<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NUMBER 333-65929
PROSPECTUS
1,250,000 SHARES OF COMMON STOCK
$5.00 PER SHARE
----------------
Creative Master International, Inc. is an independent manufacturer of
collectible-quality, die-cast replicas of cars, trucks, buses and other items.
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. The
bid price of the common stock as quoted on the OTC Electronic Bulletin Board on
November 11, 1998, the date of the last trade, was $1.01. We have received
approval, subject to notification, 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................. $5.00 $6,250,000
Underwriting Discounts and
Commissions.......................... $0.50 $ 625,000
Proceeds to Creative Master........... $4.50 $5,625,000
</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 187,500 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 DECEMBER 24, 1998.
<PAGE>
INSIDE FRONT COVER
[Collage of magazine covers showing the Company's products.]
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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.
Our Business............
We are an 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 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.
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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 3,749,322 shares of common
stock outstanding.
Shares Offered.......... We are offering 1,250,000 shares of common stock.
There will be a total of approximately 4,999,322
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 187,500 shares of common stock to cover any
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.
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
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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
DATA:
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 ad-
ministrative expenses... 2,394 2,552 1,921 1,964 3,070
Interest expense, net.... 88 140 104 84 191
Other income (expenses),
net..................... (96) (567) (137) 150 231
Income (loss) before in-
come taxes and minority
interests............... (507) 969 1,000 689 2,803
Net income (loss)........ (559) 815 788 561 2,074
--------- --------- --------- --------- ---------
Net income (loss) per
common share............ $ (0.16) $ 0.23 $ 0.22 $ 0.16 $ 0.55
========= ========= ========= ========= =========
Weighted average number
of common shares
outstanding............. 3,604,500 3,604,500 3,605,294 3,604,500 3,749,322
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, 1998
DECEMBER 31, -------------------
1997 ACTUAL AS ADJUSTED
------------ ------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 471 $ 889 $ 1,354
Working capital (deficit).................... (829) 238 1,659
Total assets................................. 10,499 15,689 19,122
Long-term obligations--capital lease, non-
current portion............................. 266 502 --
Stockholders' equity......................... 2,739 4,813 9,704
</TABLE>
The numbers in the column captioned "As Adjusted" under the heading "As of
September 30, 1998" have been adjusted to reflect our sale of 1,250,000 shares
of common stock at a public offering price of $5.00 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.
Cash and cash equivalents as shown in the "Balance Sheet Data" 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.
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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 20.4% 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
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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 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 Most-Favored-Nation 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 Most-Favored-Nation status. There can be no
assurance that the U.S. will renew the Most-Favored-Nation 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,
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earthquake or other causes, even if insured against, could have a material
adverse effect on our 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
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. 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.
INSTABILITY OF CUSTOMER BASE RESULTING FROM INDUSTRY CONSOLIDATION
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. 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.
CONCENTRATION OF CREDIT RISK
Our working capital position, financial condition and results of operations
depend heavily on the creditworthiness of our five largest customers, which
accounted for approximately 69% of our accounts receivable at September 30,
1998. Our top five customers accounted for approximately 92% of our accounts
receivable at December 31, 1997. 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
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discontinue them at any time. Accordingly, there can be no assurance that our
customers' products will achieve or maintain market acceptance.
INCREASED DIFFICULTIES IN COMPETING
There can be no assurance that we will be able to compete successfully. We face
significant competition from toy companies and other independent manufacturers
of die-cast products with manufacturing facilities located primarily in China.
There also 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.
LACK OF TRADE SECRET PROTECTION
We may not have adequate protection in the event an officer or employee leaves
our employ and goes into competition with us. 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.
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
If we were unable to increase capacity on a timely basis and on commercially
reasonable terms, our growth would be materially adversely effected. 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.
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.
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CLOSING OF FACILITIES; FLUCTUATING RESULTS
Our production and net sales during the first quarter of each year have
historically been lower than in other quarters, because 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. We 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 also 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.
LOSSES FROM CHANGES IN CURRENCY EXCHANGE RATES
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. 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.
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
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Asia will not materially affect the demand for our products. Furthermore,
because most of our products are, or at our request may be, paid for in U.S.
dollars, we believe that we are less susceptible to the effects of a possible
devaluation in the Hong Kong dollar or the yuan. However, the decline in the
currencies of East Asian countries may render our products less competitive if
competitors in East Asia are able to manufacture competing products at a lower
effective cost. There can be no assurance that our products will continue to be
competitive with the products of competitors from these countries. Currency
fluctuations or other effects of the economic downturn in East Asia also may
have a material adverse effect on our business, financial condition and results
of operations.
DETERMINATION OF PUBLIC OFFERING PRICE
Our common stock is quoted on the OTC Electronic Bulletin Board under the
symbol "CVMI." The bid price for the common stock as quoted on the OTC
Electronic Bulletin Board on November 11, 1998, the date of the last trade, was
$1.01. See "Market Price for Common Stock and Dividend Policy" for a more
detailed explanation of the trading market of our common stock. The public
offering price of our common stock for this offering 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. The
public offering price is likely to be substantially greater than the recent bid
prices of common stock as quoted on the OTC Electronic Bulletin Board, and it
is possible that prospective investors in this offering could purchase limited
amounts of common stock in the over-the-counter market at prices below the
public offering price. There are currently less than 375,000 freely tradeable
shares of common stock in the hands of the public, and the limited and sporadic
trading of the common stock does not constitute an established trading market
for the common stock. Accordingly, we believe the bid prices of the common
stock on the OTC Electronic Bulletin Board are not reflective of the value of
the common stock or of the prices at which the common stock would trade if an
active market existed. See "Underwriting" for a more detailed explanation of
how the offering price of the common stock in this offering will be determined.
RISK OF STOCK PRICE VOLATILITY
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
Future 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. There
are approximately 3,749,322 shares of common stock outstanding before this
offering, of which approximately 3,375,012 shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act of 1933. All of these
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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. Our directors and officers 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.
DEPENDENCE ON CONTINUED SERVICES OF MESSRS. TONG AND KWOK
Our success depends to a significant extent upon the continued services of Carl
Ka Wing Tong and Leo Sheck Pui Kwok. If we lose the services of either of these
executives, our business could be materially adversely affected. Messrs. Tong
and 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 our
management and direction. They also have served as the principal contacts with
our customers and have developed long-standing relationships with them, and we
believe that their continued involvement with our customers is important to the
maintenance of these relationships. 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.
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 68% of
our outstanding shares (or approximately 64% 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 $3.21 per share, or approximately
64%. See "Dilution" for a description of how this dilution was calculated.
AUTHORIZED PREFERRED STOCK
Our Restated Certificate of Incorporation authorizes 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 gives 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. from the sale of the
1,250,000 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 $4,891,000. The company will not receive any proceeds from the sale of
shares by the selling stockholders. 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)............................... $3,100,000 63%
Payment of capital lease obligations(2)............. 958,000 20
Repayment of short-term bank debt(3)................ 500,000 10
Working capital and general corporate purposes(4)... 333,000 7
---------- ---
Total............................................. $4,891,000 100%
========== ===
</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
"Transactions Involving Officers, Directors and Principal Stockholders--
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.
14
<PAGE>
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 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 received approval, subject to notification, to list the common
stock on the Nasdaq National Market under the proposed symbol "CMST."
The following are the high and low bid prices of the company's common stock
as quoted on the OTC Electronic Bulletin Board. The quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL 1996
Quarter Ended March 31,
1996................... N/A N/A
Quarter Ended June 30,
1996................... N/A N/A
Quarter Ended September
30, 1996............... $0.13 $0.13
Quarter Ended December
31, 1996............... $7.09 $0.13
FISCAL 1997
Quarter Ended March 31,
1997................... N/A N/A
Quarter Ended June 30,
1997................... $0.27 $0.27
Quarter Ended September
30, 1997............... N/A N/A
Quarter Ended December
31, 1997............... $2.67 $0.27
FISCAL 1998
Quarter Ended March 31,
1998................... $0.27 $0.27
Quarter Ended June 30,
1998................... $0.03 $0.03
Quarter Ended September
30, 1998............... $0.69 $0.69
Quarter Ending December
31, 1998 (through
December 22, 1998)..... $1.35 $0.68
</TABLE>
As of December 22, 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 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 $8,964,000, or $1.79 per share. This represents an immediate
increase in the net tangible book value of $0.70 per share to existing
stockholders and an immediate dilution of $3.21 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share......................... $5.00
Net tangible book value per share as of September 30, 1998.... $1.09
Increase per share attributable to this offering.............. $0.70
Pro forma net tangible book value per share after this
offering....................................................... $1.79
-----
Dilution to new investors....................................... $3.21
=====
</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.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 3,749,322 75.0% $ 4,813,000 43.5% $1.28
New investors........... 1,250,000 25.0% $ 6,250,000 56.5% $5.00
--------- ----- ----------- -----
Total................. 4,999,322 100.0% $11,063,000 100.0%
========= ===== =========== =====
</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 1,250,000 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 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 $ 1,003
Capital lease obligations, current portion................ 456 --
-------- ---------
$ 1,959 $ 1,003
======== =========
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, 3,749,322 shares issued and outstanding; 4,999,322
shares issued and outstanding, as adjusted............... 1 1
Preferred stock, $.0001 per value, 5,000,000 shares
authorized, no shares issued and outstanding............. -- --
Additional paid-in capital................................ 1,401 6,292
Retained earnings......................................... 3,411 3,411
-------- ---------
Total stockholders' equity.............................. 4,813 9,704
-------- ---------
TOTAL CAPITALIZATION........................................ $ 5,702 $ 10,091
======== =========
</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 in March 1998 the board of directors and stockholders of the
company approved a 1-for-10 reverse stock split which was effected in November
1998. In December 1998, the company effected a further 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 125,000 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 (expense),
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 an 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 factory
22
<PAGE>
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 income (expense),
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
$3,829,000 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 $1,043,000, 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 $4,204,000 in materials cost and an increase of
$2,490,000 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 $314,000 to $412,000 for the nine
months ended September 30, 1998, compared to $98,000 for the nine months ended
September 30, 1997. This increase was primarily due to higher sales volume.
Salaries increased by $428,000 to $1,406,000 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 $94,000 during the nine months ended September 30,
1998, as compared to $25,000 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 $11,426,000 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
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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 $11,426,000 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 $1,067,000 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.
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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 1.5%. The settlement period for use of the letter of credit is
90 days. Overdue amounts bear interest at the Hong Kong 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 1.75%. 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 $192,000 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
2%. 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 $36,000 outstanding under this facility.
The credit agreement with Commonwealth Finance Corporation Limited, as renewed
in December 1997, provides for a $1,291,000 line of credit, which includes a
$903,000 letter of credit against orders and a $387,000 letter of credit
against receivables. 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 U.S. prime rate plus 3.75%. As of
September 30, 1998, there was approximately $972,000 outstanding under this
facility.
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<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. In conjunction with
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 Year 2000 readiness of the company's trading partners. At
present, however, even assuming that its trading partners are not fully Year
2000 compliant, the company believes that Year 2000 issues will not have a
material adverse effect on the company's business or results of operations.
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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
10.8% of the company's net sales arose from sales to European customers, and in
1997 approximately 0.8% 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 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"
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("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.
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BUSINESS
OVERVIEW
Creative Master is an 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
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
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 Market for Collectible Die-Cast in 1998 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
approximately 5,000 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
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customers. The 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 first 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 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 1996(6) 4.2% 8.1%
. First Gear Trucks 1998 -- 2.7%
. Road Champs(7) Police cars 1997 3.6% 6.5%
. Lionel Trains Vintage trains 1998 -- --
. Hallmark Cards Pedal cars and ornaments 1997 0.2% 5.7%
</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.
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Vintage Trains and Locomotives. In June 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., which
owns 100% of Brookfield Collectors Guild and has a controlling interest in
Paul's Model Art. They also include First Gear, Hallmark Cards, 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 Hai-Lin Hu
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<PAGE>
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, Director Nominees and Key Employee"
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 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
36
<PAGE>
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.
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
37
<PAGE>
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.
Four 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.
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:
<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 2,700 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 1,390 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) 185 400 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 5,160 6,700 320,000 507,000
===== ===== ======== ========
</TABLE>
- --------
(1) Includes production space only.
(2) Estimated.
(3) Currently under construction.
38
<PAGE>
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.
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 the end of
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
39
<PAGE>
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.
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 than the company, based on the
preceding criteria the company believes that it competes effectively with these
larger manufacturers. 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 manufacturers 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
40
<PAGE>
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 30, 1998, the company had approximately 5,160 employees in
China, all of which are full-time. Of these employees, approximately 4,182 were
production workers, 425 were administrative staff, 553 were engineers and
technicians. In addition, the company employs approximately 68 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 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
41
<PAGE>
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, 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.
On December 23, 1998 the Company received a letter from Wilkinson & Grist,
counsel for ZIC Holdings Ltd., regarding certain claims threatened by ZIC
against Carl Ka Wing Tong and Henry Hai-Lin Hu, individually. The letter
attached a draft complaint which has not yet been filed. The draft complaint
reflects as the forum for the litigation, if filed, the High Court of the Hong
Kong Special Administrative Region Court of First Instance. The draft complaint
alleges that Mr. Tong and Mr. Hu breached certain confidentiality, non-
solicitation and non-competition obligations to ZIC in connection with their
respective prior employment with ZIC and breached their trust and fiduciary
duties to ZIC while serving as directors of that company. The Company is not
named in the draft complaint. However, ZIC, through its counsel, has indicated
that it may pursue certain related unspecified claims against the Company.
Mr. Tong has informed the Company that he believes the claims are without merit
and that he intends to vigorously defend against them in the event that a
lawsuit is filed.
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
December 23, 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)................ 46 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 consulting
43
<PAGE>
division of Infocan Computer (HK) Limited, 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 Group, 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 Ltd., 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
Ltd., 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, and performed the functions of chief executive officer for, 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" for additional details regarding
the company's 1998 Stock Option Plan.
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, 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 "Transactions Involving Officers, Directors and
Principal Stockholders--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
"Transactions Involving Officers, Directors and Principal Stockholders--Hu
Consulting Agreement" for a discussion of the terms of Mr. Hu's agreement.
45
<PAGE>
Consulting arrangements such as the company's arrangements with Messrs. Tong
and Hu are commonplace in Hong Kong.
In January 1996, the company entered into a service agreement with Leo Sheck
Pui Kwok pursuant to which he was appointed as an executive officer of the
company, effective as of February 1, 1996, for a term of three years. The
appointment automatically renews for a one-year term on each anniversary
beginning on February 1, 2000, unless either party provides six months written
notice to terminate the agreement. Mr. Kwok receives a salary of $46,000 per
year and a bonus of up to 2.5% of the company's net after-tax profits on a
consolidated basis, provided the company achieves certain net income targets.
In addition, the company provides Mr. Kwok with a residence allowance of
approximately $5,000 per month.
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 as soon as possible after completion of this offering and which are
expected to include certain restrictions against the executives' use of
confidential information of the company.
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 and Chief
Executive 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 those periods.
(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, 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 or so-called 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
Internal Revenue 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 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 (twelve months 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.
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<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
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 substantially identical pension plans
for their employees.
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 Securities and Exchange
Commission that, insofar as the forgoing provisions may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, the provisions
are against public policy as expressed in the Securities Act of 1933 and are,
therefore, unenforceable.
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<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, 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, one of the principal
stockholders of the company. 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
Consultancy Limited, 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. Acma Strategic's immediate parent company, Acma Investments Pte.,
Ltd., is a selling stockholder in this offering. For additional information in
this regard, see "Principal Stockholders and Selling Stockholder."
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<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 $438,000 and $232,000,
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 $258,000, $194,000, $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 is terminable upon three
months written notice by either party.
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PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
The following table sets forth the beneficial ownership of common stock as of
December 23, 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, (ii) the selling stockholder, (iii)
each director and director nominee of the company, (iv) each Named Executive
Officer of the company, and (v) 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. An
asterisk denotes beneficial ownership of less than 1%.
<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 5.2%
Leo Sheck Pui Kwok(4)... 564,948 15.1 -- 564,948 11.3
Chou Kong Seng(5)....... -- -- -- -- --
Clayton K. Trier........ -- -- -- -- --
Steve Gordon............ -- -- -- -- --
Acma Ltd. (6)........... 2,551,930 68.1 187,500(7) 2,364,430(7) 47.3(8)
Quek Sim Pin(9)......... 2,551,930 68.1 187,500(7) 2,364,430(7) 47.3(8)
All directors, director
nominees and executive
officers as a group (7
persons)............... 823,084 22.0 -- 823,084 16.5
</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 held of record 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) Mr. Chou is a Director of Acma Ltd. and, as such, may be deemed to share
voting and investment power over the shares shown as beneficially owned by
Acma Ltd. Mr. Chou disclaims such beneficial ownership.
(6) 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 Jurong Port Singapore 619092.
(7) Acma Investments Pte., Ltd. will sell 187,500 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.
(9) The shares shown consist of the 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 such shares. Mr. Quek's address
is c/o Acma Ltd., 17 Jurong Port Singapore 619092.
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<PAGE>
CHANGE IN ACCOUNTANTS
Effective April 30, 1998, Greenberg & Company, LLC, 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 & Company, LLC'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 & Company,
LLC on any matter of accounting principles, financial statements, auditing
scope or procedure during that period.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the company consists of 25,000,000 shares of
common stock, par value $.0001 per share, of which 3,749,322 shares were issued
and outstanding as of December 22, 1998, and 5,000,000 shares of preferred
stock, $.0001 par value, none of which have been issued or are outstanding.
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 is 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
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<PAGE>
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.
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, 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
Jersey Transfer & Trust Co., in Verona, New Jersey, serves as transfer agent
and registrar for the common stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADEABLE AFTER OFFERING. Upon completion of this
offering, the company will have approximately 4,999,322 shares of common stock
outstanding. The 1,250,000 shares to be sold by the company in this offering
(and all 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
50,000 shares after this offering) and the average weekly trading volume in the
common stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Commission, provided certain manner
of sale and notice requirements and requirements as to the availability of
current public information about the company are satisfied. In addition,
affiliates of the company must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of common stock. As defined in Rule 144, an "affiliate" of an issuer is
a person who, directly or indirectly, through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer. Under Rule 144(k), a holder of "restricted securities" who is not
deemed an affiliate of the issuer and who has beneficially owned shares for at
least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above.
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 its 1998 Stock Option 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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in 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 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........................................ 325,000
Josephthal & Co., Inc............................................... 325,000
Advest, Inc......................................................... 100,000
W.J. Nolan & Company, Inc........................................... 100,000
EBI Securities Corporation.......................................... 100,000
First Montauk Securities Corp....................................... 100,000
Scott & Stringfellow, Inc........................................... 100,000
Oberweis Brokerage, Inc............................................. 100,000
---------
Total........................................................... 1,250,000
=========
</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
$0.25 per share. The underwriters may allow, and such selected dealers may
reallow, a discount not in excess of $0.10 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 187,500
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
55
<PAGE>
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 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. See "Management--Compensation Pursuant to Plans" and "Shares
Eligible for Future Sale" for a description of these shares.
The company has agreed to issue to the representative, for a total of $125,
warrants to purchase up to 125,000 shares of common stock at an exercise price
per share equal to 165% 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. 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 National Association of Securities
Dealers, Inc.'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 may not be transferred, assigned or
hypothecated 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 has 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 the OTC Electronic
Bulletin Board prior to this offering, trading has been extremely limited and
sporadic. Moreover, there are less than 375,000 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
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<PAGE>
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
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, in the event the
over-allotment option is exercised, 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, warranty agreement or covenant of the
company contained in the underwriting agreement. The selling stockholders has
similar indemnification obligations to the underwriters and their respective
controlling persons in connection with losses or claims arising out of 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, it 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 (i.e. sell more shares than are set forth on the cover page of this
prospectus), thereby creating a "short position" in the underwriters' syndicate
account. 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 option described above. Any of these activities
may
57
<PAGE>
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.
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, and in accordance therewith files reports, proxy or
information statements and other information with the Securities and Exchange
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 of 1933 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>
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.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
December 15, 1998.
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 3,749,322 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 3,605,294 3,604,500 3,749,322
========= ========= ========= ========= =========
</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) have been 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 Hong Kong 100% Manufacturing of
Limited ..................
(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 Hong Kong 55%
Limited................... 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 3,605,294, respectively, and for the nine
months ended September 30, 1997 and 1998 was 3,604,500 and 3,749,322,
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, followed by 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
----- ----- ----- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(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 as described in Note 1), and (ii) other professional fees
for the acquisition of CML.
16.SHARE CAPITAL
During the period from January 1, 1995 (the earliest date covered by this
report) to May 28, 1996, the Company had authorized share capital of
250,000,000 shares of common stock, par value $0.0001 each, and outstanding
share capital of 193,745,200 shares of common stock, par value $0.0001 each. On
May 29, 1996, the Company effected a one-for-one hundred reverse stock split
and a redenomination of par value in share capital, resulting in 1,937,452
shares of common stock, par value $0.0001 each, outstanding. Also, on May 29,
1996, the authorized share capital of the Company was decreased from
250,000,000 shares of common stock, par value $0.0001 each, to 50,000,000
shares of common stock, par value $0.0001 each. On December 30, 1997, the
Company
F-17
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
issued 48,060,000 shares of common stock (after the one-for-one hundred reverse
stock split as described above but before the one-for-ten reverse stock split
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 14,
1998, the Company effected a three-for-four reverse stock split and a
redenomination of par value in share capital resulting in 3,749,322 shares of
common stock, par value $0.0001 each, outstanding. Also, on December 14, 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 $1,421,000 and $1,853,000, respectively, for
overdrafts, loans and trade financing. Unused facilities as of December 31,
1997 and September 30, 1998 amounted to approximately $99,000 and $350,000,
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 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.
c 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.
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 --
=== === ===
</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%
Tyco Hong Kong Limited............... -- 5.1% 5.6% 7.2% --
Drumwell Limited..................... -- 1.8% 4.2% 1.8% 4.2%
Brookfield Collectors Guild.......... -- 7.7% 4.7% 7.1% 4.2%
Road Champs Ltd. .................... -- -- 3.6% 3.9% 6.5%
Hallmark Cards (Hong Kong) Ltd. ..... -- -- 0.2% 0.8% 5.7%
Paul's Model Art GmbH................ -- -- -- -- 6.9%
==== ==== ==== ==== ====
</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%
Zinamet Co., Ltd........ 8.7% 2.7% 6.9% 4.8% 2.7%
Lee Kee Metal Co. Ltd... -- 0.7% 6.1% 5.8% 6.8%
==== === === === ====
</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
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Five largest accounts receivable.................. 94.2% 92.1% 77.8%
====== ====== ====
</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, $835,000, $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>
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WE HAVE NOT, NOR HAVE ANY OF THE UNDERWRITERS AUTHORIZED ANY DEALER, SALESMAN
OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF ANY DEALER, SALESMAN OR OTHER
PERSON GIVES INFORMATION OR MAKES REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, YOU SHOULD NOT RELY ON THEM. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT, NOR ARE ANY OF THE UNDERWRITERS, SO-
LICITING 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 UN-
LAWFUL PRIOR TO THEIR REGISTRATION OR QUALIFICATION UNDER THE SECURITIES 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 PROSPECTUS AFTER
THE DATE OF THIS PROSPECTUS, WE ARE NOT MAKING, NOR ARE ANY OF THE UNDERWRIT-
ERS, 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>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,250,000 SHARES
[LOGO OF CREATIVE MASTER
INTERNATIONAL, INC.]
COMMON STOCK
---------------
PROSPECTUS
---------------
Cruttenden Roth
INCORPORATED
DECEMBER 24, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
