0001
each. On March 12, 1998, the Company effected a one-for-ten reverse stock split
and a redenomination of par value in share capital, resulting in 60,000,000
shares of common stock, par value $0.0001 each, authorized, and 4,999,746
shares of common stock, par value $0.0001 each, outstanding. [On December ,
1998, the Company effected a three-for-four reverse stock split and a
redenomination of par value in share capital resulting in 3,749,810 shares of
common stock, par value $0.0001 each, outstanding. Also, on December , 1998,
the authorized share capital of the Company was decreased from 60,000,000
shares of common stock, par value $0.0001 each, to 25,000,000 shares of common
stock, par value $0.0001 each, and 5,000,000 shares of preferred stock, par
value $0.0001 each.]
The effects of the one-for-one hundred reverse stock split, the one-for-ten
reverse stock split, the three-for-four reverse stock split, and the
redenominations of par value in share capital have been reflected retroactively
in the financial statements and all net income (loss) per common share
computations.
17. OPERATING LEASE COMMITMENTS
The Group has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2006. Rental expenses for the years
ended December 31, 1995, 1996 and 1997 were approximately $447,000, $509,000
and $602,000, respectively, and for the nine months ended September 30, 1997
and 1998 were approximately $434,000 and $522,000, respectively. Future minimum
rental payments as of December 31, 1997 and September 30, 1998, under
agreements classified as operating leases with non-cancellable terms, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Payable during the following period
--Within one year.................................. 563 621
--Over one year but not exceeding two years........ 487 538
--Over two years but not exceeding three years..... 427 532
--Over three years but not exceeding four years.... 448 489
--Over four years but not exceeding five years..... 390 466
--Thereafter....................................... 977 1,318
----- -----
3,292 3,964
===== =====
</TABLE>
18. RETIREMENT PLAN
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
F-18
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $50,000, and for the nine months ended September
30, 1997 and 1998 were approximately $37,000 and $46,000, respectively.
The Group has no other post-retirement or post-employment benefit plans.
19. BANKING FACILITIES
As of December 31, 1997 and September 30, 1998, the Group had banking
facilities of approximately $1,422,000 and $1,943,000, respectively, for
overdrafts, loans and trade financing. Unused facilities as of December 31,
1997 and June 30, 1998 amounted to approximately $99,000 and $439,000,
respectively. These facilities were secured by :
a Pledges of the Group's bank deposits of approximately $72,000 and $472,000 as
of December 31, 1997 and September 30, 1998, respectively;
b Personal guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing
Tong;
c Mortgage over real estate property owned by Mr. Carl Ka-Wing Tong;
d Corporate guarantee provided by Acma Strategic Holdings Limited; and
e A standby letter of credit issued by Acma Ltd. of approximately $388,000 as
of September 30, 1998.
20. RELATED PARTY TRANSACTIONS
a The Group entered into the following transactions with related companies:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
----------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Consultancy/Management fees paid to
Carl Tong & Associate Management
Consultancy Limited*............... 12 -- -- -- --
Management fee paid to Acma
Strategic Holdings Limited......... -- 88 115 79 116
Rental expenses paid to Wellholding
Limited**.......................... -- 59 -- -- --
Purchases of machinery and tools
from Faithera Engineering Limited
***................................ -- -- -- -- 362
=== === === === ===
</TABLE>
- --------
* Carl Tong & Associate Management Consultancy Limited is beneficially owned
by Mr. Carl Ka-Wing Tong.
F-19
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
** Wellholding Limited is beneficially owned by Mr. Leo Sheck-Pui Kwok.
*** Faithera Engineering Limited is beneficially owned by certain minority
shareholders of Mastercraft Engineering Limited.
b Details of amounts due to directors of the Company are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Mr. Leo Sheck-Pui Kwok............................... 614 612 438
Mr. Carl Ka-Wing Tong................................ 265 249 232
--- --- ---
879 861 670
=== === ===
</TABLE>
The amounts due to directors are unsecured, non-interest bearing and without
pre-determined repayment terms.
c Details of amount due from a related company are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Mastercraft Engineering Limited....................... 41 -- --
=== === ===
</TABLE>
Mastercraft Engineering Limited is a company in which Mr. Leo Sheck-Pui Kwok
and Mr. Carl Ka-Wing Tong are directors. During the year ended December 31,
1997, the Company acquired 100% equity interest in Mastercraft Engineering
Limited for approximately $1,000. The amount due from the related company was
unsecured, non-interest bearing and without pre-determined repayment terms.
d Details of amount due to parent company are as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Acma Strategic Holdings Limited....................... -- 9 8
=== === ===
</TABLE>
The amount due to the parent company was unsecured, non-interest bearing and
without pre-determined repayment terms.
e As of December 31, 1997 and September 30, 1998, the Group's banking
facilities were secured by personal guarantees provided by Mr. Leo Sheck-Pui
Kwok and Mr. Carl Ka-Wing Tong; mortgage over real estate property owned by Mr.
Carl Ka-Wing Tong; corporate guarantee provided by Acma Strategic Holdings
Limited; and a standby letter of credit issued by Acma Ltd. of approximately
$388,000.
F-20
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. SEGMENTAL ANALYSIS
A NET SALES
Net sales comprised:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1995 1996 1997 1997 1998
----- ------ ------ ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of merchandise................ 9,648 12,358 13,438 10,692 19,720
Sales of molds...................... 333 1,667 2,678 2,300 4,308
Others.............................. 1 29 95 98 101
----- ------ ------ ------ ------
9,982 14,054 16,211 13,090 24,129
===== ====== ====== ====== ======
</TABLE>
A substantial portion of Group's sales are made to customers in the United
States of America.
B ASSETS
Substantially all of the Group's assets are located in Hong Kong and the PRC.
C MAJOR CUSTOMERS
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
MBI Inc.............................. 80.7% 81.2% 64.2% 68.4% 37.3%
Mattel Vendor Operations Asia Ltd.... -- -- 14.8% 10.0% 25.2%
Drumwell Limited..................... -- 1.8% 4.2% 1.8% 4.2%
Brookfield Collectors Guild.......... -- 7.7% 4.7% 7.1% 4.2%
Hallmark Cards (Hong Kong) Ltd. ..... -- -- 0.2% 0.8% 5.7%
Tyco Hong Kong Limited............... -- 5.1% 5.6% 7.2% --
==== ==== ==== ==== ====
</TABLE>
D MAJOR SUPPLIERS
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Manfield Coatings Co.,
Ltd.................... 12.6% 8.1% 9.0% 7.3% 10.9%
Genesis Off-set Printing
Co., Ltd. ............. -- 5.4% 8.5% 5.4% 9.8%
Lee Kee Metal Co. Ltd... -- 0.7% 6.1% 5.8% 6.8%
Zinamet Co., Ltd........ 8.7% 2.7% 6.9% 4.8% 2.7%
==== === === === ====
</TABLE>
F-21
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. OPERATING RISKS
A COUNTRY RISK
The Group's operations are conducted in Hong Kong and the PRC. Accordingly, the
Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong and
the PRC, and by the general state of the Hong Kong and the PRC economies.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the
PRC ("the Hong Kong SAR"). As provided in the Basic Law of the Hong Kong SAR of
the PRC, the Hong Kong SAR will have full economic autonomy and its own
legislative, legal and judicial systems for fifty years. The Group's management
does not believe that the transfer of sovereignty over Hong Kong will have an
adverse impact on the Group's financial and operating environment. There can be
no assurance, however, that changes in political or other conditions will not
result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Group's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other things.
B DEPENDENCE ON STRATEGIC RELATIONSHIP
The Group conducts its manufacturing operations through its contractual joint
venture established between the Company and a PRC party, and several
subcontracting agreements entered into with certain PRC parties. The
deterioration of any or all of these strategic relationships may have an
adverse effect on the operations of the Group.
C CONCENTRATION OF CREDIT RISK
Concentration of accounts receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Five largest accounts receivable................ 94.2% 92.1% 78.2%
====== ====== ====
</TABLE>
The Group performs ongoing credit evaluations of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
aggregate have not exceeded management's projections.
F-22
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a In March 1996, CML acquired an additional 19% equity interest in Carison
Engineering Limited for cash consideration of approximately $29,000. This
increase in the Group's equity interest in Carison Engineering Limited from 51%
to 70% resulted in goodwill of approximately $139,000.
b In October 1997, CML acquired a 100% interest in Mastercraft Engineering
Limited for a cash consideration of $1,000. Details of assets acquired and
liabilities assumed were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
$'000
<S> <C>
Deposits and prepayments........................................... 110
Inventories........................................................ 223
Machinery, equipment and capital leases............................ 361
Bank overdrafts.................................................... (3)
Short-term bank loans.............................................. (184)
Accounts payable................................................... (162)
Accrued liabilities................................................ (161)
Due to a related company........................................... (363)
Capital lease obligations.......................................... (297)
----
Net liabilities assumed as of the date of acquisition.............. (476)
Goodwill........................................................... 477
----
Consideration satisfied in cash.................................... 1
====
Net cash outflow:
Cash paid........................................................ 1
====
</TABLE>
c Cash paid for interest and income taxes comprised:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest.............................. 88 140 216 54 120
=== === === === ===
Income taxes.......................... 217 94 75 75 --
=== === === === ===
</TABLE>
d Supplemental disclosure of investing activities:
During the years ended December 31, 1995, 1996 and 1997 and nine months ended
September 30, 1997 and 1998, the Group entered into capital lease arrangements
to purchase machinery and equipment with a capital value of approximately
$318,000, $394,000 and $835,000, respectively, and approximately $835,000 and
$631,000, respectively.
F-23
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24.OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
----------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Depreciation of machinery and
equipment
--owned assets.................... 242 275 122 109 270
--assets held under capital
leases........................... 78 173 347 208 203
Provision for/write-off of doubtful
accounts........................... -- 98 15 -- 17
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 85 107 128 133
--capital lease obligations....... 32 55 109 64 75
Operating lease rentals for rented
premises........................... 447 509 602 434 522
Repairs and maintenance expenses.... 157 251 266 200 230
Net foreign exchange (gain) loss.... 20 104 47 29 (117)
=== === === === ====
</TABLE>
F-24
<PAGE>
INSIDE BACK COVER
Top Row Left
[Product designer using computer aided design tools
to make a computer design for a new product.]
Top Row Right
[Tool making machine in operation.]
Center
[Front view of CML No. 1.]
Bottom Row Left
[Pad printing process
(stamping designs on a replica as part of the finishing process.)]
Bottom Row Right
[Tool polishing machine in operation.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEITHER THE COMPANY NOR ANY OF THE UNDERWRITERS HAS AUTHORIZED ANY DEALER,
SALESMAN OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF ANY DEALER, SALESMAN OR
OTHER PERSON GIVES INFORMATION OR MAKES REPRESENTATIONS OTHER THAN THOSE CON-
TAINED IN THIS PROSPECTUS, YOU SHOULD NOT RELY ON THEM. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND NEITHER THE COMPANY NOR ANY OF THE UNDER-
WRITERS ARE SOLICITING OFFERS TO BUY THEM. THESE SECURITIES WILL NOT BE SOLD IN
ANY STATE WHERE THEIR OFFER OR SALE, OR SOLICITATIONS OF OFFERS TO BUY THEM,
WOULD BE UNLAWFUL PRIOR TO THEIR REGISTRATION OR QUALIFICATION UNDER THE SECU-
RITIES LAWS OF SUCH STATE. INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT
AS OF THE DATE OF THIS PROSPECTUS. EVEN IF YOU RECEIVE A COPY OF THIS PROSPEC-
TUS AFTER THE DATE OF THIS PROSPECTUS, NEITHER THE COMPANY NOR ANY OF THE UN-
DERWRITERS IS MAKING ANY REPRESENTATION ABOUT WHETHER THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS CORRECT AT ANY TIME AFTER THE DATE OF THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 14
Market Price for Common Stock and Dividend Policy........................ 16
Dilution................................................................. 17
Capitalization........................................................... 18
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 32
Management............................................................... 43
Transactions Involving Officers, Directors and Principal Stockholders.... 49
Principal Stockholders and Selling Stockholder........................... 51
Change in Accountants.................................................... 52
Description of Capital Stock............................................. 52
Shares Eligible For Future Sale.......................................... 54
Underwriting............................................................. 55
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 SHARES
[LOGO OF CREATIVE MASTER
INTERNATIONAL, INC.]
COMMON STOCK
---------------
PROSPECTUS
---------------
CRUTTENDEN ROTH
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company intends to amend and restate its Certificate of Incorporation prior
to completion of this offering. As is customary among Delaware corporations,
the Company's Amended and Restated Certificate of Incorporation will eliminate
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors, except (i) for breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions by
the director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption; and (iv) for transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company also intends to enter into
indemnity agreements with each of its current directors and executive officers
which will provide for indemnification of, and advancement of expenses to, such
persons to the maximum extent permitted under the laws of the State of
Delaware, including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advancement of expenses are
discretionary under Delaware law.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement
provides for the underwriters' indemnification of the Company and its directors
and officers for certain liabilities arising under the Securities Act or
otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the Commission, NASD and Nasdaq fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 4,767
NASD fees............................................................. $ 2,215
Nasdaq listing fee.................................................... $ 12,625
Underwriters' nonaccountable expenses allowance....................... $360,000
Accounting fees and expenses.......................................... $118,000
Printing and engraving expenses....................................... $ 80,000
Transfer agent and registrar fees and expenses........................ $ 5,000
Directors and officers insurance...................................... $ 20,000
Legal fees and legal expenses......................................... $225,000
Miscellaneous expenses................................................ $ 7,393
--------
Total................................................................. $835,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1997, the Company entered into a Share Exchange Agreement with Carl
Ka Wing Tong, Leo Sheck Pui Kwok and Acma Strategic Holdings Limited, all of
whom reside or are domiciled outside the U.S., pursuant to which the Company
issued an aggregate of 4,806,000 shares of common stock in exchange for all of
the capital stock of Creative Master Limited, in Hong Kong corporation. The
common stock was issued in reliance on available exemptions under U.S. federal
securities laws, including Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Specimen Stock Certificate of the Company.*
4.2 Form of Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including form of Representative's Warrant.
5.1 Opinion of Troy & Gould Professional Corporation.
10.1 Form of Indemnification Agreement with officers and directors.*
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997.*
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994.*
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996.*
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998.
10.6 [reserved]
10.7 [reserved]
10.8 Entrepreneur Agreement by and among Creative Master Limited, Chen Hao
Qiang, Gan Zi Kuen and Wu Qing Su (undated).*
10.9 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998.*
10.10 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996.*
10.11 Letter to extend credit facilities between Banque Nationale de Paris
Hong Kong Branch and Creative Master Limited dated April 21, 1997.*
10.12 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992.*
10.13 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated
December 20, 1997.*
10.14 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to exhibit 10.2 of the Company's Form 10-KSB filed on
September 2, 1998).*
</TABLE>
- --------
* Previously filed.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to exhibit 10.1 of the Company's
Form 10-KSB filed on September 2, 1998).*
10.16 Joint and Several Guarantee By Individuals or Partners in a Firm by
and among Commonwealth Finance Corporation Limited, Carl Tong and Leo
Kwok dated March 30, 1993.*
10.17 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993.*
10.18 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993.*
10.19 Creative Master Limited Defined Contribution Scheme Rules effective
January 1, 1997.*
10.20 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules.*
10.21 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules.*
10.22 Service Agreement by and between Creative Master Limited and Leo Sheck
Pui Kwok dated January , 1996.*
10.23 Factory and dormitory leases for CML No. 1.
10.24 Factory and dormitory leases for CML No. 2.
10.25 Factory and dormitory leases for CML No. 3.
10.26 Factory and dormitory leases for CML No. 4.
10.27 Factory and dormitory leases for CML No. 5.
10.28 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998.
10.29 [reserved]
10.30 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995.
10.31 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong between
Creative Master Limited and Fortune Wind Investments Limited dated
April 3, 1997.
10.32 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited.
10.33 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments Limited.
10.34 Loan Agreement dated January 31, 1996 between Carl Tong and Leo Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $1,000,000.*
10.35 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck Pui
Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000.*
10.36 Promissory Note, dated as of October 1, 1998, in the principal amount
of $227,118 from Creative Master Limited in favor of Carl Ka Wing
Tong.
10.37 Promissory Note, dated as of October 1, 1998, in the principal amount
of $493,889 from Creative Master Limited to Leo Sheck Pui Kwok.
</TABLE>
- --------
* Previously filed.
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38 Lease of apartment from Wellholding Limited by Creative Master Limited
dated January 2, 1996.*
10.39 Creative Master International, Inc. 1998 Stock Option Plan and Form of
Notice of Grant of Option under 1998 Stock Option Plan.
10.40 Standby Letter of Credit of Acma Ltd.
10.41 Guarantee of Carl Tong to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.
10.42 Guarantee of Leo Kwok to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.
10.43 Deed of Guarantee of Carl Tong and Leo Kwok to Bank of China in favor
of Creative Master Limited.
10.44 Guarantee to be Given by a Limited Company by and between Commonwealth
Finance Corporation Limited and Acma Strategic Holdings Limited dated
July 14, 1997.
16 Letter re: Change in Certifying Accountant (incorporated by reference
to exhibit 16 of the Company's Form 8-K dated April 30, 1998).
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen & Co. (incorporated by reference to Page
II-7).
23.2 Consent of Troy & Gould Professional Corporation (included in Exhibit
5.1).
23.3 Consent of The Fada Law Firm.
23.4 Consent of Angela Wang & Co.
24 Power of Attorney (incorporated by reference to page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(b) Financial Statement Schedules
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) ((S)230.424(b) of this Chapter) if,
in the aggregate,
II-4
<PAGE>
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement of
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of this offering.
Insofar as indemnification for liabilities arising from the Securities Act may
be permitted to directors, officers, and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Kowloon, Hong Kong, on the 25th day of
November, 1998.
By: /s/ Carl Ka Wing Tong
__________________________________
NAME: CARL KA WING TONG
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act, this Amendment No. 1
to the Registration Statement has been signed below by the following persons on
behalf of the Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Carl Ka Wing Tong Chairman of the Board, November 25, 1998
______________________________________ President, Chief
CARL KA WING TONG Executive Officer
(principal executive
officer) and Chief
Financial Officer
(principal financial
officer)
/s/ John Rempel Chief Financial Officer November 25, 1998
______________________________________ (principal financial and
JOHN REMPEL accounting officer)
* Director and Chief November 25, 1998
______________________________________ Operating Officer
LEO SHECK PUI KWOK
* Director November 25, 1998
______________________________________
CHOU KONG SENG
* Senior Vice-President and November 25, 1998
______________________________________ Controller
SHING KAM MING
</TABLE>
*By: /s/ Carl Ka Wing Tong
_______________________
CARL KA WING TONG
Attorney-in-Fact
II-6
<PAGE>
November 25, 1998
The Directors
Creative Master International, Inc.
8/F., Casey Industrial Building
18 Bedford Road
Taikoktsui
Kowloon
Hong Kong
Dear Sirs,
As independent public accountants, we hereby consent to the use of our reports,
and to all references to our Firm included in or made a part of this
Registration Statement on Form SB-2.
Very truly yours,
/s/ Arthur Andersen & Co.
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Specimen Stock Certificate of the Company.*
4.2 Form of Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including form of Representative's Warrant.
5.1 Opinion of Troy & Gould Professional Corporation.
10.1 Form of Indemnification Agreement with officers and directors.*
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997.*
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994.*
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996.*
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998.
10.6 [reserved]
10.7 [reserved]
10.8 Entrepreneur Agreement by and among Creative Master Limited, Chen Hao
Qiang, Gan Zi Kuen and Wu Qing Su (undated).*
10.9 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998.*
10.10 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996.*
10.11 Letter to extend credit facilities between Banque Nationale de Paris
Hong Kong Branch and Creative Master Limited dated April 21, 1997.*
10.12 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992.*
10.13 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated
December 20, 1997.*
10.14 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to exhibit 10.2 of the Company's Form 10-KSB filed on
September 2, 1998).*
</TABLE>
- --------
* Previously filed.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to exhibit 10.1 of the Company's
Form 10-KSB filed on September 2, 1998).*
10.16 Joint and Several Guarantee By Individuals or Partners in a Firm by
and among Commonwealth Finance Corporation Limited, Carl Tong and Leo
Kwok dated March 30, 1993.*
10.17 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993.*
10.18 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993.*
10.19 Creative Master Limited Defined Contribution Scheme Rules effective
January 1, 1997.*
10.20 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules.*
10.21 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules.*
10.22 Service Agreement by and between Creative Master Limited and Leo Sheck
Pui Kwok dated January , 1996.*
10.23 Factory and dormitory leases for CML No. 1.
10.24 Factory and dormitory leases for CML No. 2.
10.25 Factory and dormitory leases for CML No. 3.
10.26 Factory and dormitory leases for CML No. 4.
10.27 Factory and dormitory leases for CML No. 5.
10.28 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998.
10.29 [reserved]
10.30 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995.
10.31 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong between
Creative Master Limited and Fortune Wind Investments Limited dated
April 3, 1997.
10.32 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited.
10.33 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments Limited.
10.34 Loan Agreement dated January 31, 1996 between Carl Tong and Leo Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $1,000,000.*
10.35 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck Pui
Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000.*
10.36 Promissory Note, dated as of October 1, 1998, in the principal amount
of $227,118 from Creative Master Limited in favor of Carl Ka Wing
Tong.
10.37 Promissory Note, dated as of October 1, 1998, in the principal amount
of $493,889 from Creative Master Limited to Leo Sheck Pui Kwok.
</TABLE>
- --------
* Previously filed.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38 Lease of apartment from Wellholding Limited by Creative Master Limited
dated January 2, 1996.*
10.39 Creative Master International, Inc. 1998 Stock Option Plan and Form of
Notice of Grant of Option under 1998 Stock Option Plan.
10.40 Standby Letter of Credit of Acma Ltd.
10.41 Guarantee of Carl Tong to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.
10.42 Guarantee of Leo Kwok to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.
10.43 Deed of Guarantee of Carl Tong and Leo Kwok to Bank of China in favor
of Creative Master Limited.
10.44 Guarantee to be Given by a Limited Company by and between Commonwealth
Finance Corporation Limited and Acma Strategic Holdings Limited dated
July 14, 1997.
16 Letter re: Change in Certifying Accountant (incorporated by reference
to exhibit 16 of the Company's Form 8-K dated April 30, 1998).
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen & Co. (incorporated by reference to Page
II-7).
23.2 Consent of Troy & Gould Professional Corporation (included in Exhibit
5.1).
23.3 Consent of The Fada Law Firm.
23.4 Consent of Angela Wang & Co.
24 Power of Attorney (incorporated by reference to page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
CREATIVE MASTER INTERNATIONAL, INC.
UNDERWRITING AGREEMENT
[Date]
Cruttenden Roth Incorporated
As Representative of the
Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92612
Ladies and Gentlemen:
Creative Master International, Inc., a Delaware Corporation (the
"Company"), proposes to issue and sell to the Underwriters named in Section 2(a)
hereof (the "Underwriters"), an aggregate of [2,000,000] shares (the "Firm
Shares") of its authorized but unissued Common Stock, par value $0.0001 per
share (the "Common Stock"). Acma Investments Pte., Ltd. (the "Selling
Stockholder") proposes to grant to the Underwriters the option to purchase up to
[300,000] additional shares of Common Stock (the "Option Shares") for the sole
purpose of covering over-allotments, if any, in connection with the sale of the
Firm Shares. The Firm Shares and any Option Shares purchased pursuant to this
Agreement are referred to in this Agreement as the "Shares." The Company also
proposes to sell to you individually, and not in your capacity as
Representative, five-year warrants (the "Representative's Warrants") to purchase
up to [200,000] shares of Common Stock (the "Representative's Warrant Stock").
The sale of the Representative's Warrants will be consummated in accordance with
the terms and conditions of the form of the Representative's Warrant Agreement
filed as an Exhibit to the Registration Statement. Cruttenden Roth Incorporated
is acting as representative of the several Underwriters, and in that capacity is
referred to in this Agreement as the "Representative."
The Company hereby confirms its agreement with the Underwriters as follows:
1. Representations and Warranties of the Company and the Selling
Stockholder.
(a) The Company and the Selling Stockholder each represents and warrants
to, and agrees with, the Underwriters as follows:
(i) The Company meets the requirements for use of Form SB-2 under the
Securities Act of 1933, as amended (the "Securities Act"), and a registration
statement (Registration No. 333-65929) on Form SB-2 relating to the Shares, the
Representative's Warrants and the Representative's Warrant Stock, including such
amendments to such registration statement as may
<PAGE>
have been required to the date of this Agreement, has been prepared by the
Company under and in conformity with the provisions of the Securities Act, and
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. If such registration statement has not become effective upon
execution of this Agreement, a further amendment to such registration statement,
including a form of final prospectus, necessary to permit such registration
statement to become effective will promptly be filed by the Company with the
Commission. If such registration statement has become effective, a final
prospectus containing information permitted to be omitted at the time of
effectiveness by Rule 430A of the Rules and Regulations will promptly be filed
by the Company with the Commission in accordance with Rule 424 of the Rules and
Regulations (and in form and substance reasonably satisfactory to the counsel
for the Underwriters). The term "Registration Statement" as used in this
Agreement shall mean such registration statement, including financial
statements, schedules and exhibits, in the form in which it became or becomes,
as the case may be, effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations) and, in the event of any amendment thereto after the effective date
of the Registration Statement, shall also mean (from and after the effectiveness
of such amendment) the Registration Statement as so amended. Any registration
statement filed pursuant to Rule 462(b) under the Rules and Regulations is
herein called the "462(b) Registration Statement," and after such filing the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares included in the Registration Statement at the
time it became effective, except that if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the Prospectus on file with the
Commission at the time the Registration Statement became or becomes, as the case
may be, effective, whether or not the revised prospectus is required to be filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations, the
term "Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use.
(ii) No stop order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus has been issued
and no proceedings for that purpose are pending or threatened or, to the best
knowledge of the Company, contemplated by the Commission; no stop order
suspending the sale of the Shares in any jurisdiction has been issued and no
proceedings for that purpose are pending or, to the best knowledge of the
Company, threatened or are contemplated; and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with.
(iii) The Company and each of its subsidiaries have been duly
organized and are validly existing in good standing under the laws of their
respective jurisdiction of organization, have full power and authority to own or
lease their respective properties and conduct business as described in the
Registration Statement and the Prospectus and as they are currently conducted
such business, and are duly qualified as a foreign organization and in good
standing in all jurisdictions in which the character of the property owned or
leased or the nature of the business transacted by it makes qualification
necessary (except where the failure to be so qualified would not have a material
adverse
2
<PAGE>
effect on the business, properties, condition (financial or otherwise),
prospects or results of operations of the Company and its subsidiaries, taken as
a whole). Except as disclosed in the Registration Statement, the Company and
each of its subsidiaries have obtained, are in possession of, and operating in
compliance with, all authorizations, licenses, certificates, consents, orders
and permits from state, federal and other regulatory authorities (including
foreign governments) that are material to the conduct of their respective
business, all of which are valid and in full force and effect. The Company owns
the percentage of the outstanding capital stock of each of its subsidiaries as
set forth in Note 3 of the Notes to the Consolidated Financial Statements
included in the Registration Statement. The Company holds such outstanding
capital stock of each of its subsidiaries free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest of any type, kind or
nature. All issued and outstanding shares of capital stock or other equity
interest of each such subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to subscribe
for or purchase shares or other equity interest.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any material
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any court or governmental
action, order or decree, or any changes in the capital stock or long-term debt
of the Company or any of its subsidiaries, or any dividend or distribution of
any kind declared, paid or made on the capital stock of the Company, or any
material adverse change, or a development known to the Company that might cause
or result in a material adverse change, in or affecting the general affairs,
management, business, properties, condition (financial or otherwise), prospects
or results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
described in the Registration Statement and the Prospectus.
(v) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirement of the Securities Act and the Rules and Regulations; when the
Registration Statement became or becomes, as the case may be, effective (the
"Effective Date"), when any 462(b) Registration Statement became or becomes
effective, and when the Prospectus is first filed (if required) in accordance
with Rule 424(b), and at all times subsequent thereto up to and at the "Closing
Date" (as hereinafter defined) and through any later date on which Option Shares
are to be purchased, as the case may be, the Registration Statement, the Rule
462(b) Registration Statement and the Prospectus, and any amendments or
supplements thereto, will in all material respects conform to the requirements
of the Securities Act and the Rules and Regulations, and the Securities Exchange
Act of 1934, as amended, (the "Exchange Act"), and the rules and regulations of
the Commission thereunder; on the Effective Date, the Registration Statement,
and any 462(b) Registration Statement, on the date it became or becomes
effective, did not or will not contain any untrue statement of a material fact
and did not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading; and
3
<PAGE>
neither the Registration Statement, any 462(b) Registration Statement, nor the
Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this Section 1(a)(v) shall apply to statements
in, or omissions from, the Registration Statement, and any 462(b) Registration
Statement or the Prospectus made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of the
Underwriters specifically for use in the Registration Statement or the
Prospectus. There is no agreement, contract, license, lease or other document
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement which is not described or
filed as required. The contracts so described in the Prospectus are in full
force and effect on the date hereof, and neither the Company nor any of its
subsidiaries, nor to the best knowledge of the Company, any other party, is in
material breach of or default under any such contracts.
(vi) All of the outstanding shares of capital stock of the Company
(including the shares to be sold by the Selling Shareholder hereunder) have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all applicable securities laws (including any
applicable United States and state securities laws), were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company). The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted or
exercised thereunder, set forth in the Prospectus accurately and fairly present
the information shown therein with respect to such plans, arrangements, options
and rights. The Common Stock to be sold by the Company hereunder has been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable. Other than this Agreement, the Representative's
Warrants and the options and warrants to purchase the Common Stock described in
the Prospectus, there are no options, warrants or other rights outstanding to
subscribe for or purchase any shares of the Company's capital stock. There are
no preemptive rights or any restrictions upon the voting or transfer of any of
the Shares pursuant to the Company's Certificate of Incorporation or any other
governing document or agreement to which the Company or any of its subsidiaries
is a party or by which any of them may be bound. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any of the Shares or any
other capital stock of the Company.
(vii) The Company has full right, power and authority to enter into
and perform its obligations under this Agreement and the Representative's
Warrant Agreement, and to issue, sell and deliver the Firm Shares and the Option
Shares. This Agreement and the Representative's Warrant Agreement have each been
duly authorized, executed and delivered by the Company and
4
<PAGE>
constitute the valid and binding agreements of the Company and each is
enforceable against the Company in accordance with their respective terms.
(viii) Neither the Company nor any of its subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
Representative's Warrant Agreement, or the consummation of the transactions
contemplated by such agreements result in a violation of or constitute a default
(with the giving of notice, passage of time or otherwise) under the Certificate
of Incorporation or other charter or governing documents of the Company or any
of its subsidiaries, or any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, deed of trust, loan agreement, lease,
license, joint venture or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which it or any of their properties may
be bound or affected, nor will the performance by the Company of its obligations
under this Agreement or the Representative's Warrant Agreement violate any law,
rule, administrative regulation or decree of any court or any governmental
agency or body having jurisdiction over the Company, its subsidiaries or any of
their respective properties, or result in the creation or imposition of any
lien, charge, claim or encumbrance upon any property or asset of the Company or
any of its subsidiaries. Except for permits and similar authorizations required
under the Securities Act or the Exchange Act, and for such permits and
authorizations that have been obtained, no consent, approval, authorization or
order of any court, governmental agency or body or financial institution is
required in connection with the consummation of the transactions contemplated by
this Agreement or the Representative's Warrant Agreement.
(ix) The Company and each of its subsidiaries owns, or has valid
rights to use, all items of real and personal property which are material to the
business of the Company and its subsidiaries taken as a whole, free and clear of
all liens, encumbrances and claims that might materially interfere with the
business, properties, condition (financial or otherwise) or prospects of the
Company and its subsidiaries, taken as a whole.
(x) Except as described in the Prospectus, there is no litigation
or governmental proceeding to which the Company or any of its subsidiaries is a
party, or to which any property of the Company or any of its subsidiaries is
subject, which is pending, or to the best knowledge of the Company, contemplated
against the Company or any of its subsidiaries, that might have any material
adverse effect on, or might result in any material adverse change in the
business, properties, condition (financial or otherwise), prospects or results
of operations of the Company and its subsidiaries, taken as a whole, or that
might prevent consummation of the transactions contemplated by this Agreement or
the Representative's Warrant Agreement or that are required to be disclosed in
the Registration Statement.
(xi) Neither the Company nor any of its subsidiaries is in violation
of any law, order, ordinance, rule, regulation, writ, injunction, judgment or
decree of any court or governmental agency or body to which it or its properties
(whether owned or leased) may be subject, which violation might have a material
adverse effect on the business, properties, condition (financial or otherwise),
prospects or results of operations of the Company and its subsidiaries, taken as
a whole.
5
<PAGE>
(xii) Each of the Company and each of its subsidiaries owns or
possesses adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights described or referred to in the Prospectus as owned by or used by any
of them, or which are necessary for the conduct of their business as described
in the Prospectus; and neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the business, properties, condition
(financial or otherwise), prospects or results of operations of the Company and
its subsidiaries, taken as a whole.
(xiii) The Company has not taken, and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the rules and regulations of the Commission under the Exchange Act, or
otherwise, the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares. No bid or purchase by
the Company, and, to the best knowledge of the Company, no bid or purchase that
could be attributed to the Company (as a result of bids or purchases by an
"affiliated purchaser" within the meaning of Regulation M under the Exchange
Act) for or of the Common Stock, any securities of the same class or series as
the Common Stock or any securities immediately convertible into or exchangeable
for or that represent any right to acquire the Common Stock, is now pending or
in progress or will have commenced at any time prior to the completion of the
distribution of the Shares.
(xiv) Arthur Andersen & Co. whose report appears in the Registration
Statement and Prospectus, are, and during the periods covered by their report in
the Registration Statement were, independent accountants as required by the
Securities Act and the Rules and Regulations. The financial statements included
in the Registration Statement, any Preliminary Prospectus or the Prospectus
present fairly the consolidated financial condition, results of operations, cash
flow and changes in stockholders' equity of the Company and its subsidiaries at
the dates and for the periods indicated, and the financial statements included
in the Registration Statement present fairly the information required to be
stated therein. Such financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America,
applied on a consistent basis throughout the periods presented, except as stated
therein. The selected and summary financial and statistical data included in
the Registration Statement and the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements and no
schedules are required to be included in the Registration Statement.
(xv) The books, records and accounts of the Company and each of its
subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and each of its
subsidiaries. The systems of internal accounting controls maintained by the
Company and each of its subsidiaries are sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
(A) to permit preparation of financial statements in conformity
6
<PAGE>
with generally accepted accounting principles and (B) to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(xvi) The Company has delivered to the Representative the written
agreement of each of its officers and directors and certain beneficial owners of
its Common Stock and/or securities exercisable or exchangeable for, or
convertible into, Common Stock (collectively, "Material Holders") to the effect
that each of the Material Holders will not, for a period of six months following
the Closing Date, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock and/or securities exercisable or
exchangeable for, or convertible into, Common Stock other than intra-family
transfers or transfers to trusts for estate planning purposes, without the prior
written consent of the Representative.
(xvii) No labor disturbance by the employees of the Company or any of
its subsidiaries exists or is imminent, nor is the Company aware of any existing
or imminent labor disturbance by the employees of any principal suppliers,
contract manufacturing organizations, manufacturers, authorized dealers or
distributors, in either case, where such labor disturbance might be expected to
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or prospects of the Company and its subsidiaries,
considered as a whole. No collective-bargaining agreement exists with any of
the Company's or any of the Company's subsidiaries' employees and, to the best
knowledge of the Company, no such agreement is imminent.
(xviii) Each of the Company and each of its subsidiaries has filed all
United States, state, local, Hong Kong, Peoples' Republic of China and other
foreign tax returns which are respectively required of the Company and each of
its subsidiaries to be filed or has requested extensions thereof and has paid
all taxes, including withholding taxes, penalties and interest, assessments,
fees and other charges to the extent that the same have become due and payable.
No tax assessment or deficiency has been made or proposed against the Company or
any of its subsidiaries nor has the Company or any of its subsidiaries received
any notice of any proposed assessment or deficiency.
(xix) Except as set forth in the Prospectus, there are no
outstanding loans, advances or guaranties of indebtedness by the Company to or
for the benefit of any of its "affiliates," as such term is defined in the Rules
and Regulations, or any of the officers or directors of any of its subsidiaries,
or any of the members of the families of any of them.
(xx) Neither the Company nor any of its subsidiaries has, directly
or indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law; (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or allowed by all applicable
laws; or (iii) violated nor is it in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended.
7
<PAGE>
(xxi) Neither the Company nor any of its subsidiaries has any
liability, known or unknown, matured or not matured, absolute or contingent,
assessed or unassessed, imposed or based upon any provision of, or has received
notice of any potential liability under, any law, rule or regulation, or the
civil or common law, or any tort, nuisance or absolute liability theory,
applicable to the Company or any of its subsidiaries, or under any code, order,
decree, judgment or injunction applicable to the Company or any of its
subsidiaries relating to public health or safety, worker health or safety or
pollution, damage to or protection of the environment, including, without
limitation, laws relating to damage to natural resources, emissions, discharges,
releases or threatened releases of hazardous materials into the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), or otherwise relating to the manufacture,
processing, use, treatment, storage, generation, disposal, transport or handling
of hazardous materials. As used herein, "hazardous material" includes chemical
substances, wastes, pollutants, contaminants, hazardous or toxic substances,
constituents, materials or wastes, whether solid, gaseous or liquid in nature.
(xxii) The Company has not distributed and will not distribute prior
to the Closing Date or on or prior to any date on which the Option Shares are to
be purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Shares other than the Prospectus,
the Registration Statement and any other material which may be permitted by the
Securities Act and the Rules and Regulations.
(xxiii) The Common Stock has been approved for listing on the
National Market of The Nasaq Stock Market (the "Nasdaq National Market"),
subject to official notice of issuance.
(xxiv) The Company is familiar with and has discussed with its
United States legal counsel the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules and regulations thereunder, and has in the past
conducted, and intends in the future to conduct, its affairs in such a manner as
to ensure that it will not become an "investment company" within the meaning of
the 1940 Act and such rules and regulations.
(xxv) The Representative's Warrants have been duly and validly
authorized, and when issued and delivered will be valid and binding obligations
of the Company in accordance with their terms; the Representative's Warrant
Stock has been duly and validly authorized for issuance upon exercise of the
Representative's Warrants, and when so issued will be validly issued, fully paid
and non-assessable; and no stockholder of the Company has any preemptive rights
with respect to the Representative's Warrants or the Representative's Warrant
Stock.
(xxvi) The Company does not know of any facts which may adversely
affect its earnings, prospects or business which have not been fully disclosed
in writing to the Representative.
(b) The Selling Stockholder represents and warrants to and agrees with the
several Underwriters that:
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(i) The Selling Stockholder has valid and unencumbered title to the
Option Shares to be sold by the Selling Stockholder hereunder and has full
right, power and authority to enter into this Agreement and to sell, assign,
transfer and deliver the Shares to be sold by the Selling Stockholder hereunder.
(ii) The Selling Stockholder has duly executed and delivered, in the
form heretofore furnished to the Representative, an irrevocable Power of
Attorney and Custody Agreement appointing ____________________ as attorney-in-
fact (the "Attorney") with U.S. Stock Transfer Corporation as custodian (the
"Custodian"); the Power of Attorney and Custody Agreement constitutes a valid
and binding agreement on the part of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; and such Selling Stockholder's Attorney, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred to
in Section 5(m) hereof on behalf of such Selling Stockholder, to determine the
price to be paid by the several Underwriters to such Selling Stockholder as
provided in Section 2 hereof, to authorize the delivery of the Option Shares to
be sold by such Selling Stockholder under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such Shares or
a stock power or powers with respect thereto, to accept payment therefor, and
otherwise to act on behalf of such Selling Stockholder in connection with this
Agreement;
(iii) All authorizations, approvals and consents necessary for the
execution and delivery by the Selling Stockholder of the Power of Attorney and
Custody Agreement, the execution and delivery by or on behalf of the Selling
Stockholder of this Agreement and the sale and delivery of the Option Shares
that may be sold by the Selling Stockholder hereunder, have been obtained and
are in full force and effect; and the Selling Stockholder has full right, power
and authority to enter into this Agreement and such Power of Attorney and
Custody Agreement, and to sell, transfer and deliver the Option Shares that may
be sold by the Selling Stockholder hereunder.
(iv) Certificates in negotiable form for all Option Shares which may
be sold by the Selling Stockholder hereunder have been placed in custody with
the Custodian for the purpose of effecting delivery hereunder.
(v) This Agreement is a valid and binding agreement of the Selling
Stockholder, enforceable against the Selling Stockholder in accordance with its
terms.
(vi) Upon the delivery of and payment for such Option Shares
hereunder, the several underwriters will acquire valid title to the Option
Shares to be sold by the Selling Stockholder free and clear of any encumbrances
created by or known to the Selling Stockholder.
(vii) The consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not result in a breach of any of the
terms or provisions of, or constitute a default under, any material agreement,
indenture or other instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is, or the certificates for the Option
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<PAGE>
Shares to be sold by the Selling Stockholder hereunder are, bound or, to the
best of the knowledge of the Selling Stockholder, any statute, ruling, decree,
judgment, order or regulation of any governmental authority having jurisdiction
over the Selling Stockholder or the property of the Selling Stockholder.
(viii) The Selling Stockholder has not taken, directly or indirectly,
any action designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement and, other than as permitted by the
Act, the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and the
sale of the Shares.
(ix) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder, its parent and affiliates, the
Common Stock of the Selling Stockholder, the Option Shares that is contained in
the representations and warranties of such Selling Stockholder in such Selling
Stockholder's Power of Attorney or set forth in the Registration Statement and
the Prospectus is, and at the time the Registration Statement became or becomes,
as the case may be, effective and at all times subsequent thereto up to and on
the Closing Date, and on any later date on which Option Shares are to be
purchased, was or will be, true, correct and complete, and does not, and at the
time the Registration Statement became or becomes, as the case may be, effective
and at all times subsequent thereto up to and on the Closing Date and on any
later date on which Option Shares are to be purchased, will not, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make such information not misleading.
(x) The Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, and will advise its Attorney and the Representative prior to the Closing
Date and on any later date on which any Option Shares are to be purchased, if
any statement to be made on behalf of such Selling Stockholder in the
certificate contemplated by Section 5(m) would be inaccurate if made as of the
date on which Option Shares are to be purchased.
(xi) The Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Firm Shares; such Selling
Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering made by
the Prospectus, other than such rights of participation as have been satisfied
by the participation of such Selling Stockholder in the transactions to which
this Agreement relates in accordance with the terms of this Agreement; and such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
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<PAGE>
(xii) Except for the Option Shares, the Selling Stockholder will not,
for a period of six months following the Closing Date, offer, sell or contract
to sell, or otherwise dispose of, or announce the offer of, any Common Stock
and/or securities exercisable or exchangeable for, or convertible into, Common
Stock without the prior written consent of the Representative
2. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions set forth
in this Agreement, the Company agrees to sell to the Underwriters, and the
Underwriters agree to purchase from the Company, at a purchase price of $_____
per Firm Share, the number of Firm Shares set forth opposite such Underwriter's
name in Schedule I hereto.
(b) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions set forth
in this Agreement, including the terms set forth below, the Selling Stockholder
grants an option to the Underwriters to purchase from the Selling Stockholder
all or any portion of [300,000] Option Shares at the same price per Share as the
Underwriters shall pay for the Firm Shares. Said option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time on or before the 45/th/ business
day after the date of the Prospectus upon written, telecopied or telegraphic
notice by the Representative to the Selling Stockholder setting forth the
aggregate number and class of Option Shares as to which the Underwriters are
exercising the option and the settlement date. The Option Shares shall be
purchased severally, and not jointly, by each Underwriter, if purchased at all,
in the same proportion that the number of Firm Shares to be purchased by such
Underwriter bears to the total number of Firm Shares to be purchased by the
Underwriters under Section 2(a), above, subject to such adjustments as the
Representative in its absolute discretion shall make to eliminate any fractional
shares. Delivery of certificates for the Option Shares, and payment therefor,
shall be made as provided in Section 2(c) and Section 2(d) below.
(c) Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted by the Company in Section 2(b) above shall have
been exercised not later than 10:00 a.m., New York time, on the date two
business days preceding the Closing Date), and payment therefor shall be made at
the office of Cruttenden Roth Incorporated ,18301 Von Karman, Suite 100, Irvine,
California 92612, at 10:00 a.m., New York time, on the later to occur of (i) the
fourth business day after the date of this Agreement, (ii) the third business
day after the date the Firm Shares are first offered to the public, or (iii) as
provided in Section 8 of this Agreement. The date and hour of delivery and
payment for the Firm Shares are referred to in this Agreement as the "Closing
Date." As used in this Agreement, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and not permitted by law or executive order to be closed.
(d) If any of the options granted by the Company in Section 2(b)
above shall be exercised after 10:00 a.m., New York time, on the date two
business days preceding the Closing
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Date, delivery of certificates for the Option Shares, and payment therefor,
shall be made at the office of Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92612, at 10:00 a.m., New York time, on the date
specified by the Representative (which shall be shall not be earlier than four
and not later than 10 full business days after the exercise of said option, nor
in any event prior to the Closing Date, and such time and date is referred to
herein as the "Option Closing Date"). Time shall be of the essence and delivery
at the time and place specified in this subsection (d) is a further condition to
your obligations hereunder.
(e) Payment of the purchase price for the Firm Shares and the Option
Shares by the Underwriters, less any reimbursable expenses provided for in
----
Section 4(a) of this Agreement and the non-accountable expense allowance
provided for in Section 4(b) of this Agreement, shall be made by certified or
official bank check or checks drawn in next-day funds, payable to the order of
the Company and the Selling Stockholder, respectively (and the Company and the
Selling Stockholder agree not to deposit or permit deposit of any such check in
the bank on which drawn until the day following the date of its delivery to the
Company). Such payment shall be made upon delivery of certificates for the
Shares to you for the account of the Underwriters. Certificates for the Shares
to be delivered to you shall be registered in such name or names and shall be in
such denominations as the Representative may request at least two business days
before the Closing Date, in the case of Firm Shares, and at least one business
day prior to the Option Closing Date, in the case of the Option Shares. Such
certificates will be made available to the Representative for inspection,
checking and packaging at the offices Cruttenden Roth Incorporated, 18301 Von
Karman, Suite 100, Irvine, California 92612, not less than one full business day
prior to the Closing Date or, in the case of the Option Shares, by 3:00 p.m.,
New York time, on the first business day preceding the date of purchase.
(f) It is understood that the Underwriters propose to offer the
Shares for sale to the public as soon as the Representative deems it advisable
to do so (the "Public Offering"). The Firm Shares are to be initially offered to
the public at the public offering price set forth in the Prospectus (the "Public
Offering Price"). The Underwriters may from time to time thereafter change the
public offering price and other selling terms.
(g) The statements in the first, third, seventh and last paragraphs
under the caption "Underwriting" in any Preliminary Prospectus and in the final
form of Prospectus filed pursuant to Rule 424(b) constitute the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement.
3. Further Agreements of the Company. The Company and the Selling
Stockholder covenants and agrees with the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will file the Prospectus, properly completed (and in form and substance
reasonably
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<PAGE>
satisfactory to counsel for the Underwriters) pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will not file the Prospectus,
any amended Prospectus, any amendment of the Registration Statement or
supplement to the Prospectus or make any filing under Rule 462(b) of the Rules
and Regulations without advising the Representative of, and furnishing the
Underwriters with copies thereof a reasonable time prior to the proposed filing
of, such amendment or supplement and without obtaining the prior consent of the
Representative to such filing. The Company will prepare and file with the
Commission, promptly upon the request of the Representative, any amendment to
the Registration Statement or supplement to the Prospectus that may be necessary
or advisable in connection with the distribution of the Shares by you, and use
its best efforts to cause the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any amendment
thereof shall have become effective, (iii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company will use its best
efforts to prevent the issuance of any such stop order or suspension and, if
issued, to obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
each of you and your counsel a conformed copy of the Registration Statement as
filed and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a conformed
copy of each 462(b) Registration Statement and post-effective amendment, if any,
to the Registration Statement (together with, in each case, all exhibits thereto
unless previously furnished to you) and all documents filed by the Company with
the Commission under the Exchange Act and deemed to be incorporated by reference
into any Preliminary Prospectus or the Prospectus, and will also deliver to you,
for distribution to the Underwriters, a sufficient number of additional
conformed copies of each of the foregoing (excluding exhibits) so that one copy
of each may be distributed to each Underwriter, (ii) as promptly as possible
deliver to the Underwriters, at such office or offices as you may designate, as
many copies of any Preliminary Prospectus and the Prospectus as you may
reasonably request and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter or a
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended Prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading in the light
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<PAGE>
of the circumstances existing at the time it is delivered to a purchaser of the
Shares, or if it shall be necessary to amend or to supplement the Prospectus to
comply with the Securities Act or the Rules and Regulations, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended Prospectus so that the Prospectus as so supplemented or amended will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading, and so that it then will otherwise comply with the
Securities Act and the Rules and Regulations. If, after the public offering of
the Shares by the Underwriters and during such period, the Underwriters shall
propose to vary the terms of offering thereof by reason of changes in general
market conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the Company or
of counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters and all
dealers to whom any of the Shares may be sold by the Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with the
sale of the Shares in accordance with the applicable provisions of the
Securities Act and the Rules and Regulations for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any 462(b) Registration
Statement, post-effective amendment to the Registration Statement and any
supplement to the Prospectus or any amended Prospectus proposed to be filed.
(f) The Company will cooperate with you and your counsel in the
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or a dealer,
in keeping such qualifications in good standing under said securities or Blue
Sky laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Shares.
(g) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to you, and to each Underwriter who
may so request in writing, copies of all periodic and special reports furnished
to stockholders of the Company, of all information, documents and reports filed
with Commission, any securities exchange or the National Association of
Securities Dealers, Inc. and of all press releases and material news items or
articles in respect of the Company, its products or affairs released or prepared
by the Company (other than promotional and marketing materials disseminated
solely to customers and potential customers of the Company in the ordinary
course of business); and any additional information concerning the Company or
its business which you may reasonably request.
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<PAGE>
(h) As soon as practicable, but not later than the 45th day following
the end of the fiscal quarter first ending after the first anniversary of the
Effective Date, the Company will make generally available to its securities
holders and furnish to the Underwriters an earnings statement or statements in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees that it will cause each of its executive
officers and directors and those other Material Holders designated by the
Representative prior to the date of this Agreement to enter into agreements with
the Representative to the effect that they will not, directly or indirectly,
without your prior written consent, sell, offer, contract to sell, grant any
option to purchase, or otherwise dispose of any shares of Common Stock, or any
securities convertible into, exchangeable for or exercisable for Common Stock,
or any rights to purchase or acquire Common Stock (other than intra-family
transfers or transfers to trusts for estate planning purposes) for a period of
six months after the Closing Date.
(j) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus and will file such reports with the Commission with respect to
the sale of the Shares and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
(k) The Company will, prior to the date of this Agreement, and at all
times thereafter, unless such securities are then listed on a national
securities exchange, cause the Shares and Representative's Warrant Stock to be
included for quotation on the Nasdaq National Market, and the Company will
comply with all registration, filing, reporting and other requirements of the
Exchange Act and the Nasdaq National Market which may from time to time be
applicable to the Company. The Company further agrees not to delist from the
Nasdaq National Market without the Representative's approval, unless required to
do so by the Nasdaq National Market. As soon as practicable after the Shares
become eligible therefor, the Company will apply for listing in one or more
securities manuals (such as Moody's Over-the-Counter Industrial Manual or
Standard & Poor's Corporation Description Manual).
(l) The Company will use its best efforts to maintain insurance of
the types and in the amounts which it deems adequate for its business and
consistent with insurance coverage maintained by companies of similar size and
engaged in similar businesses, including, but not limited to, general liability
insurance covering all real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against. The Company will use its best efforts to obtain and
maintain a reasonable amount of Directors and Officers liability insurance from
a reputable insurer, and the level of coverage as well as the identity of the
insurer shall be reasonably acceptable to the Representative.
(m) In accordance with the Representative's Warrants, the Company
agrees, upon its receipt from the Representative of the sum of $200.00 in
payment therefor, to deliver to the Representative on the Closing Date upon
completion of the purchase and sale of the Shares pursuant to Section 2 of this
Agreement, the Representative's Warrants representing the right to purchase up
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<PAGE>
to [200,000] shares of Common Stock at a price equal to 120% of the offering
price per share of Common Stock to the public as set forth on the cover page of
the Prospectus.
(n) The Company shall use its best efforts to retain in their current
positions the individuals named as executive officers under the caption
"Management" in the Registration Statement for a reasonable period after the
consummation of the Public Offering.
(o) The Company shall, on or prior to the Closing Date, amend its
Bylaws to provide that it will use its best efforts to at all times maintain at
least two (2) independent directors (that is directors that are not officers of
the Company, who are neither related to its officers nor represent concentrated
or family holdings of the Company's shares, and who, in the view of the
Company's board of directors, are free of any relationship that would interfere
with the exercise of independent judgement (the "Independent Directors"). The
Independent Directors shall constitute a majority of the Company's audit and
compensation committees. Further, the favorable vote of a majority of the
Company's Independent Directors shall be required as to any related party
transaction between the Company and any 5% or more stockholder of the Company
and/or officer or director of the Company (or any affiliates of such
individuals). Any proposed changes in the Company's Bylaws that are not
otherwise approved by the majority vote of the shares held by the Company's non-
management stockholders (i.e., stockholders exclusive of officers and directors
of the Company) shall be approved by a majority of the Company's directors and
not disapproved by a majority of the Company's Independent Directors.
(p) Except in connection with acquisitions or shares of Common Stock
issuable upon exercise of options or warrants outstanding prior to the Closing
Date and except for the grant of options to its officers and employees under the
Company's 1998 Stock Option Plan at an exercise price equal to the Public
Offering Price per share, during the period of the offering, and for a period of
six months from the Closing Date, the Company will not (i) sell or otherwise
dispose of any securities of the Company (except pursuant to the Company's
employee benefit plans described in the Registration Statement) or (ii) purchase
any shares of capital stock of the Company, without your prior written consent.
(q) During the period of two (2) years commencing with the date of
this Agreement, the Company's Chief Executive Officer or Chief Financial Officer
will visit the United States investor community twice each year, stopping once
on the West Coast, once on the East Coast, and once in the Midwest on each trip,
as directed by the Representative in its sole discretion.
(r) The Company will instruct its transfer agent to provide you with
copies of the Depository Trust Company stock transfer sheets on a weekly basis
for a period of six months from the Closing Date and on a monthly basis
thereafter for six additional months.
(s) The Company will reserve and keep available that maximum number
of its authorized but unissued securities which are issuable upon exercise of
the Representative's Warrants.
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4. Fees and Expenses. The Company agrees with each Underwriter that:
(a) The Company shall pay all costs and expenses incident to the
purchase, sale and delivery of the Shares, including without limitation, all
fees and expenses of filing the Registration Statement with the SEC and the
NASD; all Blue Sky fees and expenses, including legal fees and expenses, if any,
of the Underwriters' counsel (which shall undertake all such Blue Sky matters);
fees and disbursements of counsel and accountants for the Company; printing and
mailing costs, including costs of printing the Registration Statement, any
amendments thereto, all underwriting documents, Blue Sky memoranda and a
reasonable quantity of prospectuses as determined by the Representative; the
Company's road show cost and expenses; and the cost of preparing a total of four
(4) sets of bound volumes of the Public Offering documents for the
Representative and Underwriters' counsel. The Company shall also pay for the
cost of advertising the Public Offering, including the cost of "tombstone ads in
various financial and news publications or other promotional material as
directed by the Representative and shall pay for all other expenses for
advertising undertaken at the Company's request, including graphic slide costs.
The Underwriters shall pay the fees and disbursements of its counsel, with the
exception of the Blue Sky fees described above, and the Representative's road
show costs and expenses.
(b) In addition to its obligations under Section 4(a) above, the
Company and the Selling Stockholder agree to pay the Representative a non-
accountable expense allowance equal to three percent (3%) of the aggregate
Public Offering Price of the Shares respectively sold by them in the Public
Offering. Such allowance, less $50,000 which was paid to the Representative by
the Company as an advance against non-accountable expenses, shall be paid to the
Representative by the Company and Selling Stockholder, as the case may be, as
provided in Section 2(d) of this Agreement. The Representative agrees to repay
to the Company any portion of the $50,000 paid by the Company for non-
accountable expenses that has not been utilized by the Representative in
connection with the Public Offering on an accountable basis.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless you, and you agree to indemnify and hold
harmless, the Company from and against any losses, claims, damages or
liabilities, (which shall, for all purposes of this Agreement, include, but not
be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees), to which the indemnified party may become subject
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is entitled to
a finder's fee in connection wit the proposed offering by reason of such
person's or entity's influence or prior contact with the indemnifying party.
(d) In addition to its other obligations under Section 7(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in Section 7(a)
hereof, it will pay the Underwriters on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
17
<PAGE>
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to pay the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to time in
The Wall Street Journal which represents the base rate on corporate loans posted
by a substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(e) In addition to its other obligations under Section 7(b) hereof,
the Underwriters agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding described in Section
7(b) hereof, it will reimburse the Company on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
shall promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(f) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 4(d) and (e)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD in Los
Angeles County, California. Any such arbitration may be commenced by service of
a written demand for arbitration or a written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 4(d) and (e) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses which is created by the provisions of Sections 7(a)
and 7(b) hereof or the obligation to contribute to expenses which is created by
the provisions of Section 7(d) hereof.
5. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Shares shall be subject, in the sole
discretion of the Representative, to the accuracy as of the date of execution of
this Agreement, the Closing Date and the date on which the
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Option Shares are to be purchased, as the case may be, of the representations
and warranties of the Company and the Selling Stockholder set forth in this
Agreement, to the accuracy of the statements of the Company and its officers
made in any certificate delivered pursuant to the terms of this Agreement, to
the performance by the Company and the Selling Stockholder of all of its
obligations to be performed under this Agreement at or prior to the Closing Date
or any later date on which Option Shares are to be purchased, as the case may
be, and to the following additional conditions:
(a) The Registration Statement shall have become effective, (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective and, at the Closing
Date, or, with respect to the Option Shares, the date on which such Option
Shares are to be purchased, no stop order suspending the effectiveness of the
Registration Statement or any qualification or exemption from qualification for
the sale of the Shares in any jurisdiction shall have been issued and no
proceedings for that purpose shall have been instituted or threatened; and any
request for additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Underwriters and their
counsel.
(b) The Underwriters shall have received from Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, counsel for the Underwriters, an
opinion dated the Closing Date, with respect to such matters related to the
Public Offering as the Underwriters may reasonably require, and the Company
shall have furnished counsel for the Underwritiers with the legal opinion of its
counsel and all other documents which it may request for the purpose of enabling
it to pass upon such matters.
(c) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Troy & Gould Professional Corporation, United States counsel for the
Company, addressed to the Underwriters and dated the Closing Date or such later
date, to the effect set forth in Annex A to this Agreement.
(d) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Angela Wang & Co., Hong Kong counsel for the Company, addressed to
the Underwriters and dated the Closing Date or such later date, to the effect
set forth in Annex B to this Agreement.
(e) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of The Fada Law Firm, Peoples' Republic of China counsel for the
Company, addressed to the Underwriters and dated the Closing Date or such later
date, to the effect set forth in Annex C to this Agreement.
(f) In addition, on any Option Closing Date, you shall have received
the opinion of _______________________, counsel for the Selling Stockholder,
addressed to the Underwriters and date the option Closing Date, covering the
matters set forth in Annex D to this Agreement.
(g) You shall be satisfied that there has not been any material
change in the market for securities in general or in political, financial or
economic conditions from those
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reasonably foreseeable as to render it impracticable in your sole judgment to
make a public offering of the Shares, or a material adverse change in market
levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.
(h) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the Chief
Executive Officer and the Chief Financial Officer of the Company, stating that:
(i) The representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct with the same force
and effect as if expressly made at and as of such date, and the Company has
complied with all the agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to such date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or are threatened under the Securities Act;
(iii) the Common Stock has been duly designated for listing on
the Nasdaq National Market beginning no later than the time Firm Shares are
first offered to the public; and
(iv) (A) they have carefully examined the Registration
Statement in the form in which it originally became effective and the Prospectus
and any supplements or amendments thereto, and that, as of the Effective Date,
the statements made in the Registration Statement and the Prospectus were true
and correct in all material respects, and the Registration Statement did not
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and the Prospectus did not
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstance under which
they were made, not misleading, (B) since the Effective Date, no event has
occurred that should have been set forth in a supplement or amendment to the
Prospectus that has not been set forth in such a supplement or amendment, (C)
since the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein, there has not been any material adverse change or any
development involving a prospective material adverse change in or affecting the
business, properties, condition (financial or otherwise), capitalization,
prospects or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (D) there
are not any pending or known threatened legal proceedings to which the Company
or any of its subsidiaries is a party or of which property of the Company or any
of its subsidiaries is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus, and (E) there are
not any license agreements, contracts, leases or other documents that are
required to be filed as exhibits to the Registration Statement that have not
been filed as required.
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(i) You shall have received on the Closing Date and on any
Option Closing Date later date on which Option Shares are to be purchased, as
the case may be, a letter from Arthur Andersen & Co., addressed to the Company
and the Underwriters, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than five (5) business days prior
to the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from Arthur Andersen & Co. shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth its opinion with
respect to its examination of the balance sheet of the Company as of December
31, 1996 and 1997 and related statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 1995, 1996 and 1997, (iii) state
that Arthur Andersen & Co. has performed the procedure set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information as described in SAS 71 on the financial statements of the Company
for each of the nine-month periods ended September 30, 1997 and 1998, and (iv)
address other matters agreed upon by Arthur Andersen & Co. and you. In addition,
you shall have received from Arthur Andersen & Co. a letter addressed to the
Company and made available to the Underwriters stating that its review of the
Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of its examination of the Company's
financial statements as of December 31, 1997 did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(j) The Common Stock has been duly designated for listing on the
Nasdaq National Market effective no later than the time Firm Shares were first
offered to the public
(k) On or prior to the Closing Date, you shall have received
from the Company's officers and directors and all Material Holders executed
lock-up agreements covering the matters described in Section (1)(xvi) of this
Agreement.
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(l) On the Closing Date, the Company shall have issued the
Representative's Warrant Agreement and Representative's Warrants, substantially
in the form filed as Exhibit 4.2 to the Registration Statement; and on the
Closing Date, concurrently with the purchase and sale of the Shares, the Company
shall have issued, sold and delivered the Representative's Warrants to the
Representative.
(m) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Selling Stockholder or the
Attorney to the effect that, as of the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares are to be
purchased, as the case may be; or
(ii) The Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be.
(n) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company set forth in this Agreement, as to
the performance by the Company of its obligations under this Agreement and as to
the other conditions concurrent and precedent to the obligations of the
Underwriters under this Agreement.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, counsel for the Underwriters. The
Company will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
If any of the conditions specified in this Section 5 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Underwriters and its counsel, this Agreement and all
obligations of the Underwriters hereunder may be canceled by the Underwriters
at, or at any time prior to, the Closing Date or (with respect to the Option
Shares) prior to the Option Closing Date upon which the Option Shares are to be
purchased, as the case may be. Notice of such cancellation shall be given to
the Company in writing or by telephone, telecopy or telegraph confirmed in
writing. Any such termination shall be without liability of the Company to the
Underwriters (except as provided in Section 4 or Section 7 of this Agreement)
and without liability of the Underwriters to the Company (except to the extent
provided in Section 7 of this Agreement).
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<PAGE>
6. Conditions of the Obligation of the Company. The obligations of the
Company to sell and deliver the Shares required to be delivered as and when
specified in this Agreement shall be subject to the condition that at the
Closing Date or (with respect to the Option Shares) the date upon which the
Option Shares are to be purchased, no stop order suspending the effectiveness
thereof shall be in effect and no proceedings therefor shall be pending or
threatened by the Commission.
7. Indemnification and Contribution.
(a) The Company, and in the event the option referred to in Section
2(b) is exercised, the Selling Stockholder, agrees to indemnify and hold
harmless the Underwriters against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject under the Act,
the Exchange Act or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(i) any breach of any representation, warranty, agreement or covenant of the
Company herein contained, (ii) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any untrue statement or alleged untrue statement
of any material fact contained in any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action, or (iv) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Shares under the
securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
Section 7(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act
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<PAGE>
and the Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 4(d) hereof. The indemnity agreements
of the Company contained in this Section 7(a) and the representations and
warranties of the Company and the Selling Stockholder contained in Section 1 of
this Agreement shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares.
The indemnity agreement in this Section 7(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any of the Underwriters within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Company and Selling Stockholder may otherwise have.
(b) The Underwriters severally agree, each in proportion to the
number of Firm Shares to be purchased by such Underwriter bears to the total
number of Firm Shares to be purchased pursuant to section 2(a) hereof, to
indemnify and hold harmless the Company, and in the event the option referred to
in Section 2(b) is exercised, the Selling Stockholder, against any losses,
claims, damages or liabilities, joint or several, to which the Company and the
Selling Stockholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of such Underwriter herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 7(b) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof, and agrees to reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 7(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 7, notify the indemnifying party in
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writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 7. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 7(a) or 7(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 7
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters are
responsible for the portion represented by the percentage that the underwriting
discount bears to the initial public offering price, and the Company is
responsible for the remaining portion, provided, however, that (i) the
Underwriters shall not be required to contribute any amount in excess of the
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underwriting discount applicable to the Shares purchased by such Underwriter in
excess of the amount of damages which such Underwriter has otherwise required to
pay and (ii) no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. The contribution
agreement in this Section 7(d) shall extend upon the same terms and conditions
to, and shall inure to the benefit of, each person, if any, who controls any of
the Underwriters or the Company within the meaning of the Act or the Exchange
Act and each officer of the Company who signed the Registration Statement and
each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 7, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act. The parties are advised that federal or state public policy, as interpreted
by the courts in certain jurisdictions, may be contrary to certain of the
provisions of this Section 7, and the parties hereto hereby expressly waive and
relinquish any right or ability to assert such public policy as a defense to a
claim under this Section 7 and further agree not to attempt to assert any such
defense.
8. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as you shall release the Shares to the
public. If you shall not have released the Shares prior to 5:00 p.m., New York
time, on the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without liability on
the part of the Underwriters to the Company, except as set forth in Section 7 of
this Agreement. By giving notice as set forth in Section 9 of this Agreement
before the time this Agreement becomes effective, you, as Representative, may
prevent this Agreement from becoming effective without liability of any party to
the other party, except that the Company shall remain obligated to pay costs and
expenses to the extent provided in Section 4 and Section 7 of this Agreement. If
the Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement shall become effective upon execution and delivery by
you and the Company.
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company at any time on or prior to
the Closing Date or, with respect to the purchase of the Option Shares, on or
prior to any later date on which the Option Shares are to be purchased, as the
case may be, if prior to such time any of the following has occurred or, in your
opinion, is likely to occur: (i) after the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or development involving a prospective adverse change in
or affecting particularly the condition (financial or otherwise) of the
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Company and its subsidiaries considered as a whole or the earnings, prospects or
business affairs of the Company and its subsidiaries considered as a whole,
whether or not arising in the ordinary course of business, which would
materially impair the investment quality of the offered securities; or (ii) if
there shall have been the engagement in major hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, or any outbreak of
major hostilities or other national or international calamity or crisis or
material adverse change in economic or political conditions, if the effect of
such outbreak, calamity, crisis or material adverse change in economic or
political conditions on the financial markets of the United States would, in
your sole judgment, make the offering or delivery of the Shares impracticable,
or (iii) if there shall have been suspension of trading in securities generally
or a material adverse decline in value of securities generally on the New York
Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system, or (iv) if there
shall have been the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, or change in material substantive policy by, any
court, legislative body, agency or other foreign or domestic governmental
authority which in your sole judgment materially and adversely affects or will
materially adversely affect the business, operations or prospects of the Company
and its subsidiaries considered as a whole, or (v) if there shall have been the
declaration of a banking moratorium by United States, New York or California
state authorities, or (vi) if there shall have been the taking of any action by
any United States, state or local government or agency in respect of its
monetary or fiscal affairs which in your reasonable judgment has a material
adverse effect on the securities markets in the United States or (vii) existing
international monetary conditions shall have undergone a material change which,
in your sole judgment, makes the offering or delivery of the Shares
impracticable. If this Agreement shall be terminated pursuant to this Section 8,
there shall be no liability of the Company to the Underwriters and no liability
of the Underwriters to the Company (except to the extent provided in Section 4
or Section 7 of this Agreement); provided, however, that in the event of any
such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses of the Company incident to the
performance of the obligations of the Company under this Agreement, including
all costs, expenses and advances referred to in Section 4 of this Agreement.
9. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by either telecopier or telegraph and, if to
the Underwriters, shall be mailed, telecopied or telegraphed or delivered to
Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California
92612 (telecopier: (949) 852-9603) Attention: Managing Director Corporate
Finance; and if to the Company, shall be mailed, telecopied, telegraphed or
delivered to Casey Ind. Bldg., 8/th/ Floor, 18 Bedford Road, Taikoksui, Kowloon,
Hong Kong (telecopier: (852) 2789-1737). All notices given by telecopy or
telegraph shall be promptly confirmed by letter.
10. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company and the Underwriters and, with respect to the
provisions of Section 4 and Section 7 of this Agreement, the several parties (in
addition to the Company and the Underwriters) indemnified under the provisions
of said Section 4 and Section 7, and their respective personal representatives,
27
<PAGE>
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Shares from the
Underwriters.
11. Miscellaneous. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
their respective directors or officers, and (c) delivery and payment for the
Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but all of which together shall constitute one and
the same instrument.
12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE, AND TO BE PERFORMED, SOLELY WITHIN THAT STATE.
13. Submission to Jurisdiction and Waiver of Immunity and Inconvenient
Forum. Subject to the arbitration provisions of Sections 4(e) and 4(f), the
Company agrees that any and all disputes arising in connection with this
Underwriting Agreement and the transactions contemplated by this Underwriting
Agreement, including the offer and sale of the Firm Shares and the Option
Shares, may be brought in any state or federal court of record located in the
County of Los Angeles, State of California. By its signature to this Agreement,
the Company irrevocably submits to the jurisdiction of the state and federal
courts located in the County of Los Angeles, State of California, in any legal
action or proceeding relating to this Underwriting Agreement and the
transactions contemplated by this Underwriting Agreement, including the offer
and sale of the Firm Shares and the Option Shares.
The Company irrevocably waives all immunity from jurisdiction, attachment
and execution, whether on the basis of sovereignty or otherwise, to which each
of them respectively might otherwise be entitled in any legal action or
proceeding in any state or federal court located in the County of Los Angeles,
State of California. The Company irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to any suit,
action or proceeding relating to this Underwriting Agreement and the
transactions contemplated by this Underwriting Agreement, including the offer
and the sale of the Firm Shares and the Option Shares, being brought in the
federal or state courts located in the County of Los Angeles, State of
California, and hereby further irrevocably waive any claim that any such suit,
action or proceeding brought in any such court has been brought in an
inconvenient forum.
28
<PAGE>
If the foregoing correctly sets forth the understanding between the Company
and the Underwriters, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among the
Company and the Underwriters.
Very truly yours,
CREATIVE MASTER INTERNATIONAL, INC.
By: ______________________________
Name:
Title:
ACMA INVESTMENTS PTE., LTD.
By: ______________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date
first above written.
CRUTTENDEN ROTH INCORPORATED
By: ________________________
Name:
Title:
29
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of
Troy & Gould Professional Corporation
United States Counsel for the Company
(1) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Each of
the Company and each of its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions in the United
States, if any, in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure so
to qualify would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(2) The Company has the corporate power to own, lease and operate its
properties and to conduct its business as described in the Prospectus.
(3) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable and such counsels have not been issued in violation of any
preemptive right, co-sale right, right of first refusal or other similar right.
(4) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights to
registration of such shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have, with respect to the
offering contemplated hereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement, or have included securities in the Registration
Statement pursuant to the exercise of such rights.
(5) The Shares to be issued and sold by the Company will be, upon issuance
and delivery against payment therefor in accordance with the terms of the
Agreement, duly authorized and validly issued and fully paid and nonassessable
and, will not have been issued in violation of any preemptive right,
registration right, co-sale right, right of first refusal or other similar right
set forth in the Certificate of Incorporation or Bylaws of the Company, or any
other contract agreement or document of which such counsel has knowledge.
(6) The Company has corporate power and authority to enter into the
Agreement and the Representative's Warrant Agreement and to issue, sell and
deliver the Shares to the Underwriters.
A-1
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(7) The Agreement and the Representative's Warrant Agreement each has been
duly authorized by all necessary corporate action on the part of the Company and
each has been duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by the Representative, are the valid and
binding agreements of the Company, except insofar as the indemnification and
contribution provisions of such agreements may be limited by public policy
concerns, and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by general equitable principles.
(8) The performance of the Agreement and the Representative's Warrant
Agreement and the consummation of the transactions contemplated thereby will
not result in the breach or violation of any of the terms and provisions of the
Company's Certificate of Incorporation or Bylaws, or to the best of such
counsel's knowledge, result in the breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, or any lease, license, contract or other agreement or instrument
known to such counsel to which the Company is a party or by which any of its
properties are bound, or to the best of such counsel's knowledge, (other than
performance of the Company's indemnification and contribution obligations under
such agreements, concerning which no opinion need be expressed) any applicable
statute, rule or regulation or, to the best of such counsel's knowledge, any
order, writ or decree of any court or governmental agency or body having
jurisdiction over the Company or over any of its properties or operations;
provided, however, that no opinion need be rendered concerning state securities
or Blue Sky laws.
(9) No authorization, approval or consent of any governmental authority or
agency of the United States of America is necessary in connection with the
consummation of the transactions contemplated by the Agreement and the
Representative's Warrant Agreement, except such as have been obtained under the
Securities Act or such as may be required under the rules and regulations of the
National Association of Securities Dealers, Inc., or under state securities or
Blue Sky laws in connection with the purchase and the distribution of the Shares
by the Underwriters.
(10) To the best knowledge of such counsel, neither the Company nor any of
its subsidiaries is presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of their properties are bound which is material to the financial
condition, earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise;
(11) The Representative's Warrant Agreement has been duly and validly
authorized and constitutes valid and binding obligation of the Company in
accordance with its terms; the Representative's Warrant Stock has been duly and
validly authorized for issuance upon exercise of the Representative's Warrants
and when so issued will be validly issued, fully paid and non-assessable; and,
no stockholder has any preemptive rights with respect to the Representative's
Warrant Stock.
A-2
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(12) All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusion under the laws of the United States of
America or the State of Delaware, has been reviewed by us and are a fair summary
of such matters and conclusions.
(13) The form of certificates evidencing the Common Stock complies with
Delaware law.
(14) The Registration Statement has become effective under the Securities
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for that purpose have been instituted or are
pending or, to the best knowledge of such counsel, threatened under the
Securities Act.
(15) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be described
or referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that are not described or referred to
therein and filed as required.
(16) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements, financial and
statistical data included therein, as to which such counsel need express no
opinion) as of the effective date of the Registration Statement, complied as to
form in all material respects with the requirements of the Securities Act and
the applicable Rules and Regulations.
(17) To the best knowledge of such counsel, the Common Shares conform in
all material respects to all statements in relation thereto contained in the
Prospectus.
(18) The description in the Registration Statement and the Prospectus of
the Certificate of Incorporation and Bylaws of the Company and of statutes and
contracts are accurate in all material respects and fairly present in all
material respects the information required to be presented by the Securities Act
and the Rules and Regulations.
(19) There are no legal or governmental proceedings pending or, to the best
knowledge of such counsel, threatened against the Company or any of its
subsidiaries of a character which are required to be disclosed in the
Registration Statement or the Prospectus by the Securities Act or the applicable
Rules and Regulations, other than those described therein.
(20) The information in the Prospectus under the captions "Description of
Capital Stock" and "Shares Eligible For Future Sale," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by such
counsel and are a fair summary of such matters and conclusions.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Underwriters, Underwriters' counsel and the independent public accountants of
the Company, at which conferences the contents of the Registration Statement and
the Prospectus and related matters were discussed, and although they
A-3
<PAGE>
have not (with the exception of the matters covered in paragraphs (12), (13) and
(20) of their opinion) independently checked or verified the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
that caused them to believe that, at the time the Registration Statement became
effective, the Registration Statement (except as to financial statements,
financial data and supporting schedules contained therein, as to which such
counsel need express no opinion) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are to be purchased, as the case
may be, the Prospectus (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or the States of California or Delaware
upon opinions of local counsel, and as to questions of fact upon representations
or certificates of officers of the Company, and of government officials, in
which case their opinion is explicitly to state that they are so relying thereon
and that they have no knowledge of any material misstatement or inaccuracy in
such opinions, representations or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Underwriters, and to Underwriters' Counsel.
A-4
<PAGE>
ANNEX B
Matters to be Covered in the Opinion of
Angela Wang & Co.
Hong Kong Counsel for the Company
1. Each of Creative Master Limited, Excel Master Limited, Carison
Engineering Limited, Techtime Industries Limited, Mastercraft Engineering
Limited (formerly Queenex Enterprises Limited) (the "Hong Kong subsidiaries")
has been duly registered and is validly existing as a limited liability company
in good standing under the laws of Hong Kong.
2. Each of the Hong Kong subsidiaries has the corporate power and
authority to own, lease and operate its properties and to conduct its business
in the manner currently conducted and as proposed to be conducted respectively
as described in the Prospectus.
3. The description in the Registration Statement and the Prospectus of
each of the Hong Kong subsidiaries and the relationship between the Company and
the Hong Kong subsidiaries is accurate in all material respects, and fairly
presents in all material respects the information set forth therein.
4. The Company owns all of the outstanding capital stock of each Hong
Kong Subsidiary except for Mastercraft Engineering Limited, Carison Engineering
Limited and Techtime Limited of which it owns 70%, 70% and 55%, respectively.
All of the issued and outstanding capital stock of each of the Hong Kong
subsidiaries has been duly and validly authorized and issued, is fully paid and
nonassessable, is not owned or held and has not been issued in violation of any
preemptive rights contained in the charter documents of the respective Hong Kong
Subsidiary and, to the extent owned by the Company, is owned directly by the
Company free and clear of any lien, encumbrance, claim, security interest,
restriction or transfer.
5. There are no outstanding options, warrants, calls, rights or other
agreements or commitments with respect to the purchase or sale of any capital
stock of any of the Hong Kong subsidiaries.
6. Those contracts which are included as exhibits to the Registration
Statement and which are made or to be performed in, or stated to be governed by
the law of, Hong Kong are valid and enforceable under Hong Kong law.
7. No authorization, approval or consent of any governmental authority or
agency of Hong Kong is necessary in connection with the consummation of the
transactions contemplated by the Agreement and the Representative's Warrant
Agreement.
B-1
<PAGE>
8. There are no legal or governmental proceedings pending or, to the best
knowledge of such counsel, threatened against the Company or any of the Hong
Kong subsidiaries other than those, if any, described in the Registration
Statement or the Prospectus.
9. To the best of such counsel's knowledge, none of the Hong Kong
subsidiaries is presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or other agreement or
instrument to which each such respective company is a party or by which any of
their respective properties are bound which is material to the financial
condition, earnings, operations, business or business prospects of the Company
and its Hong Kong subsidiaries considered as one enterprise.
10. All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusions under the laws of Hong Kong has been
reviewed by such counsel and are a fair summary of such matters and conclusions.
11. Under the laws of Hong Kong the submission to Jurisdiction and Waiver
of Immunity and Inconvenient Forum clause of section 13 of the Agreement are
valid and binding upon the Company.
12. All translations of documents from Chinese to English which were
provided to counsel for the Underwriters and which are included as exhibits to
the Registration Statement are complete and accurate translations in all
material respects.
In addition, such counsel shall state that although they have not (with the
exception of the matters covered in paragraph 10 of their opinion) independently
checked or verified the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus relating to the
Company and its operations in Hong Kong, nothing has come to the attention of
such counsel that caused them to believe that, at the time the Registration
Statement became effective, the Registration Statement (except as to financial
statements, financial data and supporting schedules contained therein) contained
any untrue statement of a material fact, or omitted to sate a material fact
required to be stated therein or necessary to make such statements not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact to be stated therein or necessary to make such statements, in light of the
circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the companies which are the
subject of said opinion, and of government officials in which case their opinion
is explicitly to state that they are so relying thereon and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificates so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' counsel.
B-2
<PAGE>
ANNEX C
Matters to be Covered in the Opinion of
The Fada Law Firm
China Counsel for the Company
1. Dongguan Heng Li Zhen Trading Company has been duly organized and is
validly existing in good standing under the laws of China.
2. Dongguan Heng Li Zhen Trading Company has the legal capacity,
necessary power and authority to execute and perform its obligations under the
Joint Enterprise Agreement, dated September 10, 1994, the Joint Enterprise
Agreement [that is not dated (exhibit 10.29)], the Supplement, dated April 1,
1996, to the Joint Enterprise Agreement, and the Processing Agreement dated June
18, 1998 (the "Joint Enterprise Agreements").
3. Dongguan Process Assembly Servicing Company has the right and power to
enter into with Creative Master Limited the Processing Agreement, dated June 11,
1995 and the Supplement dated November 11, 1995. Dongguang Process Assembly
Servicing Company has the right and power to enter into with Creative Master
Limited the Import Material & Processing Agreement dated November 10, 1995.
4. The Joint Enterprise Agreements have been validly executed by Dongguan
Heng Li Zhen Trading Company and Creative Master Limited and duly approved by
the Chinese government which constitute valid and binding obligations of each of
the two parties, enforceable in accordance with their terms and conditions under
the law of China.
5. Each local Chinese government agency has the right and power to enter
into the manufacturing leases, which are filed as exhibits to the Registration
Statement, and each factory and dormitory lease has been validly executed and
constitutes the valid and binding obligations of the parties, enforceable in
accordance with their respective term and conditions under the laws of China.
6. The Dongguan Chuangying Toys Factory Co., Ltd. has been duly organized
as a limited liability company and is validly existing in good standing under
the laws of China.
7. Dongguan Chuangying Toys Factory Co., Ltd. has the right and power to
own, lease and operate its properties and to conduct its business as described
in the Prospectus, including the right and power to [execute] and] perform its
obligations under the Joint Enterprise Agreement, dated September 10, 1994, and
the Joint Enterprise Agreement [that is not dated (exhibit 10.29)].
8. No authorization, approval or consent of any governmental authority or
agency of China is necessary in connection with the consummation of the
transactions contemplated by the Agreement and the Representative's Warrant
Agreement;
C-1
<PAGE>
9. The Company and [list subsidiaries party to the factory and dormitory
leases and Joint Enterprise and Processing Agreements] are in possession of, and
operating in China in compliance with such authorizations, licenses,
certificates, orders and permits as may be required from applicable regulatory
authorities in China which are material to the conduct of their business, all of
which are valid and in full force and effect; neither the Company nor [list
subsidiaries party to the factory and dormitory leases and Joint Enterprise and
Processing Agreements] is in default in the performances or observance of any
material obligation, agreement covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company or
[list subsidiaries party to the factory and dormitory leases and Joint
Enterprise and Processing Agreements] is a party or by which any of them or
their properties may be bound; and neither the Company nor [list subsidiaries
party to the factory and dormitory leases and Joint Enterprise and Processing
Agreements] is in material violation of, or liable under, any law, order, rule,
regulation, writ, injunction, judgement or decree of any court, government or
governmental agency or body of China having jurisdiction over the Company or
[list subsidiaries party to the factory and dormitory leases and Joint
Enterprise and Processing Agreements] or over any of their properties;
10. All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusions under the laws of China has been reviewed by
such counsel and is a fair summary of such matters and conclusions;
11. There are no legal or governmental proceedings pending or, to such
counsel's knowledge, threatened against the Company or [list subsidiaries party
to the factory and dormitory leases and Joint Enterprise and Processing
Agreements].
12. Under Chinese law, the submission to Jurisdiction and Waiver of
Immunity and Inconvenient Forum clause of Section 13 of the Agreement is valid
and binding upon the Company.
In addition, such counsel shall state that although they have not (with the
exception of the matters covered in paragraph 9 of their opinion) independently
checked or verified the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus relating to the
Company and its operations in China, nothing has come to the attention of such
counsel that caused them to believe that, at the time the Registration Statement
became effective, the Registration Statement (except as to financial statements,
financial data and supporting schedules contained therein) contained any untrue
statement of a material fact, or omitted to sate a material fact required to be
stated therein or necessary to make such statements not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Prospectus (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact to be stated
therein or necessary to make such statements, in light of the circumstances
under which they were made, not misleading.
C-2
<PAGE>
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the companies which are the
subject of said opinion, and of government officials in which case their opinion
is explicitly to state that they are so relying thereon and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificates so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' counsel.
C-3
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ANNEX D
Opinion of Counsel to
Selling Stockholder
1. The Agreement and the Power of Attorney and the Custody Agreement have
been duly and validly authorized, executed and delivered by the Selling
Stockholder and each is a valid and binding obligation of the Selling
Stockholder, enforceable against it in accordance with its terms except as
rights to indemnity and contribution may be limited by Federal or state
securities laws and except as enforcement (i) may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally and (ii) is subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
2. To the best knowledge of such counsel, the Selling Stockholder has all
requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits of and from all courts and all public, governmental or regulatory
agencies and bodies, as required for the execution, delivery and performance of
this Agreement, the Power of Attorney and the Custody Agreement and the
consummation of the transactions contemplated hereby and thereby, except for (A)
such as may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters, as to
which counsel need express no opinion and (B) such as have been made or obtained
under the Act.
3. Upon the delivery of and payment for the Option Shares to be sold by
the Selling Stockholder pursuant to the Agreement, you will receive good, valid
and marketable title to the Option Shares purchased from the Selling
Stockholder, free and clear of all liens, encumbrances, claims, security
interests, restrictions on transfer, stockholders' agreements, voting trusts and
other defects in title created by or known to the Selling Stockholder.
4. The execution, delivery and performance of this Agreement, the Power
of Attorney and the Custody Agreement by the Selling Stockholder and the
consummation of the transactions contemplated hereby and thereby will not
violate or conflict with, to the best knowledge of such counsel, any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over any of the
Selling Stockholder or any of their properties or assets.
5. The statements in the Prospectus under the caption "Principal and
Selling Stockholders," insofar as such statements constitute a summary of
matters referred to therein with respect to the Selling Stockholder, fairly
present the information with respect to such matters.
D-1
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EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
CREATIVE MASTER INTERNATIONAL, INC.
(FORMERLY DAVIN ENTERPRISES, INC.)
INCORPORATED ON APRIL 8, 1987
Creative Master International, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Creative Master International, Inc.
Creative Master International, Inc. was originally incorporated under the name
Davin Enterprises, Inc., and the original Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State of Delaware on
April 8, 1987.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of Incorporation
of the corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
FIRST: The name of the Corporation is
CREATIVE MASTER INTERNATIONAL, INC.
SECOND: The address of the registered office and registered agent in this
state is c/o United Corporate Services, Inc., 410 South State Street, in the
City of Dover, County of Kent, State of Delaware 19901 and the name of the
registered agent at said address is United Corporate Services, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the corporation laws of
the State of Delaware.
FOURTH: (1) The total number of shares of stock which the Corporation is
authorized to issue is Thirty Million (30,000,000) shares designated "Common
Stock" and "Preferred Stock." The number of shares of Common Stock authorized to
be issued is Twenty-Five Million (25,000,000) with a par value of $.0001 per
share. The number of shares of Preferred Stock authorized to be issued is Five
Million (5,000,000) with a par value of $.0001 per share. The holders of the
Common Stock or Preferred Stock shall have no preemptive rights to subscribe for
or purchase any shares of any class of stock of the Corporation, whether now or
hereafter authorized.
(2) The Board of Directors of the Corporation is authorized to determine
the number of series into which shares of Preferred Stock may be divided, to
determine the designations, powers, preferences and voting and other rights, and
the qualifications, limitations and restrictions granted to or imposed upon the
Preferred Stock or any series thereof or any holders thereof, to determine and
alter the designations, powers, preferences and rights, and the qualifications,
limitations and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock or the holders thereof, to fix the number of shares of
that series and to increase or decrease, within the limits stated in any
resolution of the Board of Directors originally fixing the number of shares
constituting any series (but not below the number of such shares then
outstanding), the number of shares of any such series subsequent to the issuance
of shares of that series.
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(3) The Corporation hereby reclassifies its Common Stock pursuant to
Section 242 of the Delaware General Corporation Law in order to effect a three
(3) for four (4) reverse split of its Common Stock, $.0001 par value ("Old
Common Stock"), so that four (4) shares of the Old Common Stock is equal to
three (3) shares of Common Stock, $.0001 par value ("New Common Stock"). Each
certificate which heretofore represented shares of Old Common Stock shall
hereafter represent the number of shares of New Common Stock into which the
shares of Old Common Stock represented by such certificate shall be combined;
provided, however, that each person holding of record a stock certificate or
- --------
certificates which represented shares of Old Common Stock shall receive, upon
surrender of such certificate or certificates, a new certificate or certificates
evidencing and representing the number of shares of New Common Stock to which
such person is entitled, and provided further that the Corporation shall not
issue fractional shares with respect to the combination. In lieu thereof, the
Corporation shall pay stockholders who would otherwise be entitled to be issued
a fractional share of Common Stock cash equal to the fair value of such
fractional share as determined by the Board of Directors of the Corporation.
FIFTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The number of directors of the Corporation shall be such as from time
to time shall be fixed by, or in the manner provided in the bylaws. Election of
directors need not be by ballot unless the bylaws so provide.
(2) The Board of Directors shall have power without the assent or vote of
the stockholders:
(a) To make, alter, amend, change, add to or repeal the bylaws of the
Corporation; to fix and vary the amount to be reserved for any proper purpose;
to authorize and cause to be executed mortgages and liens upon all or any part
of the property of the Corporation; to determine the use and disposition of any
surplus or net profits; and to fix the times for the declaration and payment of
dividends.
(b) To determine from time to time whether, and to what times and
places, and under what conditions the accounts and books of the Corporation
(other than the stockledger) or any of them, shall be open to the inspection of
the stockholders.
(3) The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the Corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and as binding upon the Corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the Corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors interest, or for any other reason.
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<PAGE>
(4) In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this certificate, and to any bylaws from time to time made by the
stockholders; provided, however, that no bylaws so made shall invalidate any
--------
prior act of the directors which would have been valid if such bylaw had not
been made.
SIXTH: No director of the Corporation shall be liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary duty as
a director, except with respect to (1) a breach of the director's duty of
loyalty to the Corporation or its stockholders, (2) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) liability under Section 174 of the Delaware General Corporation Law or
(4) a transaction from which the director derived an improper personal benefit,
it being the intention of the foregoing provision to eliminate the liability of
the Corporation's directors to the Corporation or its stockholders to the
fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law, as amended from time to time. The Corporation shall indemnify
to the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware
General Corporation Law, as amended from time to time, each person that such
Sections grant the Corporation to power to indemnify.
SEVENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this reserved
power.
3
<PAGE>
The foregoing Restated Certificate of Incorporation was first authorized by
the Board of Directors and subsequently duly adopted by affirmative vote of
stockholders holding at least a majority of the Corporation's outstanding stock
entitled to vote thereon in accordance with Section 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed by Carl Ka Wing Tong, its authorized officer, this ____ day of December
1998.
CREATIVE MASTER INTERNATIONAL, INC.
By: _________________________________
Carl Ka Wing Tong, President and
Chief Executive Officer
4
<PAGE>
EXHIBIT 3.2
BY LAWS
OF
DAVIN ENTERPRISES, INC.
ARTICLE I - OFFICES
-------------------
The principal office of the Corporation shall be located in the City,
County and State so provided in the Certificate of Incorporation. The
Corporation may also maintain offices at such other places within or without the
State of Delaware as the Board of Directors may, from time to time, determine
and the business may require.
ARTICLE II - SHAREHOLDERS
-------------------------
1. Place of Meetings. Meetings of shareholders shall be held at the
-----------------
principal office of the Corporation, or at such other places within or without
the State of Delaware as the Board shall authorize.
2. Annual Meetings. The annual meeting of the shareholders of the
---------------
Corporation shall be held at 2:00 p.m. on the last Tuesday of the third month in
each year after the close of the fiscal year of the Corporation, if such date is
not a legal holiday and if a legal holiday, then on the next business day
following at the same hour, at which time the shareholders shall elect a Board
of Directors, and transact such other business as may properly come before the
meeting.
3. Special Meetings. Special meetings of the shareholders may be called
----------------
at any time by the Board or by the President, and shall be called by the
President or the Secretary at the written request of the holders of ten (10%)
per cent of the outstanding shares entitled to vote thereat, or as otherwise
required by law.
4. Notice of Meetings. Written notice of each meeting of shareholders,
------------------
whether annual or special, stating the time when and place where it is to be
held, shall be served either personally or by mail. Such notice shall be served
not less than ten (10) nor more than sixty (60) days before the meeting, upon
each shareholder of record entitled to vote at such meeting, and to any other
shareholder to whom the giving of notice may be required by law. Notice of a
special meeting shall also state the purpose or purposes for which the meeting
is called, and shall indicate that it is being issued by the person calling the
meeting. If at any meeting, action is proposed to be taken that would, if
taken, entitle shareholders to receive payment for their shares, the notice of
such meeting shall include a statement of that purpose
1
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and to that effect. If mailed, such notice shall be directed to each such
shareholder at his address, as it appears on the records of the shareholders of
the Corporation, unless he shall have previously filed with the Secretary of the
Corporation a written request that notices intended for him be mailed to some
other address, in which event, it shall be mailed to the address designated in
such request.
5. Waiver. Notice of any meeting need not be given to any shareholder
------
who submits a signed waiver of notice either before or after a meeting. The
attendance of any shareholder at a meeting, in person or by proxy, shall
constitute a waiver of notice by such shareholder.
6. Fixing Record Date. For the purpose of determining the shareholders
------------------
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the Board shall fix, in advance, a date as the
record date for any such determination of shareholders. Such date shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If no record
date is fixed, it shall be determined in accordance with the provisions of law.
7. Quorum.
------
(a) Except as otherwise provided by the Certificate of Incorporation,
at all meetings of shareholders of the Corporation, the presence at the
commencement of such meetings, in person or by proxy, of shareholders holding a
majority of the total number of shares of the Corporation then issued and
outstanding on the records of the Corporation and entitled to vote, shall be
necessary and sufficient to constitute a quorum for the transaction of any
business. If a specified item of business is required to be voted on by a class
or classes, the holder of a majority of the shares of such class or classes
shall constitute a quorum for the transaction of such specified item of
business. The withdrawal of any shareholder after the commencement of a meeting
shall have no effect on the existence of a quorum, after a quorum has been
established at such meeting.
(b) Despite the absence of a quorum at any annual or special meeting
of shareholders, the shareholders, by a majority of the votes cast by the
holders of shares entitled to vote thereon, may adjourn the meeting.
8. Voting.
------
(a) Except as otherwise provided by statute or by Certificate of
Incorporation,
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<PAGE>
(1) directors shall be elected by a plurality of the votes
cast; and
(2) all other corporate action to be taken by vote
of the shareholders, shall be authorized by a majority of
votes cast;
at a meeting of shareholders by the holders of shares entitled to
vote thereon.
(b) Except as otherwise provided by statute or by the Certificate of
Incorporation, at each meeting of shareholders, each holder of record of shares
of the Corporation entitled to vote, shall be entitled to one vote for each
share of stock registered in his name on the books of the Corporation.
(c) Each shareholder entitled to vote or to express consent or dissent
without a meeting, may do so by proxy; provided, however, that the instrument
authorizing such proxy to act shall have been executed in writing by the
shareholder himself, or by his attorney-in-fact duly authorized in writing. No
proxy shall be voted or acted upon after three (3) years unless the proxy shall
specify the length of time it is to continue in force. The proxy shall be
delivered to the Secretary at the meeting and shall be filed with the records of
the Corporation. Every proxy shall be revocable at the pleasure of the
shareholder executing it, unless the proxy states that it is irrevocable, except
as otherwise provided by law.
(d) Any action that may be taken by vote may be taken without a
meeting on written consent. Such action shall constitute action by such
shareholders with the same force and effect as if the same had been approved at
a duly called meeting of shareholders and evidence of such approval signed by
all of the shareholders shall be inserted in the Minute Book of the Corporation.
ARTICLES III - BOARD OF DIRECTORS
---------------------------------
1. Number. The number of the directors of the Corporation shall be one
------
(1) until otherwise determined by a vote of the Board.
(a) Indemnification. Directors shall be indemnified for their actions
---------------
to the full extent provided by the law.
2. Election. Except as may otherwise be provided herein or in the
--------
Certificate the members of the Board need not be shareholders and shall be
elected by a majority of the votes cast at a meeting of shareholders by the
holders of shares entitled to vote in the election.
3. Term of Office. Each director shall hold office until the annual
--------------
meeting of the shareholders next succeeding his election
3
<PAGE>
and until his successor is elected and qualified, or until his prior death,
resignation or removal.
4. Duties and Powers. The Board shall be responsible for the control and
-----------------
management of the affairs, property and interests of the Corporation, and may
exercise all powers of the Corporation, except those powers expressly conferred
upon or reserved to the shareholders.
5. Annual Meetings. Regular annual meetings of the Board shall be held
---------------
immediately following the annual meeting of shareholders.
6. Regular Meetings and Notice. The Board may provide by resolution for
---------------------------
the holding of regular meetings of the Board of Directors, and may fix the time
and place thereof. Notice of regular meetings shall not be required to be given
and, if given, need not specify the purpose of the meeting; provided, however,
that in case the Board shall fix or change the time or place of any regular
meeting, notice of such action be given to each director who shall not have been
present at the meeting at which such action was taken within the time limited,
and in the manner set forth at Section 7 of this Article III, unless such notice
shall be waived.
7. Special Meetings and Notice.
---------------------------
(a) Special meetings of the Board shall be held whenever called by the
President or by one of the directors, at such time and place as may be specified
in the respective notices or waivers of notice thereof.
(b) Notice of special meetings shall be mailed directly to each
directors addressed to him at the address designated by him for such purpose at
his usual place of business, at least two (2) business days before the day on
which the meeting is to be held, or delivered to him personally or given to him
orally, not later than the business day before the day on which the meeting is
to be held.
(c) Notice of a special meeting shall not be required to be given to
any director who shall attend such meeting, or who submits a signed waiver of
notice.
8. Chairman. At all meetings of the Board, the Chairman, if present,
--------
shall preside. If there shall be no Chairman, or he shall be absent, then the
President shall preside. In his absence, the Chairman shall be chosen by the
Directors present.
9. Quorum and Adjournments.
-----------------------
(a) At all meetings of the Board, the presence of a majority of the
entire Board shall be necessary to constitute a quorum for the transaction of
business, except as otherwise provided by law, by the Certificate of
Incorporation, or by these
4
<PAGE>
By-laws. Participation of any one or more members of the Board by means of a
conference telephone or similar communications equipment, allowing all parsons
participating in the meeting to hear each other at the same time, shall
constitute presence in person at any such meeting.
(b) A majority of the directors present at any regular or special
meeting, although less than a quorum, may adjourn the same from time to time
without notice, until a quorum shall be present.
10. Manner of Actings.
-----------------
(a) At all meetings of the Board, each director present shall have one
vote.
(b) Except as otherwise provided by law, by the Certificate of
Incorporation or these By-Laws, the action of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board. Any action authorized, in writing, by all of the directors entitled to
vote thereon and filed with the minutes of the Corporation shall be the act of
the Board with the same force and effect as if the same had been passed by
unanimous vote at a duly called meeting of the Board.
11. Vacancies. Any vacancy in the Board of Directors resulting from an
---------
increase in the number of directors, or the death, resignation,
disqualification, removal or inability to act of any director, shall be filled
for the unexpired portion of the terms by a majority vote of the remaining
directors, though less than a quorum, at any regular meeting or special meeting
of the Board called for that purpose.
12. Resignation. Any director may resign at any time by giving written
-----------
notice to the Board, the President or the secretary of the Corporation. Unless
otherwise specified in such written notice, such resignation shall take effect
upon receipt thereof by the BoArd or such officer, and the acceptance of such
resignation shall not be necessary to make it effective.
13. Removal. Any director may be removed, with or without cause, at any
-------
time by the holders of a majority of the shares then entitled to vote at an
election of directors, at a special meeting of the shareholders called for that
purpose, and may be removed for cause by action of the Board.
14. Compensation. No compensation shall be paid to directors as such, for
------------
their services, but by resolution of the BOARD, a fixed sum and expenses for
actual attendance may be authorized for attendance at each regular or special
meeting of the Board. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
5
<PAGE>
15. Contracts.
---------
(a) No contract or other transaction between this Corporation and any
other business shall be affected or invalidated, nor shall any director be
liable in any way by reason of the fact that a director of this Corporation is
interested in, or is financially interested in such other business, provided
such fact is disclosed to the Board.
(b) Any director may be a party to or may be interested in any
contract or transaction of this Corporation individually, and no director shall
be liable in any way by reason of such interest, provided that the fact of such
participation or interest be disclosed to the Board and provided that the Board
shall authorize or ratify such contract or transaction by the vote (not counting
the vote of any such director) of a majority of a quorum, notwithstanding the
presence of any such director at the meeting at which such action is taken.
Such director may be counted in determining the presence of a quorum at such
meeting. This Section shall not be construed to invalidate or in any way affect
any contract or other transaction which would otherwise be valid under the law
applicable thereto.
16. Committees. The Board, by resolution adopted by a majority of the
----------
entire Board, may from time to time designate from among its members an
executive committee and such other committees, and alternate members thereof, as
they deem desirable, each consisting of three or more members, which such powers
and authority (to the extent permitted by law) as may be provided in such
resolution. Each such committee shall remain in existence at the pleasure of
the Board. Participation of any one or more members of a committee by means of
a conference telephone or similar communications equipment allowing all persons
participating in the meeting to bear each other at the same timer shall
constitute a director's presence in person at any such meeting. Any action
authorized in writing by all of the members of a committee and filed with the
minutes of the committee shall be the act of the committee with the same force
and effect as if the same had been passed by unanimous vote at a duly called
meeting of the committee.
ARTICLE IV - OFFICERS
---------------------
1. Number and Qualifications. The officers of the Corporation shall
-------------------------
consist of a President, one or more Vice Presidents, a Secretary, a Treasurer,
and such other officers, including a Chairman of the Board as the Board of
Directors may from time to time deem advisable. Any officer other than the
Chairman of the Board may be, but is not required to be, a director of the
Corporation. Any two or more offices may be held by the same person, except the
offices of President and Secretary.
6
<PAGE>
2. Election. The officers of the Corporation shall be elected by the
--------
Board at the regular annual meeting of the Board following the annual meeting of
shareholders.
3. Term of Office. Each officer shall hold office until the annual
--------------
meeting of the Board next succeeding his election, and until his successor shall
have been elected and qualified, or until his death, resignation or removal.
4. Resignation. Any officer may at any time by giving written notice
-----------
thereof to the Board, the President or the Secretary of the Corporation. Such
resignation shall take effect upon receipt thereof by the Board or by such
officer, unless otherwise specified in such written notice. The acceptance of
such resignation shall not be necessary to make it effective.
5. Removal. Any officer, whether elected or appointed by the Board, may
-------
be removed by the Board, either with or without cause, and a successor elected
by the Board at any time.
6. Vacancies. A vacancy in any office by reason of death, resignation,
---------
inability to act, disqualification, or any other cause, may at any time be
filled for the unexpired portion of the term by the Board.
7. Duties. Unless otherwise provided by the Board, officers of the
------
Corporation shall each have such powers and duties as generally pertain to their
respective offices, such powers and duties as may be set forth in these by-laws,
and such powers and duties as may be specifically provided for by the Board.
The President shall be the chief executive officer of the Corporation.
8. Sureties and Bonds. At the request of the Board, any officer,
------------------
employee or agent of the Corporation shall execute for the Corporation a bond in
such sum, and with such surety as the Board may direct, conditioned upon the
faithful performance of his duties to the Corporation, including responsibility
for negligence and for the accounting for all property, funds or securities of
the Corporation which may come into his hands.
9. Shares of Other Corporations. Whenever the Corporation is the holder
----------------------------
of shares of any other corporation, any right or power of the Corporation as
such shareholder shall be exercised on behalf of the Corporation in such manner
as the Board may authorize.
ARTICLE V - SHARES OF STOCK
---------------------------
1. Certificates.
------------
(a) The certificates representing shares in the Corporation shall be
in such form as shall be approved by the Board and shall be numbered and
registered in the order issued. They
7
<PAGE>
shall bear the holder's name and the number of shares and shall be signed by the
Chairman of the Board or the Vice Chairman of the Board or the President or a
Vice President, and (ii) the Secretary or Treasurer, or any Assistant Secretary
or Assistant Treasurer, and shall bear the corporate seal.
(b) Certificate representing shares shall not be issued until they are
fully paid for.
(c) The Board may authorize the issuance of certificates for fractions
of a share which shall entitle the holder to exercise voting rights receive
dividends and participate in liquidating distributions, in proportion to the
fractional holdings.
2. Lost or Destroyed Certificates. Upon notification by the holder of
------------------------------
any certificate representing shares of the Corporation of the loss or
destruction of one or more certificates representing the same, the Corporation
may issue new certificates in place of any certificates previously issued by it,
and alleged to have been lost or destroyed. Upon production of evidence of loss
or destruction, in such form as the Board in its sole discretion may require,
the Board may require the owner of the lost or destroyed certificates to provide
the Corporation with a bond in such sum as the Board may direct, and with such
surety as may be satisfactory to the Board, to indemnify the Corporation against
any claims, loss, liability or damage it may suffer on account of the issuance
of the new certificates. A new certificate may be issued without requiring any
such evidence or bond when, in the judgment of the Board it is proper to do so.
3. Transfers of Shares.
-------------------
(a) Transfers of shares of the Corporation may be made on the share
records of the Corporation solely by the holder of such records, in person or by
a duly authorized attorneys upon surrender for cancellation of the certificates
representing such shares, with an assignment or power of transfer endorsed
thereon or delivered therewith, duly executed and with such proof of the
authenticity of the signature, and the authority to transfer and the payment of
transfer taxes as the Corporation or its agents may require.
(b) The Corporation shall be entitled to treat the holder of record of
any shares as the absolute owner thereof for all purposes and shall not be bound
to recognize any legal, equitable or other claim to, or interest in, such shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise expressly provided by law.
(c) The Corporation shall be entitled to impose such restrictions on
the transfer of shares as may be necessary for the purpose of electing or
maintaining Subchapter S status under the
8
<PAGE>
Internal Revenue Code or for the purpose of securing or maintaining any other
tax advantage to the Corporation.
4. Record Date. In lieu of closing the share records of the Corporation,
-----------
the Board may fix, in advance, a date not less than ten (10) days nor more than
sixty (60) days, as the record date for the determination of shareholders
entitled to receive notice of, and to vote at, any meeting of shareholders, or
to consent to any proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of any dividends, or allotment of any
rights, or for the purpose of determining shareholders entitled to receive
payment of any dividends, or allotment of any rights, or for the purpose of any
other action. If no record date is fixed, the record date for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day immediately preceding the day on
which notice is given, or, if notice is waived, at the close of business on the
day immediately preceding the day on which the meeting is held; the record date
for determining shareholders for any other purpose shall be at the close of
business on the day on which the resolution of the directors relating thereto is
adopted. The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action by
the Board is necessary, shall be the day on which the first written consent is
expressed. When a determination of shareholders of record entitled to notice of
or to vote at any meeting of shareholders has been made as provided for herein,
such determination shall apply to any adjournment thereof, unless the directors
fix a new record date for the adjourned meeting.
ARTICLE VI - DIVIDENDS
----------------------
Subject to this Certificate of Incorporation and to applicable law,
dividends may be declared and paid out of any funds available therefor, as
often, in such amounts and at such time or times as the Board may determine.
Before payment of any dividends, there may be set aside out of the net profits
of the Corporation available for dividends, such sum or sums as the Board, from
time to time, in its sole discretion, deems proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the Board shall think
conducive to the interests of the Corporation, and the Board may modify or
abolish any such reserve.
ARTICLE VII - FISCAL YEAR
-------------------------
The fiscal year of the corporation shall be fixed by the Board from time to
time, subject to applicable law.
9
<PAGE>
ARTICLE VIII - CORPORATE SEAL
-----------------------------
The corporate seal, if any, shall be in such form as shall be approved
from time to time by the Board.
ARTICLE IX - AMENDMENTS
-----------------------
1. By Shareholders. All by-laws of the Corporation shall be subject
---------------
to revision, amendment or repeal, and new by-laws may be adopted from time to
time by a majority of the shareholders who are at such time entitled to vote in
the election of directors.
2. By Directors. The Board of Directors shall adopt a resolution
------------
setting forth the amendment proposed declaring its advisability, and either
calling a special meeting of the stockholders entitled to vote in respect
thereto for the consideration of such amendment or directing that the amendment
proposed be considered at the next annual meeting of stockholders. Such special
or annual meeting shall be called and held upon notice. This notice shall set
forth such amendment in full or a brief summary of the changes to be effected
thereby, as the directors shall deem advisable. At the meeting a vote of the
stockholders entitled to vote thereon shall be taken for and against the
proposed amendment. If a majority of the outstanding stock entitled to vote
thereon and a majority of the outstanding stock of each class entitled to vote
thereon as a class has been voted in favor of the amendment, a certificate
setting forth the amendment and certifying that such amendment has been duly
adopted in accordance with this section shall be executed, acknowledged, filed
and recorded and shall become effective.
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<PAGE>
__________________________________________________________
CREATIVE MASTER INTERNATIONAL, INC.
and
CRUTTENDEN ROTH INCORPORATED
________________
REPRESENTATIVE'S WARRANT AGREEMENT
Dated as of , 1998
__________________________________________________________
<PAGE>
EXHIBIT 4.2
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
____________ __, 1998 is made and entered into by and between CREATIVE MASTER
INTERNATIONAL, INC., a Delaware corporation (the "Company"), and CRUTTENDEN ROTH
INCORPORATED (the "Warrantholder").
The Company agrees to issue and sell to the Warrantholder, and the
Warrantholder agree to purchase, for the price of [$200], warrants, as
hereinafter described (the "Warrants") to purchase up to an aggregate of 200,000
shares (the "Shares") of the Company's Common Stock, $.0001 par value (the
"Common Stock"), in connection with a public offering (the "Public Offering") by
the Company of [2,000,000] shares of Common Stock pursuant to that certain
underwriting agreement (the "Underwriting Agreement"), dated as of
________________, 1998 between and among the Company, ACMA Investments Pte.,
Ltd. (the "Selling Stockholder") and the Warrantholder, as the representative of
the underwriters (the "Underwriters") in the Underwriting Agreement. The
purchase and sale of the Warrants shall occur on the Closing Date, as defined in
the Underwriting Agreement.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. Transferability and Form of Warrants.
1.1 Registration. The Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 Transfer. The Warrants and all rights thereunder shall be
transferable only on the books of the Company maintained for such purpose at its
principal office in Taikoktsui, Kowloon, Hong Kong, or wherever its principal
office may then be located, upon delivery thereof duly endorsed by the
Warrantholder or by its duly authorized attorney or representative, accompanied
by proper evidence of succession, assignment or authority to transfer, and upon
payment of any necessary transfer tax or other governmental charge imposed upon
such transfer. Upon any registration of transfer, the Company shall execute and
deliver new Warrants to the person entitled thereto.
1.3 Limitations on Transfer of the Warrants. Subject to the
provisions of Section 11 hereof, the Warrants shall not be sold, transferred,
assigned or hypothecated by the Warrantholder until ____________ __, 1999,
except (i) to an officer of the transferring Warrantholder, another Underwriter
or member of the selling group or officer of any of them; (ii) a successor to
the transferring Warrantholder in a merger or consolidation with such
transferring Warrantholder; (iii) a purchaser of all or substantially all of the
transferring Warrantholder's assets; or (iv) any person receiving the Warrants
from one or more of the persons listed in this subsection 1.3 at such person's
or persons' death pursuant to will, trust or the laws of intestate succession.
The Warrants may be combined or divided into a certificate or certificates
representing the right to purchase the same aggregate number of Shares, upon
written request to the Company specifying the names and denominations in which
new Warrants are to be issued. Unless the context indicates otherwise, the
terms "Warrantholder" or "Warrantholders" as used herein shall include any
transferee or transferees of the Warrants pursuant to this subsection 1.3, and
the term "Warrants" as used herein shall include any and all warrants
outstanding pursuant to this Agreement, including those evidenced by a
certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to this Agreement.
1.4 Form of Warrants. The text of the Warrants and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants
<PAGE>
shall be executed on behalf of the Company by its President or by a Vice
President and attested to by its Secretary or an Assistant Secretary. A Warrant
bearing the signature of an individual who was at any time the proper officer of
the Company shall bind the Company, notwithstanding that such individual shall
have ceased to hold such office prior to the delivery of such Warrant or did not
hold such office on the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
1.5 Legend on Shares. Each certificate for Shares issued upon
exercise of the Warrants shall bear the following legend, unless, at the time of
exercise, such Shares are subject to a then effective Registration Statement
under the Securities Act of 1933, as amended (the "Act"):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT
BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN
COMPLIANCE WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE
ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act, of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
Section 2. Exchange of Warrant Certificate. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled such Warrantholder to purchase. Any Warrantholder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, with
signatures guaranteed, the certificate evidencing the Warrant to be so
exchanged. Thereupon, the Company shall execute and deliver to the person
entitled thereto a new Warrant certificate as so requested.
Section 3. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, the Warrantholder shall
have the right, at any time during the period commencing at 9:00 a.m.,
California Time, on____________ __, 1999 and ending at 5:00 p.m., California
Time, on _______________ __, 2003 (the "Termination Date"), to purchase from the
Company up to the number of fully paid and nonassessable Shares to which the
Warrantholder may at the time be entitled to purchase pursuant to this
Agreement, upon surrender to the Company, at its principal office, of the
certificate evidencing the Warrants to be exercised, together with the purchase
form on the reverse thereof duly filled in and signed, with signatures
guaranteed, and upon payment to the Company of the Warrant Price (as defined in
and determined in accordance with the provisions of Sections 7 and 8 hereof),
for the number of Shares in respect of which such Warrants are then exercised,
but in no event for less than 100 Shares (unless less than an aggregate of 100
Shares are then purchasable under all outstanding Warrants held by a
Warrantholder).
(b) Payment of the aggregate Warrant Price shall be made in cash, by
wire transfer, by certified or official bank check or through the use of
Appreciation Currency (as defined below), or any combination thereof. As soon as
practicable following surrender of the Warrants as described above and payment
of such Warrant Price, the Company shall issue and cause to be delivered to the
Warrantholder and in the name or names of the Warrantholder or, subject to
compliance with the provisions of Section 11(a) hereof, in such name or names as
the Warrantholder
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<PAGE>
may designate, a certificate or certificates for the number of full Shares so
purchased upon the exercise of the Warrant, together with cash in lieu of any
fractional Shares otherwise issuable upon such surrender as provided in Section
9 hereof. Such certificate or certificates shall be deemed to have been issued,
and any person so designated to be named therein shall be deemed to have become
a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that
the certificate or certificates representing such securities shall not actually
have been delivered or that the stock transfer books of the Company shall then
be closed. The Warrants shall be exercisable, at the election of the
Warrantholder, either in full or from time to time in part and, in the event
that a Warrant is exercised for less than all of the Shares specified therein at
any time prior to the Termination Date, a new certificate evidencing the
remaining portion of the Warrants will be issued by the Company.
(c) As used herein, "Appreciation Currency" shall mean the
consideration given by the surrender of Warrants in exchange for Shares. The
number of Shares to which the holder shall be entitled upon such surrender of
Warrants ("X") shall be determined by applying the following formula: X = N x
(($S - $W)/$S), where "N" is the number of Shares that would be received if the
Warrants surrendered were instead exercised for cash, "$S" is the Current Market
Price (as defined in section 9) per share of Common Stock and "$W" is the
Warrant Price defined in section 7 as adjusted and readjusted as set forth in
Section 8.
Section 4. Payment of Taxes. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of the Warrants or the
securities comprising the Shares; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the securities comprising the Shares.
Section 5. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and a bond of indemnity, if
requested, also satisfactory in form and amount at the applicant's cost.
Applicants for such substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
Section 6. Reservation of Shares. There has been reserved, and the Company
shall at all times keep reserved so long as the Warrants remain outstanding, out
of its authorized Common Stock, such number of shares of Common Stock as shall
be subject to purchase under the Warrants. The Company will supply every
transfer agent for the Common Stock and other securities of the Company issuable
upon the exercise of the Warrants with duly executed stock and other
certificates, as appropriate, for such purpose and will provide or otherwise
make available any cash which may be payable as provided in Section 9 hereof.
Section 7. Warrant Price. The price per Share at which Shares shall be
purchasable upon the exercise of the Warrants (the "Warrant Price") shall be
$______ [insert initial public offering price per Share] subject to further
adjustment pursuant to Section 8 hereof.
Section 8. Adjustment of Number of Shares. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
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<PAGE>
8.1 Adjustments. The number of Shares purchasable upon the exercise
of the Warrants shall be subject to adjustment as follows: In case the Company
shall (i) pay a dividend in Common Stock or make a distribution in Common Stock,
(ii) subdivide its outstanding Common Stock, (iii) combine its outstanding
Common Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its Common Stock other securities of the Company, the
Warrant Price and the number of Shares purchasable upon exercise of the Warrants
immediately prior thereto shall be proportionately adjusted so that the
Warrantholder shall be entitled to receive the kind and number of Shares or
other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised at the Warrant Price
immediately prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this subsection 8.1 shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
For the purpose of this subsection 8.1, the term "Common Stock" shall
mean (i) the class of stock designated as the Common Stock of the Company at the
date of this Agreement, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par
value to par value.
8.2 No Adjustment for Dividends. Except as provided in subsection
8.1, no adjustment in respect of any dividends or distributions out of earnings
shall be made during the term of the Warrants or upon the exercise of the
Warrants.
8.3 Certificate of Adjustment. As soon as practicable following each
adjustment to the number of Shares purchasable upon the exercise of the Warrants
as herein provided, the Company shall cause to be mailed to the Warrantholder by
first class mail, postage prepaid, notice of such adjustment and a certificate
of the chief financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
8.4 Preservation of Purchase Rights upon Merger, Consolidation, etc.
In case of any consolidation of the Company with or merger of the Company into
another corporation (other than a merger with a subsidiary in which merger the
Company is the surviving corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in case
of any sale or conveyance to another corporation of the property, assets or
business of the Company as an entirety or substantially as an entirety, the
Company or such successor or purchasing corporation, as the case may be, shall
execute with the Warrantholder an agreement that the Warrantholder shall have
the right thereafter upon payment of the Warrant Price in effect immediately
prior to such action to purchase, upon exercise of the Warrants, the kind and
number of shares and other securities and property which it would have owned or
have been entitled to receive after the happening of such consolidation, merger,
sale or conveyance had the Warrants been exercised immediately prior to such
action. In the event of a merger described in Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase Shares under the Warrants shall terminate on
the date of such merger and thereupon the Warrants shall become null and void,
but only if the controlling corporation shall agree to substitute for the
Warrants its warrant which entitles the holder thereof to purchase upon its
exercise the kind and number of shares and other securities and property which
it would have owned or been entitled to receive had the Warrants been exercised
immediately prior to such merger. Any such agreements referred to in this
subsection 8.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 8
hereof. The provisions of this subsection 8.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
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<PAGE>
8.5 Par Value of Shares of Common Stock. Before taking any action
which would cause an adjustment effectively reducing the portion of the Warrant
Price allocable to each Share below the then par value per share of the Common
Stock issuable upon exercise of the Warrants, the Company will take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
Common Stock upon exercise of the Warrants.
8.6 Independent Public Accountants. The Company may retain a firm
of independent public accountants of recognized national standing (which may be
any such firm regularly employed by the Company) to make any computation
required under this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section 8.
8.7 Statement on Warrant Certificates. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at any
time in its sole discretion (which shall be conclusive), make any change in the
form of Warrant certificate that it may deem appropriate and that does not
affect the substance thereof; and any Warrant certificate thereafter issued,
whether upon registration of transfer of, or in exchange or substitution for, an
outstanding Warrant certificate, may be in the form so changed.
Section 9. Fractional Interests; Current Market Price. The Company shall
not be required to issue fractional Shares on the exercise of the Warrants. If
any fraction of a Share would, except for the provisions of this Section 9, be
issuable on the exercise of the Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the then Current Market Price per
share of Common Stock multiplied by such fraction.
For purposes of this Agreement, the term "Current Market Price" shall mean
(i) if the Common Stock is in the over-the-counter market and not in The Nasdaq
National Market nor on any national securities exchange, the average of the per
share closing bid price on the 30 consecutive trading days immediately preceding
the date in question, as reported by The Nasdaq Small Cap Market (or an
equivalent generally accepted reporting service if quotations are not reported
on The Nasdaq Small Cap Market), or (ii) if the Common Stock is traded in The
Nasdaq National Market or on a national securities exchange, the average for the
30 consecutive trading days immediately preceding the date in question of the
daily per share closing prices in The Nasdaq National Market or on the principal
stock exchange on which it is listed, as the case may be. For purposes of
clause (i) above, if trading in the Common Stock is not reported by The Nasdaq
Small Cap Market, the applicable bid price referred to in said clause shall be
the lowest bid price as reported in The Nasdaq Electronic Bulletin Board or, if
not reported thereon, as reported in the "pink sheets" published by National
Quotation Bureau, Incorporated, and, if such securities are not so reported,
shall be the price of a share of Common Stock determined by the Company's Board
of Directors in good faith. The closing price referred to in clause (ii) above
shall be the last reported sale price or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices, in
either case in The Nasdaq National Market or on the national securities exchange
on which the Common Stock is then listed.
Section 10. No Rights as Stockholder; Notices to Warrantholder. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon the Warrantholder or its transferees any rights as a stockholder of the
Company, including the right to vote, receive dividends, consent or receive
notices as a stockholder in respect of any meeting of stockholders for the
election of directors of the Company or any other matter. If, however, at any
time prior to the expiration of the Warrants and prior to their exercise, any
one or more of the following events shall occur:
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<PAGE>
(a) any action which would require an adjustment pursuant to Section
8.1; or
(b) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger or sale of its property, assets
and business as an entirety or substantially as an entirety) shall be proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 14 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive such notice
or any defect therein shall not affect the validity of any action taken with
respect thereto.
Section 11. Restrictions on Transfer; Registration Rights.
(a) The Warrantholder agrees that prior to making any disposition of
the Warrants or the Shares, including without limitation, to persons or entities
identified in clauses (i) through (iv), inclusive, of Section 1.3 hereof, other
than pursuant to a registration statement or other notification or post-
effective amendment thereto (hereinafter collectively a "Registration
Statement") filed by the Company with, and declared effective, by, the
Securities and Exchange Commission (the "Commission"), the Warrantholder shall
give written notice to the Company describing briefly the manner in which any
such proposed disposition is to be made and shall provide such other information
as may reasonably be required by the Company and counsel familiar with
securities matters to conclude that no Registration Statement under the Act is
required with respect to such disposition, and no such disposition shall be made
if the Company has notified the Warrantholder that in the opinion of counsel
reasonably satisfactory to the Company a Registration Statement under the Act is
required with respect to such disposition, and no such Registration Statement
has been filed by the Company with, and if necessary, declared effective, by the
Commission.
(b)(i) Whenever during the four-year period beginning on
____________, 1999 and ending on ______________, 2003, the Company proposes to
file with the Commission a Registration Statement under the Act (other than on
Form S-4 or Form S-8), it shall, at least 30 days prior to each such filing,
give written notice of such proposed filing to the Warrantholder, and each
holder of Shares, at his or her respective address as it appears on the records
of the Company, and shall offer to include and shall include in such filing any
proposed disposition of the Warrants and Shares upon receipt by the Company from
such holder, not less than 15 days prior to the proposed filing date, of a
written request therefor setting forth the number of Shares proposed to be
included in such registration and all other information with respect to such
person reasonably necessary to be included in such Registration Statement. In
the event that the managing underwriter for said offering advises the Company in
writing that the inclusion of such securities in the offering would be
detrimental to the offering, such securities shall nevertheless be included in
the Registration Statement, provided that the Warrantholder and each holder of
Warrants and Shares, desiring to have such securities included in the
Registration Statement agrees in writing, for a period of 90 days following such
offering, not to sell or otherwise dispose of such securities pursuant to such
Registration Statement, which Registration Statement the Company shall keep
effective for a period of at least nine months following the expiration of such
90-day period.
(ii) In addition to any Registration Statement pursuant to
subparagraph (i) above, during the four- year period beginning on __________,
1999 and ending on _____________, 2003 the Company will, as promptly as
practicable (but in any event within 60 days), after written request (the
"Request") by Cruttenden Roth Incorporated, or by a person or persons holding
(or having the right to acquire by virtue of holding the Warrants) at
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<PAGE>
least 50% of the shares of Common Stock which have been (or may be) issued upon
exercise of the Warrants, prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities sufficient to
permit the public offering of the Warrants and Shares, and will use its best
efforts at its own expense through its officers, directors, auditors and
counsel, in all matters necessary or advisable, to cause such Registration
Statement to become effective as promptly as practicable and to maintain such
effectiveness so as to permit resale of the Shares covered by the Request until
the earlier of the time that all such Shares have been sold or the expiration of
one hundred twenty (120) days from the effective date of the Registration
Statement; provided, however, that the Company shall only be obligated to file
one such Registration Statement under this Section 11(b)(ii).
(c) All fees, disbursements and out-of-pocket expenses (other than
Warrantholders' and holders' of Shares brokerage fees and commissions and legal
fees of counsel to the Warrantholder and holders of Shares, if any) in
connection with the filing of any Registration Statement under Section 11 (b)
(or obtaining the opinion of counsel and any no-action position of the
Commission with respect to sales under Rule 144) and in complying with
applicable securities and Blue Sky laws shall be borne by the Company. The
Company at its expense will supply any Warrantholder and any holder of Shares
with copies of such Registration Statement and the prospectus included therein
and other related documents any opinions and no-action letters in such
quantities as may be reasonably requested by the Warrantholder or holder of
Shares.
(d) The Company shall not be required by this Section 11 to file such
Registration Statement if, in the opinion of counsel for the Warrantholder and
holders of Shares and the Company (or, should they not agree, in the opinion of
another counsel experienced in securities law matters acceptable to counsel for
such holders and the Company), the proposed public offering or other transfer as
to which such Registration Statement is requested is exempt from applicable
federal and state securities laws and would result in all purchasers or
transferees obtaining securities which are not "restricted securities," as
defined in Rule 144 under the Act. This Section 11 shall terminate and be of no
further force or effect at the first date as of which all of the Shares then
issuable upon exercise of the Warrants may be sold publicly pursuant to Rule 144
during any single 90-day period.
(e) The provisions of this Section 11 and Section 12 hereof shall
apply to the extent as provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
(f) The Company agrees that until all Shares have been sold under a
Registration Statement or pursuant to Rule 144 under the Act, it will use its
best efforts to keep current in filing all materials required to be filed with
the Commission in order to permit the holders of such securities to sell the
same under Rule 144.
Section 12. Indemnification.
(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 11 hereof, the Company agrees to
indemnify and hold harmless the Warrantholder or any holder of such Shares and
each person, if any, who controls the Warrantholder or any holder of such Shares
within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
reasonable attorneys' fees), to which the Warrantholder or any holder of such
Shares or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such Registration
Statement, or any related preliminary prospectus, final prospectus, or amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided, however, that
-------- -------
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon
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<PAGE>
an untrue statement or alleged untrue statement or omission or alleged omission
made in such Registration Statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Warrantholder or the holder
of such Shares or any person who controls the Warrantholder or any holder of
such Shares within the meaning of the Act specifically for use in the
preparation thereof. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Warrantholder and the holders of the Shares agree that they
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by the Warrantholder or such holder of Shares specifically for
use in the preparation thereof. This indemnity agreement will be in addition to
any liability which the Warrantholder or such holder of Shares may otherwise
have.
(c) Promptly after receipt by an indemnified party under this Section
12 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 12, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 12. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 12 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party shall have employed separate counsel in accordance
with the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 12(a)
or 12(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No
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<PAGE>
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
Section 13. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) a Warrantholder or any
holder of the Shares or controlling person makes a claim for indemnification
pursuant to Section 12 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of Section 12 hereof provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
Warrantholder or any holder of the Shares or controlling person, then the
Company and any Warrantholder or any such holder of the Shares or controlling
person shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or a Warrantholder or holder of Shares
or controlling person on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and holders of such Shares and such controlling persons
agree that it would not be just and equitable if contribution pursuant to this
Section 13 were determined by pro rata allocation or by any other method which
does not take account of the equitable considerations referred to in this
Section 13. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 13 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 14. Notices. Any notice pursuant to this Agreement by the Company
or by a Warrantholder or a holder of Shares shall be in writing and shall be
deemed to have been duly given if delivered or mailed by certified mail, return
receipt requested:
(a) If to a Warrantholder or a holder of Shares addressed to
Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California
92612, Attention: Corporate Finance Department.
(b) If to the Company addressed to it at Casey Ind. Bldg, 8th Floor,
18 Bedford Rd., Taikoktsui, Kowloon, Hong Kong, Attention: Carl Ka Wing Tong,
President and Chief Executive Officer.
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
Section 15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholder, or the
holders of Shares shall bind and inure to the benefit of their respective
successors and permitted assigns hereunder.
-9-
<PAGE>
Section 16. Survival of Representations and Warranties. All statements
contained in any schedule, exhibit, certificate or other instrument delivered by
or on behalf of the parties hereto in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive until the
earlier of _____________, 2003 or all Shares underlying Warrants are sold
initially following exercise thereof.
Section 17. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of said State.
Section 18. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrantholder and the holders of Shares any legal or equitable right, remedy or
claim under this Agreement. This Agreement shall be for the sole and exclusive
benefit of the Company, the Warrantholder and the holders of Shares.
Section 19. Entire Agreement. This Agreement and the exhibits hereto
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements and
understandings, both written and oral, between the parties with to the subject
matter hereof.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
CREATIVE MASTER INTERNATIONAL, INC..
By________________________________________________
Print name:
Title:
CRUTTENDEN ROTH INCORPORATED
By________________________________________________
Print name:
Title:
-11-
<PAGE>
Exhibit A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER
EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE AGREEMENT
PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No.____
REPRESENTATIVE'S WARRANTS
TO PURCHASE _____ SHARES OF COMMON STOCK
NO PAR VALUE PER SHARE
VOID AFTER 5:00 P.M.,
CALIFORNIA TIME, ON _______, 2003
CREATIVE MASTER INTERNATIONAL, INC..
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that, for value received, ______________, the registered
holder hereof or assigns (the "Warrantholder"), is entitled to purchase from
CREATIVE MASTER INTERNATIONAL, INC.. (the "Company"), at any time during the
period commencing at 9:00 a.m., California Time, ___________, 1999, and before
5:00 p.m., California Time, on ______, 2003, at the purchase price per share of
$_______ (the "Warrant Price"), the number of shares of Common Stock of the
Company set forth above (the "Shares"). The number of shares of Common Stock of
the Company purchasable upon exercise of these Warrants shall be subject to
adjustment from time to time as set forth in the Representative's Warrant
Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at the option of the Warrantholder cash, by wire
transfer, by certified or official bank check or through the use of
"Appreciation Currency" as defined in the Representative's Warrant Agreement, or
any combination thereof.
The Warrants evidenced hereby represent the right to purchase an aggregate
of up to [200,000] Shares and are issued under and in accordance with a
Representative's Warrant Agreement, dated as of ______, 1998 (the
"Representative's Warrant Agreement"), between the Company and Cruttenden Roth
Incorporated are subject to the terms and provisions contained in the
Representative's Warrant Agreement, to all of which the Warrantholder by
acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional securities will be issued upon the exercise
of rights to purchase hereunder, but the Company shall pay the cash value of any
fraction upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject to the
limitations set forth in the Representative's Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a shareholder of the Company.
CREATIVE MASTER INTERNATIONAL, INC.
By _______________________________________
Carl Ka Wing Tong
President and Chief Executive Officer
Dated: _____________, 1998
ATTEST: [Seal]
Secretary: ________________________________
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC..
PURCHASE FORM
CREATIVE MASTER INTERNATIONAL, INC.
Casey Ind. Bldg., 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
__________ shares of Common Stock (the "Shares") provided for therein and
requests that certificates for the Shares be issued in the name of:
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant Certificate for the balance of the Shares purchasable under
the within Warrant Certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.
Dated:____________
Name of Warrantholder or Assignee:_________________________________
(Please Print)
Address: ________________________________________________
________________________________________________
Signature: ________________________________________________
Note: The above signature must correspond with the name as written upon the face
of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed: ________________________________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
(Name and Address of Assignee Must Be Printed or Typewritten)
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
the within Warrants, hereby irrevocably constituting and appointing
______________ Attorney to transfer said Warrants on the books of the Company,
with full power of substitution in the premises.
Dated:____________ ______________________________________
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatever.
Signature Guaranteed: _________________________________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE>
EXHIBIT 5.1
[Letterhead of Troy & Gould Professional Corporation]
November __, 1998
CRE4-1
Creative Master International, Inc.
Casey Ind. Bldg, 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
Re: Registration Statement on Form SB-2
(Registration No. 333-65929)
-----------------------------------
Gentlemen:
We have acted as securities counsel to Creative Master International, Inc.,
a Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), of a Registration Statement on Form SB-
2, as amended, Registration No. 333-65929 (the "Registration Statement"). The
Registration Statement relates to the public offering by the Company and a
selling stockholder named therein (the "Selling Stockholder") of up to 1,725,000
shares of Common Stock of the Company, of which 1,500,000 shares are to be
issued and sold by the Company (the "New Shares") and 225,000 shares are to be
sold by the Selling Stockholder (the "Outstanding Shares") solely to cover over-
allotments, if any.
The New Shares and the Outstanding Shares are to be sold by the Company and
the Selling Stockholder pursuant to an Underwriting Agreement (the "Underwriting
Agreement") by and among the Company, the Selling Stockholder and Cruttendon
Roth Incorporated, acting as representative of the several underwriters named in
the Underwriting Agreement. This opinion is being furnished in accordance with
the requirements of Item 601(b)(5) of Regulation S-B under the Securities Act.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Registration Statement; (ii) the Certificate of Incorporation and the
Bylaws of the Company, as amended to date; (iii) the form of the Underwriting
Agreement; (iv) the
<PAGE>
Creative Master International, Inc.
November __, 1998
Page 2
form of certificate evidencing Common Stock; (v) resolutions adopted by the
Board of Directors of the Company relating to the issuance of the New Shares and
the Outstanding Shares, the filing of the Registration Statement and any
amendments or supplements thereto and related matters; and (vi) such other
documents as we have deemed necessary or appropriate as a basis for the opinions
set forth below.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed by parties other than the Company, we have
assumed that such parties had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof. As to any
facts material to the opinions expressed herein which were not independently
established or verified, we have relied upon oral or written statements and
representations of officers and other representatives of the Company and others.
Based on the foregoing, it is our opinion that, subject to effectiveness
with the Securities and Exchange Commission of the Registration Statement and to
registration or qualification under the securities laws of the states in which
securities may be sold:
1. The New Shares are duly and validly authorized and, upon the sale
and issuance thereof in the manner contemplated in the Registration
Statement and the Underwriting Agreement, and upon payment therefor, will
constitute legally issued, fully paid and nonassessable shares of Common
Stock of the Company; and
2. The Outstanding Shares are duly and validly authorized and
constitute legally issued, fully paid and nonassessable shares of Common
Stock of the Company.
We consent to the use of our name under the caption "Legal Matters" in the
Registration Statement, and to the filing of this opinion as an exhibit to the
Registration Statement. By giving you this opinion and consent, we do not admit
that we are experts with respect to any part of the Registration Statement
within the meaning of the
<PAGE>
Creative Master International, Inc.
November __, 1998
Page 3
term "expert" as used in Section 11 of the Securities Act, or the rules and
regulations promulgated thereunder, nor do we admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ TROY & GOULD
TROY & GOULD
Professional Corporation
<PAGE>
EXHIBIT 10.5
For the sake of developing good trading relationship, Dongguang Heng Li Zhen
Company (hereafter named "Party A") together with Creative Master Ltd.
(hereafter named "Party B") set the following agreement on 18th June, 1998.
1. Responsibility of Both Parties
Party B will supply facilities for the Party A starting from 6/1998. The
total cost of these facilities is HK$3,040,000.
Party B will supply all the material, supplementary material and packaging
material while Party A will offer the corresponding plant, electricity and
labor. Under the period of agreement, Party A should take the responsibility of
process production and all the manufacturing products shmid direct to Party B
only. Moreover, Party A can ask Party B for process cost or rent, land usage
fee as well as management fee.
After delivering all the facilities to Party A, Party B must at once send
professionals to Party A in order to provide assembly and technique assistance.
All the fees like wages, travelling telephone fees, daily electricity fees and
accommodation fees spent by the technicians should be paid by Party B.
2. Total Process Fee
The total process fee of the first year should be HK$500,000. The amount
of the second should be increased based on the first year with increment rate
not less than 10%.
3. Calculation of Process Fees
i. The calculation of process fees should be decided by the consensus of
both parties. The fees should be set according to the sample production pilot.
During the production pilot period, Party B is responsible for paying
HK$600/month/worker to Party A (first batch - 30 workers, other batches - 50
workers). After the production pilot period, the process fee will be paid
according to the number of workers (each month: 26 working days, 8 hours a day),
which should not less than HK$800.
ii. Party A is responsible for letting the factory plant (total area:
3,000m/2/) and dormitory. The rental fee and usage fee of the factory plant
should be paid by Party B from the process fees. The tax of the factory plant
should be paid by Party A.
iii. The rental fee, land usage fee, management fee will increase by not
less than 8% starting from the second year.
<PAGE>
4. Society Foundation Fee
Whenever a foreign employee is employed, the society foundation fee should
be paid.
5. Production
Party Be sends representative to Party A in examining the quality and
quantity of the products.
If it is observed that the supplementary material does not match the requirement
or there are mistakes in the production process, it should be the responsibility
of Party B. If it is required to re-produce the Produce it should also be paid
by Party B.
After this agreement is effective, the production pilot period will last for 3
month. During these 3 months, the consumption rate and defective rate should be
paid according to the actual price. After this period, such fees will be paid
according to the consensus of both parties.
6. Material and Delivery Date
Party B has to provide sufficient material and packaging material for Party
A to produce. Party B has to send the material to Party A 15 days before hand.
Party A has to deliver the product according to the date, quantity, sample, etc
of the agreement.
7. Payment
The payment of the process fee is paid after the products are delivered.
Party B will pay Party A through the Bank of China in HK If Party B cannot pay
on the due date, it has to compensate Party A according to the interest. rate of
HK (at that time). At the same time, Party A has the right to stop production.
8. Transportation
The import of material and export of product should be transported through
Shenzheu Hau" Kong Cuftm (or Man Kam Dou, Sha Tao Kok, Tai Ping Custom). The
transportation cost will be paid by Party B, in which, the amount that Party A
transport should meet the requirement of Party B
9. Insurance
i. It should be the responsibility of Party B to insure (comprehensive
insurance) the material and packAging material, and the export of the products.
Such
<PAGE>
comprehensive insurance should be handled by Dongguan Insurance Company and all
premium should paid by Party B.
ii. Both parties arm to join Social Labour Insurance Scheme for the staff
and the premium is paid according to the proportion of their salary.
10. Taxation
Both paid have the responsibility to pay tax
11. Unpredictable event
Since the occurrences of earthquake, typhoon, flood and war are
unpredictable, any party (say Party A) faces these events must inform the other
party (say Party B) immediately. At the same time, Party A must inform Party B
the detail of the unpredictable event (with sufficient evident provided by the
local authority) which causes it unable to implement its responsibilities.
Party B cannot ask for compensation if the damages are caused by these
unpredictable events.
12. Arbitration
If the argument between the parties cannot be solved by
coordination/cooperation, the China Commerce and Trading Arbitration Council
will be involved. Both parties must accept the decision by this Council and the
arbitration fee should be paid by the losing party.
13. Duration of Agreement
This agreement will be effective when it is approved by an authorized
organization. The duration of this agreement is 5 years. When this agreement is
going to expire, both parties should decide whether to extend their business
relation or not.
If the instruction of this agreement is inadequate, the parties can add
some other instruction, which should then be approved by the authorized
organization.
There are 4 original copies of this agreement, Party A with 2 copies,
Commercial Representative with I copy and Party B with 1 copy. They all have
the same power. There also several supplementary copies.
1. The custom fee (i.e. 0.5% of process fee) is paid by Party B, in which
Party A is responsible for preparing the invoice
<PAGE>
2. The employment, arrangement of duties, etc. should follow the Labour Safety
and Hygiene Management Ordinance and Fire Ordinance of the Peoples Republic of
China. These ordinances we used to protect the safety and health of the
workers.
3. Any of the following situation will be considered as the termination of one
party:
i. Party B cannot provide adequate facilities for production 6 months
after the this agreement.
ii. Both parties does not handle agreement extension procedures 6 months
after the termination of this agreement.
<PAGE>
EXHIBIT 10.23
Landlord: Dongguan Weng Li Zheng Tien Tao Guin Li Chu (hereafter named
"Party A")
Address: Weng Li Zheng Tien Tao Chu Tel.: 3371281
Tenant: Creative Master Limited (hereafter named "Party B")
Address: 8/F., Casey Ind. Bldg., 18 Bedford Road, Taikoktsui, Kln.
Tel.: 23960147
After discussion, both parties agree:
A. Party A let 3 blocks of factory plant and 5 blocks of dormitory, which
are located in Weng Li Zheng Tien Tao Industrial Estate with total
area of 21,133 m/2/. The details are as follow:
1. 1st Stage: 1 block of production plant with total area of 3,957
m/2/, and one block of dormitory with electricity room and
security room with total area of 1,546 m/2/. Party A has to
provide these buildings for Party B before Sep 30, 94 for
decoration. The letting period starts from Dec 1, 94.
2. 2nd Stage: 1 block of production plant with total area of 3,818
m/2/, and 2 blocks of dormitory with security room with total
area of 2,983 m/2/. Party A has to provide these buildings for
Party B before Dec 31, 94 for decoration. The letting period
starts from Apr 1, 95.
3. 3rd Stage: 1 block of production plant with total area of 5,638
m/2/, and 2 blocks of dormitory with electricity room with total
area of 3,191 m/2/. Party A has to provide these buildings for
Party B before May 30, 95 for decoration. The letting period
starts from Jul 1, 95.
B. The letting period starts from Dec 1, 1994, and last for 10 years
C. Rental Fee
1st stage: 1 block of Production Plant with total area of 3,957 m/2/.
(1) The rental fee for the 1st years is HK$8/m/2//month, total
$31,656.00.
(2) The rental fee for the 2nd and 3rd year is HK$9/m/2//month, total
$35,613.00.
(3) The rental fee for dormitory, security room and electricity room
(total area 1,546 m/2/) is HK$6.5/m/2//month, total $10,049.00.
2nd stage: 1 block of Production Plant with total area of 3,818 m/2/.
(1) The rental fee for the 1st years is HK$8/m/2//month, total
$30,544.00.
(2) The rental fee for the 2nd and 3rd year is HK$9/m/2//month, total
$34,362.00.
(3) The rental fee for dormitory, security room and security room
(total area 2,983 m/2/) is HK$6.5/m/2//month, total $19,389.50.
3rd stage: The rental fee for stage is the same as the 2nd stage. 1
block of Production Plant with total area of 5,638 m/2/.
(1) The rental fee for the 1st years is HK$8/m/2//month, total
$45,104.00
(2) The rental fee for the 2nd and 3rd year is HK$9/m/2//month, total
$50,742.00.
(3) The rental fee for dormitory (total area 3,191 m/2/) is
HK$6.5/m/2//month, total $20,741.50.
D. Party B has to pay part of the rent at the beginning of the month,
while the remaining amount has to be paid by the end of the month.
E. 3 years as 1 letting period. Party A will increase the rental fee by
the end of the letting period.
1.
<PAGE>
F. Both parties have to bear 50% of the transformer and other facilities.
G. Party B has to buy insurance for the dormitory and factory plant in the
rate not less than $450/m/2/. If Party B did not buy the insurance and
causes the loss of Party A, Party B has to compensate by 3.5/1000 of
the insuring amount.
H. The factory plant should follow all the safety instruction, in which
Party B is responsible for installing fire prevention facilities.
I. Breach of contract: If any party want to terminate the agreement, it
should inform other 6 months before, or else it has to compensate 6-
month rental fee to the other party.
J. Party B has to pay HK$100,000.00 as pre-payment, which will be
considered as the rental fee for the 1st stage. For the construction of
the 2nd and 3rd stage, party B has to borrow HK$700,000.00 to Party A.
This amount will be returned back to Party B within 3 years in terms of
30% of the rental fee.
K. There are 2 original copies of this agreement, and both parties get one
of them.
2.
<PAGE>
Landlord: Dongguan Weng Li Zheng Tien Tao Guin Li Chu (hereafter named "Party
A")
Address: Weng Li Zheng Tien Tao Chu Tel.: 3371281
Tenant: Creative Master Limited (hereafter named "Party B")
Address: 8/F., Casey Ind. Bldg., 18 Bedford Road, Taikoktsui, Kln.
Tel.: 23960147
After discussion, both parties agree:
A. Party A let 1 block of factory plant and 1 block of dormitory, which are
located in Weng Li Zheng Tien Tao Industrial Estate with total area of
4,529 m/2/. The details are as follow:
B. The letting period start from Jul 1, 1996 and will last for 10 years.
C. Rental Fee
1. 1 block of Production Plant with total area of 3,064m/2/.
2. The rental fee for the 1st years is HK$7.5/m/2//month, total $22.980.00.
3. The rental fee for the 2nd and 3rd year is HK$____/m/2//month, total
$____.
4. 1 block of dormitory with total area of 1.465 m/2/
D. Party B has to pay part of the rent at the beginning of the month, while the
remaining amount has to be paid by the end of the month.
E. 3 years as 1 letting period. Party A will increase the rental fee by the end
of the letting period.
F. Party B has to buy insurance for the dormitory and factory plant in the rate
not less than $450/m/2/. If Party B did not but the insurance and causes the
loss of Party A, Party B has to compensate by 3.5/1000 of the insuring
amount.
G. The factory plant should follow all the safety instruction, in which Party B
is responsible for installing fire extinguishing facilities.
H. Breach of contract: If any party want to terminate the agreement, it should
inform other 6 months before, or else it has to compensate 6-month rental
fee to the other party.
I. There are 2 original copies of this agreement, and both party get one of
them.
3.
<PAGE>
EXHIBIT 10.24
Landlord: Dongguan Weng Li Zhen Tien Tao Guin Li Chu (hereafter named
Party A)
Address: Weng Li Zheng Tien Tao Chu
Tel.: 3371281
Tenant: Techtime Industries Limited (hereafter named "Party B")
Address: Tien Tao Guin Li Chu
Tel.: 3375665
After discussion, Party A agreed to let the 2/F and 3/F to Party B as the
dormitory and the details are as follow:
A. Party A agree to let 1 block of factory plant and 1 block of dormitory
to Party B, which is located in Tien Tao Guin Li Chu. The total area
of these buildings is 4,380m/2/.
B. This letting period starts from May 1, 1996 to May 1, 1999, last for 3
years.
C. The rental fee will start to count from the 45th date of handover.
D. The annual rental fee is RMB$335,000. Part of the rental fee has to be
paid at the beginning of the month, while the remaining will be paid
by the end of the month.
E. Party A has to provide 160KVA electricity for Party B, in which the
extra installation of KVA will be paid by Party B.
F. Party B is responsible for installation fee of all the facilities.
G. Party B has to pay 400/m/2/ insurance premium for the factory plant
and dormitory each month.
H. If any party breach the contract, it has to compensate the other for
3-month rental fee.
I. Party B has prior right to continue renting the buildings after the
termination of the contract.
J. There are 2 original copies of this agreement, and both parties get
one of them.
1.
<PAGE>
Landlord: Dongguan Weng Li Zhen Tien Tao Guin Li Chu (hereafter named
Party A)
Address: Weng Li Zheng Tien Tao Chu
Tel.: 3371281
Tenant: Techtime Industries Limited (hereafter named "Party B")
Address: Tien Tao Guin Li Chu
Tel.: 3375665
After discussion, both parties agree:
A. Party A let an area, which is located in "Tien Tao Industrial Estate",
to Party B for new factory plant, dormitory. Total area is 2,440 m/2/.
The details are as follow:
1. Letting period: From Nov 1, 1997 to Oct 30, 1999, last for 2
years.
2. 1st stage: 1 block of factory plant, the total area of 1/F is
1,000 m/2/. The monthly rent is HK$7.50/ m/2/, total $7,500.00,
which starts to count from Nov, 97.
3. 1 block of dormitory, total area 1,454 m/2/. The monthly rent is
HK$6.50/ m/2/, total $9,451.00, which starts to count from Nov,
97.
4. Party A has to provide 315VA transformer. Party A charges Party
$4/KVA/month for the transformer, total $1,260/annum.
5. The total rental fee is RMB$18,211/month. Part of the amount has
to be paid at the beginning of the month, while the remaining has
to be paid by the end of the month.
B. Party B has to buy insurance for the dormitory and factory plant at
the rate of $400/m/2/. If Party B did not buy insurance and cause the
loss of Party A, Party B has to compensate Party A.
C. If any party breach the contract, this party has to pay 3-month rental
fee to the other party as compensation.
D. Party B has the prior right to rent the buildings but Party A has the
right to increase the rental fee by 10%
E. This agreement has two original copies, both parties get one of them.
2.
<PAGE>
EXHIBIT 10.25
Landlord: Dongguan Weng Li Zheng Economic Development Company (hereafter
named "Party A")
Address: 2/F Weng Li Zheng Economic Development Building, Dongguan
Tel.: 0769-3371828
Tenant: Creative Master Limited (hereafter named "Party B")
Address: 8/F., Casey Ind. Bldg., 18 Bedford Road, Taikoktsui, Kln.
Tel.: 00852-23960147
After discussion, both parties agree the following:
A. Starting from Feb 1, 1997, Party A let 1 block of factory plant and 1
block of dormitory to Party B. The total area of the factory plant is
3,141m/2/, in a rate of HK$7/month. The total area of the dormitory is
2,860 m/2/, in a rate of HK$6/month. The total monthly rental fee is
HK$39,147.00
B. Party A agrees not to let the block B to other party for 1 year. Party
B also guarantees that it will rent block B in the 2nd year, meaning
that Party B has to pay the rental fee of block B starting from Feb 1,
1998. The total monthly rental fee is HK$21,987.00. If Party B use
block B in the 1st year, it has to pay the rent according to the
actual value and its usage area.
C. Party A guarantees that it is willing to construct 1 block of
dormitory (with not less than 1,000 people) for Party B. But Party B
has to inform Party A 5 months earlier if it wants to build the
dormitory.
D. After signing the contract, Party A has to install all the electricity
room and other facilities. The rental fee during this period is
HK$7/m/2//month. The detail will be listed in the supplementary
agreement.
E. Party A has to provide 300 Watt electricity for Party B. Party B has
to pay RMB$72/1000 Watt per month. Thus, the total rental fee is
RMB$21,600.00. The rent has to be paid bi-annually. When Party B rent
block B, Party A has to increase the electricity by 200 Watt. Thus,
Party B has to pay extra rental fee.
F. Letting Period
1. The letting period starts from Feb 1, 1997 and will last for 5
years. After the letting period, Party B has prior right to rent
the building.
2. The rental fee will adjust in every 3 years. The increment rate
is basically 15%, but will depend on the real market value.
G. Payment
After signing the agreement, Party B has to pre-pay 3 month rent, in
which the rental fee for the 1st month will be considered as mortgage.
The remaining fee will be considered as the rental fee for the coming
months. Party B has to pay the rental fee on the 1st date of each
month afterwards. If Party B pay the rental fee after the deadline
without the permission of Party A, Party B has to pay 1% extra fee.
After discussion, Party A agrees to allow Party B to decorate the
building for 75 days. This means that Party B has to pay the rental
fee starting from Feb 1, 1997
1.
<PAGE>
H. Others
1. Party A provides electricity room with high voltage for Party B,
others will be responsible by Party B
2. Party A provides water for the building
3. Party B provides fire prevention facilities
4. Party B installs lift in the factory plant
5. During the production period, if Party B want to construct extra
building, it should ask for the permission of Party A. The extra
construction must not affect the outlook of the buildings and the
exit.
6. Party B is responsible for the factory plant, dormitory and other
buildings during the letting period. After the letting period or
if Party B move out from the buildings, Party B has to pay the
maintenance fee to Party A.
7. Party A charges Party B for the rental fee of the building. Other
fees that concerns with economic problems will be borne by Party
B
8. Party B has to buy insurance for the factory plant and dormitory.
The insurance amount should equals to the rate of
$450/m/2//month. If Party B did not buy insurance and cause any
damages, all the cost will be borne by Party B
9. Breach of Contract: If any party breach the contract, this party
has to pay 6-month rental fee to the other for compensation
10. If the parties found that the content of the agreement is
inadequate, they can discuss together.
I. There are 2 original copies of this agreement, both parties get one of
them.
2.
<PAGE>
Landlord: Dongguan Weng Li Zheng Real Estate Development Company
(hereafter named "Party A")
Tenant: Changying Toys Manufacturing Company (hereafter named "Party B")
According to the agreement signed in Nov 19, 96, both parties agree the
following:
A. Party A agrees to let 1/F and 2/F of Block B to Party B, with total
area of 2,094m/2/. The rental fee is HK$7/m/2//month, meaning that the
monthly rental fee is HK$14,658.
B. Party B has to pay the captioned rental fee from Feb 1, 1998. Party B
is also required to pay the rental fee on the 1st date of the
following months.
C. Starting from Feb 1, 1998, both parties agree that Party B has to pay
HK$63,077.20 each month to Party A.
D. The responsibility of Party B on Block B is the same as that of
Block A.
E. If this agreement is inadequate, both parties should follow the
original agreement.
F. This agreement has two original copies, both parties get one of them.
3.
<PAGE>
Landlord: Dongguan Weng Li Zheng Real Estate Development Company (Party A)
Tenant: Creative Master Limited (Party B)
According to the agreement signed on Nov 19, 98, both parties agree the
following:
A. Starting from Jul 1, 1997, Party A agree to let Party B the 3/F of the
block B factory plant, with total area of 1,047m/2/. The rental fee is
HK$7/m/2//month, total rental fee is HK$7,329.00.
B. Party B has to pay the above rental fee starting from Jul 1, 97. Party B
has to pay this the rental fee on the 1st day of each month together with
the rental fee of block A.
C. The responsibility of Party B on this building is the same as block A.
D. If this agreement is inadequate, both parties should follow the original
agreement
E. There are 2 original copies of this agreement, both parties get one of
them.
4.
<PAGE>
Party A: Dongguan Weng Li Zheng Economic Development Company
Party B: Creative Master Limited
After discussion, both parties agree to the following:
A. After checking by both parties, the area of the newly built factory plant
and 2 blocks of dormitory is 8,224M/2/, 1,442M/2/, and 1,279M/2/
respectively. The total area of these buildings is 10,945M/2/. The
monthly rent is HK$8/M/2/, approximately HK$47,560.
B. Both parties agree that 10/1/1998 is the date where Party A let the factory
plant to Party B. Thus, according to the original agreement, the letting
period will last for 5 years, that is from 10/1/1998 to 9/30/2003. The
maintenance period lasts for 45 days, that is from 10/1 to 11/15. The next
day of 11/15 is the date that Party B needs to pay the rent.
C. There are 2 original copies of this agreement, both parties get one of
them.
Party A: /s/ (illegible) Party B: /s/ (illegible)
seal
Dated: October 13, 1998
1.
<PAGE>
EXHIBIT 10.26
Landlord: Dongguan Weng Li Zheng Tien Tao Guin Li Chu (hereafter named "Party
A")
Address: Weng Li Zheng Tien Tao Chu
Tenant: Mastercraft Engineering Company Limited (hereafter named "Party B")
After discussion, both parties agree:
A. Party A lets an area, which is located in "Tien Tao Industrial Estate", to
Party B for new factory plant, dormitory. Total area is _____ M/2/.
B. The factory plant and dormitory have to be built before Sep. 30, 1998 and
let to B. Party B rents the buildings for decoration for 45 days without
paying rent.
C. Letting period: From Dec. 1, 1998 to Nov. 30, 2001.
D. Rental fee
1. The Total area of the dormitory and factory plant is 7,006M/2/. The
monthly rent is HK$ 730M/2/. Thus, the total monthly rent is HK$
51,538, which starts to pay from Dec. 98.
2. The area of the warehouse is 408M/2/. The monthly rent is HK$ 8/M/2/.
Thus, the total monthly rent is $3,264, which starts to pay from Dec.
98.
3. The total rental fee is HK$ 54,802, in which part of this has to be
paid at the beginning of the month, while the remaining will be paid
by the end of the month.
E. Three years as one letting period, By the end of the letting period, Party
A will increase the rent by _____%
F. Party A has to provide 200KVA Transformer. Party A charges Party B
$____/KVA for the transformer, total $____/annum.
G. Party B has to buy insurance for the dormitory and factory plant at the
rate of $400/M/2/. If Party B did not buy insurance and cause the loss of
Party A, party B has to compensate Party A.
H. If any party breaches the contract, this party has to pay 6-month rental
fee to the other party as compensation.
I. After signing by both parties, Party B has to pre-pay HK$ 100,000.00 as
mortgage.
J. This agreement has two original copies, both parties get one of them.
Landlord: /s/ (illegible) Tenant: /s/ (illegible)
seal seal
dated: April 25, 1998
<PAGE>
EXHIBIT 10.27
Party A: Dongguan Weng Li Zheng Economic Development Company
Party B: Dongguan Changying Toys Company Limited
After discussion, Party A agrees to let factory plant, dormitory and office to
Party B, which is Located in Weng Li Zheng Industrial Development Company.
A. Responsibility of the parties
1. Party A has to construct a 3-story plant according to the draft. The
area of each story is 55x27M/2/. Party A also has to construct a 5-
story factory plant, with the area of each story be 44x26M/2/. 1-
story office, total area 55x27M/2/.
2. Party A is responsible for the construction of the water supply and
exit of the factory plant, dormitory, electricity room, warehouse and
office.
3. Party A is responsible for providing water to the buildings. The
electricity and water fee will be born by Party B.
4. Both parties have to bear 50% of the transformer and other facilities.
5. Factory plant, dormitory and office will be handed over to Party B by
the end of the year. Party B is responsible for the decoration of the
buildings.
6. After signing agreement, Party B has to pay 25% of the construction
fee for 6 consecutive months (RMB$88 in cash). Such amount will
return in terms of rent in 2nd and 3rd year.
B. Rental Fee Payment
1. The rental fee for factory plant, dormitory and office is HK$
7.5/M/2//month. The rental fee will increase 10% in the 5th year.
The rental fee will increase by 10% in three years afterwards.
2. The rental fee has to be paid before the 10th date of each season.
3. Party B has to pay the rental fee starting from the 45th day.
4. The rental fee includes factory plant, dormitory, electricity room,
warehouse and office.
C. Party B is responsible for all the management fee. If any party breaches
the contract, it has to Compensate the other 6-months rental fee.
D. Party B has to provide Party A the factory plant and dormitory 180 days
after signing the agreement.
E. This agreement will be effective after signing the contract by both
parties.
F. After Party B occupies the factory plants for 2 years, Party B has the
right to purchase the Plant and other facilities. The cost will depend on
the construction
<PAGE>
fee and the cost of the Facilities. The cost of the land is $125/M/2/.
G. If this agreement is inadequate, both parties should follow the original
agreement.
Party A: /s/ (illegible) Party B: /s/ (illegible)
seal seal
Dates: June 22, 1998
<PAGE>
[LETTERHEAD OF BUSINESS PLUS CONSULTANTS LIMITED]
EXHIBIT 10.28
8 September 1998
Creative Master Limited
8/F., Casey Industrial Building
18 Bedford Road
Tai Kok Tsui
Kowloon
Attention: The Directors
- ------------------------
Dear Sirs
Addendum to letter dated 18 August 1998
---------------------------------------
duly signed for acceptance by Creative Master Limited
-----------------------------------------------------
We refer to our above letter and write to confirm that our Mr. Henry Hu is
pleased to accept the position as the Executive Vice President - Marketing of
Creative Master Limited.
We stress that Mr. Henry Hu's appointment is in association with the
Consultancy Services provided by our Company and shall stop as soon as our
consultancy services are terminated for whatever reason. All of the terms and
conditions as stipulated in our 18 August 1998 letter shall remain valid as
before and shall continue to constitute a binding agreement between us.
Yours faithfully
/s/ George Tso
- ----------------
George Tso
Director
<PAGE>
Henry Hai-Lin Hu, aged 53, Executive Vice President - Marketing. He holds a
Bachelor degree of the University of Hong Kong in Mechanical Engineering. He is
a Chartered Engineer and Registered Professional Engineer in Manufacturing and
Industrial Engineering. He has over thirty years' experience in manufacturing
business of toys, giftware and premium goods.
Position held
-------------
Wah Shing Toys Consolidated Ltd. 1981 up to 1990
- Co-founder and Executive Director
Zindart Industrial Co., Ltd. 1993-1996
- Chairman and C.E.O.
Business Plus Consultants Ltd. Present
- Co-founder and Executive Director
<PAGE>
[LETTERHEAD OF BUSINESS PLUS CONSULTANTS LIMITED]
- --------------------------------------------------------------------------------
Private and Confidential
------------------------
18 August 1998
Creative Master Limited
8/F., Casey Industrial Building
18 Bedford Road
Tai Kok Tsui
Kowloon
Attn: The Directors
- -------------------
Dear Sirs
Re: Consultancy Services
- ------------------------
Business Plus Consultants Limited (Business Plus) has been established to render
business development, marketing planning and strategic planning services to
clients who are keen to seek new business horizon under the current stringent
business climate. In particular, Business Plus urges to enhance the value of
resources and capabilities within its client's organisation and, through close
participation in its client affairs, to attain those new business goals.
We thank you for the opportunity to allow us to offer consultancy services to
your Company with the following specific focuses:
(1) To engage the prototype making and tool building capability of Altrust
Precision Tooling Limited (PRC) through Altrust (USA) Inc. This includes
relevant technical training of Creative Master Limited personnels;
(2) To solicit manufacturing business in areas of die-cast replicas of cars,
boats, tractors that are compatible to your current business;
(3) To develop Original Design Manufacturing (ODM) capabilities within
Creative Master Limited and to place such products to appropriate vendors
in USA for marketing and distribution; and
(4) To assist in engaging vendors in marketing, distribution, and sales for
Creative Master Limited own proprietary products.
<PAGE>
[LETTERHEAD OF BUSINESS PLUS CONSULTANTS LIMITED]
- --------------------------------------------------------------------------------
Page 2
In consideration for the above services, Creative Master Limited shall pay
Business Plus commission at the rate up to 7.5% on the actual turnover value
achieved caused by our above (3) to (5) services based on a scale to be mutually
agreed. All out-of-pocket expenses incurred by us will be charged to your
Company on arising basis but more substantial outlays will require pre-approval
by your Company before incurrence. A monthly guarantee minimum fee payable at
each month-end of HK$38,000 will be accrued to Business Plus for a period of 2
years from your acceptance of this offer after which either party can terminate
this agreement by 3 months prior notice in writing.
The guarantee minimum fees that have been paid to us during the agreement period
shall be deductible from the commission that would be payable to us as
stipulated above. The net commission, accompanied by a statement showing the
calculation of the net commission, shall be payable to Business Plus after the
related sale proceeds are received by your Company.
We shall be grateful if you will confirm your agreement to the above by signing
and returning to us the enclosed copy of this letter, where upon this letter
shall constitute a binding agreement between us.
Yours faithfully
For and on behalf of
Business Plus Consultants Limited
/s/ Henry Hu
- ----------------------------------
Henry Hu
Director
<PAGE>
EXHIBIT 10.30
For the sake of developing good trading relationship, Dongguang Process Assembly
Servicing Company (hereafter named "Party A") together with Creative Master Ltd.
(hereafter named "Party B") set the following agreement on 10th November, 1995.
2. Responsibility of Both Parties
Party B will supply facilities for the Party A starting from 11/1995. The
total cost of these facilities is HK$187,388.
Party B will supply all the material, supplementary material and packaging
material while Party A will offer the corresponding plant, electricity and
labor. Under the period of agreement Party A should take the responsibility of
process production and all the manufacturing products should direct to Party B
only. Moreover, Party A can ask Party B for process cost or rent, land usage fee
as well a management fee.
After delivering all the facilities to Party A, Party B must at once send
professionals to Party A in order to provide assembly and technique assistance.
All the fees like wages, travelling fees, telephone fees, daily electricity fees
and accommodation fees spent by the technicians should be paid by Party B.
2. Total Process Fee
The total process fee of the first year should be HK$1,000,000. The amount
of the second year should be based on the first year with increment rate not
less than 10%.
3. Calculation of Process Fees
iv. The calculation process fees should be decided by the consensus of
both parties. The fees should be set according to the sample production pilot.
During the production pilot period, Party B is responsible for paying
HK$600/month/worker to Party A (first batch - 20 workers, other batches - 100
workers). After the production pilot period, the process fee will be paid
according to the number of workers (each month: 26 working days, 8 hours a day),
which should not less than HK$800.
v. Party A is responsible for letting the factory plant and dormitory.
The rental fee and usage fee of the factory plant should be paid by Party B from
the process fees. The tax of the plant should be paid by Party A.
vi. The rental fees, land usage fee, management fee will increase starting
from the second year.
<PAGE>
4. Society Foundation Fee
Whenever a foreign employee is employed, the society foundation fee should
be paid (RMB$300/worker/year).
5. Production
Party B sends representative to Party A in examining the quality and
quantity of the products.
If it is observed that the supplementary material does not match the requirement
or there are mistakes in the production process, it should be the responsibility
of Party B. If it is required to reproduce the product, it should also be paid
by Party B.
After this agreement is effective, the production pilot period will last for 3
month. During these 3 months, the consumption rate and defective rate should be
paid according to the actual price. After this period, such fees will be paid
according to the consensus of both parties.
6. Material and Delivery Date
Party B has to provide sufficient material and packaging material for Party
A to produce. Party B has to send the material to Party A 15 days before hand.
Party A has to deliver the product according to the date, quantity, sample, etc
of the agreement.
7. Payment
The payment of the process fee is paid after the products are delivered.
Party B will pay Party A through the Heng Sang Bank in HK. If Party B cannot pay
on the due date, it has to compensate Party A according to the interest rate of
HK (at that time). At the same time, Party A has the right to stop production.
8. Transportation
The import of material and export of product should be transported through
Shenzheu Haung Kong Custom (or Man Kam Dou, Sha Tao Kok, Tai Ping Custom). The
transportation cost will be paid by Party B, in which, the amount that Party A
transport should meet the requirement of Party B.
9. Insurance
iii. It should be the responsibility of Party B to insure (comprehensive
insurance) the import of material and packaging material, and the export of the
products. Such
<PAGE>
comprehensive insurance should be handled by Dongguan Insurance Company and all
premium should also be paid by Party B.
iv. Both parties agree to join Social Labour Insurance Scheme for the
staff and the premium is paid according to the proportion of their salary.
10. Taxation
After the exemption of taxation is ended, both parties have the
responsibility to pay tax.
11. Unpredictable event
Since the occurrences of earthquake, typhoon, flood and war are
unpredictable, any party (say Party B) faces these events must inform the other
party (say Party B) immediately. At the same time, Party A must inform Party B
the detail of the unpredictable event (with sufficient evident provided by the
local authority) which causes it unable to implement its responsibilities. Party
B cannot a for compensation if the damages are caused by these unpredictable
events.
12. Arbitration
If the argument between the parties cannot be solved by
coordination/cooperation, the China Commerce and Trading Arbitration Council
will be involved. Both parties must accept the decision made by this Council and
the arbitration fee should be paid by the losing party.
13. Duration of Agreement
This agreement will be effective when it is approved by an authorized
organization. The duration of this agreement is 11 years. When this agreement is
going to expire, both parties should decide whether to extend their business
relation or not.
If the instruction of this agreement is inadequate, the parties can add
some other instruction, which should then be approved by the authorized
organization.
There are 4 original copies of this agreement, Party A with 2 copies,
Commercial Representative with 1 copy and Party B with 1 copy. They all have the
same power. There are also several supplementary copies.
14. The custom fee (i.e. 0.5% of process fee) is paid by Party B, in which
Party A is responsible for preparing the invoice.
<PAGE>
15. The employment, arrangement of duties, etc. should follow the Labour Safety
and Hygiene Management Ordinance and Fire Ordinance of the Peoples Republic of
China. These ordinances am used to protect the safety and health of the workers.
16. Any of the following situation will be considered as the termination of one
party:
iii. Party B cannot provide adequate facilities for production 6 months
after the date of this agreement.
iv. Both parties does not handle agreement extension procedures 6 months
after the termination of this agreement.
<PAGE>
EXHIBIT 10.31
Dated the 3rd day of April, 1997
FORTUNE WIND INVESTMENTS LIMITED
AND
CREATIVE MASTER LIMITED
_________________________
TENANCY AGREEMENT
of
Unit(s) B on the 8th
Floor of Casey Industrial
Building, No.18/20
Bedford Road, Kowloon
_________________________
WOO, KWAN, LEE & LO,
Solicitors & c.,
26th Floor, Jardine House,
1 Connaught Place,
Central, Hong Kong.
Ref: 517200390/SML/mm
Doc#casey
<PAGE>
AN AGREEMENT made the 3rd day of April, One thousand nine hundred and
ninety-seven BETWEEN FORTUNE WIND INVESTMENTS LIMITED a company incorporated in
British Virgin Islands whose registered office is situate at P.0 Box 3136, Road
Town, Tortola, British Virgin Islands with a principal place of business at 45th
Floor, Sun Hung Kai Centre, 30 Harbour Road, Wanchai, Hong Kong (hereinafter
called "the Landlord") of the one part and CREATIVE MASTER LIMITED whose
registered office is situate at Unit(s) B on 8th Floor, Casey Industrial
Building, 18/20 Bedford Road, Taikoktsui, Kowloon, Hong Kong --------
(hereinafter called "the Tenant") of the other part. WHEREBY IT IS HEREBY
AGREED as follows:
1. The Landlord lets and the Tenant takes ALL.THAT UNIT(S) B on the 8TH
FLOOR of CASEY INDUSTRIAL BUILDING at No.18/20 Bedford Road, Kowloon, Hong Kong
(hereinafter referred to as "the said Building") erected on All That piece or
parcel of ground registered in the Land Registry as Kowloon Inland Lot No.8234
(which said Unit(s) is/are shown for identification purpose only and coloured
pink on the plan annexed hereto and is/are hereinafter referred to as "the said
premises") Together with the use in common with the co-owners of the said
building their tenants work-people and persons authorized by them of the
entrance lifts (whenever the same shall be operating) passages and staircases
leading to the said premises for the term of TWO YEARS from the 16th day of May
1997 to the 15th day of May 1999
1
<PAGE>
both days inclusive determinable as hereinafter mentioned YIELDING AND PAYING
therefor during the said term monthly and every calendar month the rent as set
out in Part I (a) of the Schedule hereto exclusive of rates and management fee
payable in Hong Kong Currency in advance on the 1st day of each and every
calendar month without deduction whatsoever.
2. THE TENANT TO THE INTENT THAT THE OBLIGATION MAY CONTINUE THROUGHOUT
THE TERM OF TENANCY HEREBY CREATED AGREES WITH THE LANDLORD as follows:
(a) (i) To pay the said rent at the times and in manner aforesaid.
(ii) To pay as from the 16th day of May 1997 all existing and future
rates taxes assessments and outgoings payable by law in respect
of the said premises either by the owner or occupier thereof
except only the crown rent property tax and payment of a capital
nature.
(b) (i) To pay as from the 16th day of May 1997 and discharge punctually
during the said term all charges for electricity, water, gas,
telephone rental and other outgoings now or at any time
2
<PAGE>
hereafter consumed by the Tenant and to pay all necessary
deposits for the same.
(ii) To pay as from the 16th day of May 1997 and discharge punctually
during the said term the monthly contribution as set out in Part
I (b) of the Schedule towards the costs, charges and expenses for
the maintenance and management of the said Building chargeable in
respect of the said premises as provided under the Deed of Mutual
Covenants relating to the Building of which the said-premises
form part (if any) or as the management agent of the said
Building shall reasonably require.
(c) (i) To fit out the said premises in accordance with such plans and
specifications as shall have been submitted by the Tenant to and
approved in writing by the Landlord and thereafter to constantly
maintain and keep the whole of the interior of the said premises
and every part thereof in proper and tenantable repair and
condition including, but not limited to, all doors, windows,
skylights, locks, hinges, bolts, ceilings, floors, water pipes,
water closets, electrical installations and
3
<PAGE>
wirings and all the Landlord's fixtures and fittings therein
(fair wear and tear excepted).
(ii) To be wholly responsible for any loss damage or injury caused to
any person whomsoever directly or indirectly through the
defective or damaged condition of any part of the interior of the
said premises and to make good the same by payment or otherwise
and to indemnify the Landlord against all actions proceedings
claims and demands made upon the Landlord in respect of any such
loss damage or injury and all costs and expenses incidental
thereto.
(d) In the event of any of the drains becoming choked or stopped up owing
to careless use by the Tenant or his work-people to pay the cost
incurred by the Landlord in cleansing and clearing the said drains
from obstruction.
(e) To permit the Landlord to use and maintain existing pipes and conduits
in and through the said premises. The Landlord or its agents shall
have the right to enter the said premises at all reasonable times to
examine the same.
4
<PAGE>
(f) To comply with such rules and regulations as the Landlord or the
management agent may from time to time impose in connection with the
industrial refuse chutes in the said Building (if any).
(g) Not to do or permit or suffer to be done anything whereby the policy
or policies of insurance on the said premises or other parts of the
said Building against damage by fire explosion storm or tempest may
become void or voidable or whereby the rate of premium thereon may be
increased and the Tenant shall indemnify the Landlord against such
increased premium as shall have been brought about or caused by his
act or default.
(h) Not to make or permit to make any structural alterations in or
additions to the said premises or to the external walls of the said
premises or to the electrical wirings installations or other
Landlord's fixtures without having first obtained the written license
and consent of the Landlord therefor or cut maim or injure or suffer
to be cut maimed or injured any doors windows walls structural members
or other fabric thereof. If any such consent shall be granted by the
Landlord it shall in any.event be subject to the condition that the
Tenant shall not cause any damage to the said premises or any part
thereof in addition to
5
<PAGE>
such other conditions as the Landlord shall think fit to impose and
subject to the approval of the Public Works Department or other
Government authority (if necessary).
(i) Not to transfer assign underlet or otherwise part with the possession
of the said premises or any part thereof either by way of subletting
lending sharing or other means whereby any person or persons not party
to this Agreement obtains the use or possession of the said premises
or any part thereof irrespective of.whether any rental or other
consideration is given for such use or possession and in the event of
any such transfer subletting sharing assignment or parting with the
possession of the said premises (whether for monetary consideration or
not) this Agreement shall at the discretion of the Landlord determine
and the Tenant shall forthwith surrender the said premises to the
Landlord.
(j) Not to do or permit to be done in or.upon the said premises or any
part thereof anything which may be or become a nuisance annoyance
damage or disturbance to the Landlord or the tenants or occupiers of
the other part or parts of the said Building or of other property
6
<PAGE>
in the neighborhood or in anywise against the law or regulations of
Hong Kong.
(k) Not to put or place any dust-bins, garbage-cans, furniture, chattels,
packing cases, boxes, goods, chattels or any other things in the
staircases, landings or other common passages in the said Building.
(l) To permit the Landlord and all persons authorized by him at all
reasonable times by prior appointment (except in case of emergency) to
enter into the said premises to view the condition thereof and to give
or leave notice in writing upon the said premises for the Tenant of
all defects and wants of repair there found for which the Tenant is
responsible hereunder and within one month after every such notice
well and sufficiently to repair and make good such defects and wants
of repair whereof notice shall have been so given or left.
(m) If any defects or want of repair shall be found and if the Landlord
shall give or leave a notice in writing at the said premises or at the
business address of the Tenant requiring him to amend the same and if
the Tenant shall not within 14 days after the service of such notice
proceed diligently with the execution of
7
<PAGE>
such repairs then to permit the Landlord or his authorized person to
enter upon the said premises and execute such repairs and the cost
thereof (the amount thereof in case of difference to be determined by
the Landlord's agent) shall be a debt due from the Tenant to the
Landlord and be forthwith recoverable by action.
(n) To permit the Landlord and his agent with all necessary workmen and
appliances at all reasonable times upon prior notice to the Tenant to
enter upon the said premises to execute repairs or alterations on any
adjoining premises now or hereafter belonging to the Landlord who
shall make good all damages occasioned to the Tenant by such entry.
(o) Not to do or cause or permit or suffer to be done any act deed matter
or thing whatsoever in contravention of the negative or restrictive
covenants terms or conditions of the Conditions of Sale or Crown Lease
under which the said premises are held from the Crown or of the
relevant Deed of Mutual Covenant of the said Building.
(p) Not to permit or suffer any sale by auction to take place on the said
premises.
8
<PAGE>
(q) Not to keep or store or cause or permit or suffer to be kept or stored
any arms, ammunition, unlawful goods, gun powder, saltpetre, kerosene
or other explosive or combustible substance on or in any part of the
said premises.
(r) Not to use the said premises or any part thereof for any illegal or
immoral purpose.
(s) Not to use the said premises for any purpose other than that of a
factory carrying on light industrial undertaking only and not to carry
on any industrial undertaking thereon which is now or may hereafter be
declared to be offensive under the Public Health and Urban Services
Ordinances or any enactment amending the same or substituted thereof
and to conduct therein only such factory business which is duly
authorized licensed or approved by the competent government
authorities and to comply in all respects with the conditions terms
and regulations relating to such factory business or imposed on the
grant of license in respect thereof.
(t) Not to exhibit or display within or on the exterior of the said
premises any writing sign or other device whether illuminated or not
which may be visible from outside the said premises except the display
of name-
9
<PAGE>
plates or signboards of the Tenant the size and position of which
shall be subject to the Landlord's approval. The Landlord or his
authorized agents shall have the right to remove at the cost and
expense of the Tenant any signboard, sign, decoration, or device which
shall be affixed or put up or displayed without the prior approval of
the Landlord or his agents.
(u) Not to permit any person to remain in the said premises overnight,
except for the purpose of posting watchmen to look after the contents
of the said premises which shall not be used as sleeping quarters or
as domestic premises within the meaning of any Landlord and Tenant
Ordinance for the time being in force.
(v) Not to put or install or permit to be put or installed any machinery
or thing whatsoever the load of which exceeds the loading capacity of
the said premises.
(w) At the reasonable request of the Landlord, the Tenant shall mount and
equip his machinery particularly machinery with horizontal
reciprocating action and every part thereof with anti-vibration
absorbers and anti-dumping absorbers for eliminating and reducing
vibrations and dumping produced by the operation and
10
<PAGE>
running of any of the machinery installed at the said premises.
(x) At the expiration or sooner determination of this Agreement to deliver
up to the Landlord the said premises including the Landlord's fixtures
and fittings therein in good repair and condition as aforesaid (fair
wear and tear excepted) together with any additional erections
alterations or improvements which the Tenant may with the consent of
the Landlord as aforesaid have made upon or in the said premises and
which the Landlord in his absolute discretion may be willing to retain
without payment of any compensation for such additional erections
alterations or improvements. The Tenant shall be entitled to remove
its own trade fixtures and fittings subject to making good all damages
including damage to the Landlord's decoration within the said premises
and within the said building caused by such removal to the
satisfaction of the Landlord. The Landlord shall have the right to
require the Tenant to reinstate to its original state any part of the
said premises in respect of which the Tenant may have carried out
alterations with the consent of the Landlord.
11
<PAGE>
(y) Not to cause, allow, permit or suffer the load of electricity supply
to, in or on the said premises exceeding 60 AMP TPN.
3. THE LANDLORD AGREES WITH THE TENANT as follows:
(a) That the Tenant paying the rent hereby reserved and all charges
payable hereunder and performing and observing the agreements by the
Tenant hereinbefore contained may peaceably hold and enjoy the said
premises during the said term without any interruption by the Landlord
or any person lawfully claiming through or under or in trust for him.
(b) To pay the Crown Rent and Property Tax which are now or may hereafter
during the said term be imposed by Government upon the said premises.
(c) To maintain and keep or cause to be maintained or kept the main
structure of the said premises and every part of such main structure
the main drains and pipes in proper and tenantable repair and
condition Provided that the Landlord's liability hereunder shall not
be deemed to have arisen unless and until written notice of any want
of repair of the same shall have been previously given by the Tenant
to the Landlord and the
12
<PAGE>
Landlord shall have failed to take step to repair the same after the
lapse of a reasonable time.
4. PROVIDED ALWAYS AND IT IS MUTUALLY AGREED as follows:
(a) That if and whenever any part of the rent hereby reserved or any other
payments payable by the Tenant hereunder shall be in arrear for
fifteen days (whether the same shall have been formally demanded or
not) or if and whenever there shall be a breach of any of the
agreements by the Tenant hereinbefore contained or if the Tenant
(being an individual or sole proprietor or partnership) shall commit
an act of bankruptcy or shall have its Business Registration cancelled
or (being a corporation) shall go into liquidation (either voluntary
or otherwise) or shall have any order made or resolution passed for
winding up other than a resolution for the purpose of amalgamation or
reconstruction or if the Tenant shall enter into any composition or
arrangements with his creditors or shall suffer execution to be levied
upon any of his goods or effects the Landlord shall upon the happening
of any such event be entitled to re-enter upon the said premises or
any part thereof in the name of the whole and thereupon this Agreement
shall absolutely determine but without prejudice to any rights which
may have
13
<PAGE>
accrued to the Landlord by reason of any antecedent breach of any of
the obligations on the part of the Tenant hereinbefore contained AND
the deposit paid hereunder shall be forfeited to the Landlord as and
for liquidated damages and not as penalty but without prejudice to the
Landlord's right to claim any further damages which the Landlord shall
have sustained or may sustain AND a written notice served by the
Landlord on the Tenant or left at the said premises to the effect that
the Landlord thereby exercises the power of re-entry shall be a full
and sufficient exercise of such power without actual entry on the part
of the Landlord. Notwithstanding the foregoing, the Landlord may in
any such event at its option elect not to terminate this Agreement but
to deduct from the deposit the amount of any monetary loss incurred by
the Landlord in consequence of the breach, non-observance or non-
performance by the Tenant in which event the Tenant shall, as a
condition precedent to the continuation of the tenancy, deposit with
the Landlord the amount so deducted and, if the Tenant shall fail so
to do, the Landlord shall forthwith be entitled to re-enter on the
said premises and to determine this Agreement in which event the
deposit may be forfeited to the Landlord as hereinbefore provided.
Notwithstanding anything herein contained, the Landlord shall have the
right to charge
14
<PAGE>
by way of additional rent interest at the rate of 1.5% per month in
respect of any payments to be made by the Tenant to the Landlord under
this Agreement which shall be more than Fifteen days in arrears
(whether legally or formally demanded or not) and such interest shall
be payable by the Tenant to the Landlord on demand calculated from the
date upon which such payments in arrears fell due (and not fifteen
days thereafter) until the date of payment. The Landlord shall
further be entitled to recover from the Tenant as a debt all expenses
including fees paid to debt collectors appointed by the Landlord and
all solicitors' and/or counsel's fees and court fees incurred by the
Landlord for the purpose of recovering the rental in arrears and/or
other moneys unpaid or any part thereof from the Tenant on a full
indemnity basis together with such sum or sums as shall be determined
by the Landlord as being collection charges for the additional work
incurred by the Landlord and its staff and/or the manager of the said
building (as the case may be) in recovering the said areas and/or
unpaid sums or any part thereof.
(b) In the event of the said premises or any part thereof at any time
during the said term being damaged or destroyed by fire or by any
other cause (not attributable to the act or default of the Tenant) so
as
15
<PAGE>
to be unfit for occupation and use or become subject to a closure
order or become totally inaccessible to the Tenant then the rent
hereby reserved or a fair proportion thereof according to the nature
and extent of the damage sustained shall be suspended until the said
premises shall again be rendered fit for occupation and use or until
the said premises cease to be subject to a closure order or cease to
be totally inaccessible and any dispute concerning this clause shall
be determined by arbitration in accordance with the Arbitration
Ordinance Cap.341 of the Laws of Hong Kong or any statutory enactment
in that behalf for the time being in force Provided Always that the
Landlord shall not be required to reinstate the said premises if by
reason of their condition or any local regulations or other
circumstances beyond the control of the Landlord it is in the opinion
of the Landlord not economical or practicable or reasonable so to do.
(c) Acceptance of rent by the Landlord shall not be deemed to operate as a
waiver by the Landlord of any right to proceed against the Tenant in
respect of any breach non-observance or non-performance by the Tenant
of any of the agreements stipulations and conditions herein contained
and on the Tenant's part to be observed and performed.
16
<PAGE>
(d) For the purpose of these presents any act default or omission of the
agents servants visitors customers and workmen of the Tenant shall be
deemed to be the act default or omission of the Tenant.
(e) To the extent that the Tenant can lawfully do so the Tenant hereby
expressly declares that at the expiration or sooner determination of
this Agreement the Tenant will not invoke or seek to avail himself of
any protection which may or shall hereafter be afforded by any
ordinance or regulation of Hong Kong protecting tenants or lessees
from eviction but will promptly and punctually quit and deliver up
possession of the said premises at the expiration of this Agreement or
sooner determination as aforesaid.
(f) The Tenant shall n the signing of this Agreement pay to the Landlord
the sums set out in Part II of the Schedule hereto by way of deposit
for the due performance and observance of the agreements on the part
of the Tenant herein contained. At the expiration or sooner
determination of this Agreement subject to prior forfeiture in
accordance with Clause 4(a) hereof if the Tenant shall have paid all
rent due hereunder and if there shall be no breach of any of the
agreements on the Tenant's part to be observed and
17
<PAGE>
performed the Landlord will repay to the Tenant the said deposit paid
by the Tenant to the Landlord as a deposit on the signing of this
Agreement but without any interest thereon within 30 days after
delivery of vacant possession of the said premises to the Landlord and
after full settlement of all outstanding payments in respect of the
said premises payable by the Tenant.
(g) The Tenant hereby expressly declares that he has paid no premium
construction fee, key money or other sum of money of a similar nature
to the Landlord or other person or persons authorized by him for the
possession of the said premises or for the granting of this Agreement.
(h) The Landlord shall not be under any liability to the Tenant or to any
other person whomsoever in respect of any loss or damage to person or
property sustained by the Tenant or any such other person caused by or
through or in any way owing to any typhoon overflow of water or escape
of fumes smoke fire or any other substance or thing originating from
anywhere within the said Building. The Tenant shall fully and
effectually indemnify the Landlord from and against all claims and
demands made against the Landlord by any person in respect of any loss
damage or injury caused by or
18
<PAGE>
through or in any way owing to the overflow of water or the escape of
fumes smoke fire or any other substance or thing originating from the
said premises or to the negligence or default of the Tenant his
servants agents or licensees or to the defective or damaged condition
of the interior of the said premises or any fixtures or fittings for
the repair of which the Tenant is responsible hereunder and against
all costs and expenses incurred by the Landlord in respect of any such
claim or demand.
(i) The Landlord or his agents accepts no responsibility for any accident
or damage which may be caused to the Tenant or any occupier of the
said premises or their or his or her servants or customers arising
from any defect in or operation of any lift in the said Building.
(j) For the purpose of Part III of the Landlord and Tenant (Consolidation)
Ordinance Chapter 7 and of these presents the rent payable in respect
of the said premises shall be and be deemed to be in arrear if not
paid in advance at the times and in manner hereinbefore provided for
payment thereof. All costs of and incidental to the demand for rent
distraint or any legal action for the recovery of rent and any other
19
<PAGE>
sums due hereunder shall be recoverable from the Tenant as a debt.
(k) During the two months immediately preceding the expiration of the term
hereby created the Landlord shall be at liberty to affix and maintain
without interference upon any external part of the said premises a
notice for re-letting the said premises and the Tenant shall permit
persons authorized by the Landlord or its agents at reasonable time of
the day to view the said premises or any part thereof.
(l) The expression "the Tenant" shall (where the context permits) mean and
include the party or parties specifically named and shall not include
the executors and administrators of any such party or where such party
is a corporation any liquidator thereof.
(m) The Landlord shall be entitled to treat non-payment of rates (if any)
and management fee and of any amount payable by the Tenant hereunder
or any part thereof in all respects as non-payment of rent under this
Agreement.
(n) Any notice under this Agreement shall be in writing and any notice to
the Tenant shall be sufficiently served
20
<PAGE>
if left addressed to him at the said premises or any part thereof or
sent to him by registered post or left at his last known business
address in Hong Kong or sent to its registered office as recorded in
the Company Registry by registered post and any notice to the Landlord
shall be sufficiently served if delivered to him personally or sent to
him by registered post or left at his last known address in Hong Kong
or sent to its registered office as recorded in the Company Registry
by registered post.
(o) All costs of and incidental to the preparation completion and stamping
of this Agreement shall be borne and paid by the Landlord and the
Tenant in equal shares.
(p) The design load of electricity supply to in or on the said premises
shall not exceed 60 AMP TPN. The Tenant shall fully indemnify the
Landlord against all loss and damages whatsoever suffered by the
Landlord caused by or arising from or in any way owing to the
overloading of electricity supply including but not limited to all
claims, demands, actions and legal proceedings whatsoever upon the
Landlord in respect of any loss, damage or injury to any person
whomsoever caused by or
21
<PAGE>
arising from or in any way owing to the overloading of electricity
supply.
5. The Landlord and the Tenant do hereby jointly and severally declare
and confirm that the rent herein reserved is the best rent which can be
reasonably obtained for the grant of this tenancy without a premium.
6. This Agreement is subject to the compliance by the Tenant of all
terms and conditions contained in the existing Tenancy Agreement in respect of
the said Premises. In the event the Tenant shall have committed any breach of
the terms and conditions of the existing Tenancy Agreement before the
commencement of this term and fails to rectify such breach after receiving from
the Landlord 7 days' written notice or upon the happening of any events which
would have entitled the Landlord to forfeit the existing tenancy, then the
Landlord shall have the right to forfeit this tenancy and all the deposit paid
hereunder without prejudice to the Landlord's right to claim any further damage
which the Landlord shall have sustained or may sustain.
It is hereby declared that (if the context permits or requires) the
singular number shall include the plural and the masculine gender shall include
the feminie and te neuter.
22
<PAGE>
AS WITNESS the hands of the parties hereto the day and year first above
written.
23
<PAGE>
THE SCHEDULE ABOVE REFERRED TO
------------------------------
Part I
------
(a) The monthly rental shall be HONG KONG DOLLARS TWENTY TWO THOUSAND
FOUR HUNDRED AND FIFTY EIGHT ONLY (HK$22,458.00).
(b) The monthly management fee shall be HONG KONG DOLLARS FIVE THOUSAND
SEVEN HUNDRED AND FOURTEEN ONLY (HK$5,714.00) subject to revision.
Part II
-------
(a) The rental deposit shall be HONG KONG DOLLARS SIXTY SEVEN THOUSAND
THREE HUNDRED AND SEVENTY FOUR ONLY (HK$67,374.00).
(b) The management fee deposit shall be HONG KONG DOLLARS SEVENTEEN
THOUSAND ONE HUNDRED AND FORTY TWO ONLY (HK$17,142.00).
24
<PAGE>
SIGNED by Kwong Chun, its )
director for and on behalf )
of Hong Yip Service Company ) For and on behalf of
Limited as the lawful ) HONG YIP SERVICE CO., LTD.
attorney of the Landlord ) /s/ (illegible)
whose signature is verified )
by: )
)
/s/ Maria S.M. Leung
Maria S.M. Leung
Solicitor
Hong Kong
SIGNED by Tong Ka Wing Carl, )
director for and on behalf )
of the Tenant in the ) For and on behalf of
presence of: ) CREATIVE MASTER LIMITED
) /s/ (illegible)
)
/s/ (illegible)
MO CHI KEUNG
25
<PAGE>
ACKNOWLEDGE RECEIPT of and )
from the Tenant the sum of )
HONG KONG DOLLARS SIXTY )
SEVEN THOUSAND THREE HUNDRED ) HK$67,374.00
AND SEVENTY FOUR ONLY being )
the rental deposit above )
mentioned. )
)
V E R I F I C A T I O N of the signatures
/s/ (illegble) For and on behalf of
Leung Suk Mun, Maria HONG YIP SERVICE CO., LTD.
Solicitor /s/ (illegible)
Hong Kong
ACKNOWLEDGE RECEIPT of and )
from the Tenant the sum of )
HONG KONG DOLLARS SEVENTEEN ) HK$17,142.00
THOUSAND ONE HUNDRED AND )
FORTY TWO ONLY being the )
management fee deposit above )
mentioned )
)
V E R I F I C A T I O N of the signatures by:
/s/ (illegible) For and on behalf of
Leung Suk Mun, Maria HONG YIP SERVICE CO., LTD.
Solicitor /s/ (illegible)
Hong Kong
26
<PAGE>
EXHIBIT 10.32
Dated the 5th day of March, 1997
FORTUNE WIND INVESTMENTS LIMITED
AND
EXCEL MASTER LIMITED
________________________
TENANCY AGREEMENT
of
Unit A1 on the 8th Floor
of Casey Industrial
Building, No.18/20
Bedford Road, Kowloon
________________________
WOO, KWAN, LEE & LO,
Solicitors & c.,
26th Floor, Jardine House,
1 Connaught Place,
Central, Hong Kong.
<PAGE>
AN AGREEMENT made the 5th day of March, One thousand nine hundred and
ninety-seven BETWEEN FORTUNE WIND INVESTMENTS LIMITED a company incorporated in
British Virgin Islands whose registered office is situate at P.0 Box 3136, Road
Town, Tortola, British Virgin Islands with a principal place of business at 45th
Floor, Sun Hung Kai Centre, 30 Harbour Road, Wanchai, Hong Kong (hereinafter
called "the Landlord") of the one part and EXCEL MASTER LIMITED whose registered
office is situate at Unit B on 8th Floor, Casey Industrial Building, 18/20
Bedford Road, Taikoktsui, Kowloon, Hong Kong -------- (hereinafter called "the
Tenant") of the other part. WHEREBY IT IS HEREBY AGREED as follows:
1. The Landlord lets and the Tenant takes ALL.THAT UNIT Al on the 8TH
FLOOR of CASEY INDUSTRIAL BUILDING at No.18/20 Bedford Road, Kowloon, Hong Kong
(hereinafter referred to as "the said Building") erected on All That piece or
parcel of ground registered in the Land Registry as Kowloon Inland Lot No.8234
(which said Unit is shown for identification purpose only and coloured pink on
the plan annexed hereto and is hereinafter referred to as "the said premises")
Together with the use in common with the co-owners of the said building their
tenants work-people and persons authorized by them of the entrance lifts
(whenever the same shall be operating) passages and staircases leading to the
said premises for the term of TWO YEARS from the 15th day of February 1997 to
the 14th day of February 1999 both
2
<PAGE>
days inclusive determinable as hereinafter mentioned YIELDING AND PAYING
therefor during the said term monthly and every calendar month the rent as set
out in Part I (a) of the Schedule hereto exclusive of rates and management fee
payable in Hong Kong Currency in advance on the 1st day of each and every
calendar month without deduction whatsoever PROVIDED THAT the Tenant shall be
entitled to a rent-free period of 21 days from the 15th February 1997 to the 7th
March 1997 both days inclusive.
2. THE TENANT TO THE INTENT THAT THE OBLIGATION MAY CONTINUE THROUGHOUT
THE TERM OF TENANCY HEREBY CREATED AGREES WITH THE LANDLORD as follows:
(a) (i) To pay the said rent at the times and in manner aforesaid.
(ii) To pay as from the 15th day of February 1997 all existing and
future rates taxes assessments and outgoings payable by law in
respect of the said premises either by the owner or occupier
thereof except only the crown rent property tax and payment of a
capital nature.
(b) (i) To pay as from the 15th day of February 1997 and discharge
punctually during the said term all charges for electricity,
water, gas, telephone
3
<PAGE>
rental and other outgoings now or at any time hereafter consumed
by the Tenant and to pay all necessary deposits for the same.
(ii) To pay as from the 15th day of February 1997 and discharge
punctually during the said term the monthly contribution as set
out in Part I (b) of the Schedule towards the costs, charges and
expenses for the maintenance and management of the said Building
chargeable in respect of the said premises as provided under the
Deed of Mutual Covenants relating to the Building of which the
said-premises form part (if any) or as the management agent of
the said Building shall reasonably require.
(c) (i) To fit out the said premises in accordance with such plans and
specifications as shall have been submitted by the Tenant to and
approved in writing by the Landlord and thereafter to constantly
maintain and keep the whole of the interior of the said premises
and every part thereof in proper and tenantable repair and
condition including, but not limited to, all doors, windows,
skylights, locks, hinges, bolts, ceilings, floors, water pipes,
water closets, electrical installations and
4
<PAGE>
wirings and all the Landlord's fixtures and fittings therein
(fair wear and tear excepted).
(ii) To be wholly responsible for any loss damage or injury caused to
any person whomsoever directly or indirectly through the
defective or damaged condition of any part of the interior of the
said premises and to make good the same by payment or otherwise
and to indemnify the Landlord against all actions proceedings
claims and demands made upon the Landlord in respect of any such
loss damage or injury and all costs and expenses incidental
thereto.
(d) In the event of any of the drains becoming choked or stopped up owing
to careless use by the Tenant or his work-people to pay the cost
incurred by the Landlord in cleansing and clearing the said drains
from obstruction.
(e) To permit the Landlord to use and maintain existing pipes and conduits
in and through the said premises. The Landlord or its agents shall
have the right to enter the said premises at all reasonable times to
examine the same.
5
<PAGE>
(f) To comply with such rules and regulations as the Landlord or the
management agent may from time to time impose in connection with the
industrial refuse chutes in the said Building (if any).
(g) Not to do or permit or suffer to be done anything whereby the policy
or policies of insurance on the said premises or other parts of the
said Building against damage by fire explosion storm or tempest may
become void or voidable or whereby the rate of premium thereon may be
increased and the Tenant shall indemnify the Landlord against such
increased premium as shall have been brought about or caused by his
act or default.
(h) Not to make or permit to make any structural alterations in or
additions to the said premises or to the external walls of the said
premises or to the electrical wirings installations or other
Landlord's fixtures without having first obtained the written license
and consent of the Landlord therefor or cut maim or injure or suffer
to be cut maimed or injured any doors windows walls structural members
or other fabric thereof. If any such consent shall be granted by the
Landlord it shall in any.event be subject to the condition that the
Tenant shall not cause any damage to the said premises or any part
thereof in addition to
6
<PAGE>
such other conditions as the Landlord shall think fit to impose and
subject to the approval of the Public Works Department or other
Government authority (if necessary).
(i) Not to transfer assign underlet or otherwise part with the possession
of the said premises or any part thereof either by way of subletting
lending sharing or other means whereby any person or persons not party
to this Agreement obtains the use or possession of the said premises
or any part thereof irrespective of.whether any rental or other
consideration is given for such use or possession and in the event of
any such transfer subletting sharing assignment or parting with the
possession of the said premises (whether for monetary consideration or
not) this Agreement shall at the discretion of the Landlord determine
and the Tenant shall forthwith surrender the said premises to the
Landlord.
(j) Not to do or permit to be done in or.upon the said premises or any
part thereof anything which may be or become a nuisance annoyance
damage or disturbance to the Landlord or the tenants or occupiers of
the other part or parts of the said Building or of other property
7
<PAGE>
in the neighborhood or in anywise against the law or regulations of
Hong Kong.
(k) Not to put or place any dust-bins, garbage-cans, furniture, chattels,
packing cases, boxes, goods, chattels or any other things in the
staircases, landings or other common passages in the said Building.
(l) To permit the Landlord and all persons authorized by him at all
reasonable times by prior appointment (except in case of emergency) to
enter into the said premises to view the condition thereof and to give
or leave notice in writing upon the said premises for the Tenant of
all defects and wants of repair there found for which the Tenant is
responsible hereunder and within one month after every such notice
well and sufficiently to repair and make good such defects and wants
of repair whereof notice shall have been so given or left.
(m) If any defects or want of repair shall be found and if the Landlord
shall give or leave a notice in writing at the said premises or at the
business address of the Tenant requiring him to amend the same and if
the Tenant shall not within 14 days after the service of such notice
proceed diligently with the execution of
8
<PAGE>
such repairs then to permit the Landlord or his authorized person to
enter upon the said premises and execute such repairs and the cost
thereof (the amount thereof in case of difference to be determined by
the Landlord's agent) shall be a debt due from the Tenant to the
Landlord and be forthwith recoverable by action.
(n) To permit the Landlord and his agent with all necessary workmen and
appliances at all reasonable times upon prior notice to the Tenant to
enter upon the said premises to execute repairs or alterations on any
adjoining premises now or hereafter belonging to the Landlord who
shall make good all damages occasioned to the Tenant by such entry.
(o) Not to do or cause or permit or suffer to be done any act deed matter
or thing whatsoever in contravention of the negative or restrictive
covenants terms or conditions of the Conditions of Sale or Crown Lease
under which the said premises are held from the Crown or of the
relevant Deed of Mutual Covenant of the said Building.
(p) Not to permit or suffer any sale by auction to take place on the said
premises.
9
<PAGE>
(q) Not to keep or store or cause or permit or suffer to be kept or stored
any arms, ammunition, unlawful goods, gun powder, saltpetre, kerosene
or other explosive or combustible substance on or in any part of the
said premises.
(r) Not to use the said premises or any part thereof for any illegal or
immoral purpose.
(s) Not to use the said premises for any purpose other than that of a
factory carrying on light industrial undertaking only and not to carry
on any industrial undertaking thereon which is now or may hereafter be
declared to be offensive under the Public Health and Urban Services
Ordinances or any enactment amending the same or substituted thereof
and to conduct therein only such factory business which is duly
authorized licensed or approved by the competent government
authorities and to comply in all respects with the conditions terms
and regulations relating to such factory business or imposed on the
grant of license in respect thereof.
(t) Not to exhibit or display within or on the exterior of the said
premises any writing sign or other device whether illuminated or not
which may be visible from outside the said premises except the display
of name-
10
<PAGE>
plates or signboards of the Tenant the size and position of which
shall be subject to the Landlord's approval. The Landlord or his
authorized agents shall have the right to remove at the cost and
expense of the Tenant any signboard, sign, decoration, or device which
shall be affixed or put up or displayed without the prior approval of
the Landlord or his agents.
(u) Not to permit any person to remain in the said premises overnight,
except for the purpose of posting watchmen to look after the contents
of the said premises which shall not be used as sleeping quarters or
as domestic premises within the meaning of any Landlord and Tenant
Ordinance for the time being in force.
(v) Not to put or install or permit to be put or installed any machinery
or thing whatsoever the load of which exceeds the loading capacity of
the said premises.
(w) At the reasonable request of the Landlord, the Tenant shall mount and
equip his machinery particularly machinery with horizontal
reciprocating action and every part thereof with anti-vibration
absorbers and anti-dumping absorbers for eliminating and reducing
vibrations and dumping produced by the operation and
11
<PAGE>
running of any of the machinery installed at the said premises.
(x) At the expiration or sooner determination of this Agreement to deliver
up to the Landlord the said premises including the Landlord's fixtures
and fittings therein in good repair and condition as aforesaid (fair
wear and tear excepted) together with any additional erections
alterations or improvements which the Tenant may with the consent of
the Landlord as aforesaid have made upon or in the said premises and
which the Landlord in his absolute discretion may be willing to retain
without payment of any compensation for such additional erections
alterations or improvements. The Tenant shall be entitled to remove
its own trade fixtures and fittings subject to making good all damages
including damage to the Landlord's decoration within the said premises
and within the said building caused by such removal to the
satisfaction of the Landlord. The Landlord shall have the right to
require the Tenant to reinstate to its original state any part of the
said premises in respect of which the Tenant may have carried out
alterations with the consent of the Landlord.
12
<PAGE>
(y) Not to cause, allow, permit or suffer the load of electricity supply
to, in or on the said premises exceeding 60 AMP TPN.
3. THE LANDLORD AGREES WITH THE TENANT as follows:
(a) That the Tenant paying the rent hereby reserved and all charges
payable hereunder and performing and observing the agreements by the
Tenant hereinbefore contained may peaceably hold and enjoy the said
premises during the said term without any interruption by the Landlord
or any person lawfully claiming through or under or in trust for him.
(b) To pay the Crown Rent and Property Tax which are now or may hereafter
during the said term be imposed by Government upon the said premises.
(c) To maintain and keep or cause to be maintained or kept the main
structure of the said premises and every part of such main structure
the main drains and pipes in proper and tenantable repair and
condition Provided that the Landlord's liability hereunder shall not
be deemed to have arisen unless and until written notice of any want
of repair of the same shall have been previously given by the Tenant
to the Landlord and the
13
<PAGE>
Landlord shall have failed to take step to repair the same after the
lapse of a reasonable time.
4. PROVIDED ALWAYS AND IT IS MUTUALLY AGREED as follows:
(a) That if and whenever any part of the rent hereby reserved or any other
payments payable by the Tenant hereunder shall be in arrear for
fifteen days (whether the same shall have been formally demanded or
not) or if and whenever there shall be a breach of any of the
agreements by the Tenant hereinbefore contained or if the Tenant
(being an individual or sole proprietor or partnership) shall commit
an act of bankruptcy or shall have its Business Registration cancelled
or (being a corporation) shall go into liquidation (either voluntary
or otherwise) or shall have any order made or resolution passed for
winding up other than a resolution for the purpose of amalgamation or
reconstruction or if the Tenant shall enter into any composition or
arrangements with his creditors or shall suffer execution to be levied
upon any of his goods or effects the Landlord shall upon the happening
of any such event be entitled to re-enter upon the said premises or
any part thereof in the name of the whole and thereupon this Agreement
shall absolutely determine but without prejudice to any rights which
may have
14
<PAGE>
accrued to the Landlord by reason of any antecedent breach of any of
the obligations on the part of the Tenant hereinbefore contained AND
the deposit paid hereunder shall be forfeited to the Landlord as and
for liquidated damages and not as penalty but without prejudice to the
Landlord's right to claim any further damages which the Landlord shall
have sustained or may sustain AND a written notice served by the
Landlord on the Tenant or left at the said premises to the effect that
the Landlord thereby exercises the power of re-entry shall be a full
and sufficient exercise of such power without actual entry on the part
of the Landlord. Notwithstanding the foregoing, the Landlord may in
any such event at its option elect not to terminate this Agreement but
to deduct from the deposit the amount of any monetary loss incurred by
the Landlord in consequence of the breach, non-observance or non-
performance by the Tenant in which event the Tenant shall, as a
condition precedent to the continuation of the tenancy, deposit with
the Landlord the amount so deducted and, if the Tenant shall fail so
to do, the Landlord shall forthwith be entitled to re-enter on the
said premises and to determine this Agreement in which event the
deposit may be forfeited to the Landlord as hereinbefore provided.
Notwithstanding anything herein contained, the Landlord shall have the
right to charge
15
<PAGE>
by way of additional rent interest at the rate of 1.5% per month in
respect of any payments to be made by the Tenant to the Landlord under
this Agreement which shall be more than Fifteen days in arrears
(whether legally or formally demanded or not) and such interest shall
be payable by the Tenant to the Landlord on demand calculated from the
date upon which such payments in arrears fell due (and not fifteen
days thereafter) until the date of payment. The Landlord shall
further be entitled to recover from the Tenant as a debt all expenses
including fees paid to debt collectors appointed by the Landlord and
all solicitors' and/or counsel's fees and court fees incurred by the
Landlord for the purpose of recovering the rental in arrears and/or
other moneys unpaid or any part thereof from the Tenant on a full
indemnity basis together with such sum or sums as shall be determined
by the Landlord as being collection charges for the additional work
incurred by the Landlord and its staff and/or the manager of the said
building (as the case may be) in recovering the said areas and/or
unpaid sums or any part thereof.
(b) In the event of the said premises or any part thereof at any time
during the said term being damaged or destroyed by fire or by any
other cause (not attributable to the act or default of the Tenant) so
as
16
<PAGE>
to be unfit for occupation and use or become subject to a closure
order or become totally inaccessible to the Tenant then the rent
hereby reserved or a fair proportion thereof according to the nature
and extent of the damage sustained shall be suspended until the said
premises shall again be rendered fit for occupation and use or until
the said premises cease to be subject to a closure order or cease to
be totally inaccessible and any dispute concerning this clause shall
be determined by arbitration in accordance with the Arbitration
Ordinance Cap.341 of the Laws of Hong Kong or any statutory enactment
in that behalf for the time being in force Provided Always that the
Landlord shall not be required to reinstate the said premises if by
reason of their condition or any local regulations or other
circumstances beyond the control of the Landlord it is in the opinion
of the Landlord not economical or practicable or reasonable so to do.
(c) Acceptance of rent by the Landlord shall not be deemed to operate as a
waiver by the Landlord of any right to proceed against the Tenant in
respect of any breach non-observance or non-performance by the Tenant
of any of the agreements stipulations and conditions herein contained
and on the Tenant's part to be observed and performed.
17
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(d) For the purpose of these presents any act default or omission of the
agents servants visitors customers and workmen of the Tenant shall be
deemed to be the act default or omission of the Tenant.
(e) To the extent that the Tenant can lawfully do so the Tenant hereby
expressly declares that at the expiration or sooner determination of
this Agreement the Tenant will not invoke or seek to avail himself of
any protection which may or shall hereafter be afforded by any
ordinance or regulation of Hong Kong protecting tenants or lessees
from eviction but will promptly and punctually quit and deliver up
possession of the said premises at the expiration of this Agreement or
sooner determination as aforesaid.
(f) The Tenant shall n the signing of this Agreement pay to the Landlord
the sums set out in Part II of the Schedule hereto by way of deposit
for the due performance and observance of the agreements on the part
of the Tenant herein contained. At the expiration or sooner
determination of this Agreement subject to prior forfeiture in
accordance with Clause 4(a) hereof if the Tenant shall have paid all
rent due hereunder and if there shall be no breach of any of the
agreements on the Tenant's part to be observed and
18
<PAGE>
performed the Landlord will repay to the Tenant the said deposit paid
by the Tenant to the Landlord as a deposit on the signing of this
Agreement but without any interest thereon within 30 days after
delivery of vacant possession of the said premises to the Landlord and
after full settlement of all outstanding payments in respect of the
said premises payable by the Tenant.
(g) The Tenant hereby expressly declares that he has paid no premium
construction fee, key money or other sum of money of a similar nature
to the Landlord or other person or persons authorized by him for the
possession of the said premises or for the granting of this Agreement.
(h) The Landlord shall not be under any liability to the Tenant or to any
other person whomsoever in respect of any loss or damage to person or
property sustained by the Tenant or any such other person caused by or
through or in any way owing to any typhoon overflow of water or escape
of fumes smoke fire or any other substance or thing originating from
anywhere within the said Building. The Tenant shall fully and
effectually indemnify the Landlord from and against all claims and
demands made against the Landlord by any person in respect of any loss
damage or injury caused by or
19
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through or in any way owing to the overflow of water or the escape of
fumes smoke fire or any other substance or thing originating from the
said premises or to the negligence or default of the Tenant his
servants agents or licensees or to the defective or damaged condition
of the interior of the said premises or any fixtures or fittings for
the repair of which the Tenant is responsible hereunder and against
all costs and expenses incurred by the Landlord in respect of any such
claim or demand.
(i) The Landlord or his agents accepts no responsibility for any accident
or damage which may be caused to the Tenant or any occupier of the
said premises or their or his or her servants or customers arising
from any defect in or operation of any lift in the said Building.
(j) For the purpose of Part III of the Landlord and Tenant (Consolidation)
Ordinance Chapter 7 and of these presents the rent payable in respect
of the said premises shall be and be deemed to be in arrear if not
paid in advance at the times and in manner hereinbefore provided for
payment thereof. All costs of and incidental to the demand for rent
distraint or any legal action for the recovery of rent and any other
20
<PAGE>
sums due hereunder shall be recoverable from the Tenant as a debt.
(k) During the two months immediately preceding the expiration of the term
hereby created the Landlord shall be at liberty to affix and maintain
without interference upon any external part of the said premises a
notice for re-letting the said premises and the Tenant shall permit
persons authorized by the Landlord or its agents at reasonable time of
the day to view the said premises or any part thereof.
(l) The expression "the Tenant" shall (where the context permits) mean and
include the party or parties specifically named and shall not include
the executors and administrators of any such party or where such party
is a corporation any liquidator thereof.
(m) The Landlord shall be entitled to treat non-payment of rates (if any)
and management fee and of any amount payable by the Tenant hereunder
or any part thereof in all respects as non-payment of rent under this
Agreement.
(n) Any notice under this Agreement shall be in writing and any notice to
the Tenant shall be sufficiently served
21
<PAGE>
if left addressed to him at the said premises or any part thereof or
sent to him by registered post or left at his last known business
address in Hong Kong or sent to its registered office as recorded in
the Company Registry by registered post and any notice to the Landlord
shall be sufficiently served if delivered to him personally or sent to
him by registered post or left at his last known address in Hong Kong
or sent to its registered office as recorded in the Company Registry
by registered post.
(o) All costs of and incidental to the preparation completion and stamping
of this Agreement shall be borne and paid by the Landlord and the
Tenant in equal shares.
(p) The design load of electricity supply to in or on the said premises
shall not exceed 60 AMP TPN. The Tenant shall fully indemnify the
Landlord against all loss and damages whatsoever suffered by the
Landlord caused by or arising from or in any way owing to the
overloading of electricity supply including but not limited to all
claims, demands, actions and legal proceedings whatsoever upon the
Landlord in respect of any loss, damage or injury to any person
whomsoever caused by or
22
<PAGE>
arising from or in any way owing to the overloading of electricity
supply.
5. The Landlord shall at its own costs and expenses erect a partition wall as
shown for identification purpose only and marked green on the plan annexed
hereto between the said premises and the adjacent premises before commencement
of the term hereby created. Without prejudice to the generality of Clause 2(x)
hereof, the Tenant shall deliver the said partition wall to the Landlord at the
expiration or sooner determination of this Agreement.
6. The Landlord and the Tenant do hereby jointly and severally declare and
confirm that the rent herein reserved is the best rent which can be reasonably
obtained for the grant of this tenancy without a premium.
It is hereby declared that (if the context permits or requires) the
singular number shall include the plural and the masculine gender shall include
the feminine and the neuter.
AS WITNESS the hands of the parties hereto the day and year first above
written.
23
<PAGE>
THE SCHEDULE ABOVE REFERRED TO
------------------------------
Part I
------
(a) The monthly rental shall be HONG KONG DOLLARS EIGHT THOUSAND FIVE HUNDRED
AND TWENTY FIVE ONLY (HK$8,525.00).
(b) The monthly management fee shall be HONG KONG DOLLARS TWO THOUSAND THREE
HUNDRED AND SIXTY SIX ONLY (HK$2,366.00) subject to revision.
Part II
-------
(a) The rental deposit shall be HONG KONG DOLLARS TWENTY FIVE THOUSAND FIVE
HUNDRED AND SEVENTY FIVE ONLY (HK$25,575.00).
(b) The management fee deposit shall be HONG KONG DOLLARS SEVEN THOUSAND AND
NINETY EIGHT ONLY (HK$7,098.00).
24
<PAGE>
SIGNED by Kwong Chun, its )
director for and on behalf )
of Hong Yip Service Company ) For and on behalf of
Limited as the lawful ) HONG YIP SERVICE CO., LTD.
attorney of the Landlord ) /s/ (illegible)
whose signature is verified )
by: )
/s/ Maria S.M. Leung
Maria S.M. Leung
Solicitor
Hong Kong
SIGNED by Mr. Shing Kam )
Ming, its director for and )
on behalf of the Tenant in ) For and on behalf of
the presence of: ) EXCEL MASTER LIMITED
) /s/ (illegible)
/s/ Maria S.M. Leung
Maria S.M. Leung
Solicitor
Hong Kong
25
<PAGE>
ACKNOWLEDGE RECEIPT of and )
from the Tenant the sum of )
HONG KONG DOLLARS TWENTY )
FIVE THOUSAND FIVE HUNDRED ) HK$25,575.00
AND SEVENTY FIVE ONLY being )
the rental deposit above )
mentioned. )
V E R I F I C A T I O N of the signatures
/s/ Maria S.M. Leung For and on behalf of
Maria S.M. Leung HONG YIP SERVICE CO., LTD.
Solicitor /s/ (illegible)
Hong Kong
ACKNOWLEDGE RECEIPT of and )
from the Tenant the sum of )
HONG KONG DOLLARS SEVEN ) HK$7,098.00
THOUSAND AND NINETY EIGHT )
ONLY being the management )
fee deposit above mentioned )
V E R I F I C A T I O N of the signatures by:
/s/ Maria S.M. Leung For and on behalf of
Maria S.M. Leung HONG YIP SERVICE CO., LTD.
Solicitor /s/ (illegible)
Hong Kong
26
<PAGE>
EXHIBIT 10.33
AN AGREEMENT made the 18th day of February, One thousand nine hundred and
ninety-eight BETWEEN FORTUNE WIND INVESTMENTS LIMITED a company incorporated in
British Virgin Islands whose registered office is situate at P.0 Box 3136, Road
Town, Tortola, British Virgin Islands with a principal place of business at 45th
Floor, Sun Hung Kai Centre, 30 Harbour Road, Wanchai, Hong Kong (hereinafter
called "the Landlord") of the one part and CREATIVE MASTER LIMITED whose
registered office is situate at Unit B on 8th Floor, Casey Industrial Building,
18/20 Bedford Road, Taikoktsui, Kowloon, Hong Kong -------- (hereinafter called
"the Tenant") of the other part. WHEREBY IT IS HEREBY AGREED as follows:
I. The Landlord lets and the Tenant takes ALL THAT UNIT A2 on the 8TH
FLOOR of CASEY INDUSTRIAL BUILDING at No.18/20 Bedford Road, Kowloon, Hong Kong
(hereinafter referred to as "the said Building") erected on All That piece or
parcel of ground registered in the Land Registry as Kowloon Inland Lot No.8234
(which said Unit is shown for identification purpose only and coloured pink on
the plan annexed hereto and is hereinafter referred to as "the said premises")
Together with the use in common with the co-owners of the said building their
tenants work-people and persons authorized by them of the entrance lifts
(whenever the same shall be operating) passages and staircases leading to the
said premises for the term of ONE YEAR THREE MONTHS AND TWENTY THREE DAYS from
the 23rd day of January 1998 to
<PAGE>
the 15th day of May 1999 both days inclusive determinable as hereinafter
mentioned YIELDING AND PAYING therefor during the said term monthly and every
calendar month the rent as set out in Part I (a) of the Schedule hereto
exclusive of rates and management fee payable in Hong Kong Currency in advance
on the 1st day of each and every calendar month without deduction whatsoever
PROVIDED THAT the Tenant shall be entitled to a rent-free period of 15 days from
the 23rd January 1998 to the 6th February 1998 both days inclusive but the
Tenant shall be required to pay rates, management fees and all outgoings in
respect of the said premises during the said rent-free period.
II. THE TENANT TO THE INTENT THAT THE OBLIGATION MAY CONTINUE THROUGHOUT
THE TERM OF TENANCY HEREBY CREATED AGREES WITH THE LANDLORD as follows:
A. 1. To pay the said rent at the times and in manner aforesaid.
2. To pay as from the 23rd day of January 1998 all existing and
future rates taxes assessments and outgoings payable by law in
respect of the said premises either by the owner or occupier
thereof except only the crown rent property tax and payment of a
capital nature.
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<PAGE>
B. 1. To pay as from the 23rd day of January 1998 and discharge
punctually during the said term all charges for electricity,
water, gas, telephone rental and other outgoings now or at any
time hereafter consumed by the Tenant and to pay all necessary
deposits for the same.
2. To pay as from the 23rd day of January 1998 and discharge
punctually during the said term the monthly contribution as set
out in Part I (b) of the Schedule towards the costs, charges and
expenses for the maintenance and management of the said Building
chargeable in respect of the said premises as provided under the
Deed of Mutual Covenants relating to the Building of which the
said-premises form part (if any) or as the management agent of
the said Building shall reasonably require.
C. 1. To fit out the said premises in accordance with such plans and
specifications as shall have been submitted by the Tenant to and
approved in writing by the Landlord and thereafter to constantly
maintain and keep the whole of the interior of the said premises
and every part thereof in proper and tenantable repair and
condition including, but not
2
<PAGE>
limited to, all doors, windows, skylights, locks, hinges, bolts,
ceilings, floors, water pipes, water closets, electrical
installations and wirings and all the Landlord's fixtures and
fittings therein (fair wear and tear excepted).
2. To be wholly responsible for any loss damage or injury caused to
any person whomsoever directly or indirectly through the
defective or damaged condition of any part of the interior of the
said premises and to make good the same by payment or otherwise
and to indemnify the Landlord against all actions proceedings
claims and demands made upon the Landlord in respect of any such
loss damage or injury and all costs and expenses incidental
thereto.
D. In the event of any of the drains becoming choked or stopped up owing
to careless use by the Tenant or his work-people to pay the cost
incurred by the Landlord in cleansing and clearing the said drains
from obstruction.
E. To permit the Landlord to use and maintain existing pipes and conduits
in and through the said premises. The Landlord or its agents shall
have the right to
3
<PAGE>
enter the said premises at all reasonable times to examine the same.
F. To comply with such rules and regulations as the Landlord or the
management agent may from time to time impose in connection with the
industrial refuse chutes in the said Building (if any).
G. Not to do or permit or suffer to be done anything whereby the policy
or policies of insurance on the said premises or other parts of the
said Building against damage by fire explosion storm or tempest may
become void or voidable or whereby the rate of premium thereon may be
increased and the Tenant shall indemnify the Landlord against such
increased premium as shall have been brought about or caused by his
act or default.
H. Not to make or permit to make any structural alterations in or
additions to the said premises or to the external walls of the said
premises or to the electrical wirings installations or other
Landlord's fixtures without having first obtained the written license
and consent of the Landlord therefor or cut maim or injure or suffer
to be cut maimed or injured any doors windows walls structural members
or other fabric thereof. If any such consent shall be granted
4
<PAGE>
by the Landlord it shall in any.event be subject to the condition that
the Tenant shall not cause any damage to the said premises or any part
thereof in addition to such other conditions as the Landlord shall
think fit to impose and subject to the approval of the Public Works
Department or other Government authority (if necessary).
I. Not to transfer assign underlet or otherwise part with the possession
of the said premises or any part thereof either by way of subletting
lending sharing or other means whereby any person or persons not party
to this Agreement obtains the use or possession of the said premises
or any part thereof irrespective of.whether any rental or other
consideration is given for such use or possession and in the event of
any such transfer subletting sharing assignment or parting with the
possession of the said premises (whether for monetary consideration or
not) this Agreement shall at the discretion of the Landlord determine
and the Tenant shall forthwith surrender the said premises to the
Landlord.
J. Not to do or permit to be done in or.upon the said premises or any
part thereof anything which may be or become a nuisance annoyance
damage or disturbance to
5
<PAGE>
the Landlord or the tenants or occupiers of the other part or parts of
the said Building or of other property in the neighborhood or in
anywise against the law or regulations of Hong Kong.
K. Not to put or place any dust-bins, garbage-cans, furniture, chattels,
packing cases, boxes, goods, chattels or any other things in the
staircases, landings or other common passages in the said Building.
L. To permit the Landlord and all persons authorized by him at all
reasonable times by prior appointment (except in case of emergency) to
enter into the said premises to view the condition thereof and to give
or leave notice in writing upon the said premises for the Tenant of
all defects and wants of repair there found for which the Tenant is
responsible hereunder and within one month after every such notice
well and sufficiently to repair and make good such defects and wants
of repair whereof notice shall have been so given or left.
M. If any defects or want of repair shall be found and if the Landlord
shall give or leave a notice in writing at the said premises or at the
business address of the Tenant requiring him to amend the same and if
the
6
<PAGE>
Tenant shall not within 14 days after the service of such notice
proceed diligently with the execution of such repairs then to permit
the Landlord or his authorized person to enter upon the said premises
and execute such repairs and the cost thereof (the amount thereof in
case of difference to be determined by the Landlord's agent) shall be
a debt due from the Tenant to the Landlord and be forthwith
recoverable by action.
N. To permit the Landlord and his agent with all necessary workmen and
appliances at all reasonable times upon prior notice to the Tenant to
enter upon the said premises to execute repairs or alterations on any
adjoining premises now or hereafter belonging to the Landlord who
shall make good all damages occasioned to the Tenant by such entry.
O. Not to do or cause or permit or suffer to be done any act deed matter
or thing whatsoever in contravention of the negative or restrictive
covenants terms or conditions of the Conditions of Sale or Crown Lease
under which the said premises are held from the Crown or of the
relevant Deed of Mutual Covenant of the said Building.
P. Not to permit or suffer any sale by auction to take
7
<PAGE>
place on the said premises.
Q. Not to keep or store or cause or permit or suffer to be kept or stored
any arms, ammunition, unlawful goods, gun powder, saltpetre, kerosene
or other explosive or combustible substance on or in any part of the
said premises.
R. Not to use the said premises or any part thereof for any illegal or
immoral purpose.
S. Not to use the said premises for any purpose other than that of a
factory carrying on light industrial undertaking only and not to carry
on any industrial undertaking thereon which is now or may hereafter be
declared to be offensive under the Public Health and Urban Services
Ordinances or any enactment amending the same or substituted thereof
and to conduct therein only such factory business which is duly
authorized licensed or approved by the competent government
authorities and to comply in all respects with the conditions terms
and regulations relating to such factory business or imposed on the
grant of license in respect thereof.
T. Not to exhibit or display within or on the exterior of the said
premises any writing sign or other device
8
<PAGE>
whether illuminated or not which may be visible from outside the said
premises except the display of name-plates or signboards of the Tenant
the size and position of which shall be subject to the Landlord's
approval. The Landlord or his authorized agents shall have the right
to remove at the cost and expense of the Tenant any signboard, sign,
decoration, or device which shall be affixed or put up or displayed
without the prior approval of the Landlord or his agents.
U. Not to permit any person to remain in the said premises overnight,
except for the purpose of posting watchmen to look after the contents
of the said premises which shall not be used as sleeping quarters or
as domestic premises within the meaning of any Landlord and Tenant
Ordinance for the time being in force.
V. Not to put or install or permit to be put or installed any machinery
or thing whatsoever the load of which exceeds the loading capacity of
the said premises.
W. At the reasonable request of the Landlord, the Tenant shall mount and
equip his machinery particularly machinery with horizontal
reciprocating action and every part thereof with anti-vibration
absorbers and anti-dumping absorbers for eliminating and reducing
9
<PAGE>
vibrations and dumping produced by the operation and running of any of
the machinery installed at the said premises.
X. At the expiration or sooner determination of this Agreement to deliver
up to the Landlord the said premises including the Landlord's fixtures
and fittings therein in good repair and condition as aforesaid (fair
wear and tear excepted) together with any additional erections
alterations or improvements which the Tenant may with the consent of
the Landlord as aforesaid have made upon or in the said premises and
which the Landlord in his absolute discretion may be willing to retain
without payment of any compensation for such additional erections
alterations or improvements. The Tenant shall be entitled to remove
its own trade fixtures and fittings subject to making good all damages
including damage to the Landlord's decoration within the said premises
and within the said building caused by such removal to the
satisfaction of the Landlord. The Landlord shall have the right to
require the Tenant to reinstate to its original state any part of the
said premises in respect of which the Tenant may have carried out
alterations with the consent of the Landlord.
10
<PAGE>
Y. Not to cause, allow, permit or suffer the load of electricity supply
to, in or on the said premises exceeding 60 AMP TPN.
III. THE LANDLORD AGREES WITH THE TENANT as follows:
A. That the Tenant paying the rent hereby reserved and all charges
payable hereunder and performing and observing the agreements by the
Tenant hereinbefore contained may peaceably hold and enjoy the said
premises during the said term without any interruption by the Landlord
or any person lawfully claiming through or under or in trust for him.
B. To pay the Crown Rent and Property Tax which are now or may hereafter
during the said term be imposed by Government upon the said premises.
C. To maintain and keep or cause to be maintained or kept the main
structure of the said premises and every part of such main structure
the main drains and pipes in proper and tenantable repair and
condition Provided that the Landlord's liability hereunder shall not
be deemed to have arisen unless and until written notice of any want
of repair of the same shall have been previously given by the Tenant
to the Landlord and the
11
<PAGE>
Landlord shall have failed to take step to repair the same after the
lapse of a reasonable time.
IV. PROVIDED ALWAYS AND IT IS MUTUALLY AGREED as follows:
A. That if and whenever any part of the rent hereby reserved or any other
payments payable by the Tenant hereunder shall be in arrear for
fifteen days (whether the same shall have been formally demanded or
not) or if and whenever there shall be a breach of any of the
agreements by the Tenant hereinbefore contained or if the Tenant
(being an individual or sole proprietor or partnership) shall commit
an act of bankruptcy or shall have its Business Registration cancelled
or (being a corporation) shall go into liquidation (either voluntary
or otherwise) or shall have any order made or resolution passed for
winding up other than a resolution for the purpose of amalgamation or
reconstruction or if the Tenant shall enter into any composition or
arrangements with his creditors or shall suffer execution to be levied
upon any of his goods or effects the Landlord shall upon the happening
of any such event be entitled to re-enter upon the said premises or
any part thereof in the name of the whole and thereupon this Agreement
shall absolutely determine but without prejudice to any rights which
may have
12
<PAGE>
accrued to the Landlord by reason of any antecedent breach of any of
the obligations on the part of the Tenant hereinbefore contained AND
the deposit paid hereunder shall be forfeited to the Landlord as and
for liquidated damages and not as penalty but without prejudice to the
Landlord's right to claim any further damages which the Landlord shall
have sustained or may sustain AND a written notice served by the
Landlord on the Tenant or left at the said premises to the effect that
the Landlord thereby exercises the power of re-entry shall be a full
and sufficient exercise of such power without actual entry on the part
of the Landlord. Notwithstanding the foregoing, the Landlord may in
any such event at its option elect not to terminate this Agreement but
to deduct from the deposit the amount of any monetary loss incurred by
the Landlord in consequence of the breach, non-observance or non-
performance by the Tenant in which event the Tenant shall, as a
condition precedent to the continuation of the tenancy, deposit with
the Landlord the amount so deducted and, if the Tenant shall fail so
to do, the Landlord shall forthwith be entitled to re-enter on the
said premises and to determine this Agreement in which event the
deposit may be forfeited to the Landlord as hereinbefore provided.
Notwithstanding anything herein contained, the Landlord shall have the
right to charge
13
<PAGE>
by way of additional rent interest at the rate of 1.5% per month in
respect of any payments to be made by the Tenant to the Landlord under
this Agreement which shall be more than Fifteen days in arrears
(whether legally or formally demanded or not) and such interest shall
be payable by the Tenant to the Landlord on demand calculated from the
date upon which such payments in arrears fell due (and not fifteen
days thereafter) until the date of payment. The Landlord shall further
be entitled to recover from the Tenant as a debt all expenses
including fees paid to debt collectors appointed by the Landlord and
all solicitors' and/or counsel's fees and court fees incurred by the
Landlord for the purpose of recovering the rental in arrears and/or
other moneys unpaid or any part thereof from the Tenant on a full
indemnity basis together with such sum or sums as shall be determined
by the Landlord as being collection charges for the additional work
incurred by the Landlord and its staff and/or the manager of the said
building (as the case may be) in recovering the said areas and/or
unpaid sums or any part thereof.
B. In the event of the said premises or any part thereof at any time
during the said term being damaged or destroyed by fire or by any
other cause (not attributable to the act or default of the Tenant) so
as
14
<PAGE>
to be unfit for occupation and use or become subject to a closure
order or become totally inaccessible to the Tenant then the rent
hereby reserved or a fair proportion thereof according to the nature
and extent of the damage sustained shall be suspended until the said
premises shall again be rendered fit for occupation and use or until
the said premises cease to be subject to a closure order or cease to
be totally inaccessible and any dispute concerning this clause shall
be determined by arbitration in accordance with the Arbitration
Ordinance Cap.341 of the Laws of Hong Kong or any statutory enactment
in that behalf for the time being in force Provided Always that the
Landlord shall not be required to reinstate the said premises if by
reason of their condition or any local regulations or other
circumstances beyond the control of the Landlord it is in the opinion
of the Landlord not economical or practicable or reasonable so to do.
C. Acceptance of rent by the Landlord shall not be deemed to operate as a
waiver by the Landlord of any right to proceed against the Tenant in
respect of any breach non-observance or non-performance by the Tenant
of any of the agreements stipulations and conditions herein contained
and on the Tenant's part to be observed and performed.
15
<PAGE>
D. For the purpose of these presents any act default or omission of the
agents servants visitors customers and workmen of the Tenant shall be
deemed to be the act default or omission of the Tenant.
E. To the extent that the Tenant can lawfully do so the Tenant hereby
expressly declares that at the expiration or sooner determination of
this Agreement the Tenant will not invoke or seek to avail himself of
any protection which may or shall hereafter be afforded by any
ordinance or regulation of Hong Kong protecting tenants or lessees
from eviction but will promptly and punctually quit and deliver up
possession of the said premises at the expiration of this Agreement or
sooner determination as aforesaid.
F. The Tenant shall on the signing of this Agreement pay to the Landlord
the sums set out in Part II of the Schedule hereto by way of deposit
for the due performance and observance of the agreements on the part
of the Tenant herein contained. At the expiration or sooner
determination of this Agreement subject to prior forfeiture in
accordance with Clause 4(a) hereof if the Tenant shall have paid all
rent due hereunder and if there shall be no breach of any of the
agreements on the Tenant's part to be observed and
16
<PAGE>
performed the Landlord will repay to the Tenant the said deposit paid
by the Tenant to the Landlord as a deposit on the signing of this
Agreement but without any interest thereon within 30 days after
delivery of vacant possession of the said premises to the Landlord and
after full settlement of all outstanding payments in respect of the
said premises payable by the Tenant.
G. The Tenant hereby expressly declares that he has paid no premium
construction fee, key money or other sum of money of a similar nature
to the Landlord or other person or persons authorized by him for the
possession of the said premises or for the granting of this Agreement.
H. The Landlord shall not be under any liability to the Tenant or to any
other person whomsoever in respect of any loss or damage to person or
property sustained by the Tenant or any such other person caused by or
through or in any way owing to any typhoon overflow of water or escape
of fumes smoke fire or any other substance or thing originating from
anywhere within the said Building. The Tenant shall fully and
effectually indemnify the Landlord from and against all claims and
demands made against the Landlord by any person in respect of any loss
damage or injury caused by or
17
<PAGE>
through or in any way owing to the overflow of water or the escape of
fumes smoke fire or any other substance or thing originating from the
said premises or to the negligence or default of the Tenant his
servants agents or licensees or to the defective or damaged condition
of the interior of the said premises or any fixtures or fittings for
the repair of which the Tenant is responsible hereunder and against
all costs and expenses incurred by the Landlord in respect of any such
claim or demand.
I. The Landlord or his agents accepts no responsibility for any accident
or damage which may be caused to the Tenant or any occupier of the
said premises or their or his or her servants or customers arising
from any defect in or operation of any lift in the said Building.
J. For the purpose of Part III of the Landlord and Tenant (Consolidation)
Ordinance Chapter 7 and of these presents the rent payable in respect
of the said premises shall be and be deemed to be in arrear if not
paid in advance at the times and in manner hereinbefore provided for
payment thereof. All costs of and incidental to the demand for rent
distraint or any legal action for the recovery of rent and any other
18
<PAGE>
sums due hereunder shall be recoverable from the Tenant as a debt.
K. During the two months immediately preceding the expiration of the term
hereby created the Landlord shall be at liberty to affix and maintain
without interference upon any external part of the said premises a
notice for re-letting the said premises and the Tenant shall permit
persons authorized by the Landlord or its agents at reasonable time of
the day to view the said premises or any part thereof.
L. The expression "the Tenant" shall (where the context permits) mean and
include the party or parties specifically named and shall not include
the executors and administrators of any such party or where such party
is a corporation any liquidator thereof.
M. The Landlord shall be entitled to treat non-payment of rates (if any)
and management fee and of any amount payable by the Tenant hereunder
or any part thereof in all respects as non-payment of rent under this
Agreement.
N. Any notice under this Agreement shall be in writing and any notice to
the Tenant shall be sufficiently served
19
<PAGE>
if left addressed to him at the said premises or any part thereof or
sent to him by registered post or left at his last known business
address in Hong Kong or sent to its registered office as recorded in
the Company Registry by registered post and any notice to the Landlord
shall be sufficiently served if delivered to him personally or sent to
him by registered post or left at his last known address in Hong Kong
or sent to its registered office as recorded in the Company Registry
by registered post.
O. All costs of and incidental to the preparation completion and stamping
of this Agreement shall be borne and paid by the Landlord and the
Tenant in equal shares.
P. The design load of electricity supply to in or on the said premises
shall not exceed 30 AMP TPN. The Tenant shall fully indemnify the
Landlord against all loss and damages whatsoever suffered by the
Landlord caused by or arising from or in any way owing to the
overloading of electricity supply including but not limited to all
claims, demands, actions and legal proceedings whatsoever upon the
Landlord in respect of any loss, damage or injury to any person
whomsoever caused by or arising from or in any way owing to the
overloading of
20
<PAGE>
electricity supply.
5. The Landlord and the Tenant do hereby jointly and severally declare and
confirm that the rent herein reserved is the best rent which can be reasonably
obtained for the grant of this tenancy without a premium.
6. The Landlord shall hand over the said premises to the Tenant on an "as is"
condition including all alterations, partitions, installations and erections
existing at the said premises upon the commencement of the said tenancy.
It is hereby declared that (if the context permits or requires) the
singular number shall include the plural and the masculine gender shall include
the feminie and the neuter.
AS WITNESS the hands of the parties hereto the day and year first above
written.
21
<PAGE>
THE SCHEDULE ABOVE REFERRED TO
------------------------------
Part I
------
Q. The monthly rental shall be HONG KONG DOLLARS TWELVE THOUSAND ONLY
(HK$12,000.00).
R. The monthly management fee shall be HONG KONG DOLLARS THREE THOUSAND
SEVEN HUNDRED AND FIFTY ONLY (HK$3,750.00) subject to revision.
Part II
-------
(a) The rental deposit shall be HONG KONG DOLLARS THIRTY SIX THOUSAND ONLY
(HK$36,000.00).
(b) The management fee deposit shall be HONG KONG DOLLARS ELEVEN THOUSAND
TWO HUNDRED AND FIFTY ONLY (HK$11,250.00).
22
<PAGE>
SIGNED by mR. Kwong Chun, )
its director for and on )
behalf of Hong Yip Service ) For and on behalf of
Company Limited as the ) HONG YIP SERVICE CO., LTD.
lawful attorney of the ) /s/ (illegible)
Landlord whose signature is )
verified by: )
/s/ Porey Ip
POREY IP
Solicitor
Hong Kong SAR
Woo, Kwan, Lee& Lo
SIGNED by Tong Ka Wing Carl, )
director and authorised )
person for and on behalf of ) For and on behalf of
the Tenant in the presence ) CREATIVE MASTER LIMITED
of: ) /s/ (illegible)
)
/s/ Au Fung Ming
Au Fung Ming (G822476(4))
Admin. Manager
ACKNOWLEDGE RECEIPT of and ) For and on behalf of
from the Tenant the sum of ) HONG YIP SERVICE CO., LTD.
HONG KONG DOLLARS THIRTY SIX ) /s/ (illegible)
THOUSAND ONLY being the )
rental deposit above ) HK$36,000.00
mentioned. )
)
V E R I F I C A T I O N of the signatures
/s/ Porey Ip
POREY IP
Solicitor
Hong Kong SAR
Woo, Kwan, Lee & Lo
23
<PAGE>
ACKNOWLEDGE RECEIPT of and ) For and on behalf of
from the Tenant the sum of ) HONG YIP SERVICE CO., LTD.
HONG KONG DOLLARS ELEVEN ) /s/ (illegible)
THOUSAND TWO HUNDRED AND )
FIFTY ONLY being the ) HK$11,250.00
management fee deposit above )
mentioned. )
V E R I F I C A T I O N of the signatures by:
/s/ Porey Ip
POREY IP
Solicitor
Hong Kong SAR
Woo, Kwan, Lee & Lo
24
<PAGE>
EXHIBIT 10.36
PROMISSORY NOTE
---------------
$227,118.00
October 1, 1998
Kowloon, Hong Kong
FOR VALUE RECEIVED, the undersigned, CREATIVE MASTER LIMITED, a Hong Kong
corporation ("Maker"), hereby promises to pay to CARL KA WING TONG, or order
("Payee"), at Casey Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikaktsui, Kowloon,
Hong Kong, or such other place as the holder hereof may designate in writing, in
lawful money of the United States of America, the principal sum of Two Hundred
Twenty-Seven Thousand One Hundred Eighteen and No/100 Dollars ($227,118.00),
without interest thereon.
1. Periodic Payments.
The principal amount hereof shall be due and payable in six equal semi-
annual installments of Thirty-Seven Thousand Eight Hundred Fifty-Three and
No/100th Dollars ($37,853.00) each, commencing on March 31, 1999 and continuing
on the last day of each September and March thereafter until September 30, 2001,
when the entire unpaid principal amount of and any default interest on this Note
shall be due and payable in full. Payee understands and agrees that this Note
shall not be prepayable, in whole or in part.
2. Default Interest Rate.
If any amount due under this Note is not paid in full on or before the due
date thereof, the unpaid amount thereof shall bear interest at the rate of ten
percent (10%) per annum, without further notice to Maker, from and after the due
date until paid in full. If any amount hereunder is not paid in full within five
days after the due date thereof, in addition to all other rights and remedies
available hereunder or at law or in equity, at Payee's discretion, upon notice
to Maker the entire unpaid principal amount and default interest hereon shall
become due and payable in full.
3. Waivers.
Maker hereby waives demand for payment, presentment for payment, protest,
notice of protest, notice of dishonor, notice of nonpayment, notice of
acceleration of maturity, diligence in taking any action to collect sums owing
hereunder and all duty or obligation of the holder hereof to effect, protect,
perfect, retain or enforce any security for the payment of this Note or to
proceed against any collateral before otherwise enforcing this Note.
4. Collection Costs.
Maker agrees to reimburse Payee or other holder hereof for all reasonable
costs, including, without limitation, reasonable attorneys' fees, incurred to
collect this Note if this Note is not paid when due. Maker agrees that Payee or
other holder hereof may
1.
<PAGE>
accept further security or release security for the payment of this Note,
without in any way affecting any obligations of Maker to such holder.
5. Partial Invalidity.
If any provision hereof or of any other document or agreement evidencing,
securing or relating to the indebtedness evidenced hereby is, for any reason and
to any extent, invalid or unenforceable, then neither the remainder of the
document in which such provision is contained, nor the application of the
provision to other persons, entities or circumstances, nor any other document
referred to herein, shall be affected thereby, but instead shall be enforceable
to the maximum extent permitted by law.
6. Joint Obligation.
This Note shall be a joint and several obligation of each Maker and of any
endorser, cosigner and guarantor hereof and shall be binding upon them and their
heirs, representatives, successors and assigns.
7. Amendments.
This Note may be terminated or amended orally, but only by a termination or
amendment in writing signed by Payee or other holder and by Maker.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the day
and year first above written.
Address of Maker: CREATIVE MASTER LIMITED
- ----------------
Casey Ind. Bldg. 8th Floor By: /s/ LEO SHECK PUI KWOK
18 Bedford Rd., Taikaktsui --------------------------
Kowloon, Hong Kong Leo Sheck Pui Kwok
------------------
Chief Operating Officer
-----------------------
ATTEST:
/s/ PAUL MO
- --------------------
Paul Mo,
- -------
Secretary
2.
<PAGE>
EXHIBIT 10.37
PROMISSORY NOTE
---------------
$493,889.00
October 1, 1998
Kowloon, Hong Kong
FOR VALUE RECEIVED, the undersigned, CREATIVE MASTER LIMITED, a Hong Kong
corporation ("Maker"), hereby promises to pay to LEO SHECK PUI KWOK, or order
("Payee"), at Casey Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikaktsui, Kowloon,
Hong Kong, or such other place as the holder hereof may designate in writing, in
lawful money of the United States of America, the principal sum of Four Hundred
Ninety-Three Thousand Eight Hundred Eighty-Nine and No/100 Dollars
($493,889.00), without interest thereon.
1. Periodic Payments.
The principal amount hereof shall be due and payable in six equal semi-
annual installments of Eighty-Two Thousand Three Hundred Fourteen and 83/100th
Dollars ($82,314.83) each, commencing on March 31, 1999 and continuing on the
last day of each September and March thereafter until September 30, 2001, when
the entire unpaid principal amount of and any default interest on this Note
shall be due and payable in full. Payee understands and agrees that this Note
shall not be prepayable, in whole or in part.
2. Default Interest Rate.
If any amount due under this Note is not paid in full on or before the due
date thereof, the unpaid amount thereof shall bear interest at the rate of ten
percent (10%) per annum, without further notice to Maker, from and after the due
date until paid in full. If any amount hereunder is not paid in full within five
days after the due date thereof, in addition to all other rights and remedies
available hereunder or at law or in equity, at Payee's discretion, upon notice
to Maker the entire unpaid principal amount and default interest hereon shall
become due and payable in full.
3. Waivers.
Maker hereby waives demand for payment, presentment for payment, protest,
notice of protest, notice of dishonor, notice of nonpayment, notice of
acceleration of maturity, diligence in taking any action to collect sums owing
hereunder and all duty or obligation of the holder hereof to effect, protect,
perfect, retain or enforce any security for the payment of this Note or to
proceed against any collateral before otherwise enforcing this Note.
4. Collection Costs.
Maker agrees to reimburse Payee or other holder hereof for all reasonable
costs, including, without limitation, reasonable attorneys' fees, incurred to
collect this Note if this Note is not paid when due. Maker agrees that Payee or
other holder hereof may
1.
<PAGE>
accept further security or release security for the payment of this Note,
without in any way affecting any obligations of Maker to such holder.
5. Partial Invalidity.
If any provision hereof or of any other document or agreement evidencing,
securing or relating to the indebtedness evidenced hereby is, for any reason and
to any extent, invalid or unenforceable, then neither the remainder of the
document in which such provision is contained, nor the application of the
provision to other persons, entities or circumstances, nor any other document
referred to herein, shall be affected thereby, but instead shall be enforceable
to the maximum extent permitted by law.
6. Joint Obligation.
This Note shall be a joint and several obligation of each Maker and of any
endorser, cosigner and guarantor hereof and shall be binding upon them and their
heirs, representatives, successors and assigns.
7. Amendments.
This Note may be terminated or amended orally, but only by a termination or
amendment in writing signed by Payee or other holder and by Maker.
IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the day
and year first above written.
Address of Maker: CREATIVE MASTER LIMITED
- ----------------
Casey Ind. Bldg. 8th Floor By: /s/ CARL KA WING TONG
18 Bedford Rd., Taikaktsui --------------------------
Kowloon, Hong Kong Carl Ka Wing Tong
-----------------
Chief Executive Officer
-----------------------
ATTEST:
/s/ PAUL MO
- --------------------
Paul Mo,
- -------
Secretary
2.
<PAGE>
EXHIBIT 10.39
CREATIVE MASTER INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan (the
--------------------
"Plan") are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees,
Directors and Consultants and to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options are granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Creative Master International, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider (defined below) shall not cease to be an Employee in the case of (i)
any leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
2
<PAGE>
(r) "Option Grant" means a written agreement between the Company and
------------
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Grant is subject to the terms and conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(u) "Optionee" means the holder of an outstanding Option granted
--------
under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this Creative Master International, Inc. 1998 Stock
----
Option Plan.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 below.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 560,000 Shares (after giving effect to the 1-for-10
reverse stock split approved in March 1998). The Shares may be authorized but
unissued, or reacquired Common Stock. If an Option expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). However, Shares that have actually been issued under the Plan,
upon exercise of an Option, shall not be returned to the Plan and shall not
become available for future distribution under the Plan.
4. Administration of the Plan.
--------------------------
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
3
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options may from
time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of Option Grants for use under the Plan;
(v) to determine the terms and conditions, of any Option
granted hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or the Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal to
the amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by Optionees to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
4
<PAGE>
(xi) to construe and interpret the terms of the Plan and awards
granted and pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
------------
(a) Nonstatutory Stock Options may be granted to Service Providers.
Incentive Stock Options may be granted only to Employees.
(b) Each Option shall be designated in the Option Grant as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5(b),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option shall confer upon any Optionee any
right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate such relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Grant; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Grant.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
5
<PAGE>
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of(l) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Grant. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
6
<PAGE>
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option Grant)
from the person entitled to exercise the Option, and (ii) full payment for the
Shares with respect to which the Option is exercised. Full payment may consist
of any consideration and method of payment authorized by the Administrator and
permitted by the Option Grant and the Plan. Shares issued upon exercise of an
Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Shares, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such Shares promptly after the Option is exercised. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the Shares are issued, except as provided in Section 11 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Grant (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Grant). In the absence of a specified time in the
Option Grant, the Option shall remain exercisable for three (3) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Grant (of
at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Grant). In the absence of a specified time in
the Option Grant, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If after termination,
the Optionee does not exercise his or her Option within the time specified
7
<PAGE>
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Grant (or at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Grant) by the Optionee's estate
or by a person who acquires the right to exercise the Option by bequest or
inheritance. In the absence of a specified time in the Option Grant, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
8
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation of
such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option, the Optionee shall fully vest in and
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee in writing or electronically that the Option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option immediately
prior to the merger or sale of assets, the consideration (whether stock, cash,
or other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
- --------
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee to whom an Option is
so granted within a reasonable time after the date of such grant.
9
<PAGE>
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
14. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
15. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
16. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
17. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
10
<PAGE>
18. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options outstanding, and, in the case of an individual who
acquires Shares pursuant to the Plan, during the period such individual owns
such Shares, copies of annual financial statements. The Company shall not be
required to provide such statements to key employees whose duties in connection
with the Company assure their access to equivalent information.
11
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
STOCK OPTION GRANT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this "Option Grant".
I. NOTICE OF STOCK OPTION GRANT
----------------------------
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Grant, as follows:
Optionee _______________
Date of Grant _______________
Exercise Price per Share $______________
Total Number of Shares Granted _______________
Type of Option: Incentive Stock Option/Nonstatutory
Stock Option
Expiration Date: The Option shall terminate with respect
to the vested portions thereof three (3)
months following termination of
Optionee's employment with the Company;
provided, however, that in the case of
termination of employment by reason of
death or disability, the Option shall
terminate with respect to the vested
portions thereof three (3) years
following termination of employment. The
Option shall be cancelled with respect to
the non-vested portion thereof on the
date of termination of employment.
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
12
<PAGE>
The Option shall vest and be fully exercisable with respect to 25% of
the shares covered by the Option on the date which is six months after the date
of grant of the Option. Thereafter, the Option will vest and be fully
exercisable with respect to the remaining 75% of the shares covered by the
Option over a period of 42 months on a pro rata basis at the end of each
subsequent month.
II. AGREEMENT
---------
1. Grant of Option. The Administrator of the Company hereby grants to
---------------
the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 13(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Grant, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Grant.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form
13
<PAGE>
attached hereto as Exhibit B.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be:
-----------------
(a) by cash or check; or
(b) in the sole discretion of the Administrator and upon request of
the Optionee, by either of the following, or a combination thereof:
(1) consideration received by the Company under a formal
cashless exercise program adopted by the Company in connection with
the Plan; or
(2) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee
for more than six (6) months on the date of surrender, and (ii) have a
Fair Market Value on the date of surrender equal to the aggregate
Exercise Price of the Exercised Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Grant shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
14
<PAGE>
9. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and for at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held. In addition to the holding periods
described above, in order to realize the lowest capital gains tax rates under
the Taxpayer Relief Act of 1997, the Shares must be held for at least eighteen
months.
(d) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
15
<PAGE>
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Grant constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION GRANT,
THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH
HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT
AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof Optionee has
reviewed the Plan and this Option Grant in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option and
fully understands all provisions of the Option. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option Grant.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
OPTIONEE: CREATIVE MASTER INTERNATIONAL, INC.
- --------------------- -----------------------------------
Signature By
- --------------------- -----------------------------------
Print Name Title
- ---------------------
- ---------------------
Residence Address
16
<PAGE>
EXHIBIT A
1998 STOCK OPTION PLAN
EXERCISE NOTICE
Creative Master International, Inc.
- -----------------------------------
- -----------------------------------
Attention: President
1. Exercise of Option. Effective as of today, _____________________,
------------------
the undersigned ("Optionee") hereby elects to exercise Optionee's option to
purchase __________ shares of the Common Stock (the "Shares") of Creative Master
International, Inc. (the "Company") under and pursuant to the 1998 Stock Option
Plan (the "Plan") and the Stock Option Grant dated ____________________________
_____________ (the "Option Grant").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Grant.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Grant and agrees to abide
by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 11 of the Plan.
5. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any
17
<PAGE>
certificate(s) evidencing ownership of the Shares together with any other
legends that may be required by the Company or by state or federal securities
laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
7. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
8. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
9. Governing Law Severability. This Agreement is governed by the
--------------------------
internal substantive laws but not the choice of law rules of California.
10. Entire Agreement. The Plan and Option Grant are incorporated herein
----------------
by reference. This Agreement, the Plan, the Option Grant and the Investment
Representation Statement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and
18
<PAGE>
Optionee with respect to the subject matter hereof, and may not be modified
adversely to the Optionee's interest except by means of a writing signed by the
Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: CREATIVE MASTER INTERNATIONAL, INC.
- -------------------------- -----------------------------------
Signature By
- -------------------------- -----------------------------------
Print Name Title
- -------------------------- -----------------------------------
Date Received
- --------------------------
Residence Address
19
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: CREATIVE MASTER INTERNATIONAL, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, a legend prohibiting their transfer without the
consent of the Commissioner of Corporations of the State of California and any
other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each
20
<PAGE>
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at
the time of the grant of the Option to the Optionee, the exercise will be exempt
from registration under the Securities Act. In the event the Company becomes
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any
market stand-off agreement may require) the Securities exempt under Rule 701 may
be resold, subject to the satisfaction of certain of the conditions specified by
Rule 144, including: (1) the resale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and,
in the case of an affiliate, (2) the availability of certain public information
about the Company, (3) the amount of Securities being sold during any three
month period not exceeding the limitations specified in Rule 144(e), and (4) the
timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
-------------------------------
Date:___________, 19__
21
<PAGE>
EXHIBIT 10.40
Sender: MBBESGSGXXX
MALAYAN BANKING BERHAD
Receiver: SINGAPORE SG
MBBEHKHHXXX
MAYBANK HONG KONG
HONG KONG HK
<TABLE>
<CAPTION>
MUR: Banking Priority
- ---------------------------------------------------------------------------------
<S> <C> <C>
27 = sequence of total
1/1
40A = form of documentary credit
IRREVOCABLE STANDBY
20 = documentary credit no.
401LC702080
31C = date of issue
971229
31D = date and place of expiry
980626IN BENEFICIARY'S COUNTRY
50 = applicant
ACMA LIMITED
17 JURONG PORT ROAD
SINGAPORE 619092
59 = beneficiary
COMMONWEALTH FINANCE CORP LTD
11/F, WYNDHAM PLACE, 40-44
WYNDHAM STREET, CENTRAL, HONG KONG
32B = currency code amount
Currency: USD (US DOLLAR)
Amount : $388,100
41D = available with/by-name, address
MAYBANK, SINGAPORE
BY PAYMENT
42C = drafts at
AT SIGHT
42D = drawee - name and address
ISSUING BANK
45A = descr goods and/or services
CREDIT FACILITIES UP TO USD388,100.00
TO BE EXTENDED TO CREATIVE MASTER LTD.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
8/F, CASEY INDUSTRIAL BUILDING, 18,
BEDFORD ROAD, TAIKOKTSUI, KOWLOON,
HONG KONG
46A = documents required
BENEFICIARY'S SIGNED STATEMENT CERTIFYING THAT THE AMOUNT DRAWN
REPRESENTS AND COVERS INDEBTEDNESS OWING BY CREATIVE MASTER LTD IN
CONNECTION WITH CREDIT FACILITIES EXTENDED TO THEM.
47A = additional conditions
PARTIAL DRAWINGS ARE PERMITTED.
ALL DOCUMENTS TO BE PRESENTED IN DUPLICATE UNLESS
SPECIFIED.
ALL DOCUMENTS MUST BE CLAUSED DRAWN UNDER MALAYAN
BANKING
BERHAD, SINGAPORE STANDBY L/C NO. 401LC702080
71B = Charges
ALL CHARGES OUTSIDE SINGAPORE
INCLUDING PAYMENT CHARGES IN
SINGAPORE ARE FOR BENEFICIARY'S
ACCOUNT
49 = confirmation instructions
WITHOUT
78 = instructions to pay/acc/neg bk
WE HEREBY ENGAGE WITH DRAWERS AND/OR BONAFIDE HOLDERS THAT DRAFTS
DRAWN IN CONFORMITY WITH THE TERMS AND CONDITIONS OF THIS CREDIT WILL
BE DULY HONOURED ON PRESENTATION. WE SHALL EFFECT PAYMENT UPON
RECEIPT OF DRAFTS AND COMPLIANT DOCUMENTS AND ACCORDING TO
INSTRUCTIONS GIVEN. THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND
PRACTICE FOR DOCUMENTARY CREDIT (1993 REVISION), INTERNATIONAL CHAMBER
OF COMMERCE PUBLICATION 500.
</TABLE>
________________________________________________________________________________
Our Advising No. 971277
-----------------------------
WE CERTIFY THAT THIS IS THE
TRUE COPY OF THE ORIGINAL.
For Maybank
Hong Kong
/s/ (illegible)
LO MEI WA 27406
<PAGE>
EXHIBIT 10.41
G U A R A N T E E
-----------------
1. In consideration of BANQUE NATIONALE DE PARIS (hereinafter called "the
Bank") granting or continuing banking facilities including but not limited to
making or continuing advances overdrafts or other credits discounting bills of
exchange or negotiable instruments for or otherwise giving or granting time,
credit or accommodation giving guarantees indemnities and undertakings and
dealings in foreign currencies and/or services or facilities in any other form
for as long as and to the extent that the Bank may think fit or for account of
CREATIVE MASTER LTD of 8/F Casey Ind. Bldg.
18 Bedford Road Kowloon Hong Kong
(hereinafter called "the Principal") I/WE THE UNDERSIGNED
TONG KA WING, CARL of 65 Bisney Road 3/F
Pokfulam Hong Kong
(hereinafter called "the Guarantor(s)") HEREBY GUARANTEE payment to the Bank on
demand (free of any taxes impositions or restrictions now or hereafter imposed
under the laws of any country diminishing the amount of any payment or
preventing or delaying the Bank's unfettered utilization or disposal thereof in
immediate reimbursement to the Bank in Hongkong or as the Bank shall direct) of
all monies and liabilities whether certain or contingent now or hereafter owing
or incurred to the Bank from or by the Principal and unpaid or undischarged on
any current or other account or in any manner or in respect of bills, drafts,
notes or other negotiable instruments made drawn accepted endorsed or paid by or
for the account of the Principal or any other obligation settled for the account
of the Principal and in any place whatever whether from or by the Principal as
Principal debtor, surety or otherwise howsoever and whether alone or jointly
with any other corporation or corporations person or persons or from or by any
firm in which the Principal may be a partner under whatever name and style
including, without in any way limiting the foregoing: --
(a) in the case of the death, bankruptcy or liquidation of the
Principal all sums which would at any time have been owing to the Bank by
the Principal if such death had occurred or such bankruptcy or liquidation
had commenced at the time when the Bank received actual notice thereof and
notwithstanding such death, bankruptcy or liquidation;
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<PAGE>
(b) in the case of a limited company or other corporation all monies
unpaid in respect of debentures or debenture stock of the same held by or
on behalf of the Bank;
(c) all money obtained from or liabilities incurred to the Bank
notwithstanding that the borrowing or incurring of such liabilities may be
invalid or in excess of the powers of the Principal or of any director,
attorney, agent or other person purporting to borrow or act on behalf of
the Principal and notwithstanding any other irregularity in such borrowing
or incurring such liabilities;
(d) in the event of the discontinuance by any means of this guarantee
all cheques, drafts, bills, notes and notes and negotiable instruments
drawn by or for the account of the Principal on the Bank or its agents and
purporting to be dated on or before the date when such discontinuance
becomes known to the Bank or its agents although presented to or paid by
the Bank or them after that date and all liabilities of the Principal to
the Bank at such date whether certain or contingent and whether payable
forthwith or at some future time or times and also all credits then
established by the Bank for the Principal;
(e) interest on all such debts and liabilities to the date of payment,
commission, banking charges, legal and other costs charges, and other
expenses which the Bank may charge against the Principal together with all
expenses of enforcing or obtaining or endeavouring to enforce or obtain
payment of all or any such moneys as aforesaid; plus, interest charges
costs commissions and expenses, legal or otherwise incurred as aforesaid to
date of discontinuance or demand together with interest thereon at the rate
or rates from time to time charged by the Bank on the outstanding accounts
of the Principal from the date of such demand or of such discontinuance by
any Guarantor hereunder or by his/their respective executors,
administrators or legal representatives until payment and plus the costs
and expenses incurred by the Bank of and incidental to the enforcement of
this Guarantee against the Guarantor(s).
2. The liability of the Guarantors hereunder shall be joint and several
and any demand for payment made by the Bank to any one of the Guarantors shall
be deemed to be a demand made to all,
3. This Guarantee shall be a continuing security binding on the Guarantor
or if there be more than one Guarantor on each of them and on his or their
executors,
2
<PAGE>
administrators and legal representatives but shall be revocable as to
transactions subsequent to the expiry of such notice only by giving to the Bank
not less than three months' prior notice of discontinuance in the manner
hereinafter provided.
Notice of discontinuance must be given to the Bank by notice in writing
signed by the Guarantor or, if there be more than one, by each of them and sent
addressed to the Bank at its principal office in Hong Kong by prepaid registered
post and if given in any other manner shall not be valid unless receipt thereof
is acknowledged by the Bank in writing.
As between the Bank and the Guarantor or, if there be more than one, as
between the Bank and the Guarantors and each of them, the Guarantor or
Guarantors shall be regarded as principal debtors and accordingly this Guarantee
shall not be affected or discharged by the death, insanity, bankruptcy,
liquidation or other disability, or any change in the name, style or
constitution, of the principal or of the Guarantor or Guarantors or any of them
or by any other act, deed, matter or thing whereby the Guarantor or Guarantors,
as sureties only, might otherwise have been discharged.
4. If the Principal be a committee or association or other unincorporated
body which has no legal existence or which is under no legal liability to
discharge obligations undertaken or purported to be undertaken by it or on its
behalf this guarantee shall be valid and binding upon the Guarantor or
Guarantors notwithstanding that fact and as though the Guarantor was the
principal debtor or if there be more than one Guarantor as though the Guarantors
were joint and several debtors.
5. In the event of the dissolution or reconstitution of a firm whose
account is hereby secured this guarantee shall apply to all monies borrowed and
liabilities incurred in the firm's name until receipt by the Bank of actual
notice of such dissolution or reconstitution. If, however, the dissolution or
reconstitution be by reason only of the retirement or death of a partner or the
introduction of a further partner or partners this guarantee shall continue and
in addition apply to all monies and liabilities due or incurred to the Bank from
or by the new firms thereby constituted as though there had been no change in
the firm as previously constituted. If the Guarantor or the Principal is a
company this Guarantee shall continue to be binding and effective as a
continuing security notwithstanding the liquidation absorption amalgamation or
reconstruction of the Company.
3
<PAGE>
6. In the event of this guarantee ceasing from any cause whatsoever to be
binding as a continuing security on the Guarantor or Guarantors or his/their
executors, administrators or legal representatives, the Bank shall be at liberty
without thereby affecting their rights hereunder to open a fresh account or
accounts and to continue any then existing account with the Principal and no
monies paid into any such account or accounts by or on behalf of the Principal
and subsequently drawn out shall on settlement of any claim in respect of this
guarantee be appropriated towards or have the effect of payment of any part of
the monies due from the Principal at the time of this guarantee ceasing to be so
binding or of the interest thereon unless the person or persons paying in such
monies shall at the time in writing direct the Bank specially as to appropriate
the same.
No assurance, security or payment which may be avoided under any enactment
relating to bankruptcy or under the provisions of the Companies Ordinance as
revised and amended or any Statutory modification thereof and no release
settlement or discharge which may have been given or made on the faith of any
such assurance, security or payment shall prejudice or affect the right of the
Bank to recover from the Guarantor to the full extent of the guarantee.
7. The Bank may at all times without prejudice without prejudice to this
guarantee and without discharging or in anyway affecting the liability of any
Guarantor hereunder: --
(a) determine, vary or increase any credit or other facility granted
to the Principal,
(b) in the case of credits or facilities provided for two or more
purposes of a different character vary the proportions of the respective credits
allocated or applied for different purposes,
(c) grant the Principal or any other person any time or indulgence,
(d) renew any bills, notes or other securities whether negotiable or
not;
(e) deal with exchange, release, modify or abstain from perfecting or
enforcing any securities or other guarantees present or future or rights which
the Bank may now or hereafter have from or against the Principal or other
person,
(f) compound with the Principal or with any other person,
4
<PAGE>
(g) subsequently obtain other persons to enter into a guarantee in the
terms hereof.
8. The liability of any Guarantor hereunder shall not be affected by any
failure by the Bank to take any security or by any invalidity of any security
taken or by any existing or future agreement by the Bank as to the application
of any advances made or to be made to the Principal or should this guarantee
prove not to be binding on any other Guarantor or Guarantors hereunder for any
reason whatever.
9. No collateral or other security now or hereafter held by the Bank for
all or any part of the monies or liabilities hereby guaranteed nor anything to
which the Bank may otherwise be entitled nor the liability of any person or
persons not parties hereto for all or any part of the monies or liabilities
hereby secured shall be in any way prejudiced or affected by this guarantee.
The Bank shall be at liberty but not bound to resort to any other means of
payment at any time and in any order the Bank thinks fit without thereby
discharging or in any way affecting the liability of any Guarantor and the Bank
may enforce this guarantee either for payment of the ultimate after resorting to
other means of payment or for the balance due at any time notwithstanding that
other means of payment have not been resorted to and in the latter case without
entitling the Guarantor to any benefit from such other means of payment so long
as any monies or liabilities remain due or incurred by or from the Principal to
the Bank.
10. Any money received hereunder may be placed and kept to the credit of a
suspense account for so long as the Bank thinks fit without any obligation in
the meantime to apply the same or any part thereof in or towards the discharge
of any monies or liabilities due or incurred by or from the Principal to the
Bank. Notwithstanding any such payment, in the event of any proceedings in or
analogous to bankruptcy liquidation composition or arrangement the Bank may
prove for and agree to accept any dividend or composition in respect of the
whole or any part of such monies and liabilities in the same manner, as if this
guarantee had not been given.
11. Until all monies and liabilities due or incurred by or from the
principal to the Bank shall have been paid or discharged no Guarantor hereunder
shall be paying off any sum recoverable hereunder or by any other means or any
other ground claim any set-off or counterclaims against the principal in respect
of any liability on the part of any such Guarantor to the Principal or claim or
prove in competition with the Bank in respect of any payment by any
5
<PAGE>
Guarantor hereunder or be entitled to claim or have the benefit of any set-off
counterclaim or proof against or dividend composition or payment by the
principal or his estate or in the liquidation of the Principal or the benefit of
any other security which the Bank may now or hereafter hold for any money or
liabilities due or incurred by the Principal to the Bank or to have any share
therein.
12. Act security now or hereafter held by or for any Guarantor from the
Principal in respect of the liability of any Guarantor hereunder shall be held
in trust for the Bank and as security for the liability of the Guarantor or
Guarantors hereunder and shall forthwith be deposited by the Guarantor or
Guarantors concerned with the Bank for that purpose.
13. The Bank shall so long as any monies or liabilities due or incurred by
or from the Principal to the Bank remain unpaid or undischarged have a lien or a
right of set-off therefor on all money now or hereafter standing to the credit
of or assets now or hereafter lodged with or under the control of the Bank by
each and every Guarantor with the Bank whether on any current or other account.
14. Without prejudice to any other provision hereof the Bank shall be at
liberty from time to time to enter, without the consent of the other or others
of the Guarantors, into any arrangement with any one or more of the Guarantors
for the discharge of his or their liability hereunder on any terms that the Bank
may think fit, and any such discharge of the one or more of the Guarantors shall
leave the liability of the other or others of the Guarantors unaffected and as
effective as if such other as sole Guarantor or such others as joint and several
Guarantors had alone signed this document.
This guarantee shall continue to be binding and effective as a continuing
security notwithstanding any amalgamation of the Bank with any third party and
notwithstanding any reconstruction of the Bank involving the formation of and
transfer of all or any of the assets of the Bank to a third party, whether the
third party with which the Bank amalgamates or to whom the Bank transfers all or
any of the assets either on a reconstruction or sale as aforesaid shall or shall
not differ in their or its objects, character and construction from that of the
Bank, it being the intent of the Guarantor that this Guarantee shall remain
valid and effectual in all respects in favour of, against and with reference to,
and that the benefit of this guarantee and all rights conferred upon the Bank
hereby may be assigned to, and enforced by such third party and enforceable in
the same manner to all intents and purposes
6
<PAGE>
as if such third party had been named herein instead of the Bank.
15. Any notice or other demand required to be given by the Bank hereunder
may be given or made by leaving the same or sending it by prepaid post addressed
to the company, firm or person to or upon whom the notice or demand is to be
given or made at their registered or principal office or last known places of
abode and a notice or demand so given or made shall be deemed to be given or
made on the day it was so left or the day following that on which it was posted
as the case may be.
16. A certificate by an officer of the Bank as to the monies and
liabilities for the time being due or incurred to the Bank from or by the
Principal and as to the service or receipt of any notices hereunder shall be
conclusive between the Bank and any Guarantor or executor administrator or legal
representative thereof and the Guarantor executor administrator or legal
representative thereof shall have no right to dispute the accuracy of such
certificate.
17. This guarantee shall be in addition to any other guarantee or other
security for the Principal which the Bank may now or hereafter hold whether from
any Guarantor hereunder or otherwise and on discharge by payment or otherwise
shall remain the Bank's property.
18. The expression "the Bank," "the Principal" and "the Guarantor(s)"
whenever used herein includes and extends to their successors executors,
administrators, legal representatives and assigns and where the context allows
the expression "security" shall be deemed to include a judgment, specialty,
guarantee, indemnity, negotiable and other instruments and securities of every
kind.
19. This guarantee is governed by the law of Hong Kong and each and every
Guarantor hereunder agrees to submit to the jurisdiction and competence of the
Courts of Hong Kong in all matters pertaining thereto but with full liberty for
7
<PAGE>
the Bank to resort to the Courts of any other country where jurisdiction may
exist or be established.
DATED Hong Kong this 13th day of June 1990.
AS WITNESS the hand of a Director (or the Secretary) of and for and on
behalf of ______________________________________________________________________
(the Guarantor) acting pursuant to a Resolution of the Board dated _______ ,
19__.
SIGNED by TONG KA WING, CARL
/s/ (illegible)
in the presence of: --
Name of Witness in Block Letters:
Mr. Tony TANG
Address: c/o BNP Hong Kong
Occupation:
SIGNED by /s/ (illegible)
in the presence of: --
Name of Witness in Block Letters:
_____________________________________
Address: ____________________________
Occupation:
SIGNED by __________________ in the presence of: --
Name of Witness in Block Letters:
_____________________________________
Address: ____________________________
Occupation:
SIGNED by __________________ in the presence of: --
8
<PAGE>
Name of Witness in Block Letters:
_____________________________________
Address: ____________________________
Occupation:
THE COMMON SEAL of the Guarantor was hereunto affixed in the presence of
Director(s)
Secretary
NOTE: Sealing is not required if the Guarantee is completed under hand
(above).
9
<PAGE>
EXHIBIT 10.42
G U A R A N T E E
-----------------
1. In consideration of BANQUE NATIONALE DE PARIS (hereinafter called "the
Bank") granting or continuing banking facilities including but not limited to
making or continuing advances overdrafts or other credits discounting bills of
exchange or negotiable instruments for or otherwise giving or granting time,
credit or accommodation giving guarantees indemnities and undertakings and
dealings in foreign currencies and/or services or facilities in any other form
for as long as and to the extent that the Bank may think fit or for account of
CREATIVE MASTER LTD of 8/F Casey Ind. Bldg.
18 Bedford Road Kowloon Hong Kong
(hereinafter called "the Principal") I/WE THE UNDERSIGNED
KWOK SHECK PUI of FLAT H, FLOOR 10, NGAN SING MANSION,
TAI KOO SHING, H.K.
(hereinafter called "the Guarantor(s)") HEREBY GUARANTEE payment to the Bank on
demand (free of any taxes impositions or restrictions now or hereafter imposed
under the laws of any country diminishing the amount of any payment or
preventing or delaying the Bank's unfettered utilization or disposal thereof in
immediate reimbursement to the Bank in Hongkong or as the Bank shall direct) of
all monies and liabilities whether certain or contingent now or hereafter owing
or incurred to the Bank from or by the Principal and unpaid or undischarged on
any current or other account or in any manner or in respect of bills, drafts,
notes or other negotiable instruments made drawn accepted endorsed or paid by or
for the account of the Principal or any other obligation settled for the account
of the Principal and in any place whatever whether from or by the Principal as
Principal debtor, surety or otherwise howsoever and whether alone or jointly
with any other corporation or corporations person or persons or from or by any
firm in which the Principal may be a partner under whatever name and style
including, without in any way limiting the foregoing: --
(a) in the case of the death, bankruptcy or liquidation of the
Principal all sums which would at any time have been owing to the Bank by
the Principal if such death had occurred or such bankruptcy or liquidation
had commenced at the time when the Bank received actual notice thereof and
notwithstanding such death, bankruptcy or liquidation;
1
<PAGE>
(b) in the case of a limited company or other corporation all monies
unpaid in respect of debentures or debenture stock of the same held by or
on behalf of the Bank;
(c) all money obtained from or liabilities incurred to the Bank
notwithstanding that the borrowing or incurring of such liabilities may be
invalid or in excess of the powers of the Principal or of any director,
attorney, agent or other person purporting to borrow or act on behalf of
the Principal and notwithstanding any other irregularity in such borrowing
or incurring such liabilities;
(d) in the event of the discontinuance by any means of this guarantee
all cheques, drafts, bills, notes and notes and negotiable instruments
drawn by or for the account of the Principal on the Bank or its agents and
purporting to be dated on or before the date when such discontinuance
becomes known to the Bank or its agents although presented to or paid by
the Bank or them after that date and all liabilities of the Principal to
the Bank at such date whether certain or contingent and whether payable
forthwith or at some future time or times and also all credits then
established by the Bank for the Principal;
(e) interest on all such debts and liabilities to the date of payment,
commission, banking charges, legal and other costs charges, and other
expenses which the Bank may charge against the Principal together with all
expenses of enforcing or obtaining or endeavouring to enforce or obtain
payment of all or any such moneys as aforesaid; plus, interest charges
costs commissions and expenses, legal or otherwise incurred as aforesaid to
date of discontinuance or demand together with interest thereon at the rate
or rates from time to time charged by the Bank on the outstanding accounts
of the Principal from the date of such demand or of such discontinuance by
any Guarantor hereunder or by his/their respective executors,
administrators or legal representatives until payment and plus the costs
and expenses incurred by the Bank of and incidental to the enforcement of
this Guarantee against the Guarantor(s).
2. The liability of the Guarantors hereunder shall be joint and several
and any demand for payment made by the Bank to any one of the Guarantors shall
be deemed to be a demand made to all,
3. This Guarantee shall be a continuing security binding on the Guarantor
or if there be more than one Guarantor on each of them and on his or their
executors,
2
<PAGE>
administrators and legal representatives but shall be revocable as to
transactions subsequent to the expiry of such notice only by giving to the Bank
not less than three months' prior notice of discontinuance in the manner
hereinafter provided.
Notice of discontinuance must be given to the Bank by notice in writing
signed by the Guarantor or, if there be more than one, by each of them and sent
addressed to the Bank at its principal office in Hong Kong by prepaid registered
post and if given in any other manner shall not be valid unless receipt thereof
is acknowledged by the Bank in writing.
As between the Bank and the Guarantor or, if there be more than one, as
between the Bank and the Guarantors and each of them, the Guarantor or
Guarantors shall be regarded as principal debtors and accordingly this Guarantee
shall not be affected or discharged by the death, insanity, bankruptcy,
liquidation or other disability, or any change in the name, style or
constitution, of the principal or of the Guarantor or Guarantors or any of them
or by any other act, deed, matter or thing whereby the Guarantor or Guarantors,
as sureties only, might otherwise have been discharged.
4. If the Principal be a committee or association or other unincorporated
body which has no legal existence or which is under no legal liability to
discharge obligations undertaken or purported to be undertaken by it or on its
behalf this guarantee shall be valid and binding upon the Guarantor or
Guarantors notwithstanding that fact and as though the Guarantor was the
principal debtor or if there be more than one Guarantor as though the Guarantors
were joint and several debtors.
5. In the event of the dissolution or reconstitution of a firm whose
account is hereby secured this guarantee shall apply to all monies borrowed and
liabilities incurred in the firm's name until receipt by the Bank of actual
notice of such dissolution or reconstitution. If, however, the dissolution or
reconstitution be by reason only of the retirement or death of a partner or the
introduction of a further partner or partners this guarantee shall continue and
in addition apply to all monies and liabilities due or incurred to the Bank from
or by the new firms thereby constituted as though there had been no change in
the firm as previously constituted. If the Guarantor or the Principal is a
company this Guarantee shall continue to be binding and effective as a
continuing security notwithstanding the liquidation absorption amalgamation or
reconstruction of the Company.
3
<PAGE>
6. In the event of this guarantee ceasing from any cause whatsoever to be
binding as a continuing security on the Guarantor or Guarantors or his/their
executors, administrators or legal representatives, the Bank shall be at liberty
without thereby affecting their rights hereunder to open a fresh account or
accounts and to continue any then existing account with the Principal and no
monies paid into any such account or accounts by or on behalf of the Principal
and subsequently drawn out shall on settlement of any claim in respect of this
guarantee be appropriated towards or have the effect of payment of any part of
the monies due from the Principal at the time of this guarantee ceasing to be so
binding or of the interest thereon unless the person or persons paying in such
monies shall at the time in writing direct the Bank specially as to appropriate
the same.
No assurance, security or payment which may be avoided under any enactment
relating to bankruptcy or under the provisions of the Companies Ordinance as
revised and amended or any Statutory modification thereof and no release
settlement or discharge which may have been given or made on the faith of any
such assurance, security or payment shall prejudice or affect the right of the
Bank to recover from the Guarantor to the full extent of the guarantee.
7. The Bank may at all times without prejudice without prejudice to this
guarantee and without discharging or in anyway affecting the liability of any
Guarantor hereunder: --
(a) determine, vary or increase any credit or other facility granted
to the Principal,
(b) in the case of credits or facilities provided for two or more
purposes of a different character vary the proportions of the respective credits
allocated or applied for different purposes,
(c) grant the Principal or any other person any time or indulgence,
(d) renew any bills, notes or other securities whether negotiable or
not;
(e) deal with exchange, release, modify or abstain from perfecting or
enforcing any securities or other guarantees present or future or rights which
the Bank may now or hereafter have from or against the Principal or other
person,
(f) compound with the Principal or with any other person,
4
<PAGE>
(g) subsequently obtain other persons to enter into a guarantee in the
terms hereof.
8. The liability of any Guarantor hereunder shall not be affected by any
failure by the Bank to take any security or by any invalidity of any security
taken or by any existing or future agreement by the Bank as to the application
of any advances made or to be made to the Principal or should this guarantee
prove not to be binding on any other Guarantor or Guarantors hereunder for any
reason whatever.
9. No collateral or other security now or hereafter held by the Bank for
all or any part of the monies or liabilities hereby guaranteed nor anything to
which the Bank may otherwise be entitled nor the liability of any person or
persons not parties hereto for all or any part of the monies or liabilities
hereby secured shall be in any way prejudiced or affected by this guarantee.
The Bank shall be at liberty but not bound to resort to any other means of
payment at any time and in any order the Bank thinks fit without thereby
discharging or in any way affecting the liability of any Guarantor and the Bank
may enforce this guarantee either for payment of the ultimate after resorting to
other means of payment or for the balance due at any time notwithstanding that
other means of payment have not been resorted to and in the latter case without
entitling the Guarantor to any benefit from such other means of payment so long
as any monies or liabilities remain due or incurred by or from the Principal to
the Bank.
10. Any money received hereunder may be placed and kept to the credit of a
suspense account for so long as the Bank thinks fit without any obligation in
the meantime to apply the same or any part thereof in or towards the discharge
of any monies or liabilities due or incurred by or from the Principal to the
Bank. Notwithstanding any such payment, in the event of any proceedings in or
analogous to bankruptcy liquidation composition or arrangement the Bank may
prove for and agree to accept any dividend or composition in respect of the
whole or any part of such monies and liabilities in the same manner, as if this
guarantee had not been given.
11. Until all monies and liabilities due or incurred by or from the
principal to the Bank shall have been paid or discharged no Guarantor hereunder
shall be paying off any sum recoverable hereunder or by any other means or any
other ground claim any set-off or counterclaims against the principal in respect
of any liability on the part of any such Guarantor to the Principal or claim or
prove in competition with the Bank in respect of any payment by any
5
<PAGE>
Guarantor hereunder or be entitled to claim or have the benefit of any set-off
counterclaim or proof against or dividend composition or payment by the
principal or his estate or in the liquidation of the Principal or the benefit of
any other security which the Bank may now or hereafter hold for any money or
liabilities due or incurred by the Principal to the Bank or to have any share
therein.
12. Act security now or hereafter held by or for any Guarantor from the
Principal in respect of the liability of any Guarantor hereunder shall be held
in trust for the Bank and as security for the liability of the Guarantor or
Guarantors hereunder and shall forthwith be deposited by the Guarantor or
Guarantors concerned with the Bank for that purpose.
13. The Bank shall so long as any monies or liabilities due or incurred by
or from the Principal to the Bank remain unpaid or undischarged have a lien or a
right of set-off therefor on all money now or hereafter standing to the credit
of or assets now or hereafter lodged with or under the control of the Bank by
each and every Guarantor with the Bank whether on any current or other account.
14. Without prejudice to any other provision hereof the Bank shall be at
liberty from time to time to enter, without the consent of the other or others
of the Guarantors, into any arrangement with any one or more of the Guarantors
for the discharge of his or their liability hereunder on any terms that the Bank
may think fit, and any such discharge of the one or more of the Guarantors shall
leave the liability of the other or others of the Guarantors unaffected and as
effective as if such other as sole Guarantor or such others as joint and several
Guarantors had alone signed this document.
This guarantee shall continue to be binding and effective as a continuing
security notwithstanding any amalgamation of the Bank with any third party and
notwithstanding any reconstruction of the Bank involving the formation of and
transfer of all or any of the assets of the Bank to a third party, whether the
third party with which the Bank amalgamates or to whom the Bank transfers all or
any of the assets either on a reconstruction or sale as aforesaid shall or shall
not differ in their or its objects, character and construction from that of the
Bank, it being the intent of the Guarantor that this Guarantee shall remain
valid and effectual in all respects in favour of, against and with reference to,
and that the benefit of this guarantee and all rights conferred upon the Bank
hereby may be assigned to, and enforced by such third party and enforceable in
the same manner to all intents and purposes
6
<PAGE>
as if such third party had been named herein instead of the Bank.
15. Any notice or other demand required to be given by the Bank hereunder
may be given or made by leaving the same or sending it by prepaid post addressed
to the company, firm or person to or upon whom the notice or demand is to be
given or made at their registered or principal office or last known places of
abode and a notice or demand so given or made shall be deemed to be given or
made on the day it was so left or the day following that on which it was posted
as the case may be.
16. A certificate by an officer of the Bank as to the monies and
liabilities for the time being due or incurred to the Bank from or by the
Principal and as to the service or receipt of any notices hereunder shall be
conclusive between the Bank and any Guarantor or executor administrator or legal
representative thereof and the Guarantor executor administrator or legal
representative thereof shall have no right to dispute the accuracy of such
certificate.
17. This guarantee shall be in addition to any other guarantee or other
security for the Principal which the Bank may now or hereafter hold whether from
any Guarantor hereunder or otherwise and on discharge by payment or otherwise
shall remain the Bank's property.
18. The expression "the Bank," "the Principal" and "the Guarantor(s)"
whenever used herein includes and extends to their successors executors,
administrators, legal representatives and assigns and where the context allows
the expression "security" shall be deemed to include a judgment, specialty,
guarantee, indemnity, negotiable and other instruments and securities of every
kind.
19. This guarantee is governed by the law of Hong Kong and each and every
Guarantor hereunder agrees to submit to the jurisdiction and competence of the
Courts of Hong Kong in all matters pertaining thereto but with full liberty for
7
<PAGE>
the Bank to resort to the Courts of any other country where jurisdiction may
exist or be established.
DATED Hong Kong this 13th day of June 1990.
AS WITNESS the hand of a Director (or the Secretary) of and for and on
behalf of ______________________________________________________________________
(the Guarantor) acting pursuant to a Resolution of the Board dated _______ ,
19__.
SIGNED by KWOK SHECK PUI
/s/ S. P. Kwok
in the presence of: --
Name of Witness in Block Letters:
Mr. Tony TANG
Address: c/o BNP Hong Kong
Occupation:
SIGNED by /s/ (illegible)
in the presence of: --
Name of Witness in Block Letters:
___________________________________
Address: __________________________
Occupation:
SIGNED by __________________ in the presence of: --
Name of Witness in Block Letters:
___________________________________
Address: __________________________
Occupation:
SIGNED by __________________ in the presence of: --
8
<PAGE>
Name of Witness in Block Letters:
___________________________________
Address: __________________________
Occupation:
THE COMMON SEAL of the Guarantor was hereunto affixed in the presence of
Director(s)
Secretary
NOTE: Sealing is not required if the Guarantee is completed under hand
(above).
9
<PAGE>
EXHIBIT 10.43
DEED OF GUARANTEE
TO: BANK OF CHINA HONG KONG BRANCH
A. DEFINITION
Unless the context otherwise requires, all capitalized terms used herein
shall have their respective meanings as defined in Clause 24 of Section C
of this Deed.
B. GUARANTEE
In consideration of Bank of China, Hong Kong Branch (hereinafter called
"BOC", including its successors and assigns) agreeing at the request of the
principal debtor (hereinafter called "the Principal", whose particulars are
set out in Part A of the First Schedule hereto) and/or the undersigned
(whose particulars are set out in part B or the First Schedule hereto) from
time to time or at any time (i) to grant or continue to grant general
banking facilities of whatever nature and in whatever nature and in
whatever currency to the Principal either singly or jointly with other
parties on such terms, manner and form and for so long as BOC may in its
absolute discretion think fit; and/or (ii) to withhold proceedings against
or not to make immediate demand for repayment from the Principal for so
long and on such terms and conditions as BOC may in its absolute discretion
think fit, I, the undersigned, HEREBY AGREE (and in case where there are
more than one undersigned, we, the undersigned, HEREBY JOINTLY AND
SEVERALLY AGREE) to PAY and SATISFY to BOC ON DEMAND in writing all sums of
money debts and liabilities whether certain or contingent whether now or at
any time hereafter owing or incurred due but unpaid to BOC from or by the
Principal (or any one or more of them) in any manner howsoever or on any
account whether as principal or surety and whether along or jointly with
any other person, firm or corporation or from or by any firm in which the
Principal (or any one or more of them) may be a partner and in whatever
name, style or form or under any obligation or liability entered into by
BOC for or at my/our request including but not limited to the following:
(a) any and all sum or sums due owing and/or payable to BOC by the
Principal (or any one or more of them) under any banking facilities,
dealings, transactions, undertaking, contracts and/or obligations,
liabilities, engagements of whatever
<PAGE>
nature entered into by BOC for or at my/our request and/or under any
bills, drafts, notes, guarantees and/or indemnities;
(b) interest accrued or to be accrued;
(c) commissions, fees and other charges payable to BOC;
(d) any other costs, expenses, disbursements and/or payment of whatsoever
nature liable to be reimbursed or otherwise payable by the Principal
to BOC.
PROVIDED ALWAYS that:
(i) where no amount is specified in the Second Schedule hereto as a
Specified Amount, the amount ultimately enforceable against me/us
under this Guarantee shall for all intents and purposes be
unlimited; but
(ii) where there is a Specified Amount set out in the Second Schedule
hereto, the total liability ultimately enforceable against me/us
under this Guarantee shall not exceed in the aggregate an amount
being the total of the Specified Amount together with a sum equal
to all interest on the Specified Amount calculated at the Agreed
Interest Rate(s) (as well after as before judgment) from the date
of BOC's first demand to the Principal (whether verbal or in
writing) for repayment to date of actual payment where the debts
and liabilities are repayable on demand and in other cases from
time to time of default of the Principal to the date of actual
payment PROVIDED ALWAYS that where the total debts and
liabilities owing by the Principal to BOC exceeds the limit
ultimately enforceable against me/us under this Guarantee, BOC
shall be entitled at its absolute discretion to determine which
part of parts of such debts and liabilities shall be guaranteed
and/or demanded hereunder AND PROVIDED FURTHER that in such
event, should such debts and liabilities (or any part or parts
thereof) determined by BOC to be guaranteed and/or demanded under
this Guarantee be paid by the principal or any third party or
parties other than me/us, my/our liabilities hereunder shall not
thereby be deemed, diminished or discharged and BOC shall be
entitled to re-
<PAGE>
determine such other part or parts of the debts and liabilities
then owing by the Principal to be guaranteed hereunder and
demanded accordingly.
C. FURTHER COVENANTS
I, the undersigned, HEREBY FURTHER AGREE AND UNDERTAKE (and in case where
there are more than one undersigned, we, the undersigned, HEREBY JOINTLY
AND SEVERALLY AGREE AND UNDERTAKE) as follows:
1. CURRENCY INDEMNITY:
(a) All moneys received or held by BOC under this Deed may from time
to time after demand has been made be converted into such other
currency as BOC considers necessary or desirable to cover my/our
obligations and liabilities in that currency at the then
prevailing spot rate of exchange of BOC (as conclusively
determined by BOC) for purchasing the currency to be acquired
with the existing currency.
(b) If and to the extent I/we fail to pay the amount due on demand
BOC may in its absolute discretion without notice to me/us
purchase at any time thereafter so much of a currency as BOC
considers necessary or desirable to cover my/our obligations and
liabilities in such currency hereby secured at the then
prevailing spot rate of exchange of BOC (as conclusively
determined by BOC) for purchasing such currency with Hong Kong
Dollar price (including all costs charges and expenses paid by
BOC.
(c) No payment to BOC (whether under any judgment or court order or
otherwise) shall discharge my/our obligation or liability in
respect of which it was made unless and until BOC shall have
received payment in full in the currency in which such obligation
or liability was incurred and to the extent the amount of any
such payment shall on actual conversion into such currency fall
short of such obligation or liability expressed in that currency
BOC shall have a further separate cause of action against me/us
and shall be entitled to enforce the security hereby created to
recover the amount of the shortfall.
<PAGE>
2. PAYMENT NOT SUBJECT TO DEDUCTION: All payments under this Guarantee
shall be made free of any restriction and counterclaim and without any
set-off, deductions or withholdings whatsoever. If any payment to be
made under this Guarantee is subject to any tax or other withholding,
I/we undertake to pay to BOC such additional amount as may be
necessary to ensure that the net amount received (whether as principal
or interest) is equal to the amount which BOC would otherwise have
received.
3. INTEREST ON SUMS DEMANDED HEREUNDER: In addition nd without prejudice
to Proviso (ii) or Section B above, all sums demanded for payment but
unpaid under this Guarantee shall bear interest at the Agreed Interest
Rate(s) from the date of BOC's demand hereunder to the date of actual
payment (as well after as before judgment) and I/we shall be liable
therefor.
4. CONTINUING SECURITY: This Guarantee shall not be considered as
satisfied by any intermediate payment or satisfaction of the whole or
any part of any sum or sums of money owing by the Principal but shall
be a continuing security and shall extend to cover all sum or sums of
money which shall for the time being or at any time constitute the
balance due from the Principal to BOC in whatsoever manner.
5. GUARANTEE TO REMAIN IN FORCE UNTIL REPAYMENT IN FULL: Unless
otherwise determined in accordance with the provisions hereof, this
Guarantee shall continue in effect until all sums whatsoever payable
by the Principal to BOC have been finally paid in full.
6. HAPPENING OF SPECIFIED EVENTS: The Guarantee shall be binding as
continuing security on me/us and shall not be discharged or be in any
way affected by any one or more or all of the Specified Events.
Without prejudice to the generality of the foregoing and Clause 5
above and only on the happening of any one or more of the Specified
Events, this Guarantee may be determined upon the expiration of three
calendar months from the date of BOC's actual receipt of a notice in
writing to determine this Guarantee given by:
(a) If there is only one undersigned, the undersigned, or the
undersigned's personal or
<PAGE>
legal representative(s) (as the case may be); or
(b) If there is more than one undersigned, the personal or legal
representative(s), of each and every one of us to which a
Specified Event has happened jointly together with all of us (is
any) not affected by any Specified Event.
6A. TERMINATION BY NOTICE: Without prejudice to the generality of Clause
6 above and subject always to Clause 6B below, I/we hereby expressly
admit and declare that I/we shall have not right (and for the
avoidance of doubt, such right, if any, whether in law or equity, is
hereby absolutely relinquished and waive by me/us) to terminate this
Guarantee by giving notice to BOC so long as BOC is contractually or
otherwise bond to make any advance or provide any banking facilities
to the Principal. I/We shall only give notice to BOC to terminate
this Guarantee when BOC has completely ceased to be under any
obligations to make any advance or provide any banking facilities to
the Principal and such notice shall only take effect on the expiration
of three calendar months from he date of BOC's actual receipt of such
notice of termination and shall only be effective if it is in writing
signed by me or all of us (if there is more than one undersigned).
Notwithstanding the giving of notice by me/us under this clause or
Clause 6, BOC shall has the right to continue granting banking or
other facilities or making advance to or on account of the Principal
after BOC's receipt of such notice.
6B. LIABILITIES ON TERMINATION: Termination of this Guarantee as provided
in Clause 6, Clause 6A or by whatever reason shall not release me/us
and/or my/our estate(s) from this Guarantee in respect of any
liability owing or incurred by the Principal to BOC during the
currency of this Guarantee (including those incurred during the period
of the required three months' notice of termination as stipulated in
Clause 6 and Clause 6A) whether such liability is actual or
contingent, accrued or not yet accrued and whether or not such
liability matures or becomes due or payable or accrues only after the
expiration of the required three month's notice of termination as
stipulated in Clause 6 and Clause 6A. I/We hereby expressly agree
that my/our obligations to guarantee and indemnify BOC against the
liabilities of the Principal shall not
<PAGE>
in any way be affected by BOC not making a demand on me or us before
the termination of this Guarantee and that BOC may make a demand on
me/us at any time whether before or after the termination of this
Guarantee whereupon I/we shall promptly pay BOC the amount demanded.
7. NEW ACCOUNTS WITH PRINCIPAL: In the event of this Guarantee ceasing
from any cause whatsoever to be binding as a continuing security on
me/us, BOC shall be at liberty without thereby affecting BOC's rights
hereunder to open a fresh account or accounts and/or to continue any
then existing account or accounts with the Principal and no moneys
paid from time to time into any such fresh account or accounts so
opened by or on behalf of the Principal (or the then existing account
or accounts where no such fresh account or accounts are opened, as the
case may be) and subsequently drawn out by the Principal shall on
settlement of any claim in respect of this Guarantee be deemed
appropriated towards or have the effect of payment of any part of the
moneys due from the Principal at the time of this Guarantee ceasing to
be so binding as a continuing security or of the interest thereon
unless the person or persons paying in such moneys shall at the time
of payment direct BOC in writing specifically to appropriate the same
to that purpose.
8. CONCLUSIVE EVIDENCE:
(a) Any admission or acknowledgment in writing by the Principal or by
any person authorized by the Principal of the amount of
indebtedness of the Principal to BOC and any judgment recovered
by BOC against the Principal in respect of such indebtedness
shall be binding and conclusive on and against me/us in all
courts of law and elsewhere.
(b) A certificate by any of BOC's duly authorized officers as to the
moneys and liabilities for the time being due or owing to BOC
from or by the Principal shall be binding on me/us and conclusive
evidence in any legal proceedings against me/us in all courts of
law and elsewhere.
9. INDULGENCE, DEALING WITH PRINCIPAL: BOC shall be entitled without
notice to and/or consent of me/us and without thereby discharging or
affecting my/our liabilities hereunder at any time at BOC's
<PAGE>
sole and absolute discretion to deal freely with the Principal or any
other party or parties liable in respect of any debts and/or
liabilities guaranteed hereunder whether jointly, severally or jointly
and severally with the Principal or as surety or as provider of
securities including but without limitation:
(a) to determine, reduce, limit, restrict, grant, enlarge, increase,
vary, continue, renew or regrant any banking facilities to the
Principal; and/or
(b) to vary, exchange, renew, discharge, release, give up, abstain
from perfecting and/or hold over any securities (including but
not limited to any bills, notes, mortgages, charges, liens or
other securities) indemnities, guarantees and/or any other
undertaking or arrangement of similar nature whether from the
Principal or from any third party or parties covering or in
respect of any debts and liabilities hereby guaranteed; and/or
(c) to release, discharge, settle or compound with, grant indulgence,
give time for payment or other accommodation, to accept
compositions from and make any other arrangements with the
Principal and/or any third party or parties including but not
limited to any person or persons liable on any bills, notes,
mortgages, charges, liens or other securities as aforesaid or any
person liable jointly, severally or jointly with or as surety of
the Principal or any other person or persons.
10. SECURITY ADDITIONAL:
(a) Save and except expressly provided for in this Guarantee, this
Guarantee shall be in addition to and not in substitution of any
other guarantee or security in respect of any debt and/or
liability of the Principal guaranteed hereunder whether given by
me/us or by the Principal or by any other third party or parties.
(b) This Guarantee shall be in addition to and shall not merge with
or in any way discharge, prejudice or affect any other
guarantees, agreements, undertakings, rights, liens,
<PAGE>
collateral or other securities now or hereafter held by BOC from
me/us or any one or more of us or any third party or parties for
or in respect of all or any part of the debts and liabilities
hereby guaranteed nor vice versa should this Guarantee be
discharged prejudiced or affected thereby. Unless specified by
the payer, BOC shall have absolute discretion to apply or
appropriate any money received by BOC for payment of any debts
and/or liabilities owing to BOC by the Principal without any
notice or consent of me/us.
11. ENFORCING OTHER MEANS OF PAYMENT: BOC is to be at liberty, but not
bound, to resort for BOC's own benefit to any other means of obtaining
payment or securing performance by the Principal or any other co-
securities at any time and in any manner or order BOC thinks fit
without affecting this Guarantee and/or without in consequence
diminishing my/our liability hereunder. BOC may exercise and enforce
BOC's rights hereunder before resorting to other means of obtaining
payment or securing performance or after such means have been resorted
to in respect of any balance due or outstanding liabilities or
obligations and in the latter case without entitling me/us to any
benefit from such other means so long as any sum, liability or
obligation remains due owing or payable or outstanding (whether actual
or contingent) from or by the Principal to BOC.
12. INVALIDITY OF OTHER SECURITY ETC.: The liabilities of me/us shall not
be affected by any failure by BOC to take any security or by any
invalidity of any security taken or by any existing or future
agreement by BOC as to the application of any banking facilities made
or to be made to the Principal.
13. GUARANTEE OF WHOLE DEBT: Although my/our ultimate liability hereunder
cannot exceed the limit hereinbefore provided in proviso (ii) to
Section B, if any, this Guarantee shall be construed and take effect
as a guarantee of the whole and every part of all debts and
liabilities now or at any time hereafter owing to BOC by the
Principal.
14. PAYMENT INTO SUSPENSE ACCOUNT: Any money paid to BOC under this
Guarantee may be placed and kept by BOC in a separate or suspense
account for so long
<PAGE>
and in such name as BOC may in BOC's absolute discretion think fit
without applying the same or any part thereof in or towards discharge
of any debt or liabilities due or incurred by the Principal to BOC so
as to enable BOC to preserve intact the Principal's liability to BOC
and to sue or prove in arrangement, composition, liquidation,
bankruptcy, winding up or such similar proceedings against the
Principal the entirety of the debt or liabilities owing without taking
into account any sum so paid under this Guarantee.
15. NO COMPETITION WITH BOC'S RIGHT: Until BOC have been paid and
received in full (which expression shall not embrace payment of a
dividend in liquidation bankruptcy winding up or similar proceedings
of less than 100 percent) all debts and liabilities owing by the
Principal, I/we shall not whether directly or indirectly:
(a) prove against the Principal's estate in any liquidation,
bankruptcy, winding up or similar proceedings for or in relation
to any sum or sums paid under this Guarantee or otherwise
howsoever in competition with BOC;
(b) claim, exercise and/or enforce any rights of subrogation,
contribution, indemnity, assignment, set-off and/or counter-claim
(whether statutory, in law or in equity or howsoever) in relation
to any sum or sums paid under this Guarantee and any sum or sums
so received by me/us and in breach hereof shall be held by me/us
on trust for BOC and be paid over to BOC on demand for discharge
of any debts and liabilities due by the Principal to BOC in
addition to and independent of my/our liabilities hereunder and
shall not be subject to the limitation, if any, provided in
proviso (ii) to Section B above;
(c) do any act or thing which might on the insolvency, bankruptcy,
liquidation or similar proceedings of the Principal result in the
increase of proofs or reduce the assets distributable amongst the
creditors of the Principal to BOC's prejudice;
(d) take now or at any time hereafter for or in respect of any of
my/our liability under this Guarantee from the Principal either
directly or indirectly without BOC's consent in
<PAGE>
writing any security or counter-security, promissory note, bill
of exchange, mortgage, charge whether merely personal or
involving a charge on any property whatsoever of the Principal.
I/we hereby declare that I/we have not taken any such security or
counter-security and all security or counter-security as
aforesaid which I/we have now or at any time hereinbefore taken
or may at any time hereafter take (whether with BOC's consent or
in breach of the above provision) and all moneys at any time
received in respect thereof shall be held in trust for BOC and as
security to BOC for the fulfillment of my/our obligations
hereunder and all of them shall be deposited by me/us with BOC
and I/we shall do all such act or take all such action and/or
sign or execute all such deeds or documents at BOC's request but
at my/our costs and expenses for such purposes and for perfecting
BOC's rights and claims thereto; and/or
(e) by paying off any sum recoverable hereunder or by any other means
or on any other ground claim to have the benefit of any security
which BOC may now or hereafter hold for any moneys or liabilities
due or incurred by the Principal to BOC or to have any share
therein.
16. SET-OFF AND LIEN: In addition to any general lien or similar right to
which BOC as bankers may be entitled by law, BOC may at any time,
without prior notice to me/us:
(a) to set off and appropriate and apply any credit balance on any
account (whether subject to notice or not and whether matured or
not) in any currency of which I/we or any one or more of us
am/are beneficially entitled at any of BOC's office or branch
wherever situate against or on account of all or any liabilities
of me/us to BOC hereunder and for such purpose, BOC may convert
all or any part of such credit balance or liability to such other
currencies at the applicable rate of exchange quoted and
determined by BOC as may be necessary to effect such application
or set-off; and
(b) If any sum is due but unpaid hereunder, to retain all or any
securities, valuables or
<PAGE>
any other property whatever and wherever situate which may be
deposited with or otherwise held by BOC for or in the name of
me/us or any one or more of us whether for safe custody or
otherwise and to sell the same or any part thereof at such price
as BOC shall determine whether by public auction, private treaty
or tender and BOC may engage such agent or broker therefor and
apply the proceeds thereof to set off any or all sums owing
hereunder after first deducting all costs and expenses.
17. JOINT SIGNATORIES, LIABILITIES JOINT AND SEVERAL: Should the
undersigned be more than one party or should this Guarantee be
intended to be given by more than one party:
(a) Each and every one of the parties shall be jointly and severally
liable hereunder and "I/we", "me/us" and all provision of this
Guarantee shall be so construed accordingly.
(b) Should this Guarantee prove not to be binding on or become
invalid against any one or more but not all of us for any reason
whatsoever, the liability of such other(s) of us shall remain
intact valid and binding as if such of us who is/are not bound by
this Guarantee has/have never been party or intended to be party
hereto.
(c) This Guarantee shall be binding and effective for all intents and
purposes against each and every one of us who has actually signed
with immediate effect and the failure of any intended
guarantor(s) to sign or execute shall not affect the validity
hereof against those signed as if those who have not signed or
executed have never been intended to be party hereto.
(d) BOC shall be entitled without any notice or consent of me/us to
release or discharge any one or more but not all of us from his
or their obligations and/or liabilities under this Guarantee or
any part thereof or to accept or enter into any settlement or
compromise or composition or make any other arrangements with or
grant any time indulgence waiver or accommodation to any one or
more but not all of us without discharging, releasing or
affecting the
<PAGE>
liabilities and obligations of the other or others of us.
18. NOTICE: A notice or demand by BOC under this Guarantee may be served
by post cable telex or facsimile transmission and shall be deemed to
have been duly served if by post on the day following the day of
posting (it subsequent return or non-delivery notwithstanding) and if
by cable telex facsimile transmission or personal delivery on the day
of such cable telex facsimile transmission or delivery if addressed to
me/us or the legal or personal representative(s) of me/us at my/our
respective addresses on BOC's record or last known to BOC.
19. FIRM, CORPORATION, ASSOCIATION, UNINCORPORATED BODY ETC.: If it shall
so happen that the Principal shall be either a firm or a limited
company or other corporation or a committee or association or other
unincorporated body, any of the provisions herein contained which
shall be primarily and literally applicable to the case of a single
and individual principal only shall be construed and take effect so as
to give BOC hereunder a guarantee for the money owing from such firm
and every member thereof or from such limited company or corporation
or committee or association or other unincorporated body as identical
or analogous as may be with or to that which would have been given for
the moneys owing from a single individual if the Principal were a
single individual and any moneys or liabilities shall be deemed to be
owing remaining due and unpaid by the Principal as provided in Section
B above. And further in case where the Principal is a firm, this
Guarantee shall be deemed to be a continuing guarantee to all moneys
owing, as provided in Section B above from the persons or person now
or at any time hereafter from time to time and for the time being
carrying on business in the name of or in succession to the firm or
from any one or more of such persons and any change in the
constitution of the firm whether by death, retirement or admission of
partners or otherwise howsoever shall not affect invalidate or
discharge me/our liability under this Guarantee. And in the case of a
limited company or other corporation any reference to bankruptcy shall
be deemed to be a reference to liquidation, winding up or other
analogous proceedings and the moneys owing us aforesaid and hereby
guaranteed shall be deemed to include any moneys owing in respect of
<PAGE>
debentures or debenture stock of such limited company or other
corporation held by BOC or on BOC's behalf.
20. CONDITIONS TO DISCHARGE:
(a) Any release, discharge or settlement between BOC and me/us
(including the return of this Guarantee) shall be conditional
upon no security, disposition or payment to BOC by the Principal,
me/us or any other party being avoided or reduced pursuant to any
provisions or enactments relating to insolvency, bankruptcy,
liquidation, winding-up or such similar proceedings, and if such
condition shall not be fulfilled, BOC shall be entitled at any
time to enforce this Guarantee subsequently as if such release,
discharge or settlement had not occurred.
(b) For the purposes of Clause 20(a) above, BOC shall be entitled to
retain this Guarantee for a period of six months after the full
payment, discharge or satisfaction of all debts and liabilities
owing by the Principal to BOC and in the event of the
commencement of bankruptcy or winding-up of any party making such
payment, discharge or satisfaction, for such further period as
BOC may determine and to enforce this Guarantee subsequently as
if such release, discharge or settlement had not occurred.
21. LIABILITIES PRIMARY, INVALIDITY OF PRINCIPAL'S DEBTS ETC.:
Independently of the above stipulations, I/we further agree to be
liable as an independent principal debtor to BOC for the payment of
all sums guaranteed or ought to be guaranteed hereby so that:
(a) This Guarantee may be enforced against me/us (or any one or more
of us) without BOC first enforcing any rights or claims or
instituting legal proceedings against the Principal and/or any
third party or parties and/or to join in the Principal as a party
in the same proceedings against me/us and/or BOC first realizing
or enforcing any of the securities or other guarantees held by
BOC whether from me/us or any other party or paries.
(b) In addition and without prejudice to Clause 20 hereinabove,
should any debts and/or
<PAGE>
liabilities, which if valid or enforceable would be guaranteed by
and be the subject matter of this Guarantee, be or become wholly
or in part invalid, unenforceable against or irrecoverable from
the Principal whether in law or otherwise as a result or arising
out of any legal limitation, disability or incapacity on or of
the Principal and/or any other reasons or circumstances including
but not limited to want of or inadequacy of the borrowing power
of the Principal, the irregular or improper exercise of the
borrowing power, the exercise of the borrowing power concerned or
the borrowing concerned by the Principal is ultra vires (in the
case where the Principal is a limited company), the want of
authority by any agent or person purporting to act on behalf of
the Principal, I/we shall nevertheless be still liable to BOC for
such debts and/or liabilities as if the same were wholly valid
and enforceable and I/we were the sole and principal debtor in
respect thereof irrespective whether or not as between BOC and
the Principal, the Principal will have a valid defense thereto
and BOC shall not be concerned to see or enquire into the powers
of the Principal or its officer, employees or agents purporting
to act on its behalf.
(c) I/We hereby waive all and any of my/our rights as surety which
may at any time be inconsistent with any of the provisions of
this Guarantee.
22. WAIVER; RIGHTS CUMULATIVE: No failure to exercise or enforce and no
delay in exercising or enforcing on BOC's part of any right, remedy,
power or privilege hereunder shall operate as waiver thereof, nor
shall any single or partial exercise or enforcement of any right,
remedy, power or privilege hereunder operate as a waiver thereof, nor
shall any single or partial exercise or enforcement of any right,
remedy, power or privilege preclude any other further exercise or
enforcement thereof, or the exercise or enforcement of any other
right, remedy, power or privilege. The rights, remedies, powers and
privileges herein provided are cumulative to and not exclusive of any
right, remedy, power and privilege provided by law or other documents
held by BOC.
<PAGE>
23. NOTICE OF SUBSEQUENT INCUMBRANCE: If BOC receives notice of any
subsequent mortgage charge assignment or any other disposition
affecting the security, if any, afforded by me/us or any third party
or interest therein, BOC may open a new account for me/us; if BOC does
not open a new account for me/us then unless BOC gives notice to the
contrary to me/us, it shall nevertheless be treated as if BOC had done
so at the time when BOC receives such notice and as from that time all
payments made by or on behalf of me/us to BOC shall be credited or
treated as having been credited to the new account and shall not
operate to reduce the amount due from me/us to BOC at the time when
BOC receives notice.
24. DEFINITIONS:
In this Guarantee:
(a) "Agreed Interest Rate" means the rate or rates and the basis and
method (including whether or not to be compounded) agreed between
BOC and the Principal at and by which Interest on the debt or
liability in relation to which a sum or sums so demanded under
this Guarantee is to be calculated.
(b) "banking facilities" means all types of secured and unsecured
banking facilities, loans, advances, credit facilities and
financial, credit or other arrangement including but not limited
to overdraft facilities, trust receipt facilities and all types
or arrangement or facilities relating to documentary or other
credits, in particular, their issuance negotiation and/or
acceptance; issuance or acceptance of guarantees, indemnities and
bonds; leasing; hire-purchase arrangement and all other types of
arrangement whereby credit is extended, accommodation is afforded
and/or liability or commitment (whether actual or contingent) is
incurred by BOC for or at the request of the Principal and/or
me/us.
(c) "I/We" and "me/us" means the party or parties who executed this
Guarantee, and where there are more than one party, "me/us" means
and refers to all parties executing this Guarantee or any one or
more of them and includes also such party's or parties'
respective estate(s), successor(s), assign(s)
<PAGE>
and personal and/or legal representative(s) and "my/our" shall be
so construed accordingly.
(d) "the Principal" means the party or parties whose particulars are
set out in Part A of the First Schedule hereto and where the
Principal consists of more than one party, "the Principal" means
and refers to all such parties or any one or more of them.
(e) "Specified Amount" means the amount specified in the Second
Schedule hereto.
(f) "Specified Event" means the death, bankruptcy, liquidation,
insolvency, dissolution, incorporation or other changes
whatsoever in the constitution or composition of, or mental
illness or other disability whatsoever of, the Principal (or any
one or more of them) and/or me/us (or any one or more of us) and
"Specified Event" means any one of the foregoing events.
(g) "BOC" includes BOC's successors and assigns and any or all of
BOC's offices and/or branches whether in Hong Kong or abroad and
for the avoidance of doubt, this Guarantee shall cover all debts
and liabilities owing or incurred by or from the Principal to BOC
anywhere in the world whether to any one or more of BOC's offices
and/or branches in Hong Kong or abroad.
(h) The various matters set out as consideration in Section B of this
Guarantee are in the disjunctive and alternative and the
provision for considerations herein shall be deemed to have been
absolutely and fully complied with and fulfilled if any one of
the matters set out therein have been done.
(i) Unless the contrary intention appears, words importing the
masculine gender shall include females and corporations and words
in the singular shall include the plural and words in the plural
shall include the singular.
25. CLAUSES SEVERABLE: If at any time any provision hereof is or becomes
illegal, invalid or unenforceable in any respect under the laws of any
jurisdiction, neither the legality, validity or enforceability of the
other remaining provisions
<PAGE>
hereof nor the legality, validity or enforceability such provision
under the laws of any other jurisdiction shall in any way be affected
or impaired thereby.
26. LAW AND JURISDICTION: This Guarantee shall be governed and construed
in all respects in accordance with the laws of Hong Kong. I/We hereby
irrevocably submit to the non-exclusive jurisdiction of the Hong Kong
Courts but BOC shall be entitled to enforce this Guarantee in courts
of other competent jurisdiction as BOC may select.
27. HEADINGS: In this Guarantee, headings to sections or clauses are
inserted for convenience only and have no legal effect and reference
to sections, clauses and schedules are to sections, clauses and
schedules of this Guarantee unless otherwise stated.
<PAGE>
THE FIRST SCHEDULE ABOVE REFERRED TO
Name and particulars of the Principal
- -------------------------------------
Name Address Identification
- ---- ------- --------------
Document
--------
CREATIVE MASTER 8/F., CASEY IND. BLDG., 10677493
LIMITED 18 BEDFORD ROAD,
KOWLOON.
PART B
Name and particulars of the Principal
- -------------------------------------
Name Address Identification
- ---- ------- --------------
Document
--------
TONG KA WING, CARL 3/F., 65 BISNEY ROAD, HKID.NO.A934009(5)
POKFULAM, HONG KONG
KWOK SHECK PUI FLAT H, 10/H NGAN SING HKID.NO.E629547(2)
MANSION, TAI KOO SHING,
HONG KING
THE SECOND SCHEDULE ABOVE REFERRED TO
The Specified Amount:
HONG KONG DOLLARS FIVE HUNDRED THOUSAND ONLY. (HKD500,000.00)**
IN WITNESS WHEREOF this Deed of Guarantee is executed by the party(ies whose
name(s) appear(s) in Part B of the First Schedule hereto this day of
, 19.
SIGNED, SEALED AND DELIVERED BY:
NAME Tong Ka Wing, Carl SIGNATURE /s/ Carl Tong L.S.
------------------- ------------------------------
NAME Kwok Sheck Pui SIGNATURE /s/ S.P. Kwok L.S.
------------------- ------------------------------
NAME SIGNATURE L.S.
------------------- ------------------------------
NAME SIGNATURE L.S.
------------------- ------------------------------
Witnessed by:
NAME MOK CHUN YIN SIGNATURE /s/ (illegible)
------------------- ------------------------------
<PAGE>
EXHIBIT 10.44
GUARANTEE TO BE GIVEN BY A LIMITED COMPANY
To: Commonwealth Finance Corporation Limited
11/F, Wyndham Place, 40-44, Wyndham Street, Hong Kong.
(1) In consideration of your making or continuing advances or otherwise giving
credit or affording credit facilities (including interalia the issue of
guarantees by you and your acceptance of guarantees by the Principal as
hereinafter defined in favour of third parties) for as long as you shall think
fit to Creative Master Limited (hereinafter called "the Principal") we, the
undersigned, hereby agree to pay to you on demand all sums of money which are
now or shall at any time be owing to you anywhere on any account whatsoever
whether from the Principal solely or from the Principal jointly with any other
person or persons or from any firm in which the Principal may be a partner
including the amount of notes or bills discounted or paid and other loans,
credits or advances made to or for the accommodation or at the request either of
the Principal solely or jointly or of any such firm as aforesaid or for any
money for which the Principal may be liable as surety or in any other way
whatsoever together with in all the cases aforesaid all interest, discount and
other DTC charges including legal charges occasioned by or incident to this or
any other security held by or offered to you for the same indebtedness or by or
to the enforcement of any such security.
Provided always that the liability ultimately enforceable against us shall
not exceed in aggregate HKD 7 million together with interest thereon (as well
after as before judgement) with monthly rests computed from the date of demand
at the rate of 2% per annum above its Best Lending Rate (which expression shall
mean the rate of interest per annum from time to time quoted by the Hongkong and
Shanghai Banking Corporation as its prime or best lending rate for Hong Kong
Dollars in Hong Kong) presently 10.75%
(2) This guarantee shall not be considered as satisfied by any intermediate
payment or satisfaction of the whole or any part of any sum or sums of money
owing as aforesaid but shall be a continuing security and shall extend to cover
any sum or sums of money which shall for the time being constitute the balance
due from the Principal to you upon any such account as hereinafter mentioned.
(3) This guarantee shall be binding as a continuing security on us until the
expiration of one calendar month after we or in the event of our going into
liquidation or receivership the liquidator or receiver shall have given to you
notice in
1
<PAGE>
writing to discontinue and determine it and shall extend thereafter to any
bills, notes or cheques current at the expiration of the notice but afterwards
dishonoured and until such sums have been paid to you.
(4) In the event of this guarantee ceasing from any cause whatsoever to be
binding as a continuing security on us you shall be at liberty without thereby
affecting your rights hereunder to open a fresh account or accounts and to
continue any then existing account with the Principal and subsequently drawn out
by the Principal shall on settlement of any claim in respect of this guarantee
be appropriated towards or have the effect of payment of any part of the money
due from the Principal at the time of the guarantee ceasing to be so binding as
a continuing security or of the interest thereon unless the person or persons
paying in the money shall at the time in writing direct you specially to
appropriate it to that purpose.
(5) Any admission or acknowledgement in writing by the Principal or by any
person authorized by the Principal of the amount of indebtedness of the
Principal to you and any judgement recovered by you against the Principal is
respect of such indebtedness shall be binding and conclusive on and against us
in all courts of law and elsewhere.
(6) You shall be at liberty without thereby affecting your rights against us
hereunder at any time to determine enlarge or vary any credit to the Principal
to vary exchange abstain from perfecting or release any other securities held or
to be held by you for on account of the monies intended to be hereby secured or
any part thereof to renew bills and promissory notes in any manner and to
compound with give time for payment to accept compositions from the make any
other arrangements with the Principal or any obligants on bills notes or other
securities held or to be held by you for and on behalf of the Principal.
(7) This guarantee shall be in addition to and shall not be in any way
prejudiced or affected by any collateral or other security now or hereafter hold
by you for all or any part of the money hereby guaranteed nor shall such
collateral or other security or nay lien to which you may be otherwise entitled
or the liability of any person or persons not parties hereto for all or any part
of the monies hereby secured be in anywise prejudiced or affected by this
present guarantee. And you shall have full power at your discretion to give time
for payment to or make any other arrangement with any such other person or
persons without prejudice to this present guarantee or any liability hereunder.
And all money received by you from us or the Principal or any other person or
persons liable to pay the same may be applied by you to any account or items
2
<PAGE>
of account or to any transaction to which the same may be applicable.
(8) Although our ultimate liability hereunder cannot exceed the limit
hereinbefore mentioned yet this present guarantee shall be construed and take
effect as a guarantee of the whole and every part of the principal money and
interest owing and to become owing as aforesaid and accordingly we are not to be
entitled as against you to any right of proof in the bankruptcy or insolvency of
the Principal or other right of a surety discharging his liability in respect of
the principal debt unless and until the whole of the principal money and
interest shall have first been completely discharged and satisfied. And further
for the purpose of enabling you to sue the Principal against his estate for the
whole of the money owing as aforesaid or so preserve intact the liability of any
prove against his estate for the whole of the money owing as aforesaid or to
preserve intact the liability of any other part you may at any time place and
keep for such time as you may think prudent any money received recovered or
realized hereunder to any as a separate or suspense account to the credit either
of us or of such other person or persons or transaction if any as you shall
think fit without any intermediate obligations on your part to apply the same or
any part thereof in or towards the discharge of the money owing as aforesaid or
any intermediate right on our part to sue the Principal or prove against his
estate in competition with or so as to diminish any dividend or other advantage
that would or might come to you or to treat the liability of the Principal as
diminished.
(9) We have not taken in respect of the liability hereby undertaken by us on
behalf of the Principal and we will not take from the Principal either directly
or indirectly without your consent any promissory note bill of exchange mortgage
charge or other counter-security whether merely personal or involving a charge
on any property whatsoever of the Principal whereby we or any person claiming
through us by indorsement assignment or otherwise would or might on the
bankruptcy or insolvency of the Principal and to the prejudice of you increase
the proofs in such bankruptcy or insolvency or diminish the property
distributable amongst the creditors of the Principal. And as regards any such
counter-security as aforesaid which we may have taken or may take with such
consent is aforesaid the counter-security shall be a security to you for the
fulfillment of our obligations hereunder and shall be forthwith deposited by us
with you for that purpose.
(10) You shall so long as any money remains owing hereunder have a lien therefor
on all money now or hereafter standing to my credit with you.
3
<PAGE>
(11) For all purposes, including any legal proceedings a copy of the account of
the Principal in you books signed by any of your officers shall be accepted by
us as conclusive evidence of the state of such account.
(12) If the Principal is a corporation or an unincorporated body or firm the
absence or informality of borrowing powers on the part of the Principal or any
irregularity in the exercise thereof shall not affect our liability and any
moneys advance to the Principal shall be deemed to be due and owing
notwithstanding such absence, informality or irregularity and this guarantee
shall not be affected by any change in the name or constitution of the
corporation or unincorporated body or firm or in the persons constituting the
same.
(13) This guarantee shall be in addition to and not in substitution for any
other guarantee for the Principal given by us to you.
(14) A notice by you under this guarantee may be served by post (which shall be
registered airmail in the event that the registered office given hereunder is
outside the Colony of Hong Kong) and shall be deemed to have been duly served on
the ______________ day following the day of posting if addressed to us at the
registered office given hereunder.
(15) This guarantee and all rights, obligations and liabilities arising
hereunder shall be construed and determined under and may be enforced in
accordance with the laws of Hong Kong. [We hereby agree that the Courts in Hong
Kong shall have jurisdiction over all disputes arising under this guarantee and
irrevocably appoint _________________________________________ of
_____________________________________________________________________________ to
be our agent for the purpose of accepting service of process hereunder.]
IN WITNESS whereof this Guarantee has been duly executed by us this 14 day of
July, 1997.
THE COMMON SEAL OF ACMA STRATEGIC HOLDINGS /s/ (illegible)
LIMITED was hereunto affixed in the presence of:
/s/ (illegible)
- -----------------------------
Director
- -----------------------------
Director
(Registered Office) ___________________________
4
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
<TABLE>
<C> <S>
1. Creative Master Limited, a Hong Kong corporation.
2. Excel Master Limited, a Hong Kong corporation.
3. Carison Engineering Limited, a Hong Kong corporation.
4. Techtime Industries Limited, a Hong Kong corporation.
Mastercraft Engineering Limited (formerly Queenex Enterprises Limited), a
5. Hong Kong corporation.
6. Dongguan Changying Toys Factory Co. Ltd., a Chinese joint venture.
Creative Master Special Holdings, Inc., a British Virgin Islands
7. corporation.
</TABLE>
<PAGE>
EXHIBIT 23.3
CHINA BEIJING FADA LAW FIRM
INTERNATIONAL DEPARTMENT
84 DONG HUANG CHENG GEN SOUTH STREET
(THE ROOT OF EAST ROYAL FORBIDDEN CITY, SOUTH STREET)
BEIJING, CHINA
TEL: 86-10-6514-0912; FAX: 86-10-6514-0911
We consent to the use of our name under the caption "Legal Matters" in the
Registration Statement. By giving you this consent, we do not admit that we are
experts with respect to any part of the Registration Statement within the
meaning of the term "expert" as used in Section 11 of the Securities Act, or
the rules and regulations promulgated thereunder, nor do we admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act.
Very truly yours,
/s/ Dr. An Yeuh Zehan
_____________________________________
China Beijing Fada Law Firm
International Department
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF ANGELA WANG & CO]
Date: 24 November 1998
We consent to the use of our name under the caption "Legal Matters" in the
Registration Statement in the form provided to us. By giving you this consent,
we do not admit that we are experts with respect to any part of the
Registration Statement within the meaning of the term "expert" as used in
Section 11 of the Securities Act, or the rules and regulations promulgated
thereunder, nor do we admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Yours faithfully
/s/ Angela Wang & Co
Angela Wang & Co
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 (AUDITED) AND FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 471 889
<SECURITIES> 0 0
<RECEIVABLES> 2,966 5,231
<ALLOWANCES> 139 133
<INVENTORY> 2,928 3,331
<CURRENT-ASSETS> 6,533 9,962
<PP&E> 4,704 6,867
<DEPRECIATION> 1,549 2,013
<TOTAL-ASSETS> 10,499 15,689
<CURRENT-LIABILITIES> 7,362 9,724
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 2,738 4,812
<TOTAL-LIABILITY-AND-EQUITY> 10,499 15,689
<SALES> 16,211 24,129
<TOTAL-REVENUES> 16,211 24,129
<CGS> 12,703 18,303
<TOTAL-COSTS> 14,624 21,373
<OTHER-EXPENSES> 137 (231)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104 191
<INCOME-PRETAX> 1,000 2,803
<INCOME-TAX> 130 359
<INCOME-CONTINUING> 870 2,444
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 788 2,074
<EPS-PRIMARY> 0.219 0.553
<EPS-DILUTED> 0.219 0.553
</TABLE>
