<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1998
REGISTRATION NO. 333-65929
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CREATIVE MASTER INTERNATIONAL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(852) 2396-0147
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
<TABLE>
<S> <C> <C>
DELAWARE 3944 11-2854355
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
CARL KA WING TONG
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(852) 2396-0147
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
DALE E. SHORT, ESQ. MARK A. KLEIN, ESQ.
STEPHANIE GRANATO, ESQ. KATHERINE J. BLAIR, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION FRESHMAN, MARANTZ, ORLANSKI,
1801 CENTURY PARK EAST, 16TH FLOOR COOPER & KLEIN
LOS ANGELES, CALIFORNIA 90067 9100 WILSHIRE BLVD.
(310) 553-4441 EIGHTH FLOOR, EAST TOWER
FAX: (310) 201-4746 BEVERLY HILLS, CALIFORNIA 90212
(310) 273-1870
FAX: (310) 274-8293
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT YET COMPLETE, AND IT MAY +
+BE SUPPLEMENTED OR AMENDED IN THE FINAL VERSION. A REGISTRATION STATEMENT +
+RELATING TO THE SECURITIES DESCRIBED IN THIS PROSPECTUS HAS BEEN FILED WITH +
+THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SECURITIES, OR +
+ACCEPT OFFERS TO BUY THEM, UNTIL THE REGISTRATION STATEMENT BECOMES +
+EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE +
+ARE NOT SOLICITING OFFERS TO BUY THEM. THESE SECURITIES WILL NOT BE SOLD IN +
+ANY STATE WHERE THEIR OFFER OR SALE, OR SOLICITATIONS OF OFFERS TO BUY THEM, +
+WOULD BE UNLAWFUL PRIOR TO THEIR REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1998
PROSPECTUS
[LOGO OF CREATIVE MASTER
INTERNATIONAL, INC.]
1,600,000 SHARES OF COMMON STOCK
$ PER SHARE
---------------
Creative Master International, Inc. is an independent manufacturer of
collectible-quality, die-cast replicas of cars, trucks, buses and other items.
Of the 1,600,000 shares of common stock being offered, we are offering
1,525,276 shares. Three of our stockholders are offering an additional 74,724
shares.
Our common stock is listed on the OTC Electronic Bulletin Board under the
symbol "CVMI," but there is no active trading market for the common stock.
Before this offering we and Cruttenden Roth Incorporated will negotiate the
public offering price of the common stock. We currently estimate that the
public offering price for the common stock will range between $6.00 and $8.00
per share. 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.................
Underwriting Discounts and Commis-
sions................................
Proceeds to Creative Master...........
Proceeds to Selling Stockholders......
</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 240,000 shares of common stock to cover any
over-allotments. We will not receive any proceeds from the sale of common stock
by that selling stockholder in the event the over-allotment option is
exercised.
---------------
CRUTTENDEN ROTH
INCORPORATED
---------------
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1998.
<PAGE>
INSIDE FRONT COVER
[Collage of magazine covers showing the Company's products.]
2
<PAGE>
GATE
[Foldout -- Replicas of classic cars.]
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and financial
statements appearing elsewhere in this prospectus. This summary is not complete
and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and financial statements.
CREATIVE MASTER INTERNATIONAL, INC.
<TABLE>
<S> <C>
Our Business............ We are 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.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Our Strategy.......... Our mission is to provide the highest level of
product quality and customer service among
independent manufacturers of collectible die-cast
replicas. Key elements of our strategy are to:
. Manufacture Collectible-Quality, Die-Cast Products.
. Carefully Manage Growth/Focus on Quality Customers.
. Increase the Diversity of Customers, Products and
Market Segments Served.
. Pursue Product Development Opportunities.
. Invest in Plant, Equipment and Employees.
Our Manufacturing
Operations.............. Our manufacturing operations are conducted through
Creative Master Limited, our wholly-owned Hong Kong
subsidiary, and its subsidiaries. Our production
facilities are located in the Dongguan region of
Guangdong Province, China, approximately 60 miles
northwest of Hong Kong.
Our Principal Offices... Our principal executive offices are located at Casey
Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui,
Kowloon, Hong Kong, and our telephone number is 852-
2396-0147. We are a Delaware corporation.
THE OFFERING
Shares Outstanding...... We have approximately 3,749,810 shares of common
stock outstanding.
Shares Offered.......... We are offering 1,525,276 of the 1,600,000 shares of
common stock being offered and three of our
stockholders are offering the balance of 74,724
shares. There will be a total of approximately
5,275,086 shares of common stock outstanding after
this offering. Another of our stockholders has
granted the underwriters of this offering a 45-day
option to purchase 240,000 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 stockholders.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Financial Information
Presented in U.S.
Dollars................. All of our sales are denominated either in U.S.
dollars or Hong Kong dollars. Our expenses are
denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of
which is the yuan. All financial information in this
prospectus is presented in U.S. dollars.
Trademarks Not Owned by
Company................. This prospectus refers to certain trademarks or
servicemarks of other companies. We do not own or
have any rights to any of these marks.
Forward-Looking
Statements.............. This prospectus contains statements that we believe
are foward-looking statements within the meaning of
the federal securities laws. These include statements
about our expectations, beliefs, intentions or
strategies for the future, which we indicate by words
or phrases such as "anticipate," "expect," "intend,"
"plan," "will," "we believe," "the company believes,"
"management believes" and similar language. The
forward-looking statements are based on our current
expectations and are subject to certain risks,
uncertainties and assumptions, including those set
forth in the risk factors and under "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Our actual
results may differ materially from results
anticipated in these forward-looking statements. We
base our forward-looking statements on information
currently available to us, and we assume no
obligation to update them.
</TABLE>
5
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The summary financial data set forth below have been derived from our audited
and unaudited financial statements included in this prospectus beginning on
page F-1. Since we had no outstanding stock options or convertible securities
during the periods shown, basic and diluted net income (loss) per common share
were the same for all periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
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 3,605,296 3,604,500 3,749,810
========= ========= ========= ========= =========
</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 $ 3,937
Working capital (deficit).................... (829) 238 3,762
Total assets................................. 10,499 15,689 22,505
Long-term obligations--capital lease, non-
current portion............................. 266 502 --
Stockholders' equity......................... 2,739 4,813 13,587
</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 1,525,276 shares
of common stock at an assumed public offering price of $7.00 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.
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. Before
deciding whether to invest, you should read and consider carefully the
following risk factors.
DEPENDENCE ON IMPORTANT CUSTOMERS
Our business is concentrated among a limited number of customers. In 1997,
sales to Danbury Mint, a subsidiary of MBI, accounted for approximately 64.2%
of our net sales and sales to Mattel Vendor Operations Ltd. and Tyco Hong Kong
Limited, subsidiaries of Mattel, totaled approximately 20.4% 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
7
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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,
8
<PAGE>
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 - Danbury
Mint, Mattel (including Tyco), Brookfield Collectors Guild, Corgi Classic Cars
and Hallmark, which accounted for approximately 78% of our accounts receivable
at September 30, 1998. These same five customers accounted for approximately
92% of our accounts receivable at December 31, 1997. 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
9
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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.
10
<PAGE>
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
11
<PAGE>
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; RISK OF STOCK PRICE VOLATILITY
Our common stock is quoted on the OTC Electronic Bulletin Board under the
symbol "CVMI," but there is no active trading market for our common stock. See
"Market Price for Common Stock and Dividend Policy" for a more detailed
explanation of the trading market of our common stock. The 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
trading 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. See "Underwriting" for a more detailed explanation
of how the offering price of the common stock will be determined. In recent
years and months, the stock market has experienced significant price and volume
fluctuations. These fluctuations, which are often unrelated to the operating
performances of specific companies, have had a substantial effect on the market
price of stocks, particularly stocks of companies such as ours in the "small
cap" category. It is also possible that our operating results will not meet the
expectations of our public market analysts, which could have an adverse effect
on the trading price of the common stock. Accordingly, the market price of the
common stock may fluctuate substantially. There also is no assurance that the
market price for the common stock will ever exceed the initial public offering
price.
ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK DUE TO SALE OF ADDITIONAL SHARES
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 3,749,810 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
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.
12
<PAGE>
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 64% of
our outstanding shares (or approximately 60% if the over-allotment option is
exercised in full). Therefore, these stockholders will have the ability to
control the election of our directors and most of our corporate actions.
IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the common stock. We
estimate this dilution to be approximately $4.56 per share, or approximately
65%, assuming an initial public offering price of $7.00 per share. See
"Dilution" for a description of how this dilution was calculated.
AUTHORIZED PREFERRED STOCK
Before this offering, we will amend and restate our Certificate of
Incorporation to authorize our Board of Directors to issue up to 5,000,000
shares of preferred stock. The restated certificate will also authorize our
board to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of
the holders of any preferred stock may adversely affect the rights of holders
of common stock. Our ability to issue preferred stock will give us flexibility
concerning possible acquisitions and financings, but it could make it more
difficult for a third party to acquire a majority of our outstanding voting
stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware
Anti-Takeover Law and Certain Charter Provisions" for a more detailed
description of provisions that could impede or prevent a change in our control
or management.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to Creative Master International, Inc. ("Creative Master" or
the "Company") from the sale of the 1,525,276 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 $8,774,239. This assumes an initial public
offering price of $7.00 per share. 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)............................... $4,900,000 56%
Payment of capital lease obligations(2)............. 958,000 11
Repayment of short-term bank debt(3)................ 1,000,000 11
Working capital and general corporate purposes(4)... 1,916,239 22
---------- ---
Total............................................. $8,774,239 100%
========== ===
</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 9, 1998)... $1.35 $0.68
</TABLE>
As of December 10, 1998, there were approximately 1,200 record holders of the
common stock.
The Company has not paid any cash dividends on the common stock, and it
currently intends to retain any future earnings to fund the development and
growth of its business. The dividend payable reflected on the Company's
consolidated balance sheets included in this prospectus represent dividends
declared by Creative Master Limited, the Company's wholly-owned Hong Kong
subsidiary, prior to the exchange reorganization on December 30, 1997. For more
information about this exchange reorganization, see "Capitalization--Additional
Information About Financial Presentation." These dividends will be paid by the
Company in the future at the Company's discretion.
Dividends receive favorable tax treatment in Hong Kong and other non-U.S.
jurisdictions where the Company's principal stockholders reside, and the
Company may pay cash dividends in the future. Any future determination to pay
dividends will depend upon the Company's results of operations, financial
condition and capital requirements, applicable restrictions under any credit
facilities or other contractual arrangements and such other factors deemed
relevant by the Company's Board of Directors. The Company's existing bank
credit facilities restrict the payment of cash dividends.
16
<PAGE>
DILUTION
As of September 30, 1998, the net tangible book value of the Company was
approximately $4,073,000, or $1.09 per share of common stock. Net tangible book
value per share is determined by dividing the tangible net worth of the Company
(total assets, net of goodwill, less total liabilities) by the number of shares
of common stock outstanding. Without taking into account any change in the
Company's net tangible book value after September 30, 1998, assuming an initial
public offering price of $7.00 per share and after deducting underwriting
discounts and commissions, the underwriters' non-accountable expense allowance
and other estimated offering expenses, the pro forma net tangible book value of
the Company as of September 30, 1998 would have been approximately $12,847,000,
or $2.44 per share. This represents an immediate increase in the net tangible
book value of $1.35 per share to existing stockholders and an immediate
dilution of $4.56 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $7.00
Net tangible book value per share as of September 30, 1998.... $1.09
Increase per share attributable to this offering.............. $1.35
Pro forma net tangible book value per share after this
offering....................................................... $2.44
-----
Dilution to new investors....................................... $4.56
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30, 1998,
the number of shares of common stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors in this offering. The information in the
table assumes an initial public offering price of $7.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 3,749,810 71.1% $ 4,813,000 31.1% $1.28
New investors........... 1,525,276 28.9% $10,677,000 68.9% $7.00
--------- ----- ----------- -----
Total................. 5,275,086 100.0% $15,490,000 100.0%
========= ===== =========== =====
</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 1,525,276 shares of common stock and its
application of the estimated net proceeds and after deducting the underwriting
discounts and estimated offering expenses payable by the Company. The
information in the table assumes a public offering price of $7.00 per share.
The information in the table should be read in conjunction with the more
detailed consolidated financial statements and notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
AS
ACTUAL ADJUSTED
-------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
SHORT-TERM DEBT:
Short-term bank borrowings................................ $ 1,503 $ 503
Capital lease obligations, current portion................ 456 --
-------- ---------
$ 1,959 $ 503
======== =========
LONG-TERM DEBT:
Capital lease obligations, non-current portion............ $ 502 $ --
Minority interests........................................ 387 387
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 25,000,000 shares autho-
rized, 3,749,810 shares issued and outstanding; 5,275,086
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 10,175
Retained earnings......................................... 3,411 3,411
-------- ---------
Total stockholders' equity.............................. 4,813 13,587
-------- ---------
TOTAL CAPITALIZATION........................................ $ 5,702 $ 13,974
======== =========
</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. Prior to completion of this offering, the Company will effect 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 160,000 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
22
<PAGE>
factory is completed, and it is being fitted out with fixtures and equipment.
It will be operational by the end of 1998. This fourth factory contains
approximately 40,000 square feet of production area which will be dedicated
solely to model making and tool making and will accommodate up to 200
technicians. The Company is also building a fifth factory and related dormitory
facilities with approximately 120,000 square feet of manufacturing space and
accommodating up to 1,000 workers. Construction of this fifth factory began in
July 1998 and is expected to be completed in January 1999. The first phase of
this fifth factory is expected to be operational in March 1999. A portion of
the net proceeds of this offering will be used to pay the cost of constructing
and equipping these new factories. All the Company's factories are located
within a one-mile radius of each other. See "Business--Facilities and Planned
Expansion" for more information about the Company's expansion plans.
The Company's manufacturing operations in China are conducted through a Chinese
limited liability company established in October 1994 between CML and a local
Chinese partner. The Chinese subsidiary has a three-member board of directors,
two of whom are appointed by the Company and one of whom is appointed by CML's
local Chinese partner. Under the terms of the arrangement with the local
Chinese partner, the local Chinese partner is not entitled to any profits or
responsible for any losses from the subsidiary. Because of this profit-sharing
arrangement, the subsidiary is regarded for accounting purposes as if it were
wholly-owned by the Company.
Historically, the Company has paid no taxes in China. Under Chinese law, the
Company's operations in China are exempted from China state and local income
tax for a two-year period starting from the first year that the Company's
Chinese operations are profitable. Following the initial two-year tax
exemption, the Company will receive a 50% reduction in its Chinese state income
taxes for the next three years. The Company will become subject to taxation in
China beginning January 1, 1999. The Company is subject to tax in Hong Kong at
the statutory rate of 16% to 16.5%. However, under current interpretations of
Hong Kong tax law, a Hong Kong company which derives revenues exclusively from
manufacturing operations in China recognizes only 50% of its gross profit as
taxable income in Hong Kong.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ -----------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 79 70 78 80 76
Gross profit............ 21 30 22 20 24
Selling, general and
administrative
expenses............... 24 18 12 15 13
Interest expense, net... 1 1 1 1 1
Other 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 $4,673,000 in materials cost and an increase of
$2,220,000 in salaries and other direct labor costs. Cost of goods sold
includes the cost of raw materials, subcontracting charges for production of
molds, direct labor costs, utilities and other energy costs and depreciation
and amortization of the Company's owned equipment and other depreciable
manufacturing assets. Cost of goods sold constituted 76% of net sales for the
nine months ended September 30, 1998, compared to 80% for the same period in
1997. The decrease was primarily a result of increased sales volume and
efficiencies from better utilization of manufacturing capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses totaled $3,070,000 for the nine months ended
September 30, 1998, an increase of $1,106,000, or 56%, from $1,964,000 for the
nine months ended September 30, 1997. Selling, general and administrative
expenses decreased as a percentage of net sales to 13% of net sales for the
nine months ended September 30, 1998, as compared to 15% of net sales for the
nine months ended September 30, 1997. This decrease as a percentage of sales
was due primarily to the fact that certain components of selling, general and
administrative expenses, including the number of general and administrative
employees and their salaries, did not increase proportionally with the increase
in sales.
Selling expenses consist primarily of shipping expenses and inspection charges.
General and administrative expenses consist of salaries and other employee
expenses for the Company's administrative and product development staffs, the
majority of which are located in Hong Kong, and overhead expenses of the Hong
Kong office. Shipping expenses increased by $98,000 to $412,000 for the nine
months ended September 30, 1998, compared to $314,000 for the nine months ended
September 30, 1997. This increase was primarily due to higher sales volume.
Salaries increased by $183,000 to $1,161,000 for the nine months ended
September 30, 1998, compared to $978,000 for the nine months ended September
30, 1997. This increase was primarily due to the addition of new employees to
the Company's administrative and development staff in Hong Kong and increases
in salaries of some existing employees. The Company also incurred total legal
and professional fees of $206,000 during the nine months ended September 30,
1998, as compared to $136,000 during the same period in 1997. The increase was
due primarily to legal fees and audit expenses associated with meeting the
Company's public reporting requirements.
INTEREST EXPENSE, NET. The Company's interest expense, net was $191,000 during
the nine months ended September 30, 1998, as compared to a net interest expense
of $84,000 during the nine months
24
<PAGE>
ended September 30, 1997. The increase was due to increased borrowings under
the Company's credit facilities to fund the expansion of the Company's
facilities.
MINORITY INTERESTS. Minority interests at September 30, 1998 totaled
approximately $370,000. The Company includes in net income before minority
interests all net income of its wholly-owned and majority-owned subsidiaries.
The portion of such net income attributable to minority interests in the
subsidiaries held by others is then eliminated.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
$359,000 for the nine months ended September 30, 1998, reflecting an effective
income tax rate of 13% for the nine months ended September 30, 1998. The
Company's provision for income taxes for the nine months ended September 30,
1997 was $128,000, reflecting an effective income tax rate of 19% for the nine
months ended September 30, 1997. The decrease in the effective tax rate to 13%
for the nine months ended September 30, 1998 was due primarily to the net
effect of (i) an increase in the recognized tax losses contributed by certain
of the Company's subsidiaries and (ii) an increase in taxable income of the
Company's Hong Kong subsidiaries earned from manufacturing activities in China.
Income earned by a Hong Kong company from manufacturing activities in China is
taxed at 50% of Hong Kong's statutory tax rate.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. The Company's net sales for 1997 increased $2,157,000, or 15%, to
$16,211,000 from $14,054,000 for 1996. The increase was primarily due to sales
to a new customer, Mattel, and increased sales to Drumwell Limited, the agent
for Corgi Classic Cars. Sales to Mattel and Corgi amounted to approximately
$2,400,000 and $683,000, respectively, in 1997. The increase in sales to these
customers was partially offset by a decline in sales to Danbury Mint, which
decreased to $10,402,000 in 1997 compared to $12,426,000 in 1996, primarily due
to delays in the Company's start-up of new projects associated with capacity
constraints.
COST OF GOODS SOLD. The Company's cost of goods sold for 1997 was approximately
$12,703,000, an increase of approximately $2,921,000, or 30%, from
approximately $9,782,000 for 1996. Such increase reflected higher sales volume,
as well as increases of approximately $949,000 in salaries and direct labor
costs, approximately $795,000 in sub-contracting charges for the production of
molds and approximately $233,000 in depreciation charges. Cost of goods sold
constituted 78% of net sales in 1997, compared to 70% in 1996. The increase was
primarily a result of staff increases and production inefficiencies associated
with the start-up of production of new customer orders and operations at the
Company's new manufacturing facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses totaled approximately $1,921,000 in 1997, a
decrease of $631,000, or 25%, from approximately $2,552,000 in 1996. The
decrease was primarily the result of a higher acceptance rate of products by
customers, which resulted in lower repair costs for the Company, and reduced
air freight charges resulting from better compliance with customer delivery
schedules. Air freight charges, which are a component of the Company's shipping
expenses, are typically incurred only when the Company fails to meet customer
delivery schedules. The higher acceptance rate resulted
25
<PAGE>
from better quality control and an improvement in meeting product delivery
schedules. Selling, general and administrative expenses constituted 12% of net
sales in 1997 and 18% in 1996. The decrease was due primarily to increased net
sales in 1997.
INTEREST EXPENSE, NET. The Company's net interest expense was $104,000 in 1997
compared to a net interest expense of $140,000 in 1996. The decrease in net
interest expenses resulted from an increase in interest income arising from
higher average bank balances and higher prevailing interest rates in 1997.
MINORITY INTERESTS. Minority interests were approximately $82,000 in 1997.
There were no minority interests in 1996.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 13% in
1997 and 16% in 1996. The decrease in 1997 was primarily due to an increase in
the recognized tax losses contributed by the Company's Hong Kong subsidiaries.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. The Company's net sales in 1996 totaled approximately $14,054,000,
an increase of approximately $4,072,000, or 41%, from approximately $9,982,000
for 1995. This growth resulted from increased sales to Danbury Mint and the
addition of two new customers, Tyco and Brookfield, a subsidiary of Action
Performance, and was supported by an increase in the Company's production
capacity. Sales to Danbury Mint increased to approximately $11,225,000 in 1996
from approximately $8,055,000 in 1995. New orders from Tyco and Brookfield
amounted to approximately $714,000 and $1,081,000, respectively.
COST OF GOODS SOLD. The Company's cost of goods sold for 1996 was approximately
$9,782,000, an increase of approximately $1,904,000 or 24% from approximately
$7,878,000 for 1995. This reflected an increase of approximately $986,000 in
materials cost and an increase of approximately $395,000 in direct labor costs.
Cost of goods sold constituted 70% of net sales in 1996, compared to 79% in
1995. The reduction was primarily a result of increased operating efficiencies
at the Company's Dongguan facilities and the shut down of its Guangzhou
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses totaled $2,552,000 in 1996 compared to $2,394,000
in 1995, an increase of $158,000 or 7%. The increase resulted primarily from
increased administrative costs related to the Company's increased manufacturing
capacity. Selling, general and administrative expenses decreased to 18% of net
sales in 1996 from 24% of net sales in 1995, a decrease of 6%. The decrease as
a percentage of sales resulted from costs the Company incurred in relocating
its manufacturing operations from Guangzhou to the Dongguan facilities in 1995,
which was not expensed in 1996.
INTEREST EXPENSE, NET. The Company's net interest expense was $140,000 in 1996
compared to a net interest expense of $88,000 in 1995. The increase in interest
expense was primarily due to increased borrowings to purchase additional
machinery and equipment.
MINORITY INTERESTS. There were no minority interests in 1996 or 1995.
26
<PAGE>
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 16% in
1996. In 1995, the Company paid approximately $52,000 of income taxes despite
having a consolidated net loss before income taxes and minority interests of
approximately $507,000 due to taxes on net income of certain of its Hong Kong
subsidiaries. The effective rate increased because the amount of net loss of
certain of the Company's subsidiaries substantially decreased in 1996. The net
loss incurred by those subsidiaries decreased to $472,000 in 1996 from $743,000
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations through a combination of
cash from operations, bank financing and capital lease arrangements. For the
nine months ended September 30, 1998, the Company's operating activities
provided cash of $2,828,000. The Company's operations used cash of
approximately $1,002,000 for the nine months ended September 30, 1997.
Investing activities used approximately $1,532,000 during the nine months ended
September 30, 1998 and generated approximately $32,000 during the nine months
ended September 30, 1997. The Company used approximately $878,000 of cash in
financing activities during the nine months ended September 30, 1998. The
Company generated approximately $802,000 of cash in financing activities during
the nine months ended September 30, 1997.
At September 30, 1998, the Company had working capital of approximately
$238,000 as compared to a working capital deficit of approximately $829,000 at
December 31, 1997. The approximate $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.
27
<PAGE>
For the nine months ended September 30, 1998, additions to property, plant and
equipment were $2,163,000 as compared to $1,226,000 in 1997. In each of these
periods, the Company expanded its facilities and entered into capital leases
for plant and equipment. The Company anticipates that it will make
approximately $1,200,000 of additional capital expenditures during the
remainder of 1998 in connection with the ongoing expansion and improvement of
its manufacturing operations. As of September 30, 1998, the aggregate
outstanding amount under all capital leases was approximately $958,000 as
compared to approximately $1,030,000 at December 31, 1997.
The Company repaid short-term bank loans of approximately $825,000 in 1997 and
obtained equipment lease financing in the aggregate amount of approximately
$835,000. The Company also obtained additional short-term bank loans in the
total amount of approximately $1,097,000 secured by the individual guarantees
of Messrs. Tong and Kwok and by the corporate guarantee of Acma Strategic
Holdings Limited, its principal stockholder, and a standby letter of credit
from Acma Limited, the parent corporation of Acma Strategic Holdings Limited.
The Company has revolving lines of credit with Hang Seng Bank, Banque Nationale
de Paris, Bank of China and Commonwealth Finance Corporation Limited. The
credit agreement with Hang Seng Bank Ltd., which was renewed in July 1998,
provides for a $258,000 trust receipts letter of credit which has an overdraft
sub-limit of $26,000. The letter of credit bears interest at the Hong Kong
prime rate plus 1%. The settlement period for use of the letter of credit is 90
days. Overdue amounts bear interest at the 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 1.5%. The settlement period for use
of the letter of credit is 60 days. Overdue amounts bear interest at the Hong
Kong prime rate plus 2%. The letter of credit is secured by personal guarantees
of Messrs. Tong and Kwok. As of September 30, 1998, approximately $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
1%. The settlement period for use of the letter of credit is 90 days. Overdue
amounts bear interest at the Hong Kong prime rate plus 4.25%. As of September
30, 1998, there was approximately $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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<PAGE>
CURRENCY EXCHANGE FLUCTUATIONS
All of the Company's sales are denominated either in U.S. dollars or Hong Kong
dollars, while its expenses are denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of which is the yuan. Given the
current Asian financial crisis, there can be no assurance that the yuan-to-U.S.
dollar rate will remain stable. Although a devaluation of the Hong Kong dollar
or renminbi relative to the U.S. dollar would be likely to reduce the Company's
expenses, any material increase in the value of the Hong Kong dollar or
renminbi relative to the U.S. dollar would increase the Company's expenses, and
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has never engaged in currency
hedging operations and has no present intention to do so.
SEASONALITY
Each year, the Company ceases production for a two-week period due to the
Chinese New Year holiday, which occurs during late January or early February.
This holiday shutdown has typically resulted in lower revenues during the first
quarter of each year than during the other three quarters. Certain fixed costs,
however, continue despite the Company's closing. This reduction in revenues,
without a corresponding reduction in costs, diminishes liquidity during the
first quarter.
The Company experiences fluctuations in quarterly sales due to the timing of
receipt of orders from customers and product shipments. The Company also incurs
substantial tooling and other costs of manufacturing new products from three to
nine months in advance of obtaining the first customer orders for the new
product. This long lead time may contribute to fluctuations in the Company's
quarterly results of operations.
INTERNATIONAL SALES
The Company sells substantially all of its products to customers in the U.S.
and Europe. During the nine months ended September 30, 1998, approximately 5.0%
of the Company's net sales arose from sales to European customers, and in 1997
approximately 6.2% of the Company's net sales were attributable to sales to
European customers. The U.S. and European governments may, from time to time,
impose new quotas, duties, tariffs, or other charges or restrictions, or adjust
presently prevailing quota, duty or tariff levels, which could adversely affect
the Company's ability to continue to export products to the U.S. and Europe at
current or increased levels.
ACCOUNTING FOR STOCK OPTIONS
The Board of Directors of the Company has adopted a 1998 Stock Option Plan
under which the Company has reserved a total of 420,000 shares of common stock
for issuance upon the exercise of options granted under the plan. Concurrently
with this offering, it intends to grant stock options under the plan to certain
directors, officers, employees and consultants to purchase approximately
304,500 shares of common stock at an exercise price equal to the initial public
offering price of the 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
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<PAGE>
Compensation" ("SFAS 123"), which established the "fair value" method of
accounting for stock-based compensation arrangements, under which compensation
cost is determined using the fair value of the stock option at the grant date
and the number of options vested, and is recognized over the period in which
the related services are rendered. For securities issuances to employees, SFAS
123 also permits the use of the "intrinsic value based" method as set forth in
the Statement of Financial Accounting Standards No. 116. At present, the
Company intends to report all issuance to employees using the intrinsic value
based method for issuances to employees, as allowed by SFAS 123. As further
provided in SFAS 123, the Company will disclose the pro forma effect of
adopting the fair value based method.
Under SFAS 123, any transaction involving non-employees for which goods or
services is the consideration received in exchange for the issuance of equity
instrument, such as options, is to be recorded using the fair value method. The
fair value method states that the amount recorded is to be based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is a more reliable measure.
31
<PAGE>
BUSINESS
OVERVIEW
Creative Master is 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.
34
<PAGE>
Vintage Trains and Locomotives. In April 1998, the Company began working on
tooling for die-cast replicas of six vintage locomotives and trains for Lionel
Trains, a U.S. marketer and distributor of electric train sets and model
trains. The Company expects to begin shipping finished goods for the six
initial models by the end of 1998. In October 1998, the Company received
purchase orders for tooling for an additional six Lionel train replicas. The
Company expects to begin shipping the related finished goods in the second and
third fiscal quarters of 1999. Depending on the success of the initial
products, the Company anticipates manufacturing additional locomotive and train
products in the future.
Outboard Motors and Marine Products. The Company is in the process of
formalizing an arrangement with Alterscale, a company engaged in the
development of collectible marine replicas, to co-develop die-cast collectible
replicas of outboard motors under license from the owner of the Johnson and
Evinrude brands. The Company has manufactured and sold a limited run of
approximately 1,000 of these replicas, and one of the Company's customers is
expected to test market these replicas. The Company also is engaged in
discussions with other owners of marks for marine related products to discuss
licensing opportunities.
PRINCIPAL CUSTOMERS
The Company's customers consist principally of specialty retailers, direct
marketers and other distributors of collectibles in the U.S. and Europe. The
Company's largest customer is Danbury Mint, a division of MBI, Inc. Danbury
Mint is a leading U.S. developer and marketer of 1/24th scale premium die-cast
replicas. It was the Company's first customer.
The Company's second largest customer is Mattel. In 1997, the Company began
manufacturing the popular Matchbox die-cast collectibles series for Mattel. In
the fourth quarter of 1997, Mattel purchased Tyco Hong Kong Limited, for which
the Company had been producing die-cast vehicle replicas since 1996.
The Company's other customers include Action Performance Companies, Inc.
("Action Performance"), which owns 100% of Brookfield Collectors Guild and has
a controlling interest in Paul's Model Art. They also include First Gear,
Hallmark Cards ("Hallmark"), Road Champs and Corgi Classic Cars. The Company
plans to reduce its dependence on its key customers by continuing to diversify
its customers, products and markets through new manufacturing arrangements such
as the arrangement with Lionel Trains and co-development efforts with Companies
such as Alterscale.
The Company's sales transactions with its customers are based on purchase
orders received by the Company from time to time which are subject to
cancellation. Although the Company does not have any long-term agreements with
any of its clients, it believes that its relationships with its customers are
excellent.
MARKETING AND SALES
The Company historically has not engaged in any significant marketing
activities, and has relied primarily on its reputation for quality and
efficiency among its customers to obtain new business. The Company's senior
executives work closely with its customers to develop new products to meet
consumer demand for die-cast collectibles. In September 1998, the Company hired
Henry
35
<PAGE>
Hai-Lin Hu to bolster its product development, marketing and sales efforts. Mr.
Hu has extensive experience in the collectible industry. The Company also
recently hired a Chief Financial Officer in order to permit Mr. Tong to focus
on customer service in his capacity as President and Chief Executive Officer.
See "Management--Executive Officers, Directors, 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
36
<PAGE>
then works with the customer to design a product that meets the customer's
specifications and price point. For example, when building a classic car
replica the Company seeks to ensure that the product is properly proportioned
and historically correct. This means that the Company strives to precisely
reproduce the exterior and interior design, color schemes and accessories of
the original car. One example of this precision is the Company's 1/24th scale
Mercedes Benz SSKL, for which the Company holds a license. Among its many
authentic details, the Mercedes Benz SSKL includes wire wheels, rubber tires,
genuine leather seats, a working steering wheel and a hood that opens to reveal
the car's engine and a leather strap with a metal buckle to secure the hood.
The Company believes that model making is critical to producing the highest
quality collectibles. During the model-making stage of the production cycle,
the Company's engineering staff uses computer-aided design systems to develop a
prototype scale model. The Company will include as many functioning moving
parts as possible, given the Customer's desired price point. Examples of such
features are car doors, trunks and hoods that open, steerable wheels and
working suspension. The Company strives to ensure that the models it produces
also have an authentic build and finish. Once the prototype replica is ready,
it must be approved by the customer before the Company begins to fabricate the
molds and tools that will be used to manufacture the product in commercial
quantities. The Company can generally produce a prototype in one to three
months.
Once the customer has approved a prototype, the Company begins the tooling
process, which typically requires six to twelve months. The tooling process
occurs in two stages. First, the Company produces tooling and molds that will
be used to fabricate each component part of the product. Next, the Company
tests the components and the assembled product produced with the new tools and
molds. If necessary, the Company refines and modifies the molds and tools
before seeking customer approval to manufacture the product. Upon receiving
customer approval, the Company releases the molds and tools to produce final
products.
In the last stage of the production cycle, the Company produces the component
parts, then assembles, finishes, packages and ships the final products. The
die-casting, injection-molding and electrostatic painting areas of the
Company's facilities operate five days per week on a two-shift per day basis.
The finishing, assembly and packing areas also run on a multi-shift basis.
These areas account for most of the total work force and production area at the
Company's facilities.
Typically, customers pay 50% of the Company's tooling and mold-making costs
when the tooling and mold-making process commences and an additional 25% of
these costs when the initial test products are made using the new molds and
tools. The Company receives payment for the final 25% of the tooling costs when
the tools and molds are released for commercial production.
The Company usually insures the tools and molds until they are approved by the
customer for production. At that point, the customer takes ownership and
assumes the cost of insuring the molds and tools.
The long lead time required to develop new products and related tools and
molds, combined with each customer's financial commitment at the beginning of
the tooling process, provides the Company with an indication of prospective
orders for six to twelve months in advance.
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<PAGE>
PRINCIPAL SUPPLIERS AND SOURCES OF SUPPLY
The Company uses zinc alloy and various plastic resins in its die-cast and
injection-molded production operations. The supply and demand for zinc alloy
and for both plastic resins and the petrochemical intermediates from which
plastic resins are produced are subject to cyclical and other market factors
and can fluctuate significantly. The Company acquires raw materials for its
die-cast production primarily from Australia and the United Kingdom. The
Company's standard practice is to maintain a supply of raw materials sufficient
for approximately two months of production. The Company anticipates that it
will be able to obtain sufficient supplies of raw materials as it expands its
production capacity and output.
Three of the Company's suppliers accounted for more than 5% of its supplies in
1997 as shown in the following table:
<TABLE>
<CAPTION>
PERCENT OF TOTAL RAW MATERIAL
SUPPLIED
-----------------------------
YEAR ENDED NINE MONTHS
COMPONENT DECEMBER ENDED
SUPPLIER SUPPLIED 31, 1997 SEPTEMBER 30, 1998
-------- ------------------- ---------- ------------------
<S> <C> <C> <C>
. Manfield Coatings Co.,
Ltd.................... Paint 9.0% 10.9%
. Genesis Off-set
Printing Co., Ltd...... Packaging materials 8.5% 9.8%
. Zinamet Co., Ltd....... Zinc alloy 6.9% 2.7%
. Lee Kee Metal Co.,
Ltd.................... Zinc alloy 6.1% 6.8%
</TABLE>
The Company believes there are multiple sources of supply of these and other
raw materials used in the Company's business.
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<PAGE>
FACILITIES AND PLANNED EXPANSION
The Company's growth is closely related to its manufacturing capacity. At
present, the Company operates three factories in the Dongguan region of
Guangdong Province, China. Legal and administrative functions of these
factories are conducted through the Company's Chinese subsidiary. Following is
a summary of certain information regarding the Company's manufacturing
facilities:
<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.
Each of the Company's factories houses a self-contained manufacturing
operation. Each factory contains personnel and equipment to provide production
planning, engineering, management, decorative processes and final assembly and
packaging. In addition, as is the custom and practice in China, each factory
has adjacent dormitories to house the factory workers. The workers are provided
housing, meals, work clothes and medical care for which they pay only a nominal
monthly amount. The Company also pays for the cost of electricity, water supply
and housekeeping services for the dormitories. The Company's costs of providing
these services are included in cost of goods sold.
Within each factory, the Company provides customers a self-contained production
area with tooling and other production functions dedicated to manufacturing
each customer's products according to its particular design, engineering and
quality requirements. Quality assurance and certain technical functions are
centralized in CML No. 1. Certain other functions are centralized in the
Company's Hong Kong headquarters, including materials purchasing, customer
service, production scheduling among the factories, marketing, new product
development, shipment of finished goods and strategic planning.
39
<PAGE>
CML Nos. 1, 2 and 3 are located in space leased exclusively by the Company.
They are surrounded by perimeter walls or fencing and are generally accessible
only to the Company's employees. CML No. 4 is currently located in shared
rented space. All of these factories are located within a one-mile radius of
each other.
CML No. 1 and CML No. 2 are operating at near capacity, and the Company
believes that these facilities are operating at an efficient level. Currently,
the Company has no plans to expand or modify these facilities.
The Company is in the process of expanding CML No. 3 from approximately 70,000
square feet of production area to 100,000 square feet to meet an anticipated
increase in demand from existing customers. The Company is also building new
dormitory space to accommodate additional workers. Construction of the new
manufacturing area and dormitory space is substantially complete, and the
Company expects to commence initial operations in the new space by 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 first phase will consist of workshop, office and paint warehouse
facilities in approximately 120,000 square feet. It is estimated that initially
CML No. 5 eventually will employ approximately 1,300 workers and that
construction of CML No. 5 will be completed in the second quarter of 1999. The
second phase will be built to provide excess capacity. Based on the Company's
current business expectations, this additional capacity will begin to be
employed in the second half of 1999. The maximum buildable area is
approximately 68,000 square feet for production and 60,000 square feet for
dormitories to accommodate up to approximately 1,300 workers.
The Company works closely with its customers in order to understand and plan
for the customers' anticipated production needs. Plans for the expansion of the
Company's manufacturing facilities are based largely on the anticipated needs
of its primary customers. Adequate undeveloped land adjacent to the Company's
facilities in China permit it to expand as necessary. Typically, the Company
can complete new facilities within six months. This six-month time frame is
within with the normal product development cycle, and the Company historically
has not experienced any significant delays in bringing additional capacity on-
line to meet increased customer demand.
40
<PAGE>
COMPETITION
The Company faces significant competition from toy companies and other
independent manufacturers of die-cast products with production facilities
located in China. Certain of the Company's customers, including Mattel, Action
Performance and Road Champs, have their own die-cast manufacturing facilities
in China.
The Company competes primarily on the basis of quality, technical capabilities
and ability to meet customer delivery schedules. To a lesser extent, it
competes on the basis of price. Although some of the Company's competitors are
larger and have substantially more resources 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 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 90 people in Hong
Kong. As is customary for manufacturers in China, the Company's production
facilities includes housing facilities for its workers. The Company is
committed to
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<PAGE>
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 agreements which expire between December 1998 to
February 2000. The Company is currently in the process of negotiating a renewal
of one of its dormitory tenancy agreements which expired in September 1998. The
aggregate monthly rent for its dormitory facilities is approximately $15,000.
The Company financed the cost of constructing the Dongguan facilities and
believes that its willingness to do so will facilitate the extension of its
leases on such facilities.
The Company has recently undertaken the planned expansion of its manufacturing
facilities as described above under "--Facilities and Planned Expansion."
Through September 30, 1998, the Company had entered into three new tenancy
agreements for the land underlying the new facilities for terms ranging from
four to five years.
INSURANCE
The Company carries property, liability, and workers' compensation insurance
policies, which it believes are customary for businesses of its size and type.
However, there can be no assurance that the Company's insurance coverage will
be adequate or that insurance will continue to be available to the Company at
reasonable rates.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR NOMINEES AND KEY EMPLOYEE
The executive officers, directors, director nominees and key employee of
Creative Master and their ages and positions with Creative Master as of
November 30, 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 Stockholders."
Leo Sheck Pui Kwok has been the Chief Operating Officer and a Director of the
Company since December 1997. Mr. Kwok co-founded CML in 1986. Before founding
CML, Mr. Kwok worked for the Hallmark Group in Asia from 1980 to 1987, where
his last position was as the Chief Merchandise Manager.
John Rempel has been Chief Financial Officer of the Company since November
1998. Prior to joining the Company, from 1995 to November 1998, Mr. Rempel
founded and managed the
43
<PAGE>
consulting division of 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 Limited, a Company listed on the
Singapore stock exchange since 1994. He also serves as a Director of Acma
Strategic Holdings Limited, a principal stockholder of the Company. Before
joining Acma Limited, he was a senior manager with KPMG Peat Marwick LLP in
Singapore.
Clayton K. Trier has indicated his willingness to serve as a director of the
Company following completion of this offering. Since 1997, Mr. Trier has been a
private investor. From 1993 through 1997, Mr. Trier served as the Chairman and
Chief Executive Officer of U.S. Delivery Systems, a NYSE-listed local delivery
company with offices nationwide. He founded U.S. Delivery Systems in 1993. U.S.
Delivery Systems was aquired by Corporate Express Inc. in March 1996. From 1987
to 1991, Mr. Trier was co-Chief Executive Officer and President of Allwaste,
Inc., a NYSE-listed company engaged in waste management. Mr. Trier was a
Certified Public Accountant with Arthur Andersen & Co. in Houston, Texas and
Hong Kong from 1974 to 1987, and was a partner there from 1983 to 1987.
Steve Gordon has indicated his willingness to serve as a director of the
Company following the completion of this offering. Mr. Gordon has been a
principal of, 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 ("Associates Management"), pursuant to which Mr. Tong acts as
Managing Director of Acma Strategic Holdings Limited and performs certain other
duties, including acting as the President and Chief Executive Officer of the
Company. The terms of these agreements are described under "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 prior to 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, Chief Executive
Officer and Chief Financial Officer......... 1997 $ 115,000(2) $ --
1996 88,000(2) --
1995 12,000(3) --
Arthur Seidenfeld(4)......................... 1997 $ -- $ --
1996 -- --
1995 -- --
Leo Sheck Pui Kwok--Chief Operating Officer.. 1997 $ 46,000 $ 4,000
1996 43,200 --
1995 102,000(5) --
</TABLE>
- --------
(1) Does not include dividends paid to the Named Executive Officers with
respect to shares of stock of CML. See "Transactions Involving Officers,
Directors and Principal Stockholders--Dividends" for a more information on
these dividends.
(2) Represents compensation paid to Acma Strategic Holdings Limited for
consulting services as described under "Transactions Involving Officers,
Directors and Principal Stockholders--Tong Consulting Arrangement."
(3) Represents compensation paid to Carl Tong & Associates Management
Consultancy Limited, a Company beneficially owned by Mr. Tong, for Mr.
Tong's services. See "Transactions Involving Officers, Directors and
Principal Stockholders--Tong Consulting Arrangement" for further
information about these services.
(4) Mr. Seidenfeld served as Chief Executive Officer of the Company prior to
the exchange reorganization completed on December 30, 1997, when Mr. Tong
succeeded Mr. Seidenfeld as Chief Executive Officer. The Company was
largely inactive during the periods shown, and Mr. Seidenfeld received no
salary or bonuses during those periods. Mr. Seidenfeld, his mother and a
company controlled by him are selling stockholders in this offering as
described in more detail under "Principal Stockholders and Selling
Stockholders."
(5) Represents compensation paid to Excel Master Limited, a company
beneficially owned by Mr. Kwok at such time.
46
<PAGE>
COMPENSATION PURSUANT TO PLANS
1998 STOCK OPTION PLAN. In September 1998, the Company's Board of Directors
adopted the Company's 1998 Stock Option Plan (the "1998 Plan"), which is
expected to be approved by the Company's stockholders in December 1998. The
purpose of the 1998 Plan is to enable the Company to attract and retain top-
quality employees, officers, directors and consultants and to provide such
employees, officers, directors and consultants with an incentive to enhance
stockholder return. The 1998 Plan provides for the grant to officers,
directors, or other key employees and consultants of the Company of options to
purchase up to an aggregate of 420,000 shares of common stock. Concurrently
with this offering, the Company intends to grant stock options under the 1998
Plan to certain directors, officers, employees and consultants to purchase an
aggregate of 340,500 shares of common stock at an exercise price per share
equal to the initial public offering price of common stock. It is expected that
these options will vest and become exercisable as to 25% of the shares covered
on the date six months from the date of grant. The remaining options will vest
and become exercisable monthly pro rata over a 42-month period. It is proposed
that Messrs. Tong and Kwok receive options to purchase 112,500 shares and
67,500 shares, respectively.
The 1998 Plan may be administered by the Board of Directors or a committee of
the Board (in either case, the "Committee"), which has complete discretion to
select the optionees and to establish the terms and conditions of each option,
subject to the provisions of the 1998 Plan. Options granted under the 1998 Plan
may be "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified options.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the common stock as of the date of grant (110% of the fair
market value if the grant is to an employee who owns more than 10% of the total
combined voting power of all classes of capital stock of the Company). The Code
currently limits to $100,000 the aggregate value of common stock that may be
acquired in any one year pursuant to incentive stock options under the 1998
Plan or any other option plan adopted by the Company. Nonqualified options may
be granted under the 1998 Plan at an exercise price of not less than 100% of
the fair market value of the common stock on the date of grant. Nonqualified
options also may be granted without regard to any restriction on the amount of
common stock that may be acquired pursuant to such options in any one year.
Subject to the limitations contained in the 1998 Plan, options become
exercisable at such times and in such installments (but not less than 20% per
year) as the Committee shall provide in the terms of each individual stock
option agreement. The Committee must also provide in the terms of each stock
option agreement when the option expires and becomes unexercisable, and may
also provide the option expires immediately upon termination of employment for
any reason. No option held by directors, executive officers or other persons
subject to Section 16 of the Securities Exchange Act of 1934, as amended, may
be exercised during the first six months after such option is granted.
Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then
exercisable would terminate three months (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.
47
<PAGE>
Options granted under the 1998 Plan may not be exercised more than ten years
after the grant (five years after the grant if the grant is an incentive stock
option to an employee who owns more than 10% of the total combined voting power
of all classes of capital stock of the Company). Options granted under the 1998
Plan are not transferable and may be exercised only by the respective grantees
during their lifetime or by their heirs, executors or administrators in the
event of death. Under the 1998 Plan, shares subject to cancelled or terminated
options are reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in the
case of certain transactions such as mergers, recapitalizations, stock splits
or stock dividends. The 1998 Plan is effective for ten years, unless sooner
terminated or suspended.
PENSION PLAN. In January 1997, CML adopted a defined contribution pension plan
(the "Pension Plan") which is available to all of the Company's Hong Kong
employees with at least three months of continuous service. Participating
employees may make monthly contributions to the Pension Plan of up to 5% of
each employee's base salary, with matching contributions by the Company. The
Hong Kong employees (or their beneficiaries) are entitled to receive their
entire contribution and the Company's matching contributions, with accrued
interest thereon, upon retirement or death of the employee. Upon resignation or
termination (other than for serious misconduct), employees are entitled to
receive their entire contributions to the Pension Plan, with accrued interest
thereon, plus the vested portion of the Company's matching contributions. A
participating employee becomes fully vested with respect to 30% of the
Company's matching contributions to the Pension Plan after completing three
years of service with the Company and becomes vested with respect to an
additional 10% of the Company's matching contributions for each year of
continuous service thereafter through year ten. CML's subsidiaries, Excel
Master Limited and Carison Engineering Limited, have each adopted pension plans
for their employees which are identical to the Pension Plan.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company's Restated Certificate of Incorporation eliminates the liability of
directors of the Company for monetary damages for breach of their fiduciary
duty as directors, except (i) for breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption; and (iv) for transactions from which the director
derived an improper personal benefit. The Restated Certificate of Incorporation
also provides that the Company will indemnify its officers, directors and other
eligible persons to the fullest extent permitted under the laws of the State of
Delaware. The Company also intends to enter into indemnity agreements with each
of its current directors and executive officers which will provide for
indemnification of, and advancement of expenses to, such persons to the maximum
extent permitted under the laws of the State of Delaware, including by reason
of action or inaction occurring in the past and circumstances in which
indemnification and advancement of expenses are discretionary under Delaware
law.
The Company believes that it is the position of the Commission that, insofar as
the forgoing provisions may be invoked to disclaim liability for damages
arising under the Securities Act of 1933, as amended (the "Securities Act"),
the provisions are against public policy as expressed in the Securities Act and
are, therefore, unenforceable.
48
<PAGE>
TRANSACTIONS INVOLVING OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS
Prior to this offering, the Company entered into transactions and business
relationships with certain of its officers, directors and principal
stockholders. The Company believes that all of the transactions were on terms
no less favorable than the Company could have obtained from independent third
parties. Any future transactions between the Company and its officers,
directors or affiliates will be subject to approval by a majority of
disinterested directors or stockholders in accordance with Delaware law.
HU CONSULTING AGREEMENT. In August 1998, the Company entered into a consulting
agreement with Business Plus Consultants Limited ("Business Plus"), which is
beneficially owned by Henry Hai-Lin Hu, the Company's Executive Vice-
President--Marketing. For its services and the services of Mr. Hu, the Company
has agreed to pay Business Plus a commission equal to 7.5% of all additional
revenues of the Company generated by Business Plus, with a guaranteed monthly
minimum fee of approximately $5,000, and all out-of-pocket expenses. The
agreement has a two-year term and will continue thereafter unless terminated by
either party upon three months prior written notice.
TONG CONSULTING ARRANGEMENT. In January 1996, the Company entered into a
consulting agreement with Acma Strategic Holdings Limited ("Acma Strategic"),
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, 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 one of the selling stockholders in this offering. For additional
information in this regard, see "Principal Stockholders and Selling
Stockholders."
49
<PAGE>
LOANS TO CML. Messrs. Kwok and Tong had outstanding certain non-interest
bearing loans to CML in the amounts of $614,000 and $316,000, respectively as
of December 31, 1996 and $612,000 and $316,000, respectively, as of December
31, 1997. The loans were repayable on demand. As of September 30, 1998, the
outstanding balances of the loans were approximately $494,000 and $227,000,
respectively. As of October 1, 1998, the principal amount of the outstanding
loans from Messrs. Kwok and Tong were converted into non-interest bearing term
loans which will be due and payable in six equal semi-annual installments
commencing March 31, 1999 and ending September 30, 2001.
In addition, in 1997 Acma Strategic advanced $9,000 on CML's behalf, which was
repaid, without any interest, in January 1998.
LOANS FROM COMPANY. During 1995, 1996 and 1997, Mr. Tong borrowed certain
amounts from CML. The maximum balance of such loans at any one time was
$124,000. The loans were non-interest bearing and were repayable on demand by
CML. All loan transactions ceased upon the completion of the Company's exchange
reorganization. The remaining outstanding balance of the loans were repaid in
full in September 1998.
DIVIDENDS. During the year ended December 31, 1997, Carison Engineering
Limited, a subsidiary 70% owned by the Company, paid a dividend in the amount
of approximately $215,000. Mr. K.T. Yiu, Vice-President--Mold Engineering and
Production of the Company and a 30% shareholder of Carison Engineering Limited,
received approximately $64,500 of such dividend. For the year ended December
31, 1997, CML declared dividends in the amount of approximately $183,000 to
Acma Strategic, approximately $108,000 to Leo Sheck Pui Kwok and approximately
$32,000 to Carl Ka Wing Tong. These dividends were declared and will be paid
strictly in accordance with their respective share holdings in CML of Acma
Strategic and Messrs. Tong and Kwok.
GUARANTEES OF COMPANY DEBT. As of September 30, 1998, the Company had credit
facilities with Hang Seng Bank, Banque Nationale de Paris, Bank of China and
Commonwealth Finance Corporation Limited of $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 expires in August 2000.
50
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of common stock as of
November 30, 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) each 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 4.9%
Leo Sheck Pui Kwok(4)... 564,948 15.1 -- 564,948 10.7
Arthur Seidenfeld(5).... 74,724 2.0 74,724 -- --
Anne Seidenfeld......... 4,102 * 4,102 -- --
Modern Technology
Corp. ................. 37,575 1.0% 37,575 -- --
Clayton K. Trier........ -- -- -- -- --
Steve Gordon............ -- -- -- -- --
Acma Ltd. (6)........... 2,551,930 68.0 240,000(7) 2,311,930(7) 43.8(8)
Quek Sim Pin(9)......... 2,551,930 68.0 240,000(7) 2,311,930(7) 43.8(8)
All directors, director
nominees and executive
officers as a group (10
persons)............... 823,084 22.0 -- 823,084 15.6
</TABLE>
- -------
(1) Except as otherwise indicated, the address of each principal stockholder is
c/o the Company at Casey Ind. Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui,
Kowloun, Hong Kong.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to the shares shown. Except as indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(3) Mr. Tong is a Managing Director and 10% shareholder of Acma Strategic
Holdings Limited. As such, Mr. Tong shares investment and voting power with
respect to the shares shown as beneficially owned by Acma Strategic
Holdings Limited, as to which he disclaims beneficial ownership. Acma
Strategic Holdings Limited guarantees a banking facility of the Company.
(4) The shares shown are held of record by Superego, Inc., a British Virgin
Islands company beneficially owned by Mr. Kwok.
(5) Includes 4,102 shares being offered hereby by Anne Seidenfeld, Mr.
Seidenfeld's mother, and 37,575 shares being offered hereby by Modern
Technology Corp., a company controlled by Mr. Seidenfeld. Mr. Seidenfeld
served as a director and Chief Executive Officer of the Company until
completion of the exchange reorganization on December 30, 1997. Mr.
Seidenfeld is not an affiliate of the Company and, except as described, has
not been an affiliate or had any material relationship with the Company
during the past three years.
(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 240,000 shares of common stock if the
Underwriters' over-allotment option is exercised in full. See
"Underwriting" for more information regarding the over-allotment option.
(8) Assumes the Underwriters' over-allotment option is exercised in full.
(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.
51
<PAGE>
CHANGE IN ACCOUNTANTS
Effective April 30, 1998, Greenberg & Company, LLC ("Greenberg"), which had
been the Company's auditor prior to the exchange reorganization, resigned as
the independent accountants of the Company. The Company's Board of Directors
approved the appointment of Arthur Andersen & Co. as its new independent
accountants on April 30, 1998.
Greenberg's report on the Company's financial statements for the past two years
did not contain an adverse opinion or disclaimer, and was not modified as to
uncertainty, audit scope or accounting principles during that period. The
Company did not have any disagreements with Greenberg on any matter of
accounting principles, financial statements, auditing scope or procedure during
that period.
DESCRIPTION OF CAPITAL STOCK
The current authorized capital stock of the Company consists of 60,000,000
shares of common stock, par value $.0001 per share, 3,749,810 shares of which
were issued and outstanding as of November 24, 1998. Prior to completion of
this offering, the Company intends to amend and restate its Certificate of
Incorporation to reduce the authorized shares of capital stock to 30,000,000
shares, consisting of 25,000,000 shares of common stock and 5,000,000 newly
authorized shares of preferred stock, $.0001 par value. The Restated
Certificate of Incorporation also will effect a 3-for-4 reverse split of the
outstanding common stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. The holders of common
stock are entitled to receive dividends ratably when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of common
stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are, and the
shares of common stock offered by the Company hereby, when issued against the
consideration set forth in this Prospectus, will be, validly issued, fully-paid
and nonassessable.
PREFERRED STOCK
Under the Company's Restated Certificate of Incorporation, the Board of
Directors will be authorized, subject to any limitations prescribed by the laws
of the State of Delaware, but without further action by the Company's
stockholders, to provide for the issuance of up to 5,000,000 shares of
preferred stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the designations,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof, and to increase or
decrease
52
<PAGE>
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 (the "Delaware Law"), an anti-takeover law. In general, the
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
Jersey Transfer and Trust Co., in Verona, New Jersey, serves as transfer agent
and registrar for the common stock.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADEABLE AFTER OFFERING. Upon completion of this
offering, the Company will have 5,275,086 shares of common stock outstanding.
The 1,525,276 shares to be sold by the Company in this offering (and all shares
sold by the selling stockholders) will be freely tradeable without restriction
or limitation under the Securities Act, except for any such shares held by
"affiliates" of the Company, as such term is defined under Rule 144 of the
Securities Act, which shares will be subject to the resale limitations under
Rule 144. Of the remaining outstanding shares, approximately 3,375,012 shares
are "restricted securities" within the meaning of Rule 144 and may be publicly
sold only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. All of these
restricted shares of common stock will become eligible for resale under Rule
144 commencing December 30, 1998. The Company's directors and officers and
certain of its stockholders who collectively hold an aggregate of 3,604,500
shares, have agreed not to sell, directly or indirectly, any shares owned by
them for a period of six months after the date of the completion of this
offering without the prior written consent of the Representative. Upon the
expiration of this six month lock-up period (or earlier upon the consent of the
Representative), all of these shares will become eligible for sale subject to
the restrictions of Rule 144.
RULE 144. In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year, including an affiliate of the Company, would be entitled to
sell, within any three-month period, that number of shares that does not exceed
the greater of 1% of the then-outstanding shares of common stock (approximately
52,750 shares after this offering) and the average weekly trading volume in the
common stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Commission, provided certain manner
of sale and notice requirements and requirements as to the availability of
current public information about the Company are satisfied. In addition,
affiliates of the Company must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of common stock. As defined in Rule 144, an "affiliate" of an issuer is
a person who, directly or indirectly, through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer. Under Rule 144(k), a holder of "restricted securities" who is not
deemed an affiliate of the issuer and who has beneficially owned shares for at
least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above.
FORM S-8 REGISTRATION OF OPTIONS. The Company intends to file a Registration
Statement on Form S-8 covering the shares of common stock that have been
reserved for issuance under the 1998 Plan, which would permit the resale of
such shares in the public market.
EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK. The Company is
unable to estimate the number of shares that may be sold in the future by its
existing stockholders or the effect, if any, that such sales will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of the common stock.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Underwriters named below, for whom
Cruttenden Roth Incorporated is acting as Representative, have agreed to
purchase from the Company and the selling stockholders, and the Company and the
selling stockholders have agreed to sell to the Underwriters, the respective
number of shares of common stock set forth opposite each Underwriter's name
below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated........................................
Total........................................................... 1,600,000
=========
</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 and the selling stockholders have been advised by the
Representative that the Underwriters propose to offer the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and to certain securities dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such selected dealers may reallow, a discount not in excess of $ per
share to certain brokers and dealers. After the public offering of the shares,
the public offering price and other selling terms may be changed by the
Representative. No change in such terms shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this prospectus.
Acma Investments Pte., Ltd., a wholly-owned subsidiary of Acma Ltd., has
granted an option to the Underwriters, exercisable for a period of 45 days
after the date of this prospectus, to purchase up to an additional 240,000
shares of common stock at the public offering price set forth on the cover page
of this prospectus, less the underwriting discounts and commissions. The
Underwriters may exercise this option only to cover over-allotments, if any. To
the extent that the Underwriters exercise this option, each of the Underwriters
will be committed, subject to certain conditions, to purchase such additional
shares of common stock in approximately the same proportion as set forth in the
above table.
The Company's directors and officers and certain of its stockholders who own an
aggregate of 3,604,500 shares of common stock have agreed that they will not,
without the prior written consent of Cruttenden Roth Incorporated (which
consent may be withheld in its sole discretion) and subject to certain limited
exceptions, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, sell short, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or enter into
any swap or similar agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common stock, for a period of six
months after the date of completion this offering. Cruttenden Roth
Incorporated, on behalf of the Underwriters, may, in its sole discretion and at
any
55
<PAGE>
time without notice, release all or any portion of the securities subject to
these lock-up agreements. In addition, the Company has agreed that, for a
period of six months after the date of completion of this offering, it will
not, without the consent of Cruttenden Roth Incorporated, make any offering,
purchase, or sale or other disposition of any shares of common stock of the
Company or other securities convertible into or exchangeable or exercisable for
shares of common stock (or agreement for such) except for the grant of options
to purchase shares of common stock pursuant to the 1998 Plan and shares of
common stock issued pursuant to the exercise of options granted under such
plan. 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 $160,
warrants to purchase up to 160,000 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. ("NASD") under its
Corporate Financing Rule to determine whether the total compensation paid to an
underwriter and its associated and related persons for services in connection
with a public offering is excessive. The sole factor considered by the Company
and the Representative in negotiating the exercise price of the
Representative's Warrants in this offering was to select an amount that would
not be considered excessive under the NASD's Corporate Financing Rule in light
of the total compensation payable by the Company in connection with this
offering. The Representative's Warrants will be exercisable for a period of
four years beginning one year after the date of this prospectus and 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 374,800 shares of common stock in the
public float. As there has been no active trading market for the common stock
prior to this offering, the Company and the Representative believe that prices
for the common stock on the OTC Electronic Bulletin Board do not reflect the
trading prices that the common stock would receive if an established and active
trading market existed. Accordingly, the Company is determining the price of
the common stock in this offering in the same manner that the price of common
stock offered in an initial public offering is determined -- through
consultation and negotiation with the Representative of the Underwriters. Among
the factors to be considered in such 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
56
<PAGE>
prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management, the number of shares of
common stock being offered and the total number of shares to be outstanding
upon completion of this offering, the price that purchasers might be expected
to pay for the common stock given the nature of the Company and the general
condition of the securities markets at the time of the offering, the
consideration of these factors in relation to the market valuation of
comparable companies in related businesses or whose operations are conducted in
the same geographic area as those of the Company and the current condition of
the markets in which the Company operates. The Company believes that the
primary factors justifying a higher price for the common stock in this offering
than that quoted on the OTC Electronic Bulletin Board are an assessment of the
market prices and price-earnings ratios of publicly-traded companies engaged in
activities considered comparable to the Company's business and the sales and
earnings of the Company in recent periods. There can be no assurance that an
active trading market will develop for the common stock after this offering or
that the common stock will trade in the public market subsequent to this
offering at or above the initial public offering price.
The Underwriting Agreement provides that the Company and the selling
stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof. The Company is generally obligated to indemnify the
Underwriters and their respective controlling persons in connection with losses
or claims arising out of any untrue statement of a material fact contained in
this prospectus or in related documents filed with the Securities and Exchange
Commission or with any state securities administrator or arising out of any
omission to state in any of such documents any material fact required to be
stated in such documents or necessary to make the statements made in such
documents, in light of the circumstances under which they were made, not
misleading. In addition, the Company is generally obligated to indemnify the
Underwriters and their respective controlling persons in connection with losses
or claims arising out of any breach of any representation, warrant, agreement
or covenant of the Company contained in the Underwriting Agreement. Each of 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 maintain the market price of the shares at a level above that which might
otherwise prevail in the open market. The Underwriters are not required to
engage in these activities, and, if commenced, any such activities may be
discontinued at any time.
57
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California. The
Fada Law Firm, Beijing, China, and Angela Wang & Co., Hong Kong, have acted as
counsel to the Company with respect to certain matters of Chinese law and Hong
Kong law, respectively. Freshman, Marantz, Orlanski, Cooper & Klein, a Law
Corporation, Beverly Hills, California, has acted as counsel to the
Underwriters in connection with certain legal matters related to this offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997 and
for the years ended December 31, 1995, 1996 and 1997 included in this
prospectus have been audited by Arthur Andersen & Co., independent public
accountants, as stated in their report appearing herein and are so included
herein in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following
regional offices: Seven World Trade Center, New York, New York 10048, and
Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov.
The Company has filed with the Commission, a Registration Statement on Form SB-
2 under the Securities Act with respect to the common stock being offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the common stock offered hereby, reference is made
to the Registration Statement, and such exhibits and schedules. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at the addresses set forth above, and copies of all or any part of
the Registration Statement may be obtained from such offices upon payment of
the fees prescribed by the Commission. In addition, the Registration Statement
may be accessed at the Commission's Web site. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets--as of December 31, 1996 and 1997 (audited)
and as of September 30, 1998 (unaudited)................................ F-3
Consolidated Statements of Operations--for each of the three years ended
December 31, 1995, 1996 and 1997 (audited) and for each of the nine-
month periods ended September 30, 1997 and 1998 (unaudited)............. F-4
Consolidated Statements of Cash Flows--for each of the three years ended
December 31, 1995, 1996 and 1997 (audited) and for each of the nine-
month periods ended September 30, 1997 and 1998 (unaudited)............. F-5
Consolidated Statements of Changes in Stockholders' Equity--for each of
the three years ended December 31, 1995, 1996 and 1997 (audited) and for
the nine-month period ended September 30, 1998 (unaudited).............. F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
After the three-for-four reverse stock split and the reduction in authorized
share capital discussed in Note 16 to Creative Master International, Inc.'s
consolidated financial statements are effected, we expect to be in a position
to render the following auditors' report.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
September 30, 1998.
"REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Creative Master
International, Inc.:
We have audited the accompanying consolidated balance sheets of Creative Master
International, Inc. (a company incorporated in the State of Delaware, United
States of America; formerly known as Davin Enterprises, Inc.; "the Company")
and Subsidiaries ("the Group") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years ended December 31, 1995, 1996 and 1997.
These financial statements give retroactive effect, for all years presented, to
the acquisition of Creative Master Limited as a reverse acquisition as
described in Note 2 to the accompanying financial statements. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Master
International, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1995, 1996 and 1997, after giving retroactive effect to the acquisition of
Creative Master Limited as a reverse acquisition as described in Note 2 to the
accompanying financial statements, in conformity with generally accepted
accounting principles in the United States of America."
F-2
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 (AUDITED)
AND SEPTEMBER 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
NOTE 1996 1997 1998
---- ----- ------ -------------
$'000 $'000 $'000
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and bank deposits....................... 19 435 471 889
Accounts receivable, net..................... 5 1,733 2,827 5,098
Deposits and prepayments..................... 6 204 307 644
Inventories, net............................. 7 1,544 2,928 3,331
Due from a related company................... 20 41 -- --
----- ------ ------
Total current assets....................... 3,957 6,533 9,962
Machinery, equipment and capital leases, net... 8 2,398 3,155 4,854
Long-term investment........................... 9 1 1 1
Deferred stock issuance costs.................. -- -- 132
Goodwill....................................... 10 395 810 740
Deferred taxation.............................. 14 1 -- --
----- ------ ------
Total assets............................... 6,752 10,499 15,689
===== ====== ======
LIABILITIES, MINORITY INTERESTS
AND STOCKHOLDERS' EQUITY
-------------------------------
Current liabilities:
Short-term bank borrowings................... 11 782 1,290 1,503
Capital lease obligations, current portion... 12 258 764 456
Accounts payable............................. 1,512 1,908 3,474
Deposits from customers...................... -- 560 438
Accrued liabilities.......................... 13 979 1,579 2,699
Due to directors............................. 20 879 861 670
Due to parent company........................ 20 -- 9 --
Taxation payable............................. 14 18 68 161
Dividend payable............................. -- 323 323
----- ------ ------
Total current liabilities.................. 4,428 7,362 9,724
Capital lease obligations, non-current
portion....................................... 12 245 266 502
Deferred taxation.............................. 14 -- 57 263
----- ------ ------
Total liabilities.......................... 4,673 7,685 10,489
----- ------ ------
Minority interests............................. -- 75 387
----- ------ ------
Stockholders' equity:
Common stock, par value $0.0001; authorized
25,000,000 shares; outstanding and fully
paid 3,749,810 shares....................... 16 1 1 1
Preferred stock, par value $0.0001;
authorized 5,000,000 shares; nil
outstanding................................. -- -- --
Additional paid-in capital................... 1,202 1,401 1,401
Retained earnings............................ 872 1,337 3,411
Cumulative translation adjustments........... 4 -- --
----- ------ ------
Total stockholders' equity................. 2,079 2,739 4,813
----- ------ ------
Total liabilities, minority interests and
stockholders' equity...................... 6,752 10,499 15,689
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
NOTE 1995 1996 1997 1997 1998
---- --------- --------- --------- ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 21 9,982 14,054 16,211 13,090 24,129
Cost of goods sold...... (7,878) (9,782) (12,703) (10,466) (18,303)
--------- --------- --------- --------- ---------
Gross profit.......... 2,104 4,272 3,508 2,624 5,826
Selling, general and
administrative
expenses............... (2,394) (2,552) (1,921) (1,964) (3,070)
Interest income......... -- -- 112 108 17
Interest expense........ (88) (140) (216) (192) (208)
Other income (expenses),
net.................... (96) (567) (137) 150 231
Gain on dilution of
equity interest in a
subsidiary............. -- -- -- -- 77
Reorganization expense.. 15 -- -- (284) -- --
Amortization of
goodwill............... (33) (44) (62) (37) (70)
--------- --------- --------- --------- ---------
Income (Loss) before
income taxes and
minority interests... (507) 969 1,000 689 2,803
Provision for income
taxes.................. 14 (52) (154) (130) (128) (359)
--------- --------- --------- --------- ---------
Income (Loss) before
minority interests... (559) 815 870 561 2,444
Minority interests...... -- -- (82) -- (370)
--------- --------- --------- --------- ---------
Net income (loss)..... (559) 815 788 561 2,074
========= ========= ========= ========= =========
Net income (loss) per
common share........... 4.K $ (0.16) $ 0.23 $ 0.22 $ 0.16 $ 0.55
========= ========= ========= ========= =========
Weighted average number
of common shares
outstanding............ 3,604,500 3,604,500 3,605,296 3,604,500 3,749,810
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
1995 1996 1997 1997 1998
----- ----- ------ ----------- ----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ (559) 815 788 561 2,074
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation of machinery and
equipment..................... 320 448 469 317 473
Net (gain) loss on disposals of
machinery and equipment....... 20 12 (6) -- --
Net (gain) loss on disposal of
short-term investments........ (14) 2 -- -- --
Write-back of receivable from
minority interests............ -- (112) -- -- --
Write-down of long-term
investment.................... 235 449 -- -- --
Reorganization expense......... -- -- 199 -- --
Amortization of goodwill....... 33 44 62 37 70
Minority interests............. -- -- 82 -- 370
Deferred income taxes.......... -- 37 58 (29) 184
(Increase) Decrease in operating
assets--
Accounts receivable, net....... (471) (766) (1,094) (1,334) (2,271)
Deposits and prepayments....... (15) (130) 7 (1,050) (337)
Inventories, net............... 200 (980) (1,161) (478) (403)
Increase (Decrease) in operating
liabilities--
Accounts payable............... 143 598 234 (72) 1,566
Deposits from customers........ -- -- 560 -- (122)
Accrued liabilities............ 64 600 439 995 1,120
Due to parent company.......... -- -- 9 -- (9)
Taxation payable............... (164) 31 50 51 113
---- ----- ------ ------ ------
Net cash provided by (used
in) operating activities.... (208) 1,048 696 (1,002) 2,828
---- ----- ------ ------ ------
Cash flows from investing
activities:
Acquisition of machinery and
equipment..................... (474) (804) (24) (9) (1,532)
Proceeds from disposals of
machinery and equipment....... -- 8 -- -- --
Proceeds from disposal of
short-term investments........ 136 12 -- -- --
Net cash outflow from
acquisition of a subsidiary... -- (29) (1) -- --
Decrease (Increase) in due from
a related company............. -- (41) 41 41 --
Decrease (Increase) in due from
directors..................... 303 -- -- -- --
---- ----- ------ ------ ------
Net cash (used in) provided
by investing activities..... (35) (854) 16 32 (1,532)
---- ----- ------ ------ ------
</TABLE>
(To be continued)
F-5
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED) (CONT'D)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
$'000 $'000 $'000 $'000 $'000
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Increase (Decrease) in bank
overdrafts........................ -- 25 (28) (25) --
New short-term bank loans.......... 651 564 1,097 907 2,450
Repayment of short-term bank
loans............................. (295) (468) (825) (452) (2,386)
Increase (Decrease) in import trust
receipts bank loans............... 2 166 77 (76) 149
Repayment of capital element of
capital lease obligations......... (203) (206) (605) (279) (712)
Stock issuance costs paid.......... -- -- -- -- (132)
(Decrease) Increase in due to
directors......................... 238 34 (18) 727 (190)
Decrease in due to a related
company........................... -- -- (363) -- --
Finance from minority interests of
a subsidiary...................... -- -- -- -- 1
Dividends paid to minority
interests of a subsidiary......... (370) -- (7) -- (58)
---- ---- ----- ---- ------
Net cash (used in) provided by
financing activities............ 23 115 (672) 802 (878)
---- ---- ----- ---- ------
Effect of cumulative translation
adjustments....................... (1) -- (4) (2) --
---- ---- ----- ---- ------
Net increase (decrease) in cash and
bank deposits..................... (221) 309 36 (170) 418
Cash and bank deposits, as of
beginning of year/period.......... 347 126 435 435 471
---- ---- ----- ---- ------
Cash and bank deposits, as of end
of year/period.................... 126 435 471 265 889
==== ==== ===== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
----------------------- ADDITIONAL RETAINED TRANSLATION
NUMBER OF SHARES AMOUNT PAID-IN CAPITAL EARNINGS ADJUSTMENTS
---------------- ------ --------------- -------- -----------
<S> <C> <C> <C> <C> <C>
'000 $'000 $'000 $'000 $'000
Balance as of December
31, 1994............... 3,605 1 1,202 986 6
Net loss................ -- -- -- (559) --
Dividends............... -- -- -- (370) --
Translation
adjustments............ -- -- -- -- 1
----- ----- ----- ----- -----
Balance as of December
31, 1995............... 3,605 1 1,202 57 7
Net income.............. -- -- -- 815 --
Translation
adjustments............ -- -- -- -- (3)
----- ----- ----- ----- -----
Balance as of December
31, 1996............... 3,605 1 1,202 872 4
Effect of the exchange
reorganization 145 -- -- -- --
Reorganization expense
contributed by
stockholders (Note
15).................... -- -- 199 -- --
Net income.............. -- -- -- 788 --
Dividends............... -- -- -- (323) --
Translation
adjustments............ -- -- -- -- (4)
----- ----- ----- ----- -----
Balance as of December
31, 1997............... 3,750 1 1,401 1,337 --
Net income (unaudited).. -- -- -- 2,074 --
----- ----- ----- ----- -----
Balance as of September
30, 1998 (unaudited)... 3,750 1 1,401 3,411 --
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Creative Master International, Inc. ("the Company") is incorporated in the
State of Delaware, United States of America. With effect from March 2, 1998,
the Company changed its name from Davin Enterprises, Inc. to Creative Master
International, Inc., the present one.
During the period from January 1, 1995 (the earliest date covered by this
report) to December 30, 1997, the Company's sole asset was investment in a 9.6%
interest in Target Vision Inc., a company incorporated in the State of
Delaware, United States of America, which was principally engaged in the
trading of communication systems.
ACQUISITION OF CML
On December 30, 1997, the Company acquired 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing 3,604,500
shares of common stock of par value $0.0001 each (after the reverse stock
splits and the redenominations of par value as described in Note 16) to Acma
Strategic Holdings Limited ("ASHL"; a company incorporated in Hong Kong),
Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong. ASHL is 90% owned by Acma
Ltd., a company incorporated in Singapore and listed on the Singapore Stock
Exchange Limited, and 10% owned by Mr. Carl Ka-Wing Tong. CML and its
subsidiaries ("the CML Group") are principally engaged in the manufacturing of
collectible replica racing and classic cars for sale to customers in the United
States of America and Europe. The CML Group maintains its head office in Hong
Kong, where it coordinates sales and marketing, purchasing and administrative
functions. Its production facilities are located in Guangdong Province, the
People's Republic of China ("the PRC").
2. BASIS OF PRESENTATION
The acquisition of CML by the Company on December 30, 1997 has been treated as
a reverse acquisition since CML is the continuing entity as a result of the
exchange reorganization. On this basis, the historical financial statements
prior to December 30, 1997 represent the consolidated financial statements of
the CML Group. The historical stockholders' equity accounts of the Company as
of December 31, 1995 and 1996 represented 3,604,500 shares of common stock of
par value $0.0001 each (after the effect of the reverse stock splits and the
redenominations of par value as described in Note 16) issued in connection with
the acquisition. The original 145,310 shares of common stock of par value
$0.0001 each outstanding prior to the exchange reorganization (after the effect
of the reverse stock splits and the redenominations of par value as described
in Note 16) 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 3,605,296, respectively, and for the nine
months ended September 30, 1997 and 1998 was 3,604,500 and 3,749,810,
respectively.
L USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
M FAIR VALUE OF FINANCIAL INSTRUMENTS
The Group's financial instruments are carried at cost, which approximate their
fair values.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables................................. 1,857 2,966 5,231
Less: Allowance for doubtful accounts............. (124) (139) (133)
------ ------ -----
Accounts receivable, net.......................... 1,733 2,827 5,098
====== ====== =====
</TABLE>
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Deposits for acquisition of molds................. 105 149 430
Rental and utility deposits....................... 38 69 115
Prepayments....................................... 32 83 76
Others............................................ 29 6 23
------ ------ ---
204 307 644
====== ====== ===
</TABLE>
F-12
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................... 911 1,358 1,548
Work-in-process................................. 229 722 877
Finished goods.................................. 431 959 1,007
------ ------ -----
1,571 3,039 3,432
Less: Allowance for slow-moving and obsolete
inventories.................................... (27) (111) (101)
------ ------ -----
Inventories, net................................ 1,544 2,928 3,331
====== ====== =====
</TABLE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1996 1997 1998
----- ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment:
Machinery and tools............................. 1,170 769 1,822
Leasehold improvements.......................... 899 1,033 1,158
Furniture and office equipment.................. 330 455 726
Motor vehicles.................................. 19 21 54
Capital leases:
Machinery and tools............................. 1,060 2,412 3,057
Motor vehicle................................... -- -- 32
Furniture and office equipment.................. -- 14 18
----- ------ ------
Cost.............................................. 3,478 4,704 6,867
Less: Accumulated depreciation
Machinery and equipment......................... (863) (1,066) (1,325)
Capital leases.................................. (217) (483) (688)
----- ------ ------
Machinery, equipment and capital leases, net...... 2,398 3,155 4,854
===== ====== ======
</TABLE>
9. LONG-TERM INVESTMENT
Long-term investment represented a 9.6% interest in Target Vision Inc. (a
company incorporated in the State of Delaware, United States of America), which
was principally engaged in the trading of communication systems. The carrying
cost of the long-term investment represented:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Long-term investment............................ 685 685 685
Less: Write down of investment cost............. (684) (684) (684)
------ ------ ----
Long-term investment, net....................... 1 1 1
====== ====== ====
</TABLE>
F-13
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying cost of the long-term investment approximated its market value.
10. GOODWILL
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Goodwill......................................... 472 949 949
Less: Accumulated amortization................... (77) (139) (209)
----- ------ ----
Goodwill, net.................................... 395 810 740
===== ====== ====
</TABLE>
11. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Overdrafts......................................... 25 -- --
Short-term loans................................... 452 908 972
Import trust receipts loans........................ 305 382 531
----- ------- -----
782 1,290 1,503
===== ======= =====
</TABLE>
Short-term bank borrowings are denominated in Hong Kong dollars and bear
interest at the Hong Kong prime lending rate plus 1.5% to 4.3%, which ranged
from 11.0% to 13.8% per annum as of December 31, 1997; and at the Hong Kong
prime lending rate plus 1.5% to 4.3% or the United States prime lending rate
plus 2.3%, which ranged from 10.8% to 14.3% per annum as of September 30, 1998.
They are collaterized by the Group's bank deposits of approximately $72,000 and
$472,000 as of December 31, 1997 and September 30, 1998, respectively, personal
guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong,
mortgage over real estate property owned by Mr. Carl Ka-Wing Tong, corporate
guarantee provided by Acma Strategic Holdings Limited, and a standby letter of
credit issued by Acma Ltd. (see Note 19). They were drawn for working capital
purposes and are renewable with the consent of the relevant banks.
F-14
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental information with respect to short-term bank borrowings for the
year ended December 31, 1997 and nine months ended September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
MAXIMUM AVERAGE AVERAGE WEIGHTED
AMOUNT AMOUNT INTEREST AVERAGE
OUTSTANDING OUTSTANDING RATE AT THE INTEREST RATE
DURING THE DURING THE END OF DURING THE
YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD
----------- ----------- ----------- -------------
$'000 $'000
YEAR ENDED DECEMBER 31, 1997
----------------------------
<S> <C> <C> <C> <C>
Overdrafts.................. 111 17 12.5% 12.1%
===== ===== ==== ====
Short-term loans............ 908 686 10.7% 10.1%
===== ===== ==== ====
Import trust receipts
loans...................... 448 291 12.5% 11.9%
===== ===== ==== ====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, 1998 (UNAUDITED)
---------------------------
<S> <C> <C> <C> <C>
Overdrafts.................. 49 8 0.0% 14.2%
===== ===== ==== ====
Short-term loans............ 1,427 1,113 11.5% 11.6%
===== ===== ==== ====
Import trust receipts
loans...................... 531 378 11.7% 11.8%
===== ===== ==== ====
</TABLE>
12. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments, are:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Payable during the following period
--Within one year................................ 299 830 556
--Over one year but not exceeding two years...... 211 195 398
--Over two years but not exceeding three years... 50 91 180
----- ------ -----
Total minimum lease payments....................... 560 1,116 1,134
Less: Amount representing interest................. (57) (86) (176)
----- ------ -----
Present value of minimum lease payments............ 503 1,030 958
Less: Current portion.............................. (258) (764) (456)
----- ------ -----
Non-current portion................................ 245 266 502
===== ====== =====
</TABLE>
F-15
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
DECEMBER
31,
----------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
$'000 $'000 $'000
(UNAUDITED)
<S> <C> <C> <C>
Accruals for operating expenses
--Salaries, wages and bonus....................... 360 575 860
--Subcontracting charges.......................... 230 463 1,004
--Rentals......................................... 39 41 22
--Others.......................................... 214 120 248
Accruals for purchases of loose tools and
consumables........................................ 64 269 277
Accruals for purchases of machinery and tools....... -- -- 181
Others.............................................. 72 111 107
--- ----- -----
979 1,579 2,699
=== ===== =====
</TABLE>
14. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they
operate. The Company is subject to the United States federal tax at a rate of
35%. The Hong Kong subsidiaries are subject to Hong Kong profits tax at a rate
of 16.5% for the years ended December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1997, and 16% for the nine months ended
September 30, 1998.
The contractual joint venture established in the PRC (Dongguan Chuangying Toys
Factory Co., Ltd.) is subject to PRC income taxes at a rate of 33% (30% state
income tax and 3% local income tax). However, the joint venture is exempted
from state income tax and local income tax for two years starting from the
first year of profitable operations, 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
---- ---- ---- ----------- ----------
(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 ,
1998, the Company effected a three-for-four reverse stock split and a
redenomination of par value in share capital resulting in 3,749,810 shares of
common stock, par value $0.0001 each, outstanding. Also, on December , 1998,
the authorized share capital of the Company was decreased from 60,000,000
shares of common stock, par value $0.0001 each, to 25,000,000 shares of common
stock, par value $0.0001 each, and 5,000,000 shares of preferred stock, par
value $0.0001 each.
The effects of the one-for-one hundred reverse stock split, the one-for-ten
reverse stock split, the three-for-four reverse stock split, and the
redenominations of par value in share capital have been reflected retroactively
in the financial statements and all net income (loss) per common share
computations.
17. OPERATING LEASE COMMITMENTS
The Group has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2006. Rental expenses for the years
ended December 31, 1995, 1996 and 1997 were approximately $447,000, $509,000
and $602,000, respectively, and for the nine months ended September 30, 1997
and 1998 were approximately $434,000 and $522,000, respectively. Future minimum
rental payments as of December 31, 1997 and September 30, 1998, under
agreements classified as operating leases with non-cancellable terms, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
$'000 $'000
(UNAUDITED)
<S> <C> <C>
Payable during the following period
--Within one year.................................. 563 621
--Over one year but not exceeding two years........ 487 538
--Over two years but not exceeding three years..... 427 532
--Over three years but not exceeding four years.... 448 489
--Over four years but not exceeding five years..... 390 466
--Thereafter....................................... 977 1,318
----- -----
3,292 3,964
===== =====
</TABLE>
18. RETIREMENT PLAN
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
F-18
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
From January 1, 1997, the employees in Hong Kong, after completing a probation
period, may join the Group's defined contribution pension fund managed by an
independent trustee. Both the Group and its Hong Kong employees make monthly
contributions to the plan of 5% of the employees' basic salaries. The Hong Kong
employees are entitled to receive their entire contribution together with
accrued interest thereon at any time upon leaving the Group, and 100% of the
Group's employer contribution and the accrued interest thereon upon retirement
or leaving the Group after completing ten years of service or at a reduced
scale of between 30% to 90% after completing three to nine years of service.
Any forfeited contributions made by the Group and the accrued interest thereon
are used to reduce future employer's contributions. The aggregate amount of the
Group's employer contributions (net of forfeited contributions) for the year
ended December 31, 1997 was $50,000, and for the nine months ended September
30, 1997 and 1998 were approximately $37,000 and $46,000, respectively.
The Group has no other post-retirement or post-employment benefit plans.
19. BANKING FACILITIES
As of December 31, 1997 and September 30, 1998, the Group had banking
facilities of approximately $1,421,000 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 CON-
TAINED 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 UNDER-
WRITERS, SOLICITING OFFERS TO BUY THEM. THESE SECURITIES WILL NOT BE SOLD IN
ANY STATE WHERE THEIR OFFER OR SALE, OR SOLICITATIONS OF OFFERS TO BUY THEM,
WOULD BE UNLAWFUL PRIOR TO THEIR REGISTRATION OR QUALIFICATION UNDER THE SECU-
RITIES LAWS OF SUCH STATE. INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT
AS OF THE DATE OF THIS PROSPECTUS. EVEN IF YOU RECEIVE A COPY OF THIS PROSPEC-
TUS AFTER THE DATE OF THIS PROSPECTUS, WE ARE NOT MAKING, NOR ARE ANY OF THE
UNDERWRITERS, MAKING ANY REPRESENTATION ABOUT WHETHER THE INFORMATION CON-
TAINED IN THIS PROSPECTUS IS CORRECT AT ANY TIME AFTER THE DATE OF THIS PRO-
SPECTUS.
-----------------
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 Stockholders.......................... 51
Change in Accountants.................................................... 52
Description of Capital Stock............................................. 52
Shares Eligible For Future Sale.......................................... 54
Underwriting............................................................. 55
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,600,000 SHARES
[LOGO OF CREATIVE MASTER
INTERNATIONAL, INC.]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
CRUTTENDEN ROTH
INCORPORATED
DECEMBER , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company intends to amend and restate its Certificate of Incorporation prior
to completion of this offering. As is customary among Delaware corporations,
the Company's Amended and Restated Certificate of Incorporation will eliminate
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors, except (i) for breach of the director's duty
of loyalty to the Company or its stockholders; (ii) for acts or omissions by
the director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption; and (iv) for transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company also intends to enter into
indemnity agreements with each of its current directors and executive officers
which will provide for indemnification of, and advancement of expenses to, such
persons to the maximum extent permitted under the laws of the State of
Delaware, including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advancement of expenses are
discretionary under Delaware law.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement
provides for the underwriters' indemnification of the Company and its directors
and officers for certain liabilities arising under the Securities Act or
otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the Commission, NASD and Nasdaq fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 4,520
NASD fees............................................................. $ 2,216
Nasdaq listing fee.................................................... $ 20,000
Underwriters' nonaccountable expenses allowance....................... $336,000
Accounting fees and expenses.......................................... $118,000
Printing and engraving expenses....................................... $100,000
Transfer agent and registrar fees and expenses........................ $ 5,000
Directors and officers insurance...................................... $ 20,000
Legal fees and legal expenses......................................... $225,000
Miscellaneous expenses................................................ $ 4,264
--------
Total................................................................. $835,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1997, the Company entered into a Share Exchange Agreement with Carl
Ka Wing Tong, Leo Sheck Pui Kwok and Acma Strategic Holdings Limited, all of
whom reside or are domiciled outside the U.S., pursuant to which the Company
issued an aggregate of 3,604,500 shares of common stock in exchange for all of
the capital stock of Creative Master Limited, in Hong Kong corporation. The
common stock was issued in reliance on available exemptions under U.S. federal
securities laws, including Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Specimen Stock Certificate of the Company.*
4.2 Form of Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including form of Representative's Warrant.*
4.3 Forms of Irrevocable Custody Agreement and Power of Attorney.
5.1 Opinion of Troy & Gould Professional Corporation.
10.1 Form of Indemnification Agreement with officers and directors.*
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997.*
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994.*
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996.*
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998.*
10.6 [reserved]
10.7 [reserved]
10.8 Entrepreneur Agreement by and among Creative Master Limited, Chen Hao
Qiang, Gan Zi Kuen and Wu Qing Su (undated).*
10.9 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998.*
10.10 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996.*
10.11 Letter to extend credit facilities between Banque Nationale de Paris
Hong Kong Branch and Creative Master Limited dated April 21, 1997.*
10.12 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992.*
10.13 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated
December 20, 1997.*
10.14 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to exhibit 10.2 of the Company's Form 10-KSB filed on
September 2, 1998).*
</TABLE>
- --------
* Previously filed.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to exhibit 10.1 of the Company's
Form 10-KSB filed on September 2, 1998).*
10.16 Joint and Several Guarantee By Individuals or Partners in a Firm by
and among Commonwealth Finance Corporation Limited, Carl Tong and Leo
Kwok dated March 30, 1993.*
10.17 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993.*
10.18 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993.*
10.19 Creative Master Limited Defined Contribution Scheme Rules effective
January 1, 1997.*
10.20 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules.*
10.21 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules.*
10.22 Service Agreement by and between Creative Master Limited and Leo Sheck
Pui Kwok dated January , 1996.*
10.23 Factory and dormitory leases for CML No. 1.*
10.24 Factory and dormitory leases for CML No. 2.*
10.25 Factory and dormitory leases for CML No. 3.*
10.26 Factory and dormitory leases for CML No. 4.*
10.27 Factory and dormitory leases for CML No. 5.*
10.28 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998.*
10.29 [reserved]
10.30 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995.*
10.31 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong between
Creative Master Limited and Fortune Wind Investments Limited dated
April 3, 1997.*
10.32 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited.*
10.33 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments
Limited.*
10.34 Loan Agreement dated January 31, 1996 between Carl Tong and Leo Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $1,000,000.*
10.35 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck Pui
Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000.*
10.36 Promissory Note, dated as of October 1, 1998, in the principal amount
of $227,118 from Creative Master Limited in favor of Carl Ka Wing
Tong.*
10.37 Promissory Note, dated as of October 1, 1998, in the principal amount
of $493,889 from Creative Master Limited to Leo Sheck Pui Kwok.*
</TABLE>
- --------
* Previously filed.
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38 Lease of apartment from Wellholding Limited by Creative Master Limited
dated January 2, 1996.*
10.39 Creative Master International, Inc. 1998 Stock Option Plan and Form of
Notice of Grant of Option under 1998 Stock Option Plan.*
10.40 Standby Letter of Credit of Acma Ltd.*
10.41 Guarantee of Carl Tong to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.*
10.42 Guarantee of Leo Kwok to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.*
10.43 Deed of Guarantee of Carl Tong and Leo Kwok to Bank of China in favor
of Creative Master Limited.*
10.44 Guarantee to be Given by a Limited Company by and between Commonwealth
Finance Corporation Limited and Acma Strategic Holdings Limited dated
July 14, 1997.*
16 Letter re: Change in Certifying Accountant (incorporated by reference
to exhibit 16 of the Company's Form 8-K dated April 30, 1998).
21.1 List of Subsidiaries.*
23.1 Consent of Arthur Andersen & Co. (incorporated by reference to Page
II-7).
23.2 Consent of Troy & Gould Professional Corporation (included in Exhibit
5.1).
23.3 Consent of The Fada Law Firm.*
23.4 Consent of Angela Wang & Co.*
24 Power of Attorney.*
27 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
(b) Financial Statement Schedules
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) ((S)230.424(b) of this Chapter) if,
in the aggregate,
II-4
<PAGE>
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement of
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of this offering.
Insofar as indemnification for liabilities arising from the Securities Act may
be permitted to directors, officers, and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Amendment No. 3 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Kowloon, Hong Kong, on the 10th day of
December, 1998.
By: /s/ Carl Ka Wing Tong
__________________________________
NAME: CARL KA WING TONG
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act, this Amendment No. 3
to the Registration Statement has been signed below by the following persons on
behalf of the Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Carl Ka Wing Tong Chairman of the Board, December 10, 1998
______________________________________ President, Chief
CARL KA WING TONG Executive Officer
(principal executive
officer) and Chief
Financial Officer
(principal financial
officer)
/s/ John Rempel Chief Financial Officer December 10, 1998
______________________________________ (principal financial and
JOHN REMPEL accounting officer)
* Director and Chief December 10, 1998
______________________________________ Operating Officer
LEO SHECK PUI KWOK
* Director December 10, 1998
______________________________________
CHOU KONG SENG
* Senior Vice-President and December 10, 1998
______________________________________ Controller
SHING KAM MING
</TABLE>
/s/ Carl Ka Wing Tong
*By: ____________________________
CARL KA WING TONG
Attorney-in-Fact
II-6
<PAGE>
[Letterhead of Arthur Andersen]
December 10, 1998
The Directors
Creative Master International, Inc.
8/F., Casey Industrial Building
18 Bedford Road
Taikoktsui
Kowloon
Hong Kong
Dear Sirs,
As independent public accountants, we hereby consent to the use of our reports,
and to all references to our Firm included in or made a part of this
Registration Statement on Form SB-2. (Number: 333-65929).
Very truly yours,
/s/ Arthur Andersen & Co.
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Specimen Stock Certificate of the Company.*
4.2 Form of Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including form of Representative's Warrant.*
4.3 Forms of Irrevocable Custody Agreement and Power of Attorney.
5.1 Opinion of Troy & Gould Professional Corporation.
10.1 Form of Indemnification Agreement with officers and directors.*
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997.*
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994.*
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996.*
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998.*
10.6 [reserved]
10.7 [reserved]
10.8 Entrepreneur Agreement by and among Creative Master Limited, Chen Hao
Qiang, Gan Zi Kuen and Wu Qing Su (undated).*
10.9 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998.*
10.10 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996.*
10.11 Letter to extend credit facilities between Banque Nationale de Paris
Hong Kong Branch and Creative Master Limited dated April 21, 1997.*
10.12 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992.*
10.13 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated
December 20, 1997.*
10.14 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to exhibit 10.2 of the Company's Form 10-KSB filed on
September 2, 1998).*
</TABLE>
- --------
* Previously filed.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to exhibit 10.1 of the Company's
Form 10-KSB filed on September 2, 1998).*
10.16 Joint and Several Guarantee By Individuals or Partners in a Firm by
and among Commonwealth Finance Corporation Limited, Carl Tong and Leo
Kwok dated March 30, 1993.*
10.17 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993.*
10.18 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993.*
10.19 Creative Master Limited Defined Contribution Scheme Rules effective
January 1, 1997.*
10.20 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules.*
10.21 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules.*
10.22 Service Agreement by and between Creative Master Limited and Leo Sheck
Pui Kwok dated January , 1996.*
10.23 Factory and dormitory leases for CML No. 1.*
10.24 Factory and dormitory leases for CML No. 2.*
10.25 Factory and dormitory leases for CML No. 3.*
10.26 Factory and dormitory leases for CML No. 4.*
10.27 Factory and dormitory leases for CML No. 5.*
10.28 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998.*
10.29 [reserved]
10.30 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995.*
10.31 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong between
Creative Master Limited and Fortune Wind Investments Limited dated
April 3, 1997.*
10.32 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited.*
10.33 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments
Limited.*
10.34 Loan Agreement dated January 31, 1996 between Carl Tong and Leo Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $1,000,000.*
10.35 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck Pui
Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000.*
10.36 Promissory Note, dated as of October 1, 1998, in the principal amount
of $227,118 from Creative Master Limited in favor of Carl Ka Wing
Tong.*
10.37 Promissory Note, dated as of October 1, 1998, in the principal amount
of $493,889 from Creative Master Limited to Leo Sheck Pui Kwok.*
</TABLE>
- --------
* Previously filed.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38 Lease of apartment from Wellholding Limited by Creative Master Limited
dated January 2, 1996.*
10.39 Creative Master International, Inc. 1998 Stock Option Plan and Form of
Notice of Grant of Option under 1998 Stock Option Plan.*
10.40 Standby Letter of Credit of Acma Ltd.*
10.41 Guarantee of Carl Tong to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.*
10.42 Guarantee of Leo Kwok to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990.*
10.43 Deed of Guarantee of Carl Tong and Leo Kwok to Bank of China in favor
of Creative Master Limited.*
10.44 Guarantee to be Given by a Limited Company by and between Commonwealth
Finance Corporation Limited and Acma Strategic Holdings Limited dated
July 14, 1997.*
16 Letter re: Change in Certifying Accountant (incorporated by reference
to exhibit 16 of the Company's Form 8-K dated April 30, 1998).
21.1 List of Subsidiaries.*
23.1 Consent of Arthur Andersen & Co. (incorporated by reference to Page
II-7).
23.2 Consent of Troy & Gould Professional Corporation (included in Exhibit
5.1).
23.3 Consent of The Fada Law Firm.*
23.4 Consent of Angela Wang & Co.*
24 Power of Attorney.*
27 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
CREATIVE MASTER INTERNATIONAL, INC.
UNDERWRITING AGREEMENT
December __, 1998
Cruttenden Roth Incorporated
As Representative of the
Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92612
Ladies and Gentlemen:
Creative Master International, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the Underwriters named in Section 2(a)
hereof (the "Underwriters") an aggregate of 1,525,276 shares (the "Company
Shares") of its authorized but unissued Common Stock, par value $0.0001 per
share (the "Common Stock"). Certain stockholders of the Company named in
Schedule B hereto (the "Firm Selling Stockholders"), acting severally and not
jointly, propose to sell to the Underwriters an aggregate of 74,724 shares (the
"Firm Selling Stockholder Shares," and together with the Company Shares, the
"Firm Shares") of the Company's authorized and outstanding Common Stock. Acma
Investments Pte., Ltd. (the "Option Selling Stockholder" and together with the
Firm Selling Stockholders, the "Selling Stockholders") proposes to grant to the
Underwriters the option to purchase up to 240,000 additional shares of Common
Stock (the "Option Shares") for the sole purpose of covering over-allotments, if
any, in connection with the sale of the Firm Shares. The Firm Shares and any
Option Shares purchased pursuant to this Agreement are referred to in this
Agreement as the "Shares." The Company also proposes to sell to you
individually, and not in your capacity as Representative, five-year warrants
(the "Representative's Warrants") to purchase up to 160,000 shares of Common
Stock (the "Representative's Warrant Stock"). The sale of the Representative's
Warrants will be consummated in accordance with the terms and conditions of the
form of the Representative's Warrant Agreement filed as an Exhibit to the
Registration Statement. Cruttenden Roth Incorporated is acting as representative
of the several Underwriters, and in that capacity is referred to in this
Agreement as the "Representative."
The Company hereby confirms its agreement with the Underwriters as follows:
1. Representations and Warranties of the Company and Option Selling
Stockholder.
(a) The Company and Option Selling Stockholder, severally and not jointly,
each represents and warrants to, and agrees with, the Underwriters as follows:
(i) The Company meets the requirements for use of Form SB-2 under the
Securities Act of 1933, as amended (the "Securities Act"), and a registration
statement (Registration
<PAGE>
No. 333-65929) on Form SB-2 relating to the Shares, the Representative's
Warrants and the Representative's Warrant Stock, including such amendments to
such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under and in conformity with the
provisions of the Securities Act, and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. If such registration
statement has not become effective upon execution of this Agreement, a further
amendment to such registration statement, including a form of final prospectus,
necessary to permit such registration statement to become effective will
promptly be filed by the Company with the Commission. If such registration
statement has become effective, a final prospectus containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the Rules
and Regulations will promptly be filed by the Company with the Commission in
accordance with Rule 424 of the Rules and Regulations (and in form and substance
reasonably satisfactory to the counsel for the Underwriters). The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the form
in which it became or becomes, as the case may be, effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
Registration Statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of the Registration Statement, shall also mean (from and
after the effectiveness of such amendment) the Registration Statement as so
amended. Any registration statement filed pursuant to Rule 462(b) under the
Rules and Regulations is herein called the "462(b) Registration Statement," and
after such filing the term "Registration Statement" shall include the Rule
462(b) Registration Statement. The term "Prospectus" as used in this Agreement
shall mean the prospectus relating to the Shares included in the Registration
Statement at the time it became effective, except that if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the Prospectus on file with the
Commission at the time the Registration Statement became or becomes, as the case
may be, effective, whether or not the revised prospectus is required to be filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations, the
term "Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use.
(ii) No stop order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus has been issued
and no proceedings for that purpose are pending or threatened or, to the best
knowledge of the Company, contemplated by the Commission; no stop order
suspending the sale of the Shares in any jurisdiction has been issued and no
proceedings for that purpose are pending or, to the best knowledge of the
Company, threatened or are contemplated; and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with.
(iii) The Company and each of its subsidiaries have been duly
incorporated or registered and are validly existing in good standing under the
laws of their respective jurisdiction of organization, have full corporate power
and authority to own or lease their respective properties and conduct business
as described in the Registration Statement and the Prospectus and as they are
currently conducting such business, and are duly qualified as a foreign
organization and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so
2
<PAGE>
qualified would not have a material adverse effect on the business, properties,
condition (financial or otherwise), prospects or results of operations of the
Company and its subsidiaries, taken as a whole). Except as disclosed in the
Registration Statement, the Company and each of its subsidiaries have obtained,
are in possession of, and operating in compliance with, all authorizations,
licenses, certificates, consents, orders and permits from state, federal and
other regulatory authorities (including foreign governments) that are material
to the conduct of their respective business, all of which are valid and in full
force and effect. The Company owns the percentage of the outstanding capital
stock of each of its subsidiaries as set forth in Note 3 of the Notes to the
Consolidated Financial Statements included in the Registration Statement. The
Company holds such outstanding capital stock of each of its subsidiaries free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest of any type, kind or nature. All issued and outstanding
shares of capital stock or other equity interest of each such subsidiary of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase shares or other equity
interest.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any material
loss or interference with the Company's business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any court or
governmental action, order or decree, or any changes in the capital stock or
long-term debt of the Company or any of its subsidiaries, or any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or any material adverse change, or a development known to the Company
that might cause or result in a material adverse change, in or affecting the
general affairs, management, business, properties, condition (financial or
otherwise), prospects or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not described in the Registration Statement and
the Prospectus.
(v) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus, at the
time of filing thereof, conformed in all material respects to the requirement of
the Securities Act and the Rules and Regulations; when the Registration
Statement became or becomes, as the case may be, effective (the "Effective
Date"), when any 462(b) Registration Statement became or becomes effective, and
when the Prospectus is first filed (if required) in accordance with Rule 424(b),
and at all times subsequent thereto up to and at the "Closing Date" (as
hereinafter defined) and through any later date on which Option Shares are to be
purchased, as the case may be, the Registration Statement, the Rule 462(b)
Registration Statement and the Prospectus, and any amendments or supplements
thereto, will in all material respects conform to the requirements of the
Securities Act and the Rules and Regulations, and the Securities Exchange Act of
1934, as amended, (the "Exchange Act"), and the rules and regulations of the
Commission thereunder; on the Effective Date, the Registration Statement, and
any 462(b) Registration Statement, on the date it became or becomes effective,
did not or will not contain any untrue statement of a material fact and did not
or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and neither
the Registration Statement, any 462(b) Registration Statement, nor the
Prospectus, nor any
3
<PAGE>
amendment or supplement thereto, will include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties in this Section 1(a)(v) shall apply to statements in, or omissions
from, the Registration Statement, and any 462(b) Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished to
the Company by or on behalf of the Underwriters specifically for use in the
Registration Statement or the Prospectus. There is no agreement, contract,
license, lease or other document required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed as required. The contracts so
described in the Prospectus are in full force and effect on the date hereof, and
neither the Company nor any of its subsidiaries, nor to the best knowledge of
the Company, any other party, is in material breach of or default under any such
contracts.
(vi) All of the outstanding shares of capital stock of the Company
(including the shares to be sold by the Selling Stockholders hereunder) have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all applicable securities laws (including
any applicable United States and state securities laws), were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company). The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted or
exercised thereunder, set forth in the Prospectus accurately and fairly present
the information shown therein with respect to such plans, arrangements, options
and rights. The Common Stock to be sold by the Company hereunder has been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable. Other than this Agreement, the Representative's
Warrants and the options and warrants to purchase the Common Stock described in
the Prospectus, there are no options, warrants or other rights outstanding to
subscribe for or purchase any shares of the Company's capital stock. There are
no preemptive rights or any restrictions upon the voting or transfer of any of
the Shares pursuant to the Company's Certificate of Incorporation or any other
governing document or agreement to which the Company or any of its subsidiaries
is a party or by which any of them may be bound. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any of the Shares or any
other capital stock of the Company.
(vii) The Company has full corporate right, power and authority to
enter into and perform its obligations under this Agreement and the
Representative's Warrant Agreement, and to issue, sell and deliver the Company
Shares. This Agreement and the Representative's Warrant Agreement have each
been duly authorized, executed and delivered by the Company and constitute the
valid and binding agreements of the Company and each is enforceable against the
Company in accordance with their respective terms; except insofar as the
indemnification and contribution provisions hereunder may be limited by
applicable law, and except as the enforcement may be
4
<PAGE>
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws or judicial decisions relating to or affecting creditors'
right generally or by general equitable principles.
(viii) Neither the Company nor any of its subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
Representative's Warrant Agreement, or the consummation of the transactions
contemplated by such agreements result in a violation of the Certificate of
Incorporation or other charter or governing documents of the Company or any of
its subsidiaries, or constitute a material default (with the giving of notice,
passage of time or otherwise) under any material obligation, agreement, covenant
or condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or any of
their properties may be bound or affected, nor will the performance by the
Company of its obligations under this Agreement or the Representative's Warrant
Agreement violate any law, rule, administrative regulation or decree of any
court or any governmental agency or body having jurisdiction over the Company,
its subsidiaries or any of their respective properties, or result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
material property or asset of the Company or any of its subsidiaries. Except
for permits and similar authorizations required under the Securities Act, the
Exchange Act or state securities or "Blue Sky" laws, and for such permits and
authorizations that have been obtained, no consent, approval, authorization or
order of any court, governmental agency or body or financial institution is
required in connection with the consummation of the transactions contemplated by
this Agreement or the Representative's Warrant Agreement.
(ix) The Company and each of its subsidiaries owns, or has valid
rights to use, all items of real and personal property which are material to the
business of the Company and its subsidiaries taken as a whole, free and clear of
all liens, encumbrances and claims that might materially interfere with the
business, properties, condition (financial or otherwise) or prospects of the
Company and its subsidiaries, taken as a whole.
(x) Except as described in the Prospectus, there is no litigation
or governmental proceeding to which the Company or any of its subsidiaries is a
party, or to which any property of the Company or any of its subsidiaries is
subject, which is pending, or to the best knowledge of the Company, contemplated
against the Company or any of its subsidiaries, that would have any material
adverse effect on, or would result in any material adverse change in the
business, properties, condition (financial or otherwise), prospects or results
of operations of the Company and its subsidiaries, taken as a whole, or that
would prevent consummation of the transactions contemplated by this Agreement or
the Representative's Warrant Agreement or that are required to be disclosed in
the Registration Statement.
(xi) Neither the Company nor any of its subsidiaries is in violation
of any law, order, ordinance, rule, regulation, writ, injunction, judgment or
decree of any court or governmental agency or body to which it or its properties
(whether owned or leased) may be subject, which violation would have a material
adverse effect on the business, properties, condition (financial or otherwise),
prospects or results of operations of the Company and its subsidiaries, taken as
a whole.
5
<PAGE>
(xii) Each of the Company and each of its subsidiaries owns or
possesses adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights described or referred to in the Prospectus as owned by or used by any
of them, or which are necessary for the conduct of their business as described
in the Prospectus; and neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the business, properties, condition
(financial or otherwise), prospects or results of operations of the Company and
its subsidiaries, taken as a whole.
(xiii) The Company has not taken, and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the rules and regulations of the Commission under the Exchange Act, or
otherwise, the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares. No bid or purchase by
the Company, and, to the best knowledge of the Company, no bid or purchase that
could be attributed to the Company (as a result of bids or purchases by an
"affiliated purchaser" within the meaning of Regulation M under the Exchange
Act) for or of the Common Stock, any securities of the same class or series as
the Common Stock or any securities immediately convertible into or exchangeable
for or that represent any right to acquire the Common Stock, is now pending or
in progress or will have commenced at any time prior to the completion of the
distribution of the Shares.
(xiv) Arthur Andersen & Co., whose report appears in the Registration
Statement and Prospectus, to the Company's knowledge are, and during the periods
covered by their report in the Registration Statement were, independent
accountants as required by the Securities Act and the Rules and Regulations.
The financial statements included in the Registration Statement, any Preliminary
Prospectus or the Prospectus present fairly the consolidated financial
condition, results of operations, cash flow and changes in stockholders' equity
of the Company and its subsidiaries at the dates and for the periods indicated,
and the financial statements included in the Registration Statement present
fairly the information required to be stated therein. Such financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States of America, applied on a consistent basis throughout the
periods presented, except as stated therein. The selected and summary financial
data included in the Registration Statement and the Prospectus present fairly
the information shown therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No financial statements or
schedules are required to be included in the Registration Statement other than
the financial statements and schedules appearing therein.
(xv) The books, records and accounts of the Company and each of its
subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and each of its
subsidiaries. The systems of internal accounting controls maintained by the
Company and each of its subsidiaries are sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
(A) to permit preparation of financial statements in conformity with generally
accepted accounting principles and (B) to maintain accountability for assets;
(iii)
6
<PAGE>
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(xvi) The Company has delivered to the Representative the written
agreement of each of its officers and directors and certain beneficial owners of
its Common Stock and/or securities exercisable or exchangeable for, or
convertible into, Common Stock (collectively, "Material Holders") to the effect
that each of the Material Holders will not, for a period of six months following
the Closing Date, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock and/or securities exercisable or
exchangeable for, or convertible into, Common Stock other than intra-family
transfers or transfers to trusts for estate planning purposes, without the prior
written consent of the Representative.
(xvii) No labor disturbance by the employees of the Company or any of
its subsidiaries exists or is imminent, nor is the Company aware of any existing
or imminent labor disturbance by the employees of any principal suppliers,
contract manufacturing organizations, manufacturers, authorized dealers or
distributors, in either case, where such labor disturbance would result in any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or prospects of the Company and its subsidiaries,
considered as a whole. No collective-bargaining agreement exists with any of
the Company's or any of the Company's subsidiaries' employees and, to the best
knowledge of the Company, no such agreement is imminent.
(xviii) Each of the Company and each of its subsidiaries has filed all
United States, state, local, Hong Kong, Peoples' Republic of China and other
foreign tax returns which are respectively required of the Company and each of
its subsidiaries to be filed, or has requested extensions thereof, and has paid
all taxes, including withholding taxes, penalties and interest, assessments,
fees and other charges to the extent that the same have become due and payable.
No material tax assessment or deficiency has been made or proposed against the
Company or any of its subsidiaries nor has the Company or any of its
subsidiaries received any notice of any such proposed assessment or deficiency.
(xix) Except as set forth in the Prospectus and except for
advancements of expenses in the ordinary course of business, none of which is
material, there are no outstanding loans, advances or guaranties of indebtedness
by the Company to or for the benefit of any of its "affiliates," as such term is
defined in the Rules and Regulations, or any of the officers or directors of any
of its subsidiaries, or any of the members of the families of any of them.
(xx) Neither the Company nor any of its subsidiaries has, directly
or indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law; (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or allowed by all applicable
laws; or (iii) violated nor is it in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended.
(xxi) Neither the Company nor any of its subsidiaries has any
liability, known or unknown, matured or not matured, absolute or contingent,
assessed or unassessed, imposed or based
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upon any provision of, or has received notice of any potential liability under,
any law, rule or regulation, or the civil or common law, or any tort, nuisance
or absolute liability theory, applicable to the Company or any of its
subsidiaries, or under any code, order, decree, judgment or injunction
applicable to the Company or any of its subsidiaries relating to public health
or safety, worker health or safety or pollution, damage to or protection of the
environment, including, without limitation, laws relating to damage to natural
resources, emissions, discharges, releases or threatened releases of hazardous
materials into the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), or otherwise
relating to the manufacture, processing, use, treatment, storage, generation,
disposal, transport or handling of hazardous materials, in each case that might
cause or result in a material adverse change in the business, properties,
condition (financial or otherwise), prospects or results of operations of the
Company and its subsidiaries, taken as a whole. As used herein, "hazardous
material" includes chemical substances, wastes, pollutants, contaminants,
hazardous or toxic substances, constituents, materials or wastes, whether solid,
gaseous or liquid in nature.
(xxii) The Company has not distributed and will not distribute prior
to the Closing Date or on or prior to any date on which the Option Shares are to
be purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Shares other than the Prospectus,
the Registration Statement and any other material which may be permitted by the
Securities Act and the Rules and Regulations.
(xxiii) The Common Stock has been approved for listing on the National
Market of The Nasdaq Stock Market (the "Nasdaq National Market"), subject to
official notice of issuance.
(xxiv) The Company is familiar with and has discussed with its United
States legal counsel the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules and regulations thereunder, and has in the past conducted,
and intends in the future to conduct, its affairs in such a manner as to ensure
that it will not become an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(xxv) The Representative's Warrants have been duly and validly
authorized, and when issued and delivered will be valid and binding obligations
of the Company in accordance with their terms; except insofar as the
indemnification and contribution provisions hereunder may be limited by
applicable law, and except as the enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws or
judicial decisions relating to or affecting creditors' right generally or by
general equitable principles; the Representative's Warrant Stock has been duly
and validly authorized for issuance upon exercise of the Representative's
Warrants, and when so issued will be validly issued, fully paid and non-
assessable; and no stockholder of the Company has any preemptive rights with
respect to the Representative's Warrants or the Representative's Warrant Stock.
(xxvi) The Company does not know of any facts which may adversely
affect its earnings, prospects or business which have not been fully disclosed
in the Prospectus.
(b) Each Selling Stockholder, severally for itself and not jointly,
represents and warrants to and agrees with the several Underwriters that:
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(i) Such Selling Stockholder has valid and unencumbered title to the
Shares to be sold by such Selling Stockholder hereunder and has full right,
power and authority to enter into and perform this Agreement and to sell,
assign, transfer and deliver the Shares to be sold by such Selling Stockholder
hereunder.
(ii) Custody Agreement.
(A) With regards to the Firm Selling Stockholders, such Selling
Stockholder has duly executed and delivered, in the form heretofore furnished to
the Representative, an Irrevocable Custody Agreement (the "Irrevocable Custody
Agreement") with Jersey Trust and Transfer Company as custodian; the Irrevocable
Custody Agreement constitutes a valid and binding agreement on the part of such
Selling Stockholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy, in solvency,
reorganization, moratorium or other, similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(B) With regards to the Option Selling Stockholder, the Option
Selling Stockholder has duly executed and delivered, in the form heretofore
furnished to the Representative, an Irrevocable Custody Agreement and Power of
Attorney (the "Option Custody Agreement" and together with the Irrevocable
Custody Agreement, the "Custody Agreement") appointing Carl Tong as attorney-in-
fact (the "Attorney") with Jersey Trust and Transfer Company as custodian (the
"Custodian"); the Option Custody Agreement constitutes a valid and binding
agreement on the part of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and such Selling Stockholder's Attorney, acting alone, is authorized
to execute and deliver this Agreement and the certificate referred to in Section
5(n) hereof on behalf of such Selling Stockholder, to determine the price to be
paid by the several Underwriters to such Selling Stockholder as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by such
Selling Stockholder under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Shares or a stock
power or powers with respect thereto, to accept payment therefor, and otherwise
to act on behalf of such Selling Stockholder in connection with this Agreement;
(iii) All authorizations, approvals and consents necessary for the
execution and delivery by such Selling Stockholder of the Custody Agreement, the
execution and delivery by or on behalf of such Selling Stockholder of this
Agreement and the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained and are in full force and effect; and
such Selling Stockholder has full right, power and authority to enter into this
Agreement and such Custody Agreement, and to sell, transfer and deliver the
Shares that may be sold by such Selling Stockholder hereunder.
(iv) Certificates in negotiable form for all Shares which may be sold
by such Selling Stockholder hereunder, together with a stock power or powers
duly endorsed in blank by such
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<PAGE>
Selling Stockholder, have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder.
(v) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder, enforceable against such Selling Stockholder in accordance
with its terms; except insofar as the indemnification and contribution
provisions hereunder may be limited by applicable law, and except as the
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws or judicial decisions relating to or affecting
creditors' right generally or by general equitable principles.
(vi) Upon the delivery of and payment for such Shares to be sold by
such Selling Stockholder hereunder in good faith and without notice of any
adverse claim within the meaning of Article VIII of the Uniform Commercial Code,
the several Underwriters will acquire valid title to the Shares to be sold by
such Selling Stockholder free and clear of any encumbrances created by or known
to such Selling Stockholder.
(vii) The consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not result in a material breach of any
of the terms or provisions of, or constitute a material default under, any
material agreement, indenture or other instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder is, or the
certificates for the Shares to be sold by such Selling Stockholder hereunder
are, bound or, to the best of the knowledge of such Selling Stockholder, any
statute, ruling, decree, judgment, order or regulation of any governmental
authority having jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder, or, if such Selling Stockholder is other than a
natural person, result in any violation of any provisions of the charter, bylaws
or other organizational documents of such Selling Stockholder.
(viii) Such Selling Stockholder has not taken, directly or indirectly,
any action designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement and, other than as permitted by the
Act, the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and the
sale of the Shares.
(ix) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder, its parent and affiliates, the
Common Stock of such Selling Stockholder, and the Shares that is contained in
the representations and warranties of such Selling Stockholder in such Selling
Stockholder's Custody Agreement or set forth in the Registration Statement and
the Prospectus is, and at the time the Registration Statement became or becomes,
as the case may be, effective and at all times subsequent thereto up to and on
the Closing Date, and on any later date on which Option Shares are to be
purchased, was or will be, true, correct and complete, and does not, and at the
time the Registration Statement became or becomes, as the case may be, effective
and at all times subsequent thereto up to and on the Closing Date and on any
later date on which Option Shares are to be purchased, will not, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make such information not misleading.
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<PAGE>
(x) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, and will advise its Attorney and the Representative prior to the Closing
Date and on any later date on which any Option Shares are to be purchased, if
any statement to be made on behalf of such Selling Stockholder in the
certificate contemplated by Section 5(n) would be inaccurate if made as of the
date on which such Shares are to be purchased.
(xi) Such Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Company Shares or any of the other
Shares of the Selling Stockholders; such Selling Stockholder does not have, or
has waived prior to the date hereof, any registration right or other similar
right to participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of such
Selling Stockholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Stockholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(xii) Except for the Shares, Selling Stockholder will not, for a
period of six months following the Closing Date, offer, sell or contract to
sell, or otherwise dispose of, or announce the offer of, any Common Stock and/or
securities exercisable or exchangeable for, or convertible into, Common Stock
without the prior written consent of the Representative
2. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions set forth
in this Agreement, the Company and the Firm Selling Stockholders agree,
severally and not jointly, to sell to the Underwriters, and each Underwriter
agrees, severally and not jointly, to purchase from the Company and the Firm
Selling Stockholders, the respective number of Company Shares and Firm Selling
Stockholder Shares set forth opposite the names of the Company and the Firm
Selling Stockholders in Schedule B hereto at a purchase price of $_____ per Firm
Share, the number of Firm Shares set forth opposite such Underwriter's name in
Schedule A hereto. The obligation of each Underwriter to the Company and to
each Firm Selling Stockholder shall be to purchase from the Company or such Firm
Selling Stockholder that number of Company Shares or Firm Selling Stockholder
Shares, as the case may be, which (as nearly as practicable, as determined by
you) is in the same proportion to the number of Company Shares or Firm Selling
Stockholder Shares, as the case may be, set forth opposite the name of the
Company or such Firm Selling Stockholder in Schedule B hereto as the number of
Firm Shares which is set forth opposite the name of such Underwriter in Schedule
A hereto (subject to adjustment as provided in Section 8) is to the total number
of Firm Shares to be purchased by all the Underwriters under this Agreement. In
the event that any Firm Selling Stockholder shall have failed, refused or been
unable to perform any agreement on his, her or its part to be performed
hereunder, the Company and not such Firm Selling Stockholder shall sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and not from such Firm
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Selling Stockholder, at the same price per share as set forth in this Section 2,
that number of additional authorized but unissued shares of Common Stock which
were otherwise to be sold by such Firm Selling Stockholder but for such Firm
Selling Stockholder's failure, refusal or inability to perform any agreement on
his, her or its part to be performed hereunder. The additional shares of Common
Stock so sold by the Company as a result of the provisions of the preceding
sentence shall added to, and included within, "Company Shares," and shall be
subtracted and excluded from "Selling Stockholder Shares" as may be applicable
in the context of this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares have
been placed in custody (for delivery under this Agreement) under the Custody
Agreements. Each Selling Stockholder agrees that the certificates for the
Selling Stockholder Shares of such Selling Stockholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Stockholder for such custody, including the Power of
Attorney, if applicable, is to that extent irrevocable and that the obligations
of such Selling Stockholder hereunder shall not be terminated by the act of such
Selling Stockholder or by operation of law, whether by the death or incapacity
of such Selling Stockholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Stockholder should die or be incapacitated, or if any other such event should
occur, before the delivery of the certificates for the Selling Stockholder
Shares hereunder, the Selling Stockholder Shares to be sold by such Selling
Stockholder shall, except as specifically provided herein or in the Custody
Agreement, be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether the Custodian shall have received notice of such
death or other event.
(b) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions set forth
in this Agreement, including the terms set forth below, Option Selling
Stockholder grants an option to the Underwriters to purchase from Option Selling
Stockholder all or any portion of 240,000 Option Shares at the same price per
Share as the Underwriters shall pay for the Firm Shares. Said option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on or before
the 45/th/ day after the date of the Prospectus upon written, telecopied or
telegraphic notice by the Representative to Option Selling Stockholder setting
forth the aggregate number and class of Option Shares as to which the
Underwriters are exercising the option and the settlement date. The Option
Shares shall be purchased severally, and not jointly, by each Underwriter, if
purchased at all, in the same proportion that the number of Firm Shares to be
purchased by such Underwriter bears to the total number of Firm Shares to be
purchased by the Underwriters under Section 2(a), above, subject to such
adjustments as the Representative in its absolute discretion shall make to
eliminate any fractional shares. Delivery of certificates for the Option
Shares, and payment therefor, shall be made as provided in Section 2(c) and
Section 2(d) below.
(c) Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted by Option Selling Stockholder in Section 2(b)
above shall have been exercised not later than 10:00 a.m., New York time, on the
date two business days preceding the Closing Date), and payment therefor shall
be made at the office of Cruttenden Roth Incorporated,18301 Von Karman, Suite
100, Irvine, California 92612, at 10:00 a.m., New York time, on the later to
occur of
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(i) the fourth business day after the date of this Agreement, (ii) the third
business day after the d ate the Firm Shares are first offered to the public, or
(iii) as provided in Section 9 of this Agreement. The date and hour of delivery
and payment for the Firm Shares are referred to in this Agreement as the
"Closing Date." As used in this Agreement, "business day" means a day on which
the New York Stock Exchange is open for trading and on which banks in New York
are open for business and not permitted by law or executive order to be closed.
(d) If any of the options granted by Option Selling Stockholder in
Section 2(b) above shall be exercised after 10:00 a.m., New York time, on the
date two business days preceding the Closing Date, delivery of certificates for
the Option Shares, and payment therefor, shall be made at the office of
Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California
92612, at 10:00 a.m., New York time, on the date specified by the Representative
(which date shall not be earlier than four and not later than 10 full business
days after the exercise of said option, nor in any event prior to the Closing
Date, and such time and date is referred to herein as the "Option Closing
Date"). Time shall be of the essence and delivery at the time and place
specified in this subsection (d) is a further condition to your obligations
hereunder.
(e) Payment of the purchase price for the Firm Shares and the Option
Shares by the Underwriters, less any reimbursable expenses provided for in
----
Section 4(a) of this Agreement and the non-accountable expense allowance
provided for in Section 4(b) of this Agreement, shall be made by certified or
official bank check or checks drawn in next-day funds, payable to the order of
the Company with regard to the Company Shares, and to each such Selling
Stockholder (or the Custodian for the respective accounts of the Selling
Stockholders, if applicable) with regard to the Shares being purchased from such
Selling Stockholders (and the Company and such Selling Stockholders agree not to
deposit or permit deposit of any such check in the bank on which drawn until the
day following the date of its delivery to the Company or the Custodian, as the
case may be) or by wire transfer to the account of the Company or such Selling
Stockholder pursuant to wire transfer instructions provided by the Company and
such Selling Stockholder, respectively. Such payment shall be made upon
delivery of certificates for the Shares to you for the account of the
Underwriters. Certificates for the Shares to be delivered to you shall be
registered in such name or names and shall be in such denominations as the
Representative may request at least two business days before the Closing Date,
in the case of Firm Shares, and at least one business day prior to the Option
Closing Date, in the case of the Option Shares. Such certificates will be made
available to the Representative for inspection, checking and packaging at such
office or such other location as you may reasonably request, not less than one
full business day prior to the Closing Date or, in the case of the Option
Shares, by 3:00 p.m., New York time, on the first business day preceding the
date of purchase.
(f) It is understood that the Underwriters propose to offer the
Shares for sale to the public as soon as the Representative deems it advisable
to do so (the "Public Offering"). The Firm Shares are to be initially offered to
the public at the public offering price set forth in the Prospectus (the "Public
Offering Price"). The Underwriters may from time to time thereafter change the
public offering price and other selling terms.
(g) The statements in the first, third, seventh and last paragraphs
under the caption "Underwriting" in any Preliminary Prospectus and in the final
form of Prospectus filed pursuant to
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<PAGE>
Rule 424(b) constitute the only information furnished by the Underwriters to the
Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement.
3. Further Agreements of the Company. The Company covenants and agrees
with the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to counsel for the Underwriters) pursuant to Rule 424(b)
within the time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will not file the Prospectus,
any amended Prospectus, any amendment of the Registration Statement or
supplement to the Prospectus or make any filing under Rule 462(b) of the Rules
and Regulations without advising the Representative of, and furnishing the
Underwriters with copies thereof a reasonable time prior to the proposed filing
of, such amendment or supplement and without obtaining the prior consent of the
Representative to such filing. The Company will prepare and file with the
Commission, promptly upon the request of the Representative, any amendment to
the Registration Statement or supplement to the Prospectus that may be necessary
or advisable in connection with the distribution of the Shares by you, and use
its best efforts to cause the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any amendment
thereof shall have become effective, (iii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company will use its best
efforts to prevent the issuance of any such stop order or suspension and, if
issued, to obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
each of you and your counsel a conformed copy of the Registration Statement as
filed and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a conformed
copy of each 462(b) Registration Statement and post-effective amendment, if any,
to the Registration Statement (together with, in each case, all exhibits thereto
unless previously furnished to you) and all documents filed by the Company with
the Commission under the Exchange Act and deemed to be incorporated by reference
into any Preliminary Prospectus or the Prospectus, and will also deliver to you,
for distribution to the Underwriters, a sufficient number of additional
conformed copies of each of the foregoing (excluding exhibits) so that one copy
of each may be distributed to each Underwriter, (ii) as promptly as possible
deliver to the Underwriters, at such office or offices as you may designate, as
many copies of any Preliminary Prospectus and the Prospectus as you may
reasonably request and (iii) thereafter from time to time
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<PAGE>
during the period in which a prospectus is required by law to be delivered by an
Underwriter or a dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended Prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser of the Shares, or if it
shall be necessary to amend or to supplement the Prospectus to comply with the
Securities Act or the Rules and Regulations, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
Prospectus so that the Prospectus as so supplemented or amended will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading, and so that it then will otherwise comply with the
Securities Act and the Rules and Regulations. If, after the public offering of
the Shares by the Underwriters and during such period, the Underwriters shall
propose to vary the terms of offering thereof by reason of changes in general
market conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the Company or
of counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters and all
dealers to whom any of the Shares may be sold by the Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with the
sale of the Shares in accordance with the applicable provisions of the
Securities Act and the Rules and Regulations for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any 462(b) Registration
Statement, post-effective amendment to the Registration Statement and any
supplement to the Prospectus or any amended Prospectus proposed to be filed.
(f) The Company will cooperate with you and your counsel in the
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or a dealer,
in keeping such qualifications in good standing under said securities or Blue
Sky laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Shares.
(g) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to you, and to each Underwriter who
may so request in writing, copies of all periodic and special reports furnished
to stockholders of the Company, of all
15
<PAGE>
information, documents and reports filed with Commission, any securities
exchange or the National Association of Securities Dealers, Inc. and of all
press releases and material news items or articles in respect of the Company,
its products or affairs released or prepared by the Company (other than
promotional and marketing materials disseminated solely to customers and
potential customers of the Company in the ordinary course of business); and any
additional information concerning the Company or its business which you may
reasonably request.
(h) As soon as practicable, but not later than the 45th day following
the end of the fiscal quarter first ending after the first anniversary of the
Effective Date, the Company will make generally available to its securities
holders and furnish to the Underwriters an earnings statement or statements in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees that it will cause each of its executive
officers and directors and those other Material Holders designated by the
Representative prior to the date of this Agreement to enter into agreements with
the Representative to the effect that they will not, directly or indirectly,
without your prior written consent, sell, offer, contract to sell, grant any
option to purchase, or otherwise dispose of any shares of Common Stock, or any
securities convertible into, exchangeable for or exercisable for Common Stock,
or any rights to purchase or acquire Common Stock (other than intra-family
transfers or transfers to trusts for estate planning purposes) for a period of
six months after the Closing Date.
(j) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus and will file such reports with the Commission with respect to
the sale of the Shares and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
(k) The Company will, prior to the date of this Agreement, and at all
times thereafter, unless such securities are then listed on a national
securities exchange, use its best efforts to cause the Shares and
Representative's Warrant Stock to be included for quotation on the Nasdaq
National Market, and the Company will comply with all registration, filing,
reporting and other requirements of the Exchange Act and the Nasdaq National
Market which may from time to time be applicable to the Company. The Company
further agrees not to delist from the Nasdaq National Market without the
Representative's approval, unless required to do so by the Nasdaq National
Market. As soon as practicable after the Shares become eligible therefor, the
Company will apply for listing in one or more securities manuals (such as
Moody's Over-the-Counter Industrial Manual or Standard & Poor's Corporation
Description Manual).
(l) The Company will use its best efforts to maintain insurance of
the types and in the amounts which it deems adequate for its business and
consistent with insurance coverage maintained by companies of similar size and
engaged in similar businesses, including, but not limited to, general liability
insurance covering all real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against. The Company will use its best efforts to obtain and
maintain a reasonable amount of Directors and Officers liability insurance from
a reputable insurer, and the level of coverage as well as the identity of the
insurer shall be reasonably acceptable to the Representative.
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(m) In accordance with the Representative's Warrants, the Company
agrees, upon its receipt from the Representative of the sum of $160.00 in
payment therefor, to deliver to the Representative on the Closing Date upon
completion of the purchase and sale of the Shares pursuant to Section 2 of this
Agreement, the Representative's Warrants representing the right to purchase up
to 160,000 shares of Common Stock at a price equal to 165% of the offering price
per share of Common Stock to the public as set forth on the cover page of the
Prospectus.
(n) The Company shall use its best efforts to retain in their current
positions the individuals named as executive officers under the caption
"Management" in the Registration Statement for a reasonable period after the
consummation of the Public Offering.
(o) The Company shall, following the Closing Date, amend its Bylaws
to provide that it will use its best efforts to at all times maintain at least
two (2) independent directors (that is directors that are not officers of the
Company, who are neither related to its officers nor represent concentrated or
family holdings of the Company's shares, and who, in the view of the Company's
board of directors, are free of any relationship that would interfere with the
exercise of independent judgement (the "Independent Directors"). The Independent
Directors shall constitute a majority of the Company's audit and compensation
committees.
(p) Except in connection with acquisitions or shares of Common Stock
issuable upon exercise of options or warrants outstanding prior to the Closing
Date and except for the grant of options to its officers and employees under the
Company's 1998 Stock Option Plan at an exercise price equal to the Public
Offering Price per share, during the period of the offering, and for a period of
six months from the Closing Date, the Company will not (i) sell or otherwise
dispose of any securities of the Company (except pursuant to the Company's
employee benefit plans described in the Registration Statement) or (ii) purchase
any shares of capital stock of the Company (except for fractional shares
purchased pursuant to the recently approved 3-for-4 reverse stock split of the
Company's Common Stock), without your prior written consent.
(q) During the period of two (2) years commencing with the date of
this Agreement, the Company's Chief Executive Officer or Chief Financial Officer
will visit the United States investor community twice each year, stopping once
on the West Coast, once on the East Coast, and once in the Midwest on each trip,
as reasonably directed by the Representative.
(r) The Company will instruct its transfer agent to provide you with
copies of the Depository Trust Company stock transfer sheets on a weekly basis
for a period of six months from the Closing Date and on a monthly basis
thereafter for six additional months.
(s) The Company will reserve and keep available that maximum number
of its authorized but unissued securities which are issuable upon exercise of
the Representative's Warrants.
4. Fees and Expenses. The Company agrees with each Underwriter that:
(a) The Company shall pay all costs and expenses incident to the
purchase, sale and delivery of the Shares, including without limitation, all
fees and expenses of filing the Registration Statement with the SEC and the
NASD; all Blue Sky fees and expenses, including legal
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fees and expenses, if any, of the Underwriters' counsel (which shall undertake
all such Blue Sky matters); fees and disbursements of counsel and accountants
for the Company; printing and mailing costs, including costs of printing the
Registration Statement, any amendments thereto, all underwriting documents, Blue
Sky memoranda and a reasonable quantity of prospectuses as determined by the
Representative; the Company's road show cost and expenses; and the cost of
preparing a total of four (4) sets of bound volumes of the Public Offering
documents for the Representative and Underwriters' counsel. The Company shall
also pay for the cost of advertising the Public Offering, including the cost of
"tombstone" ads in various financial and news publications or other promotional
material as directed by the Representative and shall pay for all other expenses
for advertising undertaken at the Company's request, including graphic slide
costs. The Underwriters shall pay the fees and disbursements of its counsel,
with the exception of the Blue Sky fees described above, and the
Representative's road show costs and expenses. Any additional expenses incurred
as a result of the sale of the Shares by the Selling Stockholders will be borne
by the Company. The provisions of this Section 4(a) are intended to relieve the
Underwriters from the payment of the expenses and costs which the Selling
Stockholders and the Company, as the case may be, have agreed to pay, but shall
not affect any agreement which the Selling Stockholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(b) In addition to its obligations under Section 4(a) above, the
Company agrees with the Representative to pay the Representative a non-
accountable expense allowance equal to three percent (3%) of the aggregate
Public Offering Price of the Shares (including the Firm Shares to be sold by the
Firm Selling Stockholders) sold by them in the Public Offering. Such allowance,
less $50,000 which was paid to the Representative by the Company as an advance
against non-accountable expenses, shall be paid to the Representative by the
Company, as provided in Section 2(d) of this Agreement. The Representative
agrees to repay to the Company any portion of the $50,000 paid by the Company
for non-accountable expenses that has not been utilized by the Representative in
connection with the Public Offering on an accountable basis.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless you, and you agree to indemnify and hold
harmless, the Company from and against any losses, claims, damages or
liabilities, (which shall, for all purposes of this Agreement, include, but not
be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees), to which the indemnified party may become subject
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is entitled to
a finder's fee in connection wit the proposed offering by reason of such
person's or entity's influence or prior contact with the indemnifying party.
(d) In addition to its other obligations under Section 7(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in Section 7(a)
hereof, it will pay the Underwriters on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
18
<PAGE>
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to pay the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to time in
The Wall Street Journal which represents the base rate on corporate loans posted
by a substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(e) In addition to their other obligations under Section 7(b) hereof,
each Selling Stockholder agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 7(b) hereof relating to such Selling Stockholder, it will pay the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of such Selling
Stockholder's obligation to pay the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Stockholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(f) In addition to its other obligations under Section 7(c) hereof,
the Underwriters agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding described in Section
7(c) hereof, it will reimburse the Company and each such Selling Stockholder on
a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(g) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 4(d), (e) and (f)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on
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<PAGE>
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted pursuant to the Code of Arbitration Procedure
of the NASD in Los Angeles County, California. Any such arbitration may be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections 4(d),
(e) and (f) hereof and will not resolve the ultimate propriety or enforceability
of the obligation to indemnify for expenses which is created by the provisions
of Sections 7(a), 7(b) and 7(c) hereof or the obligation to contribute to
expenses which is created by the provisions of Section 7(e) hereof.
5. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Shares shall be subject, in the sole
discretion of the Representative, to the accuracy as of the date of execution of
this Agreement, the Closing Date and the date on which the Option Shares are to
be purchased, as the case may be, of the representations and warranties of the
Company and the Selling Stockholders set forth in this Agreement, to the
accuracy of the statements of the Company and its officers made in any
certificate delivered pursuant to the terms of this Agreement, to the
performance by the Company and the Selling Stockholders of all of its
obligations to be performed under this Agreement at or prior to the Closing Date
or any later date on which Option Shares are to be purchased, as the case may
be, and to the following additional conditions:
(a) The Registration Statement shall have become effective, (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective) and, at the Closing
Date, or, with respect to the Option Shares, the date on which such Option
Shares are to be purchased, no stop order suspending the effectiveness of the
Registration Statement or any qualification or exemption from qualification for
the sale of the Shares in any jurisdiction shall have been issued and no
proceedings for that purpose shall have been instituted or threatened; and any
request for additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Underwriters and their
counsel.
(b) The Underwriters shall have received from Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, counsel for the Underwriters, an
opinion dated the Closing Date, with respect to such matters related to the
Public Offering as the Underwriters may reasonably require, and the Company
shall have furnished counsel for the Underwriters with the legal opinion of its
counsel and all other documents which it may request for the purpose of enabling
it to pass upon such matters.
(c) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Troy & Gould Professional Corporation, United States counsel for the
Company, addressed to the Underwriters and dated the Closing Date or such later
date, to the effect set forth in Annex A to this Agreement.
(d) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Angela Wang & Co.,
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<PAGE>
Hong Kong counsel for the Company, addressed to the Underwriters and dated the
Closing Date or such later date, to the effect set forth in Annex B to this
Agreement.
(e) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of The Fada Law Firm, Peoples' Republic of China counsel for the
Company, addressed to the Underwriters and dated the Closing Date or such later
date, to the effect set forth in Annex C to this Agreement.
(f) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Gerald A. Kaufman, Esq., counsel to the Firm Selling Stockholders,
addressed to the Underwriters and dated the Closing Date or such later date, to
the effect set forth in Annex D to this Agreement.
(g) In addition, on any Option Closing Date, you shall have received
the opinion of Angela Wang & Co., counsel for Option Selling Stockholder,
addressed to the Underwriters and dated the Option Closing Date, covering the
matters set forth in Annex D to this Agreement.
(h) You shall be satisfied that there has not been any material
change in the market for securities in general or in political, financial or
economic conditions from those reasonably foreseeable as to render it
impracticable in your sole judgment to make a public offering of the Shares, or
a material adverse change in market levels for securities in general (or those
of companies in particular) or financial or economic conditions which render it
inadvisable to proceed.
(i) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the Chief
Executive Officer and the Chief Financial Officer of the Company, stating that:
(i) the representations and warranties of the Company set forth
in Section 1 of this Agreement are true and correct with the same force and
effect as if expressly made at and as of such date, and the Company has complied
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best of their knowledge, are
threatened under the Securities Act;
(iii) the Common Stock has been duly designated for listing on
the Nasdaq National Market beginning no later than the time Firm Shares are
first offered to the public; and
(iv) (A) they have carefully examined the Registration
Statement in the form in which it originally became effective and the Prospectus
and any supplements or amendments thereto, and that, as of the Effective Date,
the statements made in the Registration Statement and the Prospectus were true
and correct in all material respects, and the Registration Statement did not
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and the Prospectus did not
omit to state any material fact required to be stated
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<PAGE>
therein or necessary in order to make the statements therein, in light of the
circumstance under which they were made, not misleading, (B) since the Effective
Date, no event has occurred that should have been set forth in a supplement or
amendment to the Prospectus that has not been set forth in such a supplement or
amendment, (C) since the respective dates as of which information is given in
the Registration Statement in the form in which it originally became effective
and the Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change in or
affecting the business, properties, condition (financial or otherwise),
capitalization, prospects or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration Statement in
the form in which it originally became effective and the Prospectus contained
therein, (D) there are not any pending or known threatened legal proceedings to
which the Company or any of its subsidiaries is a party or of which property of
the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, and
(E) there are not any license agreements, contracts, leases or other documents
that are required to be filed as exhibits to the Registration Statement that
have not been filed as required.
(j) You shall have received on the Closing Date and on any Option
Closing Date later date on which Option Shares are to be purchased, as the case
may be, a letter from Arthur Andersen & Co., addressed to the Company and the
Underwriters, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, confirming that they are independent
certified public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than five (5) business days prior to the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, (i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be, and
(ii) setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes in
the facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from
Arthur Andersen & Co. shall be addressed to or for the use of the Underwriters
in form and substance satisfactory to the Underwriters and shall (i) represent,
to the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth its opinion with respect to its
examination of the balance sheet of the Company as of December 31, 1996 and 1997
and related statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1995, 1996 and 1997, (iii) state that Arthur
Andersen & Co. has performed the procedure set out in Statement on Auditing
Standards No. 71 ("SAS 71") for a review of interim financial information as
described in SAS 71 on the financial statements of the Company for each of the
nine-month
22
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periods ended September 30, 1997 and 1998, and (iv) address other matters agreed
upon by Arthur Andersen & Co. and you. In addition, you shall have received from
Arthur Andersen & Co. a letter addressed to the Company and made available to
the Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of its examination of the Company's financial statements as of December
31, 1997 did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(k) The Common Stock has been duly designated for listing on the
Nasdaq National Market effective no later than the time Firm Shares were first
offered to the public.
(l) On or prior to the Closing Date, you shall have received from the
Company's officers and directors and all Material Holders executed lock-up
agreements covering the matters described in Section (1)(xvi) of this Agreement.
(m) On the Closing Date, the Company shall have issued the
Representative's Warrant Agreement and Representative's Warrants, substantially
in the form filed as Exhibit 4.2 to the Registration Statement; and on the
Closing Date, concurrently with the purchase and sale of the Shares, the Company
shall have issued, sold and delivered the Representative's Warrants to the
Representative.
(n) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from each Selling Stockholder or the
Attorney to the effect that, as of the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such Selling
Stockholder herein are not true or correct in any material respect on the
Closing Date or on any later date on which Option Shares are to be purchased, as
the case may be; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be.
(o) The Company and the Selling Stockholders shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Stockholders or
officers of the Selling Stockholders (when the Selling Stockholder is not a
natural person)), as to the accuracy of the representations and warranties of
the Company and the Selling Stockholders set forth in this Agreement, as to the
performance by the Company and the Selling Stockholders of its obligations under
this Agreement and as to the other conditions concurrent and precedent to the
obligations of the Underwriters under this Agreement.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, counsel for the
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Underwriters. The Company and the Selling Stockholders will furnish you with
such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
If any of the conditions specified in this Section 5 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Underwriters and its counsel, this Agreement and all
obligations of the Underwriters hereunder may be canceled by the Underwriters
at, or at any time prior to, the Closing Date or (with respect to the Option
Shares) prior to the Option Closing Date upon which the Option Shares are to be
purchased, as the case may be. Notice of such cancellation shall be given to
the Company in writing or by telephone, telecopy or telegraph confirmed in
writing. Any such termination shall be without liability of the Company or the
Selling Stockholders to the Underwriters (except as provided in Section 4 or
Section 7 of this Agreement) and without liability of the Underwriters to the
Company or the Selling Stockholders (except to the extent provided in Section 7
of this Agreement).
6. Conditions of the Obligation of the Company. The obligations of the
Company and the Selling Stockholders to sell and deliver the Shares required to
be delivered as and when specified in this Agreement shall be subject to the
condition that at the Closing Date or (with respect to the Option Shares) the
date upon which the Option Shares are to be purchased, no stop order suspending
the effectiveness thereof shall be in effect and no proceedings therefor shall
be pending or threatened by the Commission.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriters against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any untrue statement or alleged untrue statement
of any material fact contained in any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action, or (iv) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Shares under the
securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange, or the omission or alleged
omission to state therein a
24
<PAGE>
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, such
Preliminary Prospectus or the Prospectus, or any such amendment or supplement
thereto, in reliance upon, and in conformity with, written information relating
to any Underwriter furnished to the Company by such Underwriter, directly or
through you, specifically for use in the preparation thereof and, provided
further, that the indemnity agreement provided in this Section 7(a) with respect
to any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of material
fact or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof. The indemnity agreements of the Company contained in
this Section 7(a) and the representations and warranties of the Company
contained in Section 1 of this Agreement shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
The indemnity agreement in this Section 7(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any of the Underwriters within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Company may otherwise have.
(b) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless the Underwriters against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
under the Act, the Exchange Act or otherwise, specifically including, but not
limited to, losses, claims, damages or liabilities, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any breach of any representation, warranty, agreement or
covenant of such Selling Stockholders herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, in
the case of subparagraphs (ii) and (iii) of this Section 7(b) to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter, directly or
through you, specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided further, that the indemnity agreement
provided in this Section 7(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter
25
<PAGE>
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of material
fact or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by such Selling
Stockholder with Section 4(e) hereof.
The indemnity agreements of the Selling Stockholders contained in this
Section 7(b) and the representations and warranties of the Selling Stockholders
contained in Section 1 of this Agreement shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
(c) The Underwriters severally agree, each in proportion to the
number of Firm Shares to be purchased by such Underwriter bears to the total
number of Firm Shares to be purchased pursuant to section 2(a) hereof, to
indemnify and hold harmless the Company, and each Selling Stockholder, against
any losses, claims, damages or liabilities, joint or several, to which the
Company or such Selling Stockholder may become subject under the Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 7(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 7(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Stockholder, and each person, if any, who controls the
Company or each Selling Stockholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Underwriters may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 7, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not
26
<PAGE>
relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 7. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 7(a), 7(b) or 7(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 7
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters are
responsible for the portion represented by the percentage that the underwriting
discount bears to the initial public offering price, and the Company and the
Selling Stockholders are responsible for the remaining portion; provided,
however, that (i) the Underwriters shall not be required to contribute any
amount in excess of the underwriting discount and non-accountable expense
allowance (less the Underwriters' actual out-of-pocket expenses on an
accountable basis, including legal fees and expenses) applicable to the Shares
purchased by such Underwriter in excess of the amount of
27
<PAGE>
damages which such Underwriter has otherwise required to pay and (ii) no person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. The contribution agreement in this Section
7(e) shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any of the Underwriters, the
Company or any Selling Stockholder within the meaning of the Act or the Exchange
Act and each officer of the Company who signed the Registration Statement and
each director of the Company.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 7, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 7, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 7 and further agree not to attempt to
assert any such defense.
8. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters, but nothing herein shall relieve a defaulting underwriter from
liability for its default.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase but nothing herein shall relieve a defaulting underwriter from
liability for its default. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including non-
business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters
28
<PAGE>
as provided in this Section 8, (i) the Company shall have the right to postpone
the time of delivery for a period of not more than seven (7) full business days,
in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (ii) the respective number of Firm Shares to be purchased by
the remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 8, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 4
and 7 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 4 and 7 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 8.
9. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as you shall release the Shares to the
public. If you shall not have released the Shares prior to 5:00 p.m., New York
time, on the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without liability on
the part of the Underwriters to the Company or Selling Stockholders, except as
set forth in Section 4 and Section 7 of this Agreement. By giving notice as set
forth in Section 10 of this Agreement before the time this Agreement becomes
effective, you, as Representative, may prevent this Agreement from becoming
effective without liability of any party to the other parties, except that the
Company and the Selling Stockholders shall remain obligated to pay costs and
expenses to the extent provided in Section 4 and Section 7 of this Agreement. If
the Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement shall become effective upon execution and delivery by
you, the Company and each Selling Stockholder (which may be by power-of-
attorney).
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company and each Selling Stockholder
(which may be through power-of-attorney) at any time on or prior to the Closing
Date or, with respect to the purchase of the Option Shares, on or prior to any
later date on which the Option Shares are to be purchased, as the case may be,
if prior to such time any of the following has occurred or, in your opinion, is
likely to occur: (i)
29
<PAGE>
after the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or development
involving a prospective adverse change in or affecting particularly the
condition (financial or otherwise) of the Company and its subsidiaries
considered as a whole or the earnings, prospects or business affairs of the
Company and its subsidiaries considered as a whole, whether or not arising in
the ordinary course of business, which would materially impair the investment
quality of the offered securities; or (ii) if there shall have been the
engagement in major hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, or any outbreak of major hostilities or
other national or international calamity or crisis or material adverse change in
economic or political conditions, if the effect of such outbreak, calamity,
crisis or material adverse change in economic or political conditions on the
financial markets of the United States would, in your sole judgment, make the
offering or delivery of the Shares impracticable, or (iii) if there shall have
been suspension of trading in securities generally or a material adverse decline
in value of securities generally on the New York Stock Exchange, the American
Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, or (iv) if there shall have been the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of, or commencement of any proceeding or investigation
by, or change in material substantive policy by, any court, legislative body,
agency or other foreign or domestic governmental authority which in your sole
judgment materially and adversely affects or will materially adversely affect
the business, operations or prospects of the Company and its subsidiaries
considered as a whole, or (v) if there shall have been the declaration of a
banking moratorium by United States, New York or California state authorities,
or (vi) if there shall have been the taking of any action by any United States,
state or local government or agency in respect of its monetary or fiscal affairs
which in your reasonable judgment has a material adverse effect on the
securities markets in the United States or (vii) existing international monetary
conditions shall have undergone a material change which, in your sole judgment,
makes the offering or delivery of the Shares impracticable. If this Agreement
shall be terminated pursuant to this Section 9, there shall be no liability of
the Company or the Selling Stockholders to the Underwriters and no liability of
the Underwriters to the Company or the Selling Stockholders (except to the
extent provided in Section 4 or Section 7 of this Agreement); provided, however,
that in the event of any such termination the Company agrees to indemnify and
hold harmless the Underwriters from all costs or expenses of the Company
incident to the performance of the obligations of the Company under this
Agreement, including all costs, expenses and advances referred to in Section 4
of this Agreement.
10. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by either telecopier or telegraph and, if to
the Underwriters, shall be mailed, telecopied or telegraphed or delivered to
Cruttenden Roth Incorporated ,18301 Von Karman, Suite 100, Irvine, California
92612 (telecopier: (949) 852-9603) Attention: Managing Director Corporate
Finance; and if to the Company or the Option Selling Stockholders, shall be
mailed, telecopied, telegraphed or delivered to Casey Ind. Bldg., 8/th/ Floor,
18 Bedford Road, Taikoksui, Kowloon, Hong Kong (telecopier: (852) 2789-1737);
and if to the Firm Selling Stockholders, shall be mailed, telecopied or
telegraphed or delivered to Arthur Seidenfeld, c/o Gerald A. Kaufman, Esq., 33
Walt Whitman Road, Site 233, Huntington Station, New York 11746 (telecopier
(516) 271-2488). All notices given by telecopy or telegraph shall be promptly
confirmed by letter.
30
<PAGE>
11. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company, each Selling Stockholder and the Underwriters
and, with respect to the provisions of Section 4 and Section 7 of this
Agreement, the several parties (in addition to the Company, each Selling
Stockholder and the Underwriters) indemnified under the provisions of said
Section 4 and Section 7, and their respective personal representatives,
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Shares from the
Underwriters.
12. Miscellaneous. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company,
each Selling Stockholder or their respective directors, officers or controlling
persons thereof, and (c) delivery and payment for the Shares under this
Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but all of which together shall constitute one and
the same instrument.
13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE, AND TO BE PERFORMED, SOLELY WITHIN THAT STATE.
14. Submission to Jurisdiction and Waiver of Immunity and Inconvenient
Forum. Subject to the arbitration provisions of 4(g), the Company and each
Selling Stockholder agree that any and all disputes arising in connection with
this Underwriting Agreement and the transactions contemplated by this
Underwriting Agreement, including the offer and sale of the Firm Shares and the
Option Shares, may be brought in any state or federal court of record located in
the County of Los Angeles, State of California. By its signature to this
Agreement, the Company and each Selling Stockholder irrevocably submit to the
jurisdiction of the state and federal courts located in the County of Los
Angeles, State of California, in any legal action or proceeding relating to this
Underwriting Agreement and the transactions contemplated by this Underwriting
Agreement, including the offer and sale of the Firm Shares and the Option
Shares.
The Company and each Selling Stockholder irrevocably waive all immunity
from jurisdiction, attachment and execution, whether on the basis of sovereignty
or otherwise, to which each of them respectively might otherwise be entitled in
any legal action or proceeding in any state or federal court located in the
County of Los Angeles, State of California. The Company and each Selling
Stockholder irrevocably waive, to the fullest extent permitted by law, any
objection which it may now or hereafter have to any suit, action or proceeding
relating to this Underwriting Agreement and the transactions contemplated by
this Underwriting Agreement, including the offer and the sale of the Firm Shares
and the Option Shares, being brought in the federal or state courts located in
the County of Los Angeles, State of California, and hereby further irrevocably
waive any
31
<PAGE>
claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
32
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholders and the Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Stockholders and the
Underwriters.
Very truly yours,
CREATIVE MASTER INTERNATIONAL, INC.
By: ___________________________
Name:
Title:
ACMA INVESTMENTS PTE., LTD.
By: ___________________________
Carl Tong
Attorney-in-fact
ARTHUR SEIDENFELD
________________________________
ANNE SEIDENFELD
________________________________
MODERN TECHNOLOGY CORP.
By: ___________________________
Arthur A. Seidenfeld
President
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CRUTTENDEN ROTH INCORPORATED
By: ___________________________
Name:
Title:
33
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm
Shares to be
Underwriters Purchased
- ------------ ------------
<S> <C>
Cruttenden Roth Incorporated...........................
TOTAL..................................................
---------
1,600,000
=========
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Company
Shares to be
Company Sold
- ------- ------------
<S> <C>
Creative Master International, Inc. ................. 1,575,276
---------
TOTAL 1,575,276
=========
<CAPTION>
Number of
Selling
Stockholder
Shares to be
Name of Selling Stockholder Sold
- --------------------------- ------------
<S> <C>
Arthur Seidenfeld.................................... 33,047
Anne Seidenfeld...................................... 4,102
Modern Technology Corp. ............................. 37,575
------
TOTAL 74,724
======
</TABLE>
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of
Troy & Gould Professional Corporation
United States Counsel for the Company
(1) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Each of
the Company and each of its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions in the United
States, if any, in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure so
to qualify would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(2) The Company has the corporate power to own, lease and operate its
properties and to conduct its business as described in the Prospectus.
(3) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable and to such counsel's knowledge have not been issued in violation
of any preemptive right, co-sale right, right of first refusal or other similar
right.
(4) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights to
registration of such shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have, with respect to the
offering contemplated hereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement, or have included securities in the Registration
Statement pursuant to the exercise of such rights.
(5) The Shares to be issued and sold by the Company will be, upon issuance
and delivery against payment therefor in accordance with the terms of the
Agreement, duly authorized and validly issued and fully paid and nonassessable
and, will not have been issued in violation of any preemptive right,
registration right, co-sale right, right of first refusal or other similar right
set forth in the Certificate of Incorporation or Bylaws of the Company, or any
other contract agreement or document of which such counsel has knowledge.
(6) The Company has corporate power and authority to enter into the
Agreement and the Representative's Warrant Agreement and to issue, sell and
deliver the Shares to the Underwriters.
(7) The Agreement and the Representative's Warrant Agreement each has been
duly authorized by all necessary corporate action on the part of the Company and
each has been duly executed and delivered by the Company and, assuming due
authorization, execution and delivery
A-1
<PAGE>
by the Representative, are the valid and binding agreements of the Company,
except insofar as the indemnification and contribution provisions of such
agreements may be limited by public policy concerns, and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or judicial decisions relating to or affecting
creditors' rights generally or by general equitable principles.
(8) The performance of the Agreement and the Representative's Warrant
Agreement and the consummation of the transactions contemplated thereby will not
result in the breach or violation of any of the terms and provisions of the
Company's Certificate of Incorporation or Bylaws, or to the best of such
counsel's knowledge, result in the breach or violation of any of the terms and
provisions of, or constitute a default under, any material indenture, mortgage,
deed of trust, loan agreement, bond, debenture, note agreement or other evidence
of indebtedness, or any lease, license, contract or other agreement or
instrument known to such counsel to which the Company is a party or by which any
of its properties are bound, or to the best of such counsel's knowledge, (other
than performance of the Company's indemnification and contribution obligations
under such agreements, concerning which no opinion need be expressed) any
applicable statute, rule or regulation or, to the best of such counsel's
knowledge, any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company or over any of its properties or
operations; provided, however, that no opinion need be rendered concerning state
securities or Blue Sky laws.
(9) No authorization, approval or consent of any governmental authority or
agency of the United States of America is necessary in connection with the
consummation of the transactions contemplated by the Agreement and the
Representative's Warrant Agreement, except such as have been obtained under the
Securities Act or such as may be required under the rules and regulations of the
National Association of Securities Dealers, Inc., or under state securities or
Blue Sky laws in connection with the purchase and the distribution of the Shares
by the Underwriters.
(10) To the best knowledge of such counsel, neither the Company nor any of
its subsidiaries is presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of their properties are bound which is material to the financial
condition, earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise;
(11) The Representative's Warrant Stock has been duly and validly
authorized for issuance upon exercise of the Representative's Warrants and when
so issued in accordance with the terms thereof will be validly issued, fully
paid and non-assessable; and, to such counsel's knowledge no stockholder has any
preemptive rights with respect to the Representative's Warrant Stock.
(12) All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusion under the laws of the United States of
America or the State of Delaware, has been reviewed by us and is a fair summary
of such matters and conclusions.
A-2
<PAGE>
(13) The form of certificate evidencing the Common Stock complies with
Delaware law.
(14) The Registration Statement has become effective under the Securities
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for that purpose have been instituted or are
pending or, to the best knowledge of such counsel, threatened under the
Securities Act.
(15) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be described
or referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that are not described or referred to
therein and filed as required.
(16) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements, financial and
statistical data included therein, as to which such counsel need express no
opinion) as of the effective date of the Registration Statement, complied as to
form in all material respects with the requirements of the Securities Act and
the applicable Rules and Regulations.
(17) To the best knowledge of such counsel, the Common Stock conforms in
all material respects to all statements in relation thereto contained in the
Prospectus.
(18) The description in the Registration Statement and the Prospectus of
the Certificate of Incorporation and Bylaws of the Company and of statutes and
contracts are accurate in all material respects and fairly present in all
material respects the information required to be presented by the Securities Act
and the Rules and Regulations.
(19) There are no legal or governmental proceedings pending or, to the best
knowledge of such counsel, threatened against the Company or any of its
subsidiaries in any jurisdiction in the United States of a character which are
required to be disclosed in the Registration Statement or the Prospectus by the
Securities Act or the applicable Rules and Regulations, other than those
described therein.
(20) The information in the Prospectus under the captions "Description of
Capital Stock" and "Shares Eligible For Future Sale," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by such
counsel and is a fair summary of such matters and conclusions.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Underwriters, Underwriters' counsel and the independent public accountants of
the Company, at which conferences the contents of the Registration Statement and
the Prospectus and related matters were discussed, and although they have not
(with the exception of the matters covered in paragraphs (12), (13) and (20) of
their opinion) independently checked or verified the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, the
Registration Statement (except as to financial statements, financial data and
supporting schedules
A-3
<PAGE>
contained therein, as to which such counsel need express no opinion) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or the States of California or Delaware
upon opinions of local counsel, and as to questions of fact upon representations
or certificates of officers of the Company, and of government officials, in
which case their opinion is explicitly to state that they are so relying thereon
and that they have no knowledge of any material misstatement or inaccuracy in
such opinions, representations or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Underwriters, and to Underwriters' Counsel.
A-4
<PAGE>
ANNEX B
Matters to be Covered in the Opinion of
Angela Wang & Co.
Hong Kong Counsel for the Company
1. Each of Creative Master Limited, Excel Master Limited, Carison
Engineering Limited, Techtime Industries Limited, Mastercraft Engineering
Limited (formerly Queenex Enterprises Limited) (the "Hong Kong subsidiaries")
has been duly registered and is validly existing as a limited liability company
in good standing under the laws of Hong Kong.
2. Each of the Hong Kong subsidiaries has the corporate power and
authority to own, lease and operate its properties and to conduct its business
in the manner currently conducted and as proposed to be conducted respectively
as described in the Prospectus.
3. The description in the Registration Statement and the Prospectus of
each of the Hong Kong subsidiaries and the relationship between the Company and
the Hong Kong subsidiaries is accurate in all material respects, and fairly
presents in all material respects the information set forth therein.
4. The Company owns all of the outstanding capital stock of each Hong
Kong Subsidiary except for Mastercraft Engineering Limited, Carison Engineering
Limited and Techtime Limited of which it owns 70%, 70% and 55%, respectively.
All of the issued and outstanding capital stock of each of the Hong Kong
subsidiaries has been duly and validly authorized and issued, is fully paid and
nonassessable, is not owned or held and has not been issued in violation of any
preemptive rights contained in the charter documents of the respective Hong Kong
Subsidiary and, to such counsel's knowledge, to the extent owned by the Company,
is owned directly by the Company free and clear of any lien, encumbrance, claim,
security interest, restriction or transfer.
5. To such counsel's knowledge, there are no outstanding options,
warrants, calls, rights or other agreements or commitments with respect to the
purchase or sale of any capital stock of any of the Hong Kong subsidiaries.
6. Those contracts which are included as exhibits to the Registration
Statement and which are made or to be performed in, or stated to be governed by
the law of, Hong Kong are valid and enforceable under Hong Kong law.
7. No authorization, approval or consent of any governmental authority or
agency of Hong Kong is necessary in connection with the consummation of the
transactions contemplated by the Agreement and the Representative's Warrant
Agreement.
8. There are no legal or governmental proceedings pending or, to the best
knowledge of such counsel, threatened against the Company or any of the Hong
Kong subsidiaries other than those, if any, described in the Registration
Statement or the Prospectus.
B-1
<PAGE>
9. To the best of such counsel's knowledge, none of the Hong Kong
subsidiaries is presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or other agreement or
instrument to which each such respective company is a party or by which any of
their respective properties are bound which is material to the financial
condition, earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise.
10. All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusions under the laws of Hong Kong has been
reviewed by such counsel and is a fair summary of such matters and conclusions.
11. Under the laws of Hong Kong, the submission to Jurisdiction and Waiver
of Immunity and Inconvenient Forum clause of Section 14 of the Agreement is
valid and binding upon the Company.
In addition, such counsel shall state that although they have not (with the
exception of the matters covered in paragraph 10 of their opinion) independently
checked or verified the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus relating to the
Company and its operations in Hong Kong, nothing has come to the attention of
such counsel that caused them to believe that, at the time the Registration
Statement became effective, the Registration Statement (except as to financial
statements, financial data and supporting schedules contained therein) contained
any untrue statement of a material fact, or omitted to sate a material fact
required to be stated therein or necessary to make such statements not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact to be stated therein or necessary to make such statements, in light of the
circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the companies which are the
subject of said opinion, and of government officials in which case their opinion
is explicitly to state that they are so relying thereon and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificates so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' counsel.
B-2
<PAGE>
ANNEX C
Matters to be Covered in the Opinion of
The Fada Law Firm
China Counsel for the Company
1. Dongguan Heng Li Zhen Trading Company has been duly organized and is
validly existing in good standing under the laws of China.
2. Dongguan Heng Li Zhen Trading Company has the legal capacity,
necessary power and authority to execute and perform its obligations under the
Joint Enterprise Agreement, dated September 10, 1994, the Supplement, dated
April 1, 1996, to the Joint Enterprise Agreement, and the Processing Agreement
dated June 18, 1998 (the "Joint Enterprise Agreements").
3. Dongguan Process Assembly Servicing Company has the right and power to
enter into with Creative Master Limited the Processing Agreement, dated June 11,
1995 and the Supplement dated November 11, 1995. Dongguang Process Assembly
Servicing Company has the right and power to enter into with Creative Master
Limited the Import Material & Processing Agreement dated November 10, 1995.
4. The Joint Enterprise Agreements have been validly executed by Dongguan
Heng Li Zhen Trading Company and Creative Master Limited and duly approved by
the Chinese government which constitute valid and binding obligations of each of
the two parties, enforceable in accordance with their terms and conditions under
the law of China.
5. Each local Chinese government agency has the right and power to enter
into the manufacturing leases, which are filed as exhibits to the Registration
Statement, and each factory and dormitory lease has been validly executed and
constitutes the valid and binding obligations of the parties, enforceable in
accordance with their respective term and conditions under the laws of China.
6. The Dongguan Chuangying Toys Factory Co., Ltd. has been duly organized
as a limited liability company and is validly existing in good standing under
the laws of China.
7. Dongguan Chuangying Toys Factory Co., Ltd. has the right and power to
own, lease and operate its properties and to conduct its business as described
in the Prospectus, including the right and power to execute and perform its
obligations under the Joint Enterprise Agreement, dated September 10, 1994.
8. No authorization, approval or consent of any governmental authority or
agency of China is necessary in connection with the consummation of the
transactions contemplated by the Agreement and the Representative's Warrant
Agreement.
9. The Company and [list subsidiaries party to the factory and dormitory
leases and Joint Enterprise and Processing Agreements] are in possession of, and
operating in China in compliance with such authorizations, licenses,
certificates, orders and permits as may be required from
C-1
<PAGE>
applicable regulatory authorities in China which are material to the conduct of
their business, all of which are valid and in full force and effect; neither the
Company nor [list subsidiaries party to the factory and dormitory leases and
Joint Enterprise and Processing Agreements] is in default in the performances or
observance of any material obligation, agreement covenant or condition contained
in any bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument known to such counsel to which
the Company or [list subsidiaries party to the factory and dormitory leases and
Joint Enterprise and Processing Agreements] is a party or by which any of them
or their properties may be bound, in each case that might cause or result in a
material adverse change in the business, properties, condition (financial or
otherwise), prospects or results of operations of the Company and its
subsidiaries, taken as a whole; and neither the Company nor [list subsidiaries
party to the factory and dormitory leases and Joint Enterprise and Processing
Agreements] is in material violation of, or liable under, any law, order, rule,
regulation, writ, injunction, judgement or decree of any court, government or
governmental agency or body of China having jurisdiction over the Company or
[list subsidiaries party to the factory and dormitory leases and Joint
Enterprise and Processing Agreements] or over any of their properties;
10. All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusions under the laws of China has been reviewed by
such counsel and is a fair summary of such matters and conclusions;
11. There are no legal or governmental proceedings pending or, to such
counsel's knowledge, threatened against the Company or [list subsidiaries party
to the factory and dormitory leases and Joint Enterprise and Processing
Agreements].
12. Under Chinese law, the submission to Jurisdiction and Waiver of
Immunity and Inconvenient Forum clause of Section 14 of the Agreement is valid
and binding upon the Company.
13. All translations of documents from Chinese to English which were
provided to counsel for the Underwriters and which are included as exhibits to
the Registration Statement are complete and accurate translations in all
material respects.
In addition, such counsel shall state that although they have not (with the
exception of the matters covered in paragraph 10 of their opinion) independently
checked or verified the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus relating to the
Company and its operations in China, nothing has come to the attention of such
counsel that caused them to believe that, at the time the Registration Statement
became effective, the Registration Statement (except as to financial statements,
financial data and supporting schedules contained therein) contained any untrue
statement of a material fact, or omitted to sate a material fact required to be
stated therein or necessary to make such statements not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Prospectus (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact to be stated
therein or necessary to make such statements, in light of the circumstances
under which they were made, not misleading.
C-2
<PAGE>
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the companies which are the
subject of said opinion, and of government officials in which case their opinion
is explicitly to state that they are so relying thereon and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificates so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' counsel.
C-3
<PAGE>
ANNEX D
Opinion of Counsels to
Selling Stockholders
1. The Agreement and the Irrevocable Custody Agreement [and Power of
Attorney] have been duly and validly authorized, executed and delivered by such
Selling Stockholder and each is a valid and binding obligation of such Selling
Stockholder, enforceable against it in accordance with its terms except as
rights to indemnity and contribution may be limited by Federal or state
securities laws and judicial decisions and except as enforcement (i) may be
limited by bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally and (ii) is subject to general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
2. To the best knowledge of such counsel, such Selling Stockholder has
all requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits of and from all courts and all public, governmental or regulatory
agencies and bodies, as required for the execution, delivery and performance of
this Agreement, the Irrevocable Custody Agreement [and Power of Attorney] and
the consummation of the transactions contemplated hereby and thereby, except for
(A) such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters,
as to which counsel need express no opinion and (B) such as have been made or
obtained under the Act.
3. Upon the delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to the Agreement, you will receive good, valid and
marketable title to the Shares purchased from such Selling Stockholder, to such
counsel's knowledge, free and clear of all liens, encumbrances, claims, security
interests, restrictions on transfer, stockholders' agreements, voting trusts and
other defects in title created by or known to such Selling Stockholder.
4. The execution, delivery and performance of this Agreement, the
Irrevocable Custody Agreement [Power of Attorney] by such Selling Stockholder
and the consummation of the transactions contemplated hereby and thereby will
not violate or conflict with, to the best knowledge of such counsel, any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over any of such
Selling Stockholder or any of their properties or assets.
5. The statements in the Prospectus under the caption "Principal
Stockholders and Selling Stockholders," insofar as such statements constitute a
summary of matters referred to therein with respect to such Selling Stockholder,
fairly present the information with respect to such matters.
D-1
<PAGE>
EXHIBIT 4.3
IRREVOCABLE CUSTODY AGREEMENT AND POWER OF ATTORNEY
FOR
SALE OF SHARES OF COMMON STOCK
OF
CREATIVE MASTER INTERNATIONAL, INC.
Carl Ka Wing Tong
as Attorney-in-Fact
(the "Attorney-in-Fact")
and Jersey Transfer and Trust Co.
as Custodian (the "Custodian")
Dear Sir:
The undersigned stockholder (the undersigned is referred to herein as the
"Selling Stockholder") of Creative Master International, Inc., a Delaware
corporation (the "Company"), understands that it is contemplated that the
Company will sell certain shares of the Company's common stock (the "Common
Stock") to certain underwriters to be named in the underwriting agreement
referred to below (the "Underwriters"), represented by Cruttenden Roth
Incorporated, as representative of the Underwriters (the "Representative"), and
that the undersigned will grant the Underwriters an over-allotment option to
purchase from the undersigned certain shares of Common Stock, all of which
shares are proposed to be offered to the public in an underwritten public
offering (the "Offering"). The undersigned also understands that, in connection
with the Offering, the Company has filed a Registration Statement on Form SB-2
(No. 333-65929), as amended (the "Registration Statement"), with the Securities
and Exchange Commission (the "Commission") to register the shares of Common
Stock to be offered under the Securities Act of 1933, as amended (the "Act").
All share amounts in the Registration Statement (including the shares shown as
being offered by the undersigned) reflect a proposed three-for-four reverse
stock split to be effected by the Company prior to completion of the Offering.
Appointment of Attorney-in-Fact.
- -------------------------------
In connection with the foregoing, and intending to be legally bound, the
undersigned hereby appoints Carl Ka Wing Tong the Attorney-in-Fact and agent of
the undersigned, with full power and authority in the name of, and for and on
behalf of the undersigned to take any and all of the following actions:
1.
<PAGE>
(a) to negotiate, execute and deliver an underwriting agreement (the
"Underwriting Agreement"), to be entered into among the Company, the Selling
Stockholders and the Representative, containing such terms, conditions and
provisions as agreed to by the Company, the Attorney-in-Fact on behalf of the
Selling Stockholders and the Representative on behalf of the Underwriters. The
Underwriting Agreement to which the undersigned will become a party will
contain, among other things, provisions substantially to the following effect:
(i) representations and warranties from each Selling Stockholder relating to
certain matters regarding the Company and to the effect that such Selling
Stockholder has full authority to sell the shares, to be sold by such Selling
Stockholder to the Underwriters, free and clear of any adverse claim or defect
in title and without the necessity of any approvals or consents from any person,
entity or governmental authority (other than those that have been obtained prior
to such Selling Stockholder's execution hereof), (ii) an agreement by each
Selling Stockholder to indemnify the Underwriters against liabilities and
related expenses arising out of the Offering, and (iii) covenants requiring the
Selling Stockholder, under circumstances where the foregoing indemnity agreement
is applicable but held to be unenforceable, to make an equitable contribution to
the aggregate liability and expense which would have been covered by such
indemnity agreement. The Attorney-in-Fact is authorized to agree with the
Representative as to the initial public offering price of the shares of Common
Stock to be sold by the undersigned and the underwriting discount and
nonaccountable expense allowance applicable thereto. The Attorney-in-Fact is
also authorized to complete such Underwriting Agreement and to make such changes
therein and additions or amendments thereto as the Attorney-in-Fact acting in
his sole discretion shall approve (the execution thereof by the Attorney-in-Fact
to be conclusive evidence of the approval by the Attorney-in-Fact of the
Underwriting Agreement and any changes, additions or amendments thereto);
(b) to do all things necessary to grant to the Underwriters an over-
allotment option to purchase up to the "Maximum Number of Option Shares" of
Common Stock (as set forth on the signature page hereof) at the same price and
underwriting discounts and commissions and nonaccountable expense allowance
applicable to the shares of Common Stock to be sold by the Company to the
Underwriters, and to sell to the Underwriters, pursuant to the Underwriting
Agreement, up to the Maximum Number of Option Shares of Common Stock held by the
undersigned (which number may be fewer than the Maximum Number of Option Shares)
at a purchase price per share to be determined in accordance with this
Irrevocable Custody Agreement and Power of Attorney and the Underwriting
Agreement;
(c) to execute stock powers and give such orders and instructions to the
Custodian or any other person as the Attorney-in-Fact in his sole discretion may
determine, including, without limitation, orders and instructions for the
following: (i) the transfer of the shares on the books of the Company and its
transfer agent in order to effect such sale (including the names in which new
certificates for such shares are to be issued and the denominations thereof),
(ii) the delivery to or for the account of the Underwriters of the certificates
for the shares to be sold against receipt by the Custodian of the purchase price
to be paid therefor, (iii) the receipt of, giving of receipts for, and the
remittance to the undersigned of the proceeds from any sale of
2.
<PAGE>
such shares, less the applicable underwriting discount and nonaccountable
expense allowance and the undersigned's share, if any, of any fees, expenses or
transfer taxes which the Attorney-in-Fact shall determine to be properly payable
by the undersigned, and (iv) the return to the undersigned of one or more new
certificates representing the number of shares of Common Stock, if any,
represented by certificates deposited with the Custodian, which are in excess of
the number of shares sold by the undersigned to the Underwriters;
(d) to take such actions as may be necessary or appropriate to file
amendments or supplements to the Registration Statement if the Company should
decide to file such amendments or supplements and to join with the Company in
withdrawing the Registration Statement if the Company should decide to withdraw
such registration;
(e) to retain expense legal counsel to represent the undersigned in
connection with any and all matters referred to herein;
(f) to incur any necessary or appropriate expense in connection with the
sale of the shares and to agree upon the allocation among the undersigned and
any other selling stockholders of the expenses of the Offering to be borne by
the selling stockholders, including the undersigned; and
(g) to make, execute, acknowledge and deliver all such other contracts,
orders, receipts, notices, requests, instructions, certificates, letters and
other writings, including without limitation (i) communications to the
Commission (including but not limited to a request or requests for acceleration
of the effective date of the Registration Statement and representations to the
Commission concerning the reasons for the sale of the shares by the undersigned
and familiarity of the undersigned with the Registration Statement and any
amendments or supplements thereto and the absence of material adverse
information concerning the Company), (ii) communications to state commissions or
officers administering state securities laws and others (including consents to
service of process), and (iii) certificates and other documents required to be
delivered by or on behalf of the undersigned pursuant to the Underwriting
Agreement or necessary or convenient to the consummation of the transactions
contemplated thereby, including amendments to the Underwriting Agreement, and in
general to do or cause to be done all things and to take all action, which the
Attorney-in-Fact in his sole discretion may consider necessary or proper in
connection with or to carry out and comply with all terms and conditions of the
Underwriting Agreement and the sale of shares to the Underwriters contemplated
thereby, but not inconsistent herewith or with the Underwriting Agreement, as
fully as could the undersigned if personally present and acting.
The undersigned acknowledges that Carl Ka Wing Tong is Chairman of the
Board, President and Chief Executive Officer of the Company.
3.
<PAGE>
The certificates deposited herewith, this Irrevocable Custody Agreement and
Power of Attorney and all power and authority conferred hereby are granted and
conferred subject to the interests of the Underwriters and the Company; in
consideration of those interests, and for the purpose of completing the
transactions contemplated by the Underwriting Agreement and this Irrevocable
Custody Agreement and Power of Attorney, this Irrevocable Custody Agreement and
Power of Attorney is coupled with an interest and all power and authority
conferred hereby is irrevocable and is not subject to termination by the
undersigned or by operation of law, whether by the death, disability or
incapacity of any individual Selling Stockholder, by the termination of any
trust or estate (if the undersigned is executing this Irrevocable Custody
Agreement and Power of Attorney in his (or her) or its capacity as a trustee or
an executor), or, in the case of a corporation or partnership, by the
dissolution of such corporation or partnership, or by the occurrence of any
other event or events, except as expressly stated herein, and the obligations of
the undersigned under the Underwriting Agreement are similarly not subject to
termination. If the undersigned should die or become disabled or incapacitated,
or if any such estate or trust should be terminated, or if any such corporation
or partnership should be dissolved, or if any other event should occur, before
the delivery of the shares to be sold by the undersigned under the Underwriting
Agreement, certificates for such shares and any funds to the extent required
shall be delivered by or on behalf of the undersigned in accordance with the
terms and conditions of the Underwriting Agreement and this instrument; and
actions taken by the Attorney-in-Fact and Custodian pursuant to this Irrevocable
Custody Agreement and Power of Attorney, shall be as valid as if such death,
disability, incapacity, termination, dissolution or other event had not
occurred, regardless of whether or not the Custodian and Attorney-in-Fact shall
have received notice of such death, incapacity, termination, dissolution or
other event.
The Attorney-in-Fact for the undersigned shall have full power to make and
substitute any attorney-in-fact in his place and stead, and the undersigned
hereby ratifies and confirms all that the Attorney-in-Fact or substitute or
substitutes shall do by virtue of these presents. All actions hereunder may be
taken by any one of said Attorney-in-Fact, or his substitute or substitutes.
Custody Agreement
- -----------------
The undersigned hereby appoints Jersey Transfer and Trust Co. as Custodian.
The Custodian shall have the full power to make and substitute any custodian in
his place and stead. All actions hereunder may be taken by the Custodian, or
his substitute or substitutes. The Company shall pay all fees and expenses of
the Custodian.
For the purposes hereof, the undersigned hereby delivers to the Custodian
certificates (the "Certificates") in negotiable and properly deliverable form,
endorsed or with stock powers attached and with signatures guaranteed by a
national bank or trust company or by a member firm of the New York Stock
Exchange, Inc., representing shares of Common Stock. The Certificates are to be
held by the Custodian for the account of the undersigned and are to be
4.
<PAGE>
disposed of by the Custodian in accordance with this instrument. If the
undersigned is a trust, it has also delivered herewith duly certified extracts
of any applicable provisions of the trust agreement authorizing it to enter into
this Irrevocable Custody Agreement and Power of Attorney and authorizing a
trustee or other valid representative of trust to execute the assignment(s) or
stock power(s).
The Custodian is hereby authorized and directed to hold the Certificates
deposited herewith in custody and, at the time of consummation of any sale of
shares to the Underwriters under the Underwriting Agreement, the Custodian is
(i) to take all necessary action to cause the transfer agent for the Company's
stock (a) to cancel the Certificates delivered herewith (b) to prepare one or
more new certificates for the shares to be sold to the Underwriters under the
Underwriting Agreement in such denominations and registered in such name or
names as the Representative may request and to record such transfer on the books
of the Company and (c) to prepare a new certificate for the balances, if any, of
the shares which are to be returned to the undersigned; (ii) to deliver the
shares to be sold to the Underwriters to the Representative for the accounts of
the Underwriters against payment for such shares; (iii) to give receipt for such
payment and to deposit the same to his account as Custodian; (iv) to draw upon
such account to pay (a) such costs and expenses as the Custodian deems
appropriate, and (b) all required stock transfer taxes required to be paid in
respect of shares sold as herein provided; and (v) to remit to the undersigned
as soon as practicable the balance, after deducting the amounts set forth in
clauses (iv)(a) and (iv)(b) above, of the amount received by the Custodian as
payment for the shares sold to the Underwriters.
The total number of shares of Common Stock to be sold pursuant to the
Underwriting Agreement shall be determined solely by the Company and the
Representative. The exact number of shares of Common Stock to be sold by the
undersigned shall be determined, subject to the maximum number specified herein,
solely by the Attorney-in-Fact, in his discretion.
At such time as the shares deposited herewith are no longer subject to sale
to the Underwriters under the Underwriting Agreement, the Custodian shall
promptly return to the undersigned, at the undersigned's address set forth
below, upon written request to do so by the undersigned, certificates
representing the number of shares of Common Stock, if any, represented by the
Certificates deposited, which are in excess of the number of shares sold by the
undersigned to the Underwriters.
Until payment of the purchase price for the shares to be sold by the
undersigned to the Underwriters has been made to the Custodian by or on behalf
of the Underwriters, the undersigned shall remain the owner of such shares and
shall have the right to vote such shares and all other shares of Common Stock,
if any, represented by the Certificates deposited, and to receive all dividends
and distributions, if any, thereon.
5.
<PAGE>
It is understood that the Custodian assumes no responsibility or liability
to any person other than to deal with the Certificates deposited herewith and
the proceeds from the sale of the shares in accordance with the provisions of
this Power of Attorney and Custody Agreement. It is furthe understood that, in
performing any of its duties hereunder, the Custodian shall not incur any
liability to anyone for any damages, losses or expenses except for willful
default or negligence, and its shall accordingly not incur any such liability
with respect (i) to any action taken or omitted in good faith upon advice of its
counsel or counsel for the Company given with respect to any questions relating
to the duties and responsibilities of the Custodian under this Power of Attorney
and Custody Agreement, or (ii) to any action provided for herein, not only as to
its due execution and the validity and effectiveness of its provision but also
as to the truth and accuracy of any information contained therein, which the
Custodian shall in good faith believe to be genuine, to have assigned or
presented by a person or persons and to conform with the provisions of this
Power of Attorney and Custody Agreement, and the undersigned agrees to indemnify
and hold the Custodian harmless from any and all loss, claim, damage, liability
or expense (including, without limitation, all fees and expenses of counsel)
with respect to anything done by the Custodian in good faith in accordance with
the foregoing instructions.
The Custodian shall be entitled to act and rely upon any statement,
request, notice or instruction required or permitted under, or otherwise
respecting this Power of Attorney and Custody Agreement, given to the Custodian.
All notices to the undersigned relating to the proposed Offering shall be
duly made if given in writing and mailed first-class, postage prepaid, or
telecopied, telegraphed or hand-delivered to the Attorney-in-Fact and the
Custodian at:
If to the Attorney-in-Fact:
Carl Ka Wing Tong
Creative Master International, Inc.
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
Telecopier: (852) 789-1737
If to the Custodian:
Jersey Transfer and Trust Co.
201 Bloomfield Avenue
P. O. Box 36
Verona, NJ 07044
Telecopier: (973) 239-2361
The undersigned hereby represents and warrants that (i) all authorizations,
approvals and consents necessary for the execution and delivery of this
Irrevocable Custody Agreement and
6.
<PAGE>
Power of Attorney and the Underwriting Agreement and the sale and delivery of
the shares of Common Stock to be sold by the undersigned pursuant to the
Underwriting Agreement have been obtained and are in full force and effect, (ii)
the undersigned has the full right, power and authority to enter into, execute
and deliver this Irrevocable Custody Agreement and Power of Attorney and the
Underwriting Agreement to sell and to transfer and deliver the shares of Common
Stock to be sold by the undersigned pursuant to the Underwriting Agreement, and
all authorizations, approvals and consents necessary to carry out the foregoing
(other than effectiveness of the Registration Statement and state securities
laws approvals) have been obtained by the undersigned and are in full force and
effect, and each constitutes or will constitute a valid and binding agreement of
the undersigned and is enforceable against the undersigned in accordance with
the terms hereof and thereof, (iii) good and valid title to such shares, free
and clear of all claims, equities, security interests, liens, encumbrances and
community property rights, will be delivered to the Underwriters, (iv) the
execution and delivery of the Underwriting Agreement and the sale and delivery
of shares by the undersigned thereunder will not result in a breach or default
by the undersigned under any agreement or instrument to which the undersigned is
a party or by which it is bound, (v) on the Closing Date (as defined in the
Underwriting Agreement), all stock transfer or other taxes (other than income
taxes), if any, that are required to be paid in connection with the sale and
transfer of the shares to be sold by the undersigned to the several Underwriters
under the Underwriting Agreement will have been fully paid or provided for by
the undersigned and all laws imposing such taxes will have been fully complied
with, (vi) all information with respect to the undersigned provided in writing
to the Company by or on behalf of the undersigned expressly for use in the
Registration Statement and the Prospectus (as those terms are defined in the
Underwriting Agreement) (a) complied and will comply with all applicable
provisions of the Act and the rules and regulations thereunder, (b) contains and
will contain all statements required to be stated therein in accordance with the
Act and the rules and regulations thereunder, and (c) does not and will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, (vii) other than as permitted by the Act and the rules
and regulations thereunder, the undersigned has not distributed and will not
distribute any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering and sale of the shares. The
undersigned has not taken and will not take, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result in, under
the Act or otherwise, or which has caused or resulted in, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares, and (viii) none of the proceeds received by the
undersigned from the sale of the shares will be paid to a member of the National
Association of Securities Dealers, Inc. or any affiliate of such member. The
undersigned agrees that the Attorney-in-Fact and such law firm as the Attorney-
in-Fact may choose to represent the Selling Stockholder are entitled to rely on
the representations made herein by the undersigned together with any other
certificates, documents, agreements or letters delivered by the undersigned in
connection with the transactions contemplated by the Underwriting Agreement.
7.
<PAGE>
The attention of the undersigned is directed to the rules of the Commission
which prohibit the Selling Stockholder from bidding for or purchasing any shares
of the Common Stock, or attempting to induce anyone else to purchase any such
shares, or taking any other action which might tend to stabilize or raise the
price of the shares of Common Stock, until the distribution of Common Stock
pursuant to the Registration Statement has been completed.
If the Underwriting Agreement has not been executed on or prior to January
15, 1998, then the Custodian shall return to the undersigned all Certificates
delivered herewith, at the undersigned's address set forth below, and this
Irrevocable Custody Agreement and Power of Attorney shall immediately terminate
by the undersigned giving written notice of such termination to the Attorney-in-
Fact, subject, however, to all lawful action done or performed by the Attorney-
in-Fact pursuant to this Irrevocable Custody Agreement and Power of Attorney.
This Irrevocable Custody Agreement and Power of Attorney may be executed in
any number of counterparts each of which shall be deemed to be an original and
all of which together shall be deemed to be one and the same instrument.
Receipt by the Attorney-in-Fact of executed counterparts of this
Irrevocable Custody Agreement and Power of Attorney, or any stock certificate
deposited hereunder, shall constitute acceptance by the Attorney-in-Fact of the
authorizations herein conferred and evidence the agreement of the Attorney-in-
Fact to carry out and to perform this Irrevocable Custody Agreement and Power of
Attorney in accordance with the provisions hereof.
The validity, enforceability, interpretation and construction of this
Irrevocable Custody Agreement and Power of Attorney shall be determined in
accordance with the laws of the State of California and shall inure to the
benefit of, and this Irrevocable Custody Agreement and Power of Attorney shall
be binding upon, the undersigned and the undersigned's heirs, executors,
administrators, successors and assigns, as the case may be.
The undersigned hereby agrees that any and all controversies or disputes
arising in connection with this Irrevocable Custody Agreement and Power of
Attorney and the transactions contemplated hereby may be brought in any state or
federal court located in the County of Los Angeles, State of California. By its
signature to this Irrevocable Custody Agreement and Power of Attorney, the
undersigned irrevocably submits to the nonexclusive jurisdiction of said courts
in any legal action or proceeding relating hereto and the transactions
contemplated hereby.
If any word, phrase, clause, portion or provision of this Irrevocable
Custody Agreement and Power of Attorney shall be held or deemed to be, or shall
in fact be, inoperative or unenforceable as applied in any particular case or
circumstance in any applicable jurisdiction or jurisdictions because it
conflicts with any other provision hereof, or any constitution, statute or rule
of public policy, or for any other reason, such eventuality shall not render any
of the aforesaid inoperative or unenforceable in any other case or circumstance,
or render any one or more or combination of any words, phrases, clauses,
portions or provisions herein inoperative,
8.
<PAGE>
or unenforceable to any extent whatsoever.
The undersigned hereby ratifies and confirms all that the Attorney-in-Fact
and Custodian shall do by virtue hereof.
9.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Agreement on this ___
day of December 1998.
* (NOTE: The Selling Stockholder's signature must be guaranteed by a bank or
trust company or by a member firm of the New York Stock Exchange.)
Signature:
__________________________________________________
Please sign exactly as your name appears on your
stock certificate.
Name and address to which notices and funds shall
be sent (please print or type)
--------------------------------------------------
(Name)
--------------------------------------------------
(Street)
--------------------------------------------------
(City) (State) (Zip)
Number of Shares of Common Maximum Number of Option Shares of
Stock Represented by Common Stock to be sold to the
Certificates Deposited: Underwriters: 320,000 Shares (pre-split)/*/
__________ Shares (pre-split)/*/
Accepted and agreed to as
of the date first written
above:
JERSEY TRANSFER AND TRUST CO., as Custodian
By:_______________________________________
/*/ 240,000 shares after giving effect to a three-for-four reverse stock split
to be effected in December 1998 as reflected in the Registration Statement.
10.
<PAGE>
Carl Ka Wing Tong hereby accepts the appointment as Attorney-in-Fact
pursuant to the foregoing Irrevocable Custody Agreement and Power of Attorney,
and agrees to abide by and act in accordance with the terms of said Agreement.
Dated: December __, 1998
-------------------------------------------
CARL KA WING TONG
11.
<PAGE>
IRREVOCABLE CUSTODY AGREEMENT
FOR
SALE OF SHARES OF COMMON STOCK
OF
CREATIVE MASTER INTERNATIONAL, INC.
Jersey Transfer and Trust Co.
as Custodian (the
"Custodian")
Dear Sir:
The undersigned stockholder of Creative Master International, Inc., a
Delaware corporation (the "Company"), understands that it is contemplated that
the undersigned and certain other stockholders of the Company (the undersigned
and such other stockholders are referred to herein as the "Selling
Stockholders") and the Company will sell certain shares of the Company's common
stock (the "Common Stock"), to certain underwriters to be named in the
underwriting agreement referred to below (the "Underwriters"), represented by
Cruttenden Roth Incorporated, as representative of the Underwriters (the
"Representative"), who propose to offer such shares to the public in an
underwritten public offering (the "Offering"). The undersigned also understands
that, in connection with the Offering, the Company has filed a Registration
Statement on Form SB-2 (No. 333-65929), as amended (the "Registration
Statement"), with the Securities and Exchange Commission (the "Commission") to
register the shares of Common Stock to be offered under the Securities Act of
1933, as amended (the "Act"). All share amounts in the Registration Statement
(including the shares shown as being offered by the undersigned) reflect a
proposed three-for-four reverse stock split to be effected by the Company prior
to completion of the Offering.
Custody Agreement
- -----------------
The undersigned hereby appoints Jersey Transfer and Trust Co. as Custodian.
The Custodian shall have the full power to make and substitute any custodian in
his place and stead. All actions hereunder may be taken by the Custodian, or
his substitute or substitutes. The Company shall pay all fees and expenses of
the Custodian.
1.
<PAGE>
For the purposes hereof, the undersigned hereby delivers to the Custodian
certificates (the "Certificates") in negotiable and properly deliverable form,
endorsed or with stock powers attached and with signatures guaranteed by a
national bank or trust company or by a member firm of the New York Stock
Exchange, Inc., representing shares of Common Stock. The Certificates are to be
held by the Custodian for the account of the undersigned and are to be disposed
of by the Custodian in accordance with this instrument. If the undersigned is a
trust, it has also delivered herewith duly certified extracts of any applicable
provisions of the trust agreement authorizing it to enter into this Irrevocable
Custody Agreement and authorizing a trustee or other valid representative of
trust to execute the assignment(s) or stock power(s).
The Custodian is hereby authorized and directed to hold the Certificates
deposited herewith in custody and, at the time of consummation of any sale of
shares to the Underwriters, the Custodian is (i) to take all necessary action to
cause the transfer agent for the Company's stock (a) to cancel the Certificates
delivered herewith (b) to prepare one or more new certificates for the shares to
be sold to the Underwriters in such denominations and registered in such name or
names as the Representative may request and to record such transfer on the books
of the Company and (c) to prepare a new certificate for the balances, if any, of
the shares which are to be returned to the undersigned; (ii) to deliver the
shares to be sold to the Underwriters to the Representative for the accounts of
the Underwriters against payment for such shares; (iii) to give receipt for such
payment and to deposit the same to his account as Custodian; (iv) to draw upon
such account to pay all required stock transfer taxes required to be paid in
respect of shares sold as herein provided; and (v) to remit to the undersigned
as soon as practicable the balance, after deducting the amounts set forth in
clauses (iv)(a) and (iv)(b) above, of the amount received by the Custodian as
payment for the shares sold to the Underwriters.
The exact number of shares of Common Stock to be sold by the undersigned
shall be determined as set forth in the Underwriting Agreement (the
"Underwriting Agreement") to be entered into among the Company, the
Representative and the Selling Stockholders, including the undersigned. In this
regard, it is understood and agreed that the Selling Stockholders, including the
undersigned, shall have no obligation to enter into the Underwriting Agreement
or sell any shares of Common Stock thereunder unless the public offering price
of the shares of Common Stock to be sold by them is at least $7.00 per share
(prior to appreciable underwriting discounts and commissions) and the applicable
underwriting discounts and commissions does not exceed 10% of the public
offering price per share.
At such time as the shares deposited herewith are no longer subject to sale
to the Underwriters under the Underwriting Agreement, the Custodian shall
promptly return to the undersigned, at the undersigned's address set forth
below, upon written request to do so by the undersigned, certificates
representing the number of shares of Common Stock, if any, represented by the
Certificates deposited, which are in excess of the number of shares sold by the
undersigned to the Underwriters.
2.
<PAGE>
Until payment of the purchase price for the shares to be sold by the
undersigned to the Underwriters has been made to the Custodian by or on behalf
of the Underwriters, the undersigned shall remain the owner of such shares and
shall have the right to vote such shares and all other shares of Common Stock,
if any, represented by the Certificates deposited, and to receive all dividends
and distributions, if any, thereon.
It is understood that the Custodian assumes no responsibility or liability
to any person other than to deal with the Certificates deposited herewith and
the proceeds from the sale of the shares in accordance with the provisions of
this agreement. It is further understood and agreed that, in performing any of
its duties hereunder, the Custodian shall not incur any liability to anyone for
any damages, losses or expenses except for willful default or negligence, and it
shall accordingly not incur any such liability with respect (i) to any action
taken or omitted in good faith upon advice of its counsel or counsel for the
Company given with respect to any questions relating to the duties and
responsibilities of the Custodian under the Custody Agreement, or (ii) to any
action provided for herein, not only as to its due execution and the validity
and effectiveness of its provisions but also as to the truth and accuracy of any
information contained therein, which the Custodian shall in good faith believe
to be genuine, to have assigned or presented by a person or persons and to
conform with the provisions of this Custody Agreement, and the undersigned
agrees to indemnify and hold the Custodian harmless from any and all loss,
claim, damage, liability or expense (including, without limitation, all fees and
expenses of counsel) with respect to anything done by the Custodian in good
faith in accordance with the foregoing instructions.
The Custodian shall be entitled to act and rely upon any statement,
request, notice or instruction required or permitted under, or otherwise
respecting this Irrevocable Custody Agreement, given to the Custodian.
All notices to the undersigned relating to the proposed Offering shall be
duly made if given in writing and mailed first-class, postage prepaid, or
telecopied, telegraphed or hand-delivered to the Custodian at:
Jersey Transfer and Trust Co.
201 Bloomfield Avenue
P. O. Box 36
Verona, NJ 07044
Telecopier: (973) 239-2361
The undersigned hereby represents and warrants that (i) all authorizations,
approvals and consents necessary for the execution and delivery of this
Irrevocable Custody Agreement and the Underwriting Agreement and the sale and
delivery of the shares of Common Stock to be sold by the undersigned pursuant to
the Underwriting Agreement have been obtained and are in full force and effect,
(ii) the undersigned has the full right, power and authority to enter into,
execute and deliver this Irrevocable Custody Agreement and the Underwriting
Agreement to sell
3.
<PAGE>
and to transfer and deliver the shares of Common Stock to be sold by the
undersigned pursuant to the Underwriting Agreement, and all authorizations,
approvals and consents necessary to carry out the foregoing (other than
effectiveness of the Registration Statement and state securities laws approvals)
have been obtained by the undersigned and are in full force and effect, and each
constitutes or will constitute a valid and binding agreement of the undersigned
and is enforceable against the undersigned in accordance with the terms hereof
and thereof, (iii) good and valid title to such shares, free and clear of all
claims, equities, security interests, liens, encumbrances and community property
rights, will be delivered to the Underwriters, (iv) the execution and delivery
of the Underwriting Agreement and the sale and delivery of shares by the
undersigned thereunder will not result in a breach or default by the undersigned
under any agreement or instrument to which the undersigned is a party or by
which it is bound, (v) on the Closing Date (as defined in the Underwriting
Agreement), all stock transfer or other taxes (other than income taxes), if any,
that are required to be paid in connection with the sale and transfer of the
shares to be sold by the undersigned to the several Underwriters under the
Underwriting Agreement will have been fully paid or provided for by the
undersigned and all laws imposing such taxes will have been fully complied with,
(vi) all information with respect to the undersigned provided in writing to the
Company by or on behalf of the undersigned expressly for use in the Registration
Statement and the Prospectus (as those terms are defined in the Underwriting
Agreement) (a) complied and will comply with all applicable provisions of the
Act and the rules and regulations thereunder, (b) contains and will contain all
statements required to be stated therein in accordance with the Act and the
rules and regulations thereunder, and (c) does not and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading, (vii) other than as permitted by the Act and the rules and
regulations thereunder, the undersigned has not distributed and will not
distribute any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering and sale of the shares. The
undersigned has not taken and will not take, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result in, under
the Act or otherwise, or which has caused or resulted in, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares, and (viii) none of the proceeds received by the
undersigned from the sale of the shares will be paid to a member of the National
Association of Securities Dealers, Inc. or any affiliate of such member.
The attention of the undersigned is directed to the rules of the Commission
which prohibit the undersigned from bidding for or purchasing any shares of the
Common Stock, or attempting to induce anyone else to purchase any such shares,
or taking any other action which might tend to stabilize or raise the price of
the shares of Common Stock, until the distribution of Common Stock pursuant to
the Registration Statement has been completed.
4.
<PAGE>
If the Underwriting Agreement has not been executed on or prior to January
15, 1999, then the Custodian shall return to the undersigned all Certificates
delivered herewith, at the undersigned's address set forth below, and this
Irrevocable Custody Agreement shall immediately terminate by the undersigned
giving written notice of such termination to the Attorney-in-Fact, subject,
however, to all lawful action done or performed by the Custodian pursuant to
this Irrevocable Custody Agreement.
This Irrevocable Custody Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
Receipt by the Custodian of executed counterparts of this Irrevocable
Custody Agreement, or any stock certificate deposited hereunder, shall
constitute acceptance by the Custodian of the authorizations herein conferred
and evidence the agreement of the Custodian to carry out and to perform this
Irrevocable Custody Agreement in accordance with the provisions hereof.
The validity, enforceability, interpretation and construction of this
Irrevocable Custody Agreement shall be determined in accordance with the laws of
the State of New Jersey and shall inure to the benefit of, and this Irrevocable
Custody Agreement shall be binding upon, the undersigned and the undersigned's
heirs, executors, administrators, successors and assigns, as the case may be.
The undersigned hereby agrees that any and all controversies or disputes
arising in connection with this Irrevocable Custody Agreement and the
transactions contemplated hereby may be brought in any state or federal court
located in the State of New Jersey. By its signature to this Irrevocable
Custody Agreement, the undersigned irrevocably submits to the nonexclusive
jurisdiction of said courts in any legal action or proceeding relating hereto
and the transactions contemplated hereby.
If any word, phrase, clause, portion or provision of this Irrevocable
Custody Agreement shall be held or deemed to be, or shall in fact be,
inoperative or unenforceable as applied in any particular case or circumstance
in any applicable jurisdiction or jurisdictions because it conflicts with any
other provision hereof, or any constitution, statute or rule of public policy,
or for any other reason, such eventuality shall not render any of the aforesaid
inoperative or unenforceable in any other case or circumstance, or render any
one or more or combination of any words, phrases, clauses, portions or
provisions herein inoperative, or unenforceable to any extent whatsoever.
The undersigned hereby ratifies and confirms all that the Custodian shall
do by virtue hereof.
5.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Agreement on this ___
day of December 1998.
* (NOTE: The Selling Stockholder's signature must be guaranteed by a bank or
trust company or by a member firm of the New York Stock Exchange.)
Signature:
__________________________________________________
Please sign exactly as your name appears on your
stock certificate.
Name and address to which notices and funds shall
be sent (please print or type)
------------------------------
c/o Gerald A. Kaufman, Esq.
(Name)
33 Walt Whitman Road, Suite 233
-------------------------------
(Street)
Huntington Station, NY 11746
-------------------------------
(City) (State) (Zip)
Number of Shares of Common Maximum Number of Firm Shares of
Stock Represented by Common Stock to be sold to the
Certificates Deposited: Underwriters: __________ Shares (pre-split)/*/
________ Shares (pre-split)/*/
Accepted and agreed to as
of the date first written
above:
JERSEY TRANSFER AND TRUST CO., As Custodian
By:________________________________________
/*/ The Company intends to effect a three-for-four reverse stock split in
December 1998 as reflected in the Registration Statement.
6.
<PAGE>
EXHIBIT 5.1
[Letterhead of Troy & Gould Professional Corporation]
December 10, 1998
CRE4-1
Creative Master International, Inc.
Casey Ind. Bldg, 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
Re: Registration Statement on Form SB-2
(Registration No. 333-65929)
-----------------------------------
Gentlemen:
We have acted as securities counsel to Creative Master International, Inc.,
a Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), of a Registration Statement on Form SB-
2, as amended, Registration No. 333-65929 (the "Registration Statement"). The
Registration Statement relates to the public offering by the Company and certain
selling stockholders named therein (the "Selling Stockholders") of up to
1,840,000 shares of Common Stock of the Company, of which 1,525,276 shares are
to be issued and sold by the Company (the "New Shares"), 74,724 are to be
sold by certain Selling Stockholders in the offering, and 240,000 shares are to
be sold by a Selling Stockholder solely to cover over-allotments, if any
(collectively, the "Outstanding Shares"). Another 160,000 shares issuable upon
exercise of warrants issued to Cruttenden Roth Incorporated as representative
of the several underwriters of the public offering (the "Warrant Shares"). All
of the securities referenced above are referred to herein collectively as the
"Securities."
The Securities are to be sold by the Company and the Selling Stockholders
pursuant to an Underwriting Agreement (the "Underwriting Agreement") by and
among the Company, the Selling Stockholders and Cruttenden Roth Incorporated,
acting as representative of the several underwriters named in the Underwriting
Agreement. This opinion is being furnished in accordance with the requirements
of Item 601(b)(5) of Regulation S-B under the Securities Act.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Registration Statement; (ii) the Certificate of Incorporation and the
Bylaws of the Company, as amended to date; (iii) the form of the Underwriting
Agreement; (iv) the
<PAGE>
Creative Master International, Inc.
December 10, 1998
Page 2
form of certificate evidencing Common Stock; (v) resolutions adopted by the
Board of Directors of the Company relating to the issuance of the New Shares and
the Outstanding Shares, the filing of the Registration Statement and any
amendments or supplements thereto and related matters; and (vi) such other
documents as we have deemed necessary or appropriate as a basis for the opinions
set forth below.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed by parties other than the Company, we have
assumed that such parties had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof. As to any
facts material to the opinions expressed herein which were not independently
established or verified, we have relied upon oral or written statements and
representations of officers and other representatives of the Company and others.
Based on the foregoing, it is our opinion that, subject to effectiveness
with the Securities and Exchange Commission of the Registration Statement and to
registration or qualification under the securities laws of the states in which
securities may be sold:
1. The New Shares and Warrant Shares are duly and validly authorized
and, upon the issuance thereof in the manner contemplated in the
Registration Statement and the Underwriting Agreement, and upon payment
therefor, will constitute legally issued, fully paid and nonassessable
shares of Common Stock of the Company; and
2. The Outstanding Shares are duly and validly authorized and
constitute legally issued, fully paid and nonassessable shares of Common
Stock of the Company.
We consent to the use of our name under the caption "Legal Matters" in the
Registration Statement, and to the filing of this opinion as an exhibit to the
Registration Statement. By giving you this opinion and consent, we do not admit
that we are experts with respect to any part of the Registration Statement
within the meaning of the
<PAGE>
Creative Master International, Inc.
December 10, 1998
Page 3
term "expert" as used in Section 11 of the Securities Act, or the rules and
regulations promulgated thereunder, nor do we admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ TROY & GOULD
TROY & GOULD
Professional Corporation
