<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ___________ to ________________
COMMISSION FILE NUMBER 33-18521-NY
CREATIVE MASTER INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 11- 2854355
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(Address of principal executive offices)
ISSUER'S TELEPHONE NUMBER: 011-8522-396-0147
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, as of September
30, 1998 was 4,999,746 shares.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations - for each of the
three-month and six-month periods ended June 30, 1997
and 1998 (unaudited) 1
Consolidated Condensed Balance Sheets - as of December 31, 1997
(audited) and June 30, 1998 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - for each
of the six-month periods ended June 30, 1997 and 1998 (unaudited) 3
Notes to Consolidated Condensed Financial Statements 4-19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 20-24
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 25
ITEM 2 - CHANGES IN SECURITIES 25
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5 - OTHER INFORMATION 25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 25
</TABLE>
(i)
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1997 1998 1997 1998
------------- ------------- ------------ ------------
$'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................. 3,670 8,729 7,723 14,325
Cost of goods sold......................... (2,943) (6,436) (6,119) (10,258)
---------- ---------- ---------- ----------
Gross profit............................... 727 2,293 1,604 4,067
Selling, general and
administrative expenses................. (695) (1,141) (1,197) (1,993)
Interest income............................ 4 14 4 14
Interest expense........................... (28) (50) (54) (120)
Other expenses, net........................ 10 (60) (24) (48)
Gain on dilution of equity interest in a
subsidiary................................ - 77 - 77
Amortization of goodwill................... (10) (19) (26) (46)
---------- ---------- ---------- ----------
Income before income taxes and minority
interests................................. 8 1,114 307 1,951
Provision for income taxes................. (23) (129) (56) (228)
---------- ---------- ---------- ----------
Income (Loss) before minority
interests................................. (15) 985 251 1,723
Minority interests......................... 21 (183) - (314)
---------- ---------- ---------- ----------
Net income................................. 6 802 251 1,409
========== ========== ========== ==========
Net income per common share................ $0.001 $0.16 $0.05 $0.28
========== ========== ========== ==========
Weighted average number of
common shares outstanding................ 4,999,746 4,999,746 4,999,746 4,999,746
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed statements of operations.
1
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1997 (AUDITED) AND JUNE 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
------------------ -------------
ASSETS $'000 $'000
- ------ (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and bank deposits................................. 471 877
Accounts receivable, net............................... 2,827 3,698
Deposits and prepayments............................... 307 463
Inventories, net....................................... 2,928 3,407
------- -------
Total current assets...................................... 6,533 8,445
Machinery, equipment and capital 3,155 4,123
leases, net...............................................
Goodwill.................................................. 810 764
Long-term investment...................................... 1 1
------- -------
Total assets.............................................. 10,499 13,333
======= =======
LIABILITIES, MINORITY INTERESTS
- -------------------------------
AND STOCKHOLDERS' EQUITY
- ------------------------
Current liabilities:
Short-term bank borrowings............................. 1,290 1,376
Capital lease obligations, current portion............. 764 533
Accounts payable....................................... 1,908 2,689
Accrued liabilities.................................... 1,579 2,316
Deposits from customers................................ 560 -
Due to directors....................................... 861 832
Due to parent company.................................. 9 8
Taxation payable....................................... 68 151
Dividend payable....................................... 323 323
------- -------
Total current liabilities................................. 7,362 8,228
Capital lease obligations, non-current portion............ 266 478
Deferred taxation......................................... 57 146
------- -------
Total liabilities......................................... 7,685 8,852
------- -------
Minority interests........................................ 75 331
------- -------
Stockholders' equity:
Common stock, par value $0.0001; authorized
60,000,000 shares; outstanding and
fully paid 4,999,746 shares............................ 1 1
Additional paid-in capital................................ 1,401 1,401
Retained earnings......................................... 1,337 2,746
Cumulative translation adjustments........................ - 2
------- -------
Total stockholders' equity................................ 2,739 4,150
------- -------
Total liabilities, minority interests and stockholders'
equity................................................... 10,499 13,333
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed balance sheets.
2
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1998
------------- -------------
$'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ 251 1,409
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities -
Depreciation of machinery and equipment........... 255 283
Amortization of goodwill.......................... 26 46
Minority interests................................ - 314
Deferred income taxes............................. (38) 89
(Increase) Decrease in operating assets -
Accounts receivable, net.......................... 68 (871)
Deposits and prepayments.......................... (473) (156)
Inventories, net.................................. (588) (479)
Increase (Decrease) in liabilities -
Accounts payable.................................. (173) 781
Deposits from customers........................... 2 (560)
Accrued liabilities............................... 175 737
Due to parent company............................. - (1)
Taxation payable.................................. 64 83
----- -------
Net cash provided by (used in)
operating activities................................. (431) 1,675
----- -------
Cash flows from investing activities:
Acquisition of machinery and equipment............ (15) (797)
Decrease in due from a related company............ 41 -
Decrease in due from directors.................... 40 -
----- -------
Net cash used in investing activities................. (14) (797)
----- -------
Cash flows from financing activities:
Increase (Decrease) in bank overdrafts............ (24) 1
New short-term bank loans......................... 723 1,935
Repayment of short-term bank loans................ (188) (1,948)
Increase (Decrease) in import trust receipts
bank loans.................................... 102 (98)
Repayment of capital element of capital
lease obligations.............................. (227) (473)
Decrease in due to directors...................... (43) (29)
Decrease in due to a related company.............. (84) -
Finance from minority interests
of a subsidiary................................. - 1
Dividends paid to minority interests of
subsidiary..................................... - (58)
----- -------
Net cash (used in) provided by financing 259 (473)
activities......................................... ----- -------
Effect of cumulative translation adjustments.......... - 1
----- -------
Net increase (decrease) in cash and bank deposits..... (186) 406
Cash and bank deposits, as of beginning of period..... 435 471
----- -------
Cash and bank deposits, as of end of period........... 249 877
===== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed statements of cash flows.
3
<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 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 a 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing 4,806,000 shares
of common stock of par value $0.0001 each (after the reverse stock splits and
the redenominations of par value as described in Note 15) to Acma Strategic
Holdings Limited ("ASHL"; a company incorporated in Hong Kong), Mr. 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.
4
<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 June 30, 1998 were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
PLACE OF OF EQUITY
NAME INCORPORATION INTEREST HELD PRINCIPAL ACTIVITIES
- ------- ------------- ------------- --------------------
<S> <C> <C> <C>
Creative Master Limited Hong Kong 100% Manufacturing and trading of
collectible replica products
Excel Master Limited Hong Kong 100% Trading of collectible replica products
Mastercraft Engineering Limited
(formerly known as Queenex Hong Kong 100% Manufacturing of molds
Enterprises Limited) Note b
Carison Engineering Limited Hong Kong 70% Manufacturing of molds
(formerly known as Carison Limited) Note c
Techtime Industries Limited Hong Kong 55% Manufacturing of collectible replica
products
Dongguan Chuangying Toys The PRC Note a Manufacturing of collectible
Factory Co., Ltd replica products
</TABLE>
- ---------------------
Notes
a Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006.
Under the joint venture contract dated September 10, 1994 and the
supplemental contract dated April 1, 1996, the 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.
5
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
c Effective from May 20, 1998, Carison Limited changed its name of Carison
Engineering Limited, the present one.
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
six months ended June 30, 1997 and 1998 was approximately $26,000 and
$46,000, respectively. Accumulated amortization as of December 31, 1997
and June 30, 1998, was approximately $139,000 and $185,000 respectively.
Management assesses the 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.
6
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
f. LONG-TERM INVESTMENT
Investments held for the long-term are stated at market value. Income
from investments is accounted for to the extent of dividends received and
receivable.
g. NET SALES
Net sales represent the invoiced value of merchandise/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 six months ended June 30, 1997 and
1998, were approximately $22,000 and ($33,000), respectively.
k. NET INCOME PER COMMON SHARE
Net income per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income for each
period by the weighted average number of shares of common stock
outstanding during the 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 15) had been consummated prior to
the periods presented. The weighted average number of shares used to
compute net income per common share was 4,999,746 for all periods
presented.
7
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997 JUNE 30, 1998
----------------- -------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Trade receivables....................... 2,996 3,837
Less: Allowance for doubtful accounts... (139) (139)
------ ------
Accounts receivable, net................ 2,827 3,696
====== ======
</TABLE>
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
$'000 $'000
(UNAUDITED)
Deposits for acquisition of molds... 149 265
Rental and utility deposits......... 69 26
Prepayments......................... 83 140
Others.............................. 6 32
---- ----
307 463
==== ====
</TABLE>
7. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
------------------ --------------
<S> <C> <C>
$'000 $'000
(UNAUDITED)
Raw materials.................................. 1,358 1,661
Work-in-process................................ 722 967
Finished goods................................. 959 890
------ ------
Less: Allowance for slow-moving and obsolete 3,039 3,518
inventories................................. (111) (111)
------ ------
Inventories, net............................... 2,928 3,407
====== ======
</TABLE>
8
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases comprised:
<TABLE>
<S> <C> <C>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
$'000 $'000
(UNAUDITED)
Machinery and equipment:
Machinery and tools......................... 769 1,288
Leasehold improvements...................... 1,033 1,100
Furniture and office equipment.............. 455 552
Motor vehicles.............................. 21 21
Capital leases:
Machinery and tools......................... 2,412 2,980
Furniture and office equipment.............. 14 14
------- -------
Cost........................................... 4,704 5,955
Less: Accumulated depreciation
Machinery and equipment..................... (1,066) (1,224)
Capital leases.............................. (483) (608)
------- -------
Machinery, equipment and capital leases, net... 3,155 4,123
======= =======
</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, 1997 JUNE 30, 1998
------------------ --------------
<S> <C> <C>
$'000 $'000
(UNAUDITED)
Long-term investment.................. 685 685
Less: Write down of investment cost... (684) (684)
----- -----
Long-term investment, net............. 1 1
===== =====
</TABLE>
The carrying cost of the long-term investment approximated its market
value.
10. GOODWILL
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
------------------ --------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Goodwill......................... 949 949
Less: Accumulated amortization... (139) (185)
----- -----
Goodwill, net.................... 810 764
===== =====
</TABLE>
9
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Overdrafts.................... - 1
Short-term loans.............. 908 895
Import trust receipts loans... 382 480
------ ------
1,290 1,376
====== ======
</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 at the United States prime lending rate
plus 2.3%, which ranged from 10.8% to 14.5% per annum as of June 30, 1998. They
are collateralized by the Group's bank deposits of approximately $72,000 and
$452,000 as of December 31, 1997 and June 30, 1998, respectively, personal
guarantees provided by Mr. 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 18). They were drawn for working capital
purposes and are renewable with the consent of the relevant banks.
Supplemental information with respect to short-term bank borrowings for the year
ended December 31, 1997 and six months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED WEIGHTED
AMOUNT AMOUNT AVERAGE AVERAGE
OUTSTANDING OUTSTANDING INTEREST RATE AT INTEREST RATE
DURING THE DURING THE THE END OF THE DURING THE
YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD
----------- ----------- ---------------- -------------
YEAR ENDED DECEMBER 31, 1997 $'000 $'000
- ---------------------------------
<S> <C> <C> <C> <C>
Overdrafts....................... 111 17 12.5% 12.1%
=========== =========== =========== ===========
Short-term loans................. 908 686 10.7% 10.1%
=========== =========== =========== ===========
Import trust receipts loans...... 448 291 12.5% 11.9%
=========== =========== =========== ===========
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
- ---------------------------------
Overdrafts....................... 49 12 13.9% 14.1%
=========== =========== =========== ===========
Short-term loans................. 1,298 1,159 10.7% 10.8%
=========== =========== =========== ===========
Import trust receipts loans...... 480 351 10.7% 11.4%
=========== =========== =========== ===========
</TABLE>
10
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997 JUNE 30, 1998
------------------ --------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Payable during the following period
- - Within one year................................ 830 632
- - Over one year but not exceeding two years...... 195 331
- - Over two years but not exceeding three years... 91 203
------ ------
Total minimum lease payments..................... 1,116 1,166
Less: Amount representing interest............... (86) (155)
------ ------
Present value of minimum lease payments.......... 1,030 1,011
Less: Current portion............................ (764) (533)
------ ------
Non-current portion.............................. 266 478
====== ======
</TABLE>
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Accruals for operating expenses
- Salaries, wages and bonus................ 575 1,096
- Subcontracting charges................... 463 606
- Rentals.................................. 41 20
- Others................................... 120 64
Accruals for purchases of loose tools and
consumables............................... 269 409
Others...................................... 111 121
------ ------
1,579 2,316
====== ======
</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 six months ended June 30, 1997 and at a rate of 16% for the six months
ended June 30, 1998.
The contractual joint venture established in the PRC (Dongguan Chuangying Toys
Factory Co., Ltd.) is subject to PRC income taxes at a rate of 33% (30% state
income tax and 3% local income tax). However, the joint venture is exempted from
state income tax and local income tax for two years starting from the first year
of profitable operations and is subject to a 50% reduction in state income tax
for the next three years. The first profitable year of operations for Dongguan
Chuangying Toys Factory Co., Ltd. was the year ended December 31, 1997. If the
11
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
tax holiday had not existed, the Group's income tax expenses would have been
increased by approximately $3,000 and $6,000 for the six months ended June 30,
1997 and 1998, respectively.
Provision for income taxes comprised:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Current taxes.............. 94 139
- Hong Kong Profits Tax... (38) 89
----------- -----------
Deferred tax............... 56 228
=========== ===========
</TABLE>
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>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
United States federal
income tax rate.............. 35.0% 35.0%
Non-taxable income
arising from activities
which qualified as
offshore..................... (41.5%) (13.7%)
Non-taxable/non-
deductible activities........ 5.8% 6.1%
Tax losses not recognized....... 39.2% 4.9%
Effect of different tax rates
in foreign jurisdictions..... (20.3%) (20.6%)
------------ ------------
Effective income tax rate....... 18.2% 11.7%
============ ============
</TABLE>
12
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Components of deferred tax assets (liabilities) as of December 31, 1997 and June
30, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -----------
1997 1998
------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cumulative tax losses....................... 42 42
Accumulated differences between taxation
allowance and depreciation expenses of
machinery and equipment.................. (99) (188)
------------- -----------
Deferred taxation........................... (57) (146)
============= ===========
</TABLE>
15. SHARE CAPITAL
During the period from January 1, 1995 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 share capital of the Company was
decreased from 250,000,000 shares of common stock, par value $0.0001 each, to
50,000,000 shares of common stock, par value $0.0001 each. On December 30, 1997,
the Company issued 48,060,000 shares of common stock (after the one-for-one
hundred reverse stock split as described above but before the one-for-ten
reverse stock split as described below), par value $0.0001 each, to the
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.
The effects of the one-for-one hundred reverse stock split, the one-for-ten
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.
16. OPERATING LEASE COMMITMENTS
The Group has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2006. Rental expenses for the six months
ended June 30, 1997 and 1998 were approximately $283,000 and $344,000,
respectively. Future minimum rental payments as of December 31, 1997 and June
30, 1998, under agreements classified as operating leases with non-cancellable
terms, are as follows:
13
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<S> <C> <C>
December 31, 1997 June 30, 1998
----------------- -------------
$'000 $'000
(UNAUDITED)
Payable during the following period
- Within one year................................. 563 614
- Over one year but not exceeding two years....... 487 467
- Over two years but not exceeding three years.... 427 434
- Over three years but not exceeding four years... 448 428
- Over four years but not exceeding five years.... 390 381
- Thereafter...................................... 977 787
------ ------
3,292 3,111
====== ======
</TABLE>
17. RETIREMENT PLAN
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
From January 1, 1997, the employees in Hong Kong, after completing a probation
period, may join the Group's defined contribution pension fund managed by an
independent trustee. Both the Group and its Hong Kong employees make monthly
contributions to the plan of 5% of the employees' basic salaries. The Hong Kong
employees are entitled to receive their entire contribution together with
accrued interest thereon at any time upon leaving the Group, and 100% of the
Group's employer contribution and the accrued interest thereon upon retirement
or leaving the Group after completing ten years of service or at a reduced scale
of between 30% to 90% after completing three to nine years of service. Any
forfeited contributions made by the Group and the accrued interest thereon are
used to reduce future employer's contributions. The aggregate amount of the
Group's employer contributions (net of forfeited contributions) for the six
months ended June 30, 1997 and 1998 were approximately $24,000 and $27,000,
respectively.
The Group has no other post-retirement or post-employment benefit plans.
18. BANKING FACILITIES
As of December 31, 1997 and June 30, 1998, the Group had banking facilities of
approximately $1,421,000 and $1,864,000, respectively, for overdrafts, loans and
trade financing. Unused facilities as of December 31, 1997 and June 30, 1998
amounted to approximately $99,000 and $488,000, respectively. These facilities
were secured by:
a. Pledges of the Group's bank deposits of approximately $72,000 and
$452,000 as of December 31, 1997 and June 30, 1998, respectively;
b. Personal guarantees provided by Mr. 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 June 30, 1998.
14
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. RELATED PARTY TRANSACTIONS
a The Company entered into the following transactions with related
companies:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1997 1998
--------------- --------------
<S> <C> <C>
$'000 $'000
(UNAUDITED) (UNAUDITED)
Management fee paid to Acma
Strategic Holdings Limited.......... 53 68
Purchase of machinery and tools from
Faithera Engineering Limited*....... - 362
=============== ==============
</TABLE>
- ------------------------
* Faithera Engineering Limited is beneficially owned by certain minority
shareholders of Mastercraft Engineering Limited.
b Details of amounts due to directors of the Company are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
-------------------- ---------------
<S> <C> <C>
$'000 $'000
(UNAUDITED)
Mr. Leo Sheck-Pui Kwok... 612 611
Mr. Carl Ka-Wing Tong.... 249 221
-------------------- ---------------
861 832
==================== ===============
</TABLE>
The amounts due to directors are unsecured, non-interest bearing and without
pre-determined repayment terms.
c Details of amount due to parent company are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
--------------------- -----------------
<S> <C> <C>
$'000 $'000
(UNAUDITED)
Acma Strategic Holdings Limited... 9 8
===================== =================
</TABLE>
15
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The amount due to the parent company was unsecured, non-interest bearing and
without pre-determined repayment terms.
d As of December 31, 1997 and June 30, 1998, the Company'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.
20. SEGMENTAL ANALYSIS
a NET SALES
Net sales comprised:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1997 1998
------------ -------------
<S> <C> <C>
$'000 $'000
(UNAUDITED) (UNAUDITED)
Sales of merchandise... 6,779 11,327
Sales of molds......... 932 2,973
Others................. 12 25
------------ -------------
7,723 14,325
============ =============
</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>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998
------------- ------------
<S> <C> <C>
$'000 $'000
(UNAUDITED) (UNAUDITED)
MBI, Inc............................. 76.8% 32.9%
Mattel Vendor Operations Asia Ltd.... - 28.1%
Drumwell Limited..................... 1.3% 6.6%
Brookfield Collectors Guild.......... 4.7% 5.9%
Hallmark Card (Hong Kong) Ltd........ 0.8% 5.4%
Tyco Hong Kong Limited............... 13.0% -
============= ============
</TABLE>
16
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
d MAJOR SUPPLIERS
Details of individual suppliers accounting for more than 5% of the Company's
purchases are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1997 1998
------------- --------------
<S> <C> <C>
$'000 $'000
(UNAUDITED) (UNAUDITED)
Manfield Coatings Co., Ltd........... 9.6% 11.8%
Genesis Off-set Printing Co., Ltd.... 7.3% 9.2%
Lee Kee Metal Co., Ltd............... 7.2% 7.7%
Zinamet Co., Ltd..................... 6.1% 2.0%
============= ==============
</TABLE>
21. OPERATING RISKS
a COUNTRY RISK
The Group's operations are conducted in Hong Kong and the PRC. Accordingly,
the Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong
and the PRC, and by the general state of the Hong Kong and the PRC
economies.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of
the PRC (the "Hong Kong SAR"). As provided in the Basic Law of the Hong
Kong SAR of the PRC, the Hong Kong SAR will have full economic autonomy and
its own legislative, legal and judicial systems for fifty years. The
Group's management does not believe that the transfer of sovereignty over
Hong Kong will have an adverse impact on the Group's financial and
operating environment. There can be no assurance, however, that changes in
political or other conditions will not result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The Group's results may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other things.
b DEPENDENCE ON STRATEGIC RELATIONSHIP
The Group conducts its manufacturing operations through its contractual
joint venture established between the Company and a PRC party, and several
subcontracting agreements entered into with certain PRC parties. The
deterioration of any or all of these strategic relationships may have an
adverse effect on the operations of the Group.
c CONCENTRATION OF CREDIT RISK
Concentration of accounts receivable is as follows:
17
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
--------------------- ---------------
(UNAUDITED)
<S> <C> <C>
Five largest accounts receivable... 92.1% 78.2%
===================== ===============
</TABLE>
The Group performs ongoing credit evaluations of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
aggregate have not exceeded management's projections.
22. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a Cash paid for interest and income taxes comprised:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1998
------------ -------------
<S> <C> <C>
$'000 $'000
(UNAUDITED) (UNAUDITED)
Interest....... 54 120
============ =============
Income taxes... 75 -
============ =============
</TABLE>
b. Supplemental disclosure of investing activities:
During the six months ended June 30, 1997 and 1998, the Group entered into
capital lease arrangements to purchase machinery and equipment with a
capital value of approximately $407,000 and $454,000, respectively.
18
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
23. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
$'000 $'000
(UNAUDITED) (UNAUDITED)
Depreciation of machinery and equipment
- owned assets.............................. 104 160
- assets held under capital leases.......... 151 123
Interest expenses for
- bank overdrafts and loans................. 11 76
- capital lease obligations................. 43 44
Operating lease rentals for rented premises... 283 344
Repairs and maintenance expenses.............. 145 179
Net foreign exchange (gain) loss.............. 22 (33)
=========== ===========
</TABLE>
19
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-QSB/A that are not purely historical
are 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.
The Company's actual results could differ materially from results anticipated in
these forward-looking statements. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements.
OVERVIEW:
- ---------
The Company is a leading independent manufacturer of collectible-quality,
die-cast replicas of cars, trucks, buses and other items. 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 1/12/th/ to 1/64/th/ scale and include as many as 450 parts,
including numerous moveable parts. They are marketed and distributed by the
Company's customers primarily to collectors, hobbyists and enthusiasts at retail
prices ranging from $20 to $200 or more. The Company's customers are leading
U.S. and European marketers and distributors of vehicle replicas and other
collectibles, including Danbury Mint, Mattel, Hallmark Cards, Paul's Model Art
and Brookfield Collectors Guild.
The Company's mission is to provide the highest level of product quality and
customer service among independent manufacturers of die-cast collectibles. The
Company offers its customers turnkey product development and manufacturing
capabilities that are customized to meet their specific needs. The Company's
vertically integrated process affords complete sourcing of raw materials,
engineering, assembly, quality control and final packaging of die-cast products
in commercial quantities. Depending on the customer's needs, the Company
provides a self-contained production area within one of its factories with
tooling and other production functions dedicated to manufacturing the customer's
products according to its particular design, engineering and quality
requirements. This approach permits customers to closely supervise and control
all aspects of the production process and to protect the confidentiality of
their product design and engineering. The Company's turnkey process enables its
customers to shorten the lead time from conceptual design to product delivery
and to minimize production costs while maintaining high quality and reliability.
All of the Company's manufacturing operations are conducted through CML, the
Company's wholly-owned Hong Kong subsidiary, and CML's subsidiaries. CML was
co-founded in 1986 by Carl Ka-Wing Tong and Leo Sheck-Pui Kwok. 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 4,100 workers.
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 4,806,000
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.
20
<PAGE>
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>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1997 1998 1997 1998
------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................... 100% 100% 100% 100%
Cost of goods sold.................. 80.2 74.0 79.2 71.6
Gross profit........................ 19.8 26.0 20.8 28.4
Selling, general and
administrative expenses.......... 18.9 12.9 15.5 13.9
Interest expense, net............... 0.6 0.4 0.6 0.7
Other expenses, net................. 0.3 0.7 0.3 0.3
Income (Loss) before income taxes
and minority interests............. - 12.6 4.0 13.6
Provision for income taxes.......... 0.01 0.01 0.7 1.6
Minority interests.................. 0.01 0.02 - 2.2
Net income (loss)................... - 0.09 3.3 9.8
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Sales. The Company's net sales for the six months ended June 30, 1998
were $14,325,000, an increase of $6,602,000, or 85%, from $7,723,000 for the six
months ended June 30, 1997. The increase reflected increased demand from
existing customers. Sales to Mattel increased by $4,013,000 for the six months
ended June 30, 1998 compared to the same period in 1997. In addition, sales to
Corgi increased by $846,000, sales to Hallmark increased by $716,000 and sales
to Brookfield increased by $475,000.
Cost of Goods Sold. The Company's cost of goods sold for the six months
ended June 30, 1998 was $10,258,000, an increase of $4,139,000, or 68%, from
$6,119,000 for the six months ended June 30, 1997. This increase reflected an
increase of $2,731,000 in materials cost and an increase of $561,000 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 assets.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses totaled $1,993,000 for the six months ended June 30,
1998, an increase of $796,000, or 67%, from $1,197,000 for the six months ended
June 30, 1997. Selling, general and administrative expenses increased because
the Company incurred increased air freight charges, added 15 employees to its
administrative and development staff at its Hong Kong headquarters, and
increased administrative staff salaries. Selling, general and administrative
expenses decreased as a percentage of net sales to 14% of net sales for the six
months ended June 30, 1998, as compared to 16% of net sales for the six months
ended June 30, 1997. Selling expenses consist primarily of freight 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.
Interest Expense, Net. The Company's interest expense, net was $106,000
during the six months ended June 30, 1998 as compared to a net interest expense
of $50,000 during the six months ended June 30, 1997. The increase in interest
expense was due primarily to increased finance costs associated with increased
short-term debt incurred in 1998 to meet working capital needs [and, to a lesser
extent, to higher prevailing interest rates on borrowings].
Minority Interests. Minority interests at June 30, 1998 totaled
approximately $314,000. This amount represents the net income of Carison
Engineering Limited, the Company's 70%-owned subsidiary, attributable to the 30%
minority interest.
21
<PAGE>
Provision for Income Taxes. The Company's effective income for tax rate was
12% for the six months ended June 30, 1998 as compared to 18% for the six months
ended June 30, 1997. The decrease in the effective tax rate was due primarily to
the net effect of (i) an increase in the recognized tax losses contributed by
certain 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.
Three Months Ended June 30, 1998 Compared To Three Months Ended June 30, 1997
Net Sales. Net sales for the three months ended June 30, 1998 were
$8,729,000, an increase of $5,059,000 or 238%, from $3,670,000 for the three
months ended June 30, 1997. This increase was due primarily to an increase in
sales volume of the Company's products to existing and new customers and a
direct result of the increase in capacity.
Cost of Goods Sold. Cost of goods sold for the three months ended June 30,
1998 was $6,436,000, an increase of $3,493,000, or 218%, from $2,943,000 for the
three months ended June 30, 1997. This increase was due to additional raw
material purchases that were made to meet increased sales volume and
manufacturing capacity.
Selling, General And Administrative Expenses. Selling, general and
administrative expenses totaled $1,141,000 for the three months ended June 30,
1998, an increase of $446,000, or 64%, from $695,000 for the three months ended
June 30, 1997. Selling, general and administrative expenses constituted 13% of
net sales for the three months ended June 30, 1998 and 19% of net sales for
three months ended June 30, 1997. Selling, general and administrative expenses
increased due to an increase in administrative and personnel costs to support
the increase in sales and manufacturing capacity.
Interest Expense, Net. Interest expense, net was $36,000, or 0.4% of net
sales, for the three months ended June 30, 1998 as compared to $24,000, or 0.6%
of net sales, for the three months ended June 30, 1997. The increase in interest
expenses was attributable to higher interest rates and finance charges
associated with additional capital requirements needed to meet manufacturing
needs.
Minority Interests. 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. Minority interests at June 30,
1998 totaled approximately $314,000.
Provision For Income Taxes. The Company's provision for income taxes was
$129,000 for the three months ended June 30, 1998, reflecting an effective
income tax rate of 12%, for the three months ended June 30, 1998. The
Company's provision for income taxes was $23,000 for the three months ended June
30, 1997, reflecting an effective income tax rate of 288%. The difference in
the effective tax rate was due to changes in contributions from subsidiaries
with minority interests and (ii) tax on net income of its Hong Kong
subsidiaries.
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
six months ended June 30, 1998, the Company's operating activities provided cash
of $1,675,000. The Company's operations used cash of approximately $431,000 for
the six months ended June 30, 1997. Investing activities used approximately
$797,000 during the six months ended June 30, 1998 and approximately $14,000
during the six months ended June 30, 1997. The Company used approximately
$473,000 of cash in financing activities during the six months ended June 30,
1998. The Company generated approximately $259,000 of cash in financing
activities during the six months ended June 30, 1997.
At June 30, 1998, the Company had working capital of approximately $217,000
as compared to a working capital deficit of $829,000 at December 31, 1997. The
approximately $1,046,000 increase was primarily due to an increase in
inventories and accounts receivable.
At June 30, 1998, net accounts and bills receivable totaled approximately
$3,698,000 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
22
<PAGE>
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 credit facilities provided by
affiliates and third parties. At June 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 has not experienced any significant problems with collection of its
accounts receivable. See Note 21 of Notes to Consolidated Financial Statements.
The Company's accounts payable and accrued liabilities increased by
approximately $1,518,000, or 44%, to approximately $5,005,000 at June 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 June 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 $479,000, or 16%, to
approximately $3,407,000 at June 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.
For the six months ended June 30, 1998, additions to property, plant and
equipment were $1,251,000 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
$3,581,000 of additional expenditures to expand and improve its manufacturing
operations during the remainder of 1998. As of June 30, 1998, the aggregate
outstanding amount under all capital leases was approximately $1,011,000 as
compared to approximately $1,030,000 at December 31, 1997. The Company intends
to use a portion of the net proceeds of the offering to make regularly scheduled
payments under its capital leases.
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 Holding Limited.
The Company has revolving lines of credit with Hang Seng Bank, Banque
Nationale de Paris, Bank of China and Commonwealth Finance Corporation Limited.
As of June 30, 1998, these lines of credit allowed for aggregate borrowings of
up to $1,864,000. As of June 30, 1998, the Company had approximately $1,376,000
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 has no capital commitments to purchase
machinery or tools but expects to spend approximately $1,990,000 to purchase
such items 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 proceeds
from this offering, net cash from operating activities, 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 twelve 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.
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Year 2000 Compliance
The Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000. However, there
can be no assurance that there will not be a delay in, or increased costs
associated with, the Company's implementation of the necessary systems and
changes to address the year 2000 issues. If the Company is unable to implement
such systems and changes in a timely manner, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as financial institutions, government agencies,
customers and suppliers for accurate exchange of data. Even if the internal
systems of the Company are not materially affected by the year 2000 issue, the
Company could be affected by disruptions in the operation of the enterprises
with which the Company interacts.
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.
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 six months ended June 30, 1998, approximately 10.6% of
the Company's net sales arose from sales to European customers, and in 1997
approximately 6.2% of the Company's net sales were attributable to sales to
European customers. The U.S. and European governments may, from time to time,
impose new quotas, duties, tariffs, or other charges or restrictions, or adjust
presently prevailing quota, duty or tariff levels, which could adversely affect
the Company's ability to continue to export products to the U.S. and Europe at
current or increased levels.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
During the quarter ended June 30, 1998, the Company
filed a report on Form 8-K for the event dated April 30, 1998 with
respect to Item 4.
EXHIBITS:
10.1 Processing Agreement by and between Creative Master
Limited and Dongguan Heng Li Zhen Trading Company dated June
18, 1998. (To be filed by amendment).
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CREATIVE MASTER INTERNATIONAL INC.
Date: October 30, 1998 By: /s/ Carl Tong
------------------------------
Carl Tong, President
26
