<PAGE>
Form 10QSB for CREATIVE MASTER INTERNATIONAL INC filed on November 16, 1998
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OR THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ________________
COMMISSION FILE NUMBER 33-18521-NY
CREATIVE MASTER INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 11- 2854355
(State or other jurisdiction (IRS Employer Identification No.)
or organization)
CASEY IND. BLDG., 8TH FLOOR
18 BEDFORD RD., TAIKOKTSUI
KOWLOON, HONG KONG
(Address of principal executive offices)
ISSUER'S TELEPHONE NUMBER: 011-8522-396-0147
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: September 30, 1998 was 4,999,746
shares of common stock, par value $.0001.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations - for each of the
three-month and nine-month periods ended September 30, 1997
and 1998 (unaudited) 1
Consolidated Condensed Balance Sheets - as of December 31, 1997
(audited) and September 30, 1998 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - for each
of the nine-month periods ended September 30, 1997 and 1998 (unaudited) 3
Notes to Consolidated Condensed Financial Statements 4-19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 20-24
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 25
ITEM 2 - CHANGES IN SECURITIES 25
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5 - OTHER INFORMATION 25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 25
</TABLE>
(i)
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998,
-------------------------------------------------------
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
-------------------------------------------------------------
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
3 months 9 months
September September
1 9 9 7 1 9 9 8 1 9 9 7 1 9 9 8
$'000 $'000 $'000 $'000
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales 5,367 9,804 13,090 24,129
Cost of goods sold 4,347 (8,045) 10,466 (18,303)
Gross profit 1,020 1,759 2,624 5,826
Selling, general and administrative expenses (767) (1,077) (1,964) (3,070)
Interest income 104 3 108 17
Interest expense (138) (88) (192) (208)
Other income, net 174 279 150 231
Gain on dilution of equity interest in
a subsidiary 0 77
Reorganization expense 0 0
Amortization of goodwill (11) (24) (37) (70)
0
Income (Loss) before income taxes and minority
interests 382 852 689 2,803
0
Provision for income taxes (72) (131) (128) (359)
0
Income (Loss) before minority interests 310 721 561 2,444
0
Minority interests 0 (56) 0 (370)
Net income (loss) 310 665 561 2,074
Net income (loss) per common share 0.06 0.13 $0.11 $0.41
Weighted average number of common shares
outstanding 4,999,746 4,999,746 4,999,746 4,999,746
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
statements of operations.
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1997 (AUDITED) AND SEPTEMBER 30, 1998 (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1998
1 9 9 7 1 9 9 8
$'000 $'000
ASSETS (audited) (unaudited)
<S> <C> <C>
Current assets:
Cash and bank deposits 471 889
Accounts receivable, net 2,827 5,098
Deposits and prepayments 307 644
Inventories, net 2,928 3,331
Total current assets 6,533 9,962
Machinery, equipment and capital leases, net 3,155 4,854
Long-term investment 1 1
Deferred stock issuance costs 0 132
Goodwill 810 740
------ ------
Total assets 10,499 15,689
====== ======
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings 1,290 1,503
Capital lease obligations, current portion 764 456
Accounts payable 1,908 3,474
Deposits from customers 1,579 2,699
Accrued liabilities 560 438
Due to directors 861 670
Due to parent company 9 0
Taxation payable 68 161
Dividend payable 323 323
------ ------
Total current liabilities 7,362 9,724
Capital lease obligations, non-current portion 266 502
Deferred taxation 57 263
------ ------
------ ------
Total liabilities 7,685 10,489
------ ------
------ ------
Minority interests 75 387
------ ------
Stockholders' equity:
Common stock, par value $0.0001; authorized -
60,000,000 shares; outstanding and fully paid -
4,999,746 shares 1 1
Additional paid-in capital 1,401 1,401
Retained earnings 1,337 3,411
Cumulative translation adjustments 0 0
------ ------
Total stockholders' equity 2,739 4,813
------ ------
Total liabilities, minority interest and stockholders'
equity 10,499 15,689
------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
-----------------------------------------------------------------
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
September 30,
1 9 9 7 1 9 9 8
$'000 $'000
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income 561 2,074
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation of machinery and equipment 317 473
Amortization of goodwill 37 70
Minority interests 0 370
Deferred income taxes (29) 184
(Increase) Decrease in operating assets-
Accounts receivable, net (1,334) (2,271)
Deposits and prepayments (1,050) (337)
Inventories, net (478) (403)
Increase (Decrease) in operating liabilities-
Accounts payable (72) 1,566
Deposits from customers 0 (122)
Accrued liabilities 995 1,120
Due to parent company 0 (9)
Taxation payable 51 113
------ ------
Net cash provided by (used in) operating activities (1,002) 2,828
------ ------
Cash flows from investing activities:
Acquisition of machinery and equipment (9) (1,532)
Decrease in due from a related company 41 0
------ ------
Net cash (used in) provided by investing activities 32 (1,532)
------ ------
Cash flows from financing activities:
Decrease in bank overdrafts (25) 0
New short-term bank loans 907 2,450
Repayment of short-term bank loans (452) (2,386)
Increase (Decrease) in import trust receipts bank loans (76) 149
Repayment of capital element of capital lease obligations (278) (712)
Stock issuance costs paid 0 (132)
(Decrease) Increase in due to directors 727 (190)
Decrease in due to a related company 0 0
Finance from minority interest of a subsidiary 0 1
Dividends paid to minority interests of a subsidiary 0 (58)
------ ------
Net cash (used in) provided by financing activities 830 (878)
------ ------
Effect of cumulative translation adjustments (2) 0
------ ------
Net increase (decrease) in cash and cash equivalents (170) 418
Cash and bank deposits, as of beginning of period 435 471
------ ------
Cash and bank deposits, as of end of period 265 889
------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Creative Master International, Inc. ("the Company") is incorporated in the State
of Delaware, United States of America. With effect from March 2, 1998, the
Company changed its name from Davin Enterprises, Inc. to Creative Master
International, Inc., the present one.
During the period from January 1, 1995 to December 30, 1997, the Company's sole
asset was investment in a 9.6% interest in Target Vision Inc., a company
incorporated in the State of Delaware, United States of America, which was
principally engaged in the trading of communication systems.
Acquisition of CML
- ------------------
On December 30, 1997, the Company acquired 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing 4,806,000 shares
of common stock of par value $0.0001 each (after the reverse stock splits and
the redenominations of par value as described in Note 15) to Acma Strategic
Holdings Limited ("ASHL"; a company incorporated in Hong Kong), Mr. 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.
3. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Percentage of
Place of equity interest
Name incorporation held Principal activities
- ------------------------------- -------------- ---------------- -------------------------------
<S> <C> <C> <C>
Creative Master Limited Hong Kong 100% Manufacturing and trading of
collectible replica products
Excel Master Limited Hong Kong 100% Trading of collectible replica
products
Mastercraft Engineering Limited Hong Kong 100% Manufacturing of molds
(formerly known as Queenex Note a
Enterprises Limited)
Carison Engineering Limited Hong Kong 70% Manufacturing of molds
(formerly known as Carison Note b
Limited)
Techtime Industries Limited Hong Kong 55% Manufacturing of collectible
replica products
Dongguan Chuangying Toys Factory The PRC Note c Manufacturing of collectible
Co., Ltd. replica products
</TABLE>
4
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
Notes
a. 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 that are not involved in management of the Company at
par and 11,000 shares of common stock to the Group at par.
b. Effective from May 20, 1998, Carison Limited changed its name from Carison
Engineering Limited, to the present one.
c. Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006. Under
the joint venture contract dated September 10, 1994 and the supplemental
contract dated April 1, 1996, the Group's joint venture partner is not
entitled to any profit of the joint venture and is not responsible for any
loss of the joint venture. In view of the profit sharing arrangement, the
joint venture is regarded as 100% owned by the Company.
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 year ended
December 31, 1997 was approximately $62,000, 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, 1997 and September
30, 1998 was approximately $139,000 and $209,000, respectively. Management
assesses the remaining life of the goodwill annually, taking into
consideration current operating results and future prospects of the
subsidiaries.
C. CONTRACTUAL JOINT VENTURE
A contractual joint venture is an entity established between the Group and
one or more other parties, with the rights and obligations of the joint
venture partners governed by a contract. If the Group owns more than 50% of
the joint venture and is able to govern and control its financial and
operating policies and its board of directors, such joint venture is
considered as a de facto subsidiary and is accounted for as a subsidiary.
D. INVENTORIES
Inventories are stated at the lower of cost, on a first-in first-out basis,
and market value. Costs of work-in-process and finished goods are composed
of direct materials, direct labor and an attributable portion of production
overhead.
E. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases are recorded at cost. Gains or
losses on disposals are reflected in current operations. Depreciation for
financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets as follows: machinery and tools 3
to 10 years, leasehold improvements 3 to 10 years, furniture and office
equipment 3 to 5 years, and motor vehicles 3 to 4 years. All ordinary repair
and maintenance costs are expensed as incurred.
5
<PAGE>
The Group recognizes an impairment loss on machinery and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges) indicates that future operations will not produce
sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of the asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair value
of the assets.
F. LONG-TERM INVESTMENTS
Investments held for the long-term are stated at market value. Income from
investments is accounted for to the extent of dividends received and
receivable.
G. NET SALES
Net sales represent the invoiced value of merchandise/molds supplied to
customers, net of sales returns and allowances. Sales are recognized upon
delivery of goods and passage of title to customers.
Deposits or advanced payments from customers prior to delivery of goods and
passage of title are recorded as deposits from customers.
H. INCOME TAXES
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax
returns. Deferred income taxes are provided using the liability method.
Under the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial statement
bases of assets and liabilities.
I. OPERATING LEASES
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
J. FOREIGN CURRENCY TRANSLATION
The translation of the financial statements of subsidiaries into United
States dollars is performed for balance sheet accounts using the closing
exchange rate in effect at the balance sheet dates and for revenue and
expense accounts using an average exchange rate during each reporting
period. The gains or losses resulting from translation are included in
stockholders' equity separately as cumulative translation adjustments.
Aggregate losses (gains) from foreign currency transactions included in the
results of operations for the year ended December 31, 1997 was approximately
$47,000 and for the nine months ended September 30, 1997 and 1998 were
approximately $29,000 and ($117,000), respectively.
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 period by the weighted average number of shares of comon stock
outstanding during the period, as if the common stock issued for the
acquisition of CML (see Note 1) and the reverse stock splits and the
redenominations of par value (see Note 15) had been consummated prior to the
periods presented. The weighted average number of shares used to compute net
income (loss) per common share was 4,999,746 for all periods presented.
6
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE STATED)
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
<TABLE>
<CAPTION>
Accounts receivable comprised:
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Trade receivables 2,966 5,231
Less: Allowance for doubtful accounts (139) (133)
--------------------- --------------------
Accounts receivable, net 2,827 5,098
===================== ====================
</TABLE>
6. DEPOSITS AND PREPAYMENTS
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Deposits for acquisition of moulds 149 430
Rental and utility deposits 69 115
Prepayments 83 76
Others 6 23
--------------------- --------------------
307 644
===================== ====================
</TABLE>
7. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Raw materials 1,358 1,548
Work-in-process 722 877
Finished goods 959 1,007
--------------------- --------------------
3,039 3,432
Less: Allowance for slow-moving and obsolete
inventories (111) (101)
--------------------- --------------------
Inventories, net 2,928 3,331
===================== ====================
</TABLE>
7
<PAGE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
Machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Machinery and equipment:
Machinery and tools 769 1,822
Leasehold improvements 1,033 1,158
Furniture and office equipment 455 726
Motor vehicles 21 54
Capital leases:
Machinery and tools 2,412 3,057
Motor vehicle - 32
Furniture and office equipment 14 18
--------------------- --------------------
Cost 4,704 6,867
Less: Accumulated depreciation
Machinery and equipment (1,066) (1,325)
Capital leases (483) (688)
--------------------- --------------------
Machinery, equipment and capital leases, net 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,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Long-term investment 685 685
Less: Write down of investment cost (684) (684)
--------------------- --------------------
===================== ====================
Long-term investment, net 1 1
===================== ====================
</TABLE>
The carrying cost of the long-term investment approximated its market value.
10. GOODWILL
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Goodwill 949 949
Less: Accumulated amortization (139) (209)
--------------------- --------------------
Goodwill, net 810 740
===================== ====================
</TABLE>
8
<PAGE>
11. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
-------------------- -------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Short-term loans 908 972
Import trust receipts loans 382 531
-------------------- -------------------
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 18). They were drawn for working capital
purposes and are renewable with the consent of the relevant banks.
Supplemental information with respect to short-term bank borrowings for the year
ended December 31, 1997 and nine months ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE WEIGHTED AVERAGE
OUTSTANDING OUTSTANDING INTEREST RATE AT INTEREST RATE
DURING THE DURING THE THE END OF DURING THE
YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD YEAR/PERIOD
-------------------- -------------------- -------------------- --------------------
$'000 $'000
<S> <C> <C> <C> <C>
Year ended
December 31, 1997
- --------------------------
Overdrafts 111 17 12.5% 12.1%
==================== ==================== ==================== ====================
Short-term loans 908 686 10.7% 10.1%
==================== ==================== ==================== ====================
Import trust receipts
loans 448 291 12.5% 11.9%
==================== ==================== ==================== ====================
Nine months ended
September 30, 1998
(unaudited)
- --------------------------
Overdrafts 49 8 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>
9
<PAGE>
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,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Payable during the following period
- Within one year 830 556
- Over one year but not exceeding two years 195 398
- Over two years but not exceeding three years 91 180
--------------------- --------------------
Total minimum lease payments 1,116 1,134
Less: Amount representing interest (86) (176)
--------------------- --------------------
Present value of minimum lease payments 1,030 958
Less: Current portion (764) (456)
--------------------- --------------------
Non-current portion 266 502
===================== ====================
</TABLE>
13. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
$'000 $'000
(unaudited)
<S> <C> <C>
Accruals for operating expenses
- Salaries, wages and bonus 575 860
- Subcontracting charges 463 1,004
- Rentals 41 22
- Others 120 248
Accruals for purchases of loose tools and
consumables 269 277
Accruals for purchases of machinery and tools
- 181
Others 111 107
--------------------- --------------------
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 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 $6,000 and $9,000 for the nine months ended
September 30, 1997 and 1998, respectively.
10
<PAGE>
Provision for income taxes comprised:
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------
1 9 9 7 1 9 9 8
------------------ ------------------
$'000 $'000
(unaudited) (unaudited)
<S> <C> <C>
Current taxes
- Hong Kong profits tax 157 175
Deferred taxes (29) 184
------------------ ------------------
128 359
================== ==================
</TABLE>
Provision for income taxes for the year ended December 31, 1997 and the nine
months ended September 30, 1998 represent provisions for current Hong Kong
profits tax. The reconciliation of the United States federal income tax 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>
Nine months ended September 30,
------------------------------------------
1 9 9 7 1 9 9 8
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
United States federal income tax rate 35.0% 35.0%
Non-taxable income arising from activities which qualified as
offshore (13.9%) (16.6%)
Non-taxable/non-deductible activities 0.1% 11.4%
Tax losses not recognized 17.5% 3.6%
Effect of different tax rates in foreign jurisdictions (20.1%) (20.6%)
------------------ ------------------
Effective income tax rate 18.6% 12.8%
================== ==================
</TABLE>
Components of deferred tax assets (liabilities) as of December 31, 1997 and
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Cumulative tax losses 42 42
Accumulated differences between taxation
allowance and depreciation expenses of
machinery and equipment (99) (305)
--------------------- --------------------
Deferred taxation (57) (263)
===================== ====================
</TABLE>
15. SHARE CAPITAL
During the period from January 1, 1995 to May 28, 1996, the Company had
authorized share capital of 250,000,000 shares of common stock, par value
$0.0001 each, and outstanding share capital of 193,745,200 shares of common
stock, par value $0.0001 each. On May 29, 1996, the Company effected a one-for-
one hundred reverse stock split and a redenomination of par value in share
capital, resulting in 1,937,452 shares of common stock, par value $0.0001 each,
outstanding. Also, on May 29, 1996, the 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
11
<PAGE>
December 30, 1997, the Company issued 48,060,000 shares of common stock (after
the one-for-one hundred reverse stock split as described above but before the
one-for-ten reverse stock split as described below), par value $0.0001 each, to
the stockholders of CML in connection with its acquisition of CML as described
in Note 1 to the accompanying Financial Statements. On March 2, 1998, the
authorized capital of the Company was increased to 60,000,000 shares of common
stock, par value $0.0001 each. On March 12, 1998, the Company effected a
one-for-ten reverse stock split and a redenomination of par value in share
capital, resulting in 60,000,000 shares of common stock, par value $0.0001 each,
authorized, and 4,999,746 shares of common stock, par value $0.0001 each,
outstanding.
The effects of the one-for-one hundred reverse stock split, the one-for-ten
reverse stock split, and the redenominations of par value in share capital have
been reflected retroactively in the financial statements and all net income per
common share computations.
16. OPERATING LEASE COMMITMENTS
The Group has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2006. Rental expenses for the 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>
17. RETIREMENT PLAN
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities to these
employees.
From January 1, 1997, the employees in Hong Kong, after completing a probation
period, may join the Group's defined contribution pension fund managed by an
independent trustee. Both the Group and its Hong Kong employees make monthly
contributions to the plan of 5% of the employees' basic salaries. The Hong Kong
employees are entitled to receive their entire contribution together with
accrued interest thereon at any time upon leaving the Group, and 100% of the
Group's employer contribution and the accrued interest thereon upon retirement
or leaving the Group after completing ten years of service or at a reduced scale
of between 30% to 90% after completing three to nine years of service. Any
forfeited contributions made by the Group and the accrued interest thereon are
used to reduce future employer's contributions. The aggregate amount of the
Group's employer contributions (net of forfeited contributions) for the year
ended December 31, 1997 was $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.
18. BANKING FACILITIES
As of December 31, 1997 and September 30, 1998, the Group had banking facilities
of approximately $1,422,000 and $1,943,000, respectively, for overdrafts, loans
and trade financing. Unused facilities as of December 31, 1997 and September
30, 1998 amounted to approximately $99,000 and $439,000, respectively. These
facilities were secured by:
a. Pledges of the Group's bank deposits of approximately $72,000 and
$472,000 as of December 31, 1997 and September 30, 1998, respectively;
b. Personal guarantees provided by Mr. Leo Sheck-Pui Kwok and Mr. Carl
Ka-Wing Tong;
c. Mortgage over real estate property owned by Mr. Carl Ka-Wing Tong;
d. Corporate guarantee provided by Acma Strategic Holdings Limited; and
e. A standby letter of credit issued by Acma Ltd. of approximately
$388,000 as of September 30, 1998.
12
<PAGE>
19. RELATED PARTY TRANSACTIONS
a. The Group entered into the following transactions with related
companies:
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
1 9 9 7 1 9 9 8
--------------- ---------------
$'000 $'000
(unaudited) (unaudited)
<S> <C> <C>
Management fee paid to Acma Strategic Holdings Limited 79 116
Purchases of machinery and tools from Faithera Engineering Limited* 0 362
=============== ===============
</TABLE>
* Faithera Engineering Limited is beneficially owned by certain minority
shareholders of Mastercraft Engineering Limited.
b. Details of amounts due to directors of the Company as of December 31,
1997 and September 30, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <C> <C>
Mr. Leo Sheck-Pui Kwok 612 438
Mr. Carl Ka-Wing Tong 249 232
--------------------- --------------------
861 670
===================== ====================
</TABLE>
The amounts due to directors are unsecured, non-interest bearing and
without pre-determined repayment terms.
c. Details of amount due to parent company as of December 31, 1997 and
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------- --------------------
1 9 9 7 1 9 9 8
--------------------- --------------------
$'000 $'000
(unaudited)
<S> <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.
13
<PAGE>
d. 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.
20. SEGMENTAL ANALYSIS
A. NET SALES
Net sales comprised:
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
1 9 9 7 1 9 9 8
--------------- ---------------
$'000 $'000
(unaudited) (unaudited)
<S> <C> <C>
Sales of merchandise 10,692 19,720
Sales of molds 2,300 4,308
Others 98 101
--------------- ---------------
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
Guangding Province, the PRC.
C. MAJOR CUSTOMERS
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
1 9 9 7 1 9 9 8
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
MBI Inc. 68.4% 37.3%
Mattel Vendor Operations Asia Ltd. 10.0% 25.2%
Tyco Hong Kong Limited 7.2% -
Drumwell Limited 1.8% 4.2%
Brookfield Collectors Guild 7.1% 4.2%
Road Champs Ltd. 3.9% 6.5%
Hallmark Cards (Hong Kong) Ltd. 0.8% 5.7%
Paul's Model Art GmbH - 6.9%
=============== ===============
</TABLE>
D. MAJOR SUPPLIERS
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
<S> <C> <C>
1 9 9 7 1 9 9 8
--------------- ---------------
(unaudited) (unaudited)
Manfield Coatings Co., Ltd. 7.3% 10.9%
Genesis Off-set Printing Co., Ltd. 5.4% 9.8%
Zinamet Co., Ltd. 4.8% 2.7%
Lee Kee Metal Co., Ltd. 5.8% 6.8%
=============== ===============
</TABLE>
14
<PAGE>
21. OPERATING RISKS
A. COUNTRY RISK
The Group's operations are conducted in Hong Kong and the PRC.
Accordingly, the Group's business, financial condition and results of
operations may be influenced by the political, economic and legal
environments in Hong Kong and the PRC, and by the general state of the
Hong Kong and the PRC economies.
On July 1, 1997, sovereignty over Hong Kong was transferred from the
United Kingdom to the PRC, and Hong Kong became a Special Administrative
Region of the PRC ("the Hong Kong SAR"). As provided in the Basic Law of
the Hong Kong SAR of the PRC, the Hong Kong SAR will have full economic
autonomy and its own legislative, legal and judicial systems for fifty
years. The Group's management does not believe that the transfer of
sovereignty over Hong Kong will have an adverse impact on the Group's
financial and operating environment. There can be no assurance, however,
that changes in political or other conditions will not result in such an
adverse impact.
The Group's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies in North
America and Western EuropeFinancial Printing GroupFinancial Printing
GroupThe 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,
1 9 9 7 1 9 9 8
<S> <C> <C>
Five largest accounts receivable 92.1% 77.8%
</TABLE>
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such
losses in aggregate have not exceeded management's projections.
22. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. Cash paid for interest and income taxes comprised:
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
1 9 9 7 1 9 9 8
(unaudited) (unaudited)
<S> <C> <C>
Interest 192 208
=============== ===============
Income taxes 75 0
=============== ===============
</TABLE>
b. Supplemental disclosure of investing activities:
During the 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 $835,000 and $631,000,
respectively.
15
<PAGE>
23. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1 9 9 7 1 9 9 8
-------------- -------------
$'000 $'000
(unaudited) (unaudited)
<S> <C> <C>
Depreciation of machinery and
equipment
- owned assets 109 270
- assets held under capital leases 208 203
Provision for/write-off of doubtful
accounts 0 17
Interest expenses for
- bank overdrafts and loans 128 133
- capital lease obligations 64 75
Operating lease rentals for rented
premises 434 522
Repairs and maintenance expenses 200 230
Net foreign exchange (gain) loss 29 (117)
===============================
</TABLE>
24. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income", which is effective for financial statements
issued for fiscal years beginning after December 15, 1997. This statement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but are excluded from net income. Adoption of this statement is not
expected to have an impact on the Company's current disclosures and
presentation.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. This statement requires that public companies report certain
information about their major customers, operating segments, products and
services, and the geographic areas in which they operate. Adoption of this
statement is not expected to have an impact on the Company's current disclosures
and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits",
which is effective for financial statements issued for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pension and other postretirement benefit plans. Adoption of this statement is
not expected to have an impact on the Company's current operations.
16
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company's expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "the Company
believes," "management believes" and similar words or phrases. The forward-
looking statements are based on the Company's current expectations and are
subject to certain risks, uncertainties and assumptions. The Company's actual
results could differ materially from results anticipated in these forward-
looking statements. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
OVERVIEW:
The Company is a leading independent manufacturer of collectible-quality, die-
cast replicas of cars, trucks, buses and other items. Die-cast collectibles are
distinguishable from die-cast toys by their authentic design, exacting
engineering and attention to detail, including abundant use of identifiable
brand names, logos and other licensed marks. The die-cast products the Company
manufactures are 1/12th to 1/64th scale and include as many as 450 parts,
including numerous moveable parts. They are marketed and distributed by the
Company's customers primarily to collectors, hobbyists and enthusiasts at retail
prices ranging from $20 to $200 or more. The Company's customers are leading
U.S. and European marketers and distributors of vehicle replicas and other
collectibles, including Danbury Mint, Mattel, Hallmark Cards, Paul's Model Art
and Brookfield Collectors Guild.
The Company's mission is to provide the highest level of product quality and
customer service among independent manufacturers of die-cast collectibles. The
Company offers its customers turnkey product development and manufacturing
capabilities that are customized to meet their specific needs. The Company's
vertically integrated process affords complete sourcing of raw materials,
engineering, assembly, quality control and final packaging of die-cast products
in commercial quantities. Depending on the customer's needs, the Company
provides a self-contained production area within one of its factories with
tooling and other production functions dedicated to manufacturing the customer's
products according to its particular design, engineering and quality
requirements. This approach permits customers to closely supervise and control
all aspects of the production process and to protect the confidentiality of
their product design and engineering. The Company's turnkey process enables its
customers to shorten the lead time from conceptual design to product delivery
and to minimize production costs while maintaining high quality and reliability.
All of the Company's manufacturing operations are conducted through CML, the
Company's wholly-owned Hong Kong subsidiary, and CML's subsidiaries. CML was co-
founded in 1986 by Carl Ka-Wing Tong and Leo Sheck-Pui Kwok. The Company's
manufacturing facilities are located in the Dongguan region of Guangdong
Province, China, approximately 60 miles northwest of Hong Kong. The Dongguan
facilities contain an aggregate of approximately 320,000 square feet of
manufacturing space and related housing for up to approximately 4,100 workers.
On December 30, 1997, CML completed an exchange reorganization with Davin
Enterprises, Inc., a public company that was incorporated in Delaware in
April1987. In March 1998, Davin Enterprises, Inc. changed its name to Creative
Master International, Inc.
Through the exchange reorganization, the Company acquired all of the outstanding
capital stock of CML from Messrs. Tong and Kwok and Acma Strategic Holdings
Limited in exchange for the Company's issuance to them of 4,806,000 shares of
common stock, representing approximately 96% of the Company's outstanding stock.
Davin Enterprises, Inc. had no significant assets, liabilities, business or
operations prior to the exchange reorganization. The acquisition of CML by the
Company on December 30, 1997 has been treated as are verse 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.
17
<PAGE>
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
3 months ended 9 months ended
September 30 September 30
1997 1998 1 9 9 7 1 9 9 8
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of goods sold 81% 82% 80% 76%
Gross profit 19% 18% 20% 24%
Selling, general and administrative expenses 14% 11% 15% 13%
Interest expenses, net 0% 1% 0% 1%
Other income (expenses), net 2% 3% 1% 1%
Income before income taxes and minority interests 7% 9% 5% 12%
Provision for income taxes 1% 1% 1% 1%
Income (Loss) before minority interests 6% 7% 4% 10%
Minority interests 0% 1% 0% 2%
Net income (loss) 6% 7% 4% 9%
</TABLE>
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 increased demand
from existing customers. Sales to Mattel increased by $5,910,000 for the nine
months ended September 30, 1998 compared to the same period in 1997. In
addition, sales to Corgi increased by $932,000, sales to Hallmark increased by
$1,266,000, sales to Road Champs increased by $973,000, sales to Drumwell
increased by $775,000 and sales to 1st 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 assets.
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 increased because the Company incurred increased air freight charges,
added 15 employees to its administrative and development staff at its Hong Kong
headquarters, and increased administrative staff salaries. Selling, general and
administrative expenses decreased as a percentage of net sales to 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. Selling expenses consist
primarily of freight and inspection charges. General and administrative
expenses consist of salaries and other employee expenses for the Company's
administrative and product development staffs, the majority of which are located
in Hong Kong, and overhead expenses of the Hong Kong office.
Interest Expense, Net. The Company's interest expense, net was $84,000 during
the nine months ended September 30, 1997 as compared to a net interest expense
of $191,000 during the nine months ended September 30, 1998.
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
18
<PAGE>
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.
Three Months Ended September 30, 1998 Compared To Three Months Ended September
30, 1997
Net Sales. Net sales for the three months ended September 30, 1998 were
$9,804,000, an increase of $4,437,000, or 83%, from $5,367,000 for the three
months ended September 30, 1997. This increase was due primarily to an increase
in sales volume of the Company's products to existing and new customers and a
direct result of the increase in capacity.
Cost of Goods Sold. Cost of goods sold for the three months ended September
30,1998 was $8,045,000, an increase of $3,698,000, or 85%, from $4,347,000 for
the three months ended September 30, 1997. This increase was due to additional
raw material purchases that were made to meet increased sales volume and
manufacturing capacity.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $1,077,000 for the three months ended September
30,1998, an increase of $310,000, or 40%, from $767,000 for the three months
ended September 30, 1997. Although selling, general and administrative expenses
constituted 11% of net sales for the three months ended September 30, 1998 and
14% of net sales for three months ended September 30, 1997. Although selling,
general and administrative expenses increased in absolute dollar amount due to
an increase in administrative and personnel costs to support the increase in
sales and manufacturing capacity, they decreased as a percentage sales.
Interest Expense, Net. Interest expense, net was $85,000, or 0.9% of net sales,
for the three months ended September 30, 1998 as compared to $34,000, or 0.6% of
net sales, for the three months ended September 30, 1997.
Minority Interests. The Company includes in net income before minority
interests all net income of its wholly-owned and majority-owned subsidiaries.
The portion of such net income attributable to minority interests in the
subsidiaries held by others is then eliminated. Minority interests at September
30,1998 totaled approximately $56,000.
Provision For Income Taxes. The Company's provision for income taxes was
$131,000 for the three months ended September 30, 1998, reflecting an effective
income tax rate of 15%, for the three months ended September 30, 1998. The
Company's provision for income taxes was $72,000 for the three months ended
September 30, 1997, reflecting an effective income tax rate of 19%. The
difference in the effective tax rate was due to (i) changes in contributions
from subsidiaries with minority interests and (ii) tax on net income of its Hong
Kong subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has financed its operations through a combination of
cash from operations, bank financing and capital lease arrangements. For the
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 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 $829,000 at December 31, 1997. The
approximately $2,674,000 increase was primarily due to an increase in
inventories and accounts receivable. At September 30, 1998, net accounts and
bills 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 credit facilities
provided by affiliates and third parties.
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 has not experienced
any significant problems with collection of its accounts receivable. See Note
21 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.
19
<PAGE>
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.
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
$2,670,000 of additional expenditures to expand and improve its manufacturing
operations during the remainder of 1998. 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.
As of September 30, 1998, these lines of credit allowed for aggregate borrowings
of up to $1,942,000. 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 has no capital commitments to purchase machinery or tools but
expects to spend approximately $1,550,000 to purchase such items during the
remainder of 1998. The Company anticipates that its capital expenditures will
increase substantially in 1999 due to the planned expansion and improvement of
its manufacturing facilities. The Company expects that its principal sources of
cash will be net cash from operating activities, borrowings under existing lines
of credit and potential new bank lines. The Company believes that these sources
will be adequate to meet the Company's anticipated cash requirements for at
least the next twelve months. However, there can be no assurance that these
resources will be adequate to meet the Company's needs, particularly in the
event that the Company elects to further expand its manufacturing facilities
beyond the currently planned expansion. In the event that the Company requires
additional capital, it may issue additional equity securities, which could
result in dilution to existing stockholders, or borrow funds, which could
adversely affect operating results.
Inflation. The Company believes that inflation has not had a material impact on
its business in recent years.
Year 2000 Compliance
The Company is not aware of any material operational issues or costs associated
with preparing its internal systems for the year 2000. However, there can be no
assurance that there will not be a delay in, or increased costs associated with,
the Company's implementation of the necessary systems and changes to address the
year 2000 issues. If the Company is unable to implement such systems and changes
in a timely manner, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as financial institutions, government agencies,
customers and suppliers for accurate exchange of data. Even if the internal
systems of the Company are not materially affected by the year 2000 issue, the
Company could be affected by disruptions in the operation of the enterprises
with which the Company interacts.
Currency Exchange Fluctuations
All of the Company's sales are denominated either in U.S. dollars or Hong Kong
dollars, while its expenses are denominated primarily in Hong Kong dollars and
renminbi, the Chinese currency, the basic unit of which is the yuan. Given the
current Asian financial crisis, there can be no assurance that the yuan-to-U.S.
dollar rate will remain stable. Although a devaluation of the Hong Kong dollar
or renminbi relative to the U.S. dollar would be likely to reduce the Company's
expenses, any material increase in the value of the Hong Kong dollar or renminbi
relative to the U.S. dollar would increase the Company's expenses, and could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company has never engaged in currency hedging
operations and has no present intention to do so.
20
<PAGE>
Seasonality
Each year, the Company ceases production for a two-week period due to the
Chinese New Year holiday, which occurs during late January or early February.
This holiday shutdown has typically resulted in lower revenues during the first
quarter of each year than during the other three quarters. The Company
experiences fluctuations in quarterly sales due to the timing of receipt of
orders from customers and product shipments. The Company also incurs substantial
tooling and other costs of manufacturing new products from three to nine months
in advance of obtaining the first customer orders for the new product. This long
lead time may contribute to fluctuations in the Company's quarterly results of
operations.
International Sales
The Company sells substantially all of its products to customers in the U.S. and
Europe. During the nine months ended September 30, 1998, approximately 5% 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
<TABLE>
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CREATIVE MASTER INTERNATIONAL INC.
Date: October 30, 1998 By: /s/ Carl Tong
--------------------
Carl Tong, President
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 (AUDITED) AND FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 471 889
<SECURITIES> 0 0
<RECEIVABLES> 2,966 5,231
<ALLOWANCES> 139 133
<INVENTORY> 2,928 3,331
<CURRENT-ASSETS> 6,533 9,962
<PP&E> 4,704 6,867
<DEPRECIATION> 1,549 2,013
<TOTAL-ASSETS> 10,499 15,689
<CURRENT-LIABILITIES> 7,362 9,724
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 2,738 4,812
<TOTAL-LIABILITY-AND-EQUITY> 10,499 15,689
<SALES> 16,211 24,129
<TOTAL-REVENUES> 16,211 24,129
<CGS> 12,703 18,303
<TOTAL-COSTS> 14,624 21,373
<OTHER-EXPENSES> 137 (231)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104 208
<INCOME-PRETAX> 1,000 2,803
<INCOME-TAX> 130 359
<INCOME-CONTINUING> 870 2,444
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 788 2,074
<EPS-PRIMARY> 0.158 0.415
<EPS-DILUTED> 0 0
</TABLE>
