<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________
Commission file number 33-18521-NY
CREATIVE MASTER INTERNATIONAL, INC.
(Exact name of small business as specified in its charter)
Delaware 11-2854355
- --------------------- ----------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Casey Ind. Bldg., 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
(Address of principal executive offices)
(852) 2396-0147
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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 dated : May 13, 1998, 4,999,746 shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income (unaudited) for
the three months ended March 31, 1998 and 1997 1
Consolidated Condensed Balance Sheets (unaudited) at March
31, 1998 and December 31, 1997 2
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and 1997 3
Notes to Consolidated Condensed Financial Statements (unaudited)
for the three months ended March 31, 1998 and 1997 4-15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16-18
PART II -OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 19
ITEM 2 - CHANGES IN SECURITIES 19
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 19
ITEM 5 - OTHER INFORMATION 19
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------
1998 1998 1997 1997
----------- ----------- ----------- -----------
US$ HK$ US$ HK$
<S> <C> <C> <C> <C>
Net sales 5,596 43,369 4,053 31,410
Cost of goods sold (3,822) (29,621) (3,176) (24,614)
Gross profit 1,774 13,749 877 6,796
Selling, general and
administrative expenses (852) (6,603) (502) (3,890)
Operating income 922 7,146 375 2,906
Interest income 0 0 28 217
Interest expenses (70) (543) (54) (418)
Other income 32 248 0 0
Other expenses, net (24) (186) (34) (263)
Amortization of goodwill (23) (178) (16) (124)
Income (loss) before income tax &
minority interests 837 648 299 2,318
Provision for income taxes (99) (767) (33) (256)
Income (loss) before minority interests 738 5,720 266 2,062
Minority interests (131) (1,015) (21) (163)
Net income 607 4,704 245 1,899
=========== =========== =========== ===========
Earnings per common share $ 0.12 $ 0.94 $ 0.05 $ 0.38
=========== =========== =========== ===========
Weighted average common
shares outstanding 4,999,746 4,999,746 4,999,746 4,999,746
=========== =========== =========== ===========
</TABLE>
Translations of amounts from Hong Kong Dollars (HK$) into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on March 31, 1998 of US$1.00=HK$7.75. No
representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars at that rate on March 31, 1997 or
at any other certain rate. The accompanying notes are an integral part of these
consolidated statements of income.
1
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
MARCH 31, 1998 AND DECEMBER 31, 1997
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
March March December December
31, 1998 31, 1998 31, 1997 31, 1998
---------- ---------- ---------- ----------
US$ HK$ US$ HK$
ASSETS
- ------
<S> <C> <C> <C> <C>
Current assets
Cash and bank deposits 770 5,968 471 3,650
Accounts receivable, net 3,196 24,769 2,827 21,909
Deposits and prepayment 400 3,100 307 2,379
Inventories, net 3,110 24,102 2,928 22,693
---------- ---------- ---------- ----------
Total current assets 7,476 57,939 6,533 50,631
Machinery, equipment and
capital leases 3,121 24,188 3,155 24,451
Goodwill 783 6,068 810 6,277
Long-term investment 1 8 1 8
---------- ---------- ---------- ----------
Total assets 11,381 88,203 10,499 81,367
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Short-term bank loans 1,888 14,632 1,290 9,975
Capital lease obligations,
current portion 588 4,557 764 5,921
Accounts payable 2,306 17,872 1,908 14,787
Accrued expenses and other payables 1,383 10,718 1,579 12,237
Deposits from customers 248 1,922 560 4,340
Due to directors 724 5,611 861 6,673
Due to parent company 0 0 9 70
Taxation payable 169 1,310 68 527
Dividend payable 265 2,054 323 2,503
Taxes other than income - - - -
---------- ---------- ---------- ----------
Total current liabilities 7,571 58,675 7,362 57,055
Capital lease obligations,
non-current portion 203 1,573 266 2,061
Deferred Taxation 57 442 57 442
---------- ---------- ---------- ----------
Total liabilities 7,831 60,690 7,685 59,559
---------- ---------- ---------- ----------
Minority interests 206 1,597 75 581
Shareholders' equity:
Common stock, par value US$.0001
authorized - 60,000,000 shares
issued and outstanding - 4,999,746 shares
at December 31, 1997 and March 31, 1998 1 8 1 8
Additional paid-in capital 1,202 9,316 1,202 9,315
Retained earning 2,144 16,616 1,536 11,904
Cumulative translation adjustment (3) (23) 0 0
---------- ---------- ---------- ----------
Total shareholders' equity 3,343 25,916 2,739 21,227
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity 11,381 88,203 10,499 81,367
========== ========== ========== ==========
</TABLE>
Translations of amounts from Hong Kong Dollars (HK$) into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on March 31, 1998 of US$1.00=HK$7.75. No
representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars at that rate on March 31, 1997 or
at any other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
<TABLE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Amounts in thousands)
<CAPTION>
March March March March
31, 1998 31, 1998 31, 1997 31, 1997
---------- ---------- ---------- ----------
US$ HK$ US$ HK$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income
Income from continuing operations 607 4,704 247 1,914
Net loss (gain) on disposal of
Machinery and equipment 0 0 (2) 15
Minority interests 131 1,015 21 163
Depreciation and amortization 153 1,186 133 1,031
Deferred income taxes 0 0 14 108
(Increase) decrease in assets :
Accounts receivable, net (369) (2,860) (274) 2,123
Deposits and prepayments (93) (721) 2 15
Inventories, net (182) (1,411) (290) 2,247
Increase (decrease) in liabilities :
Accounts payable 398 3,085 58 449
Deposits from customers (312) (2,418) 140 1,085
Accrued expenses and
other payables (194) (1,504) 110 852
Due to related company (9) (70) (89) 690
Taxation payable 101 783 13 101
---------- ---------- ---------- ----------
Net cash used in operating activities 231 1,789 83 643
Cash flows from investing activities:
Acquisition of property,
plant and equipment (96) (744) (6) 46
Net cash outflow from
acquisition of a Subsidiary 0 0 (1) 8
Decrease (increase) in due
from a related Company 0 0 11 85
---------- ---------- ---------- ----------
Net cash (used in) provided by
investing activities (96) (744) 4 31
---------- ---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease)
in bank overdrafts 0 0 (7) 54
Increase (decrease) in
short-term bank loans 641 4,968 68 527
Increase (Decrease) in
import trust receipts and
Bank loans (43) (333) 19 147
Repayment of capital
element of capital
Lease obligations (239) (1,852) (151) 1,170
(Decrease) increase in
due to directors (137) (1,062) (5) 39
Dividends paid to minority
interests of Subsidiaries (58) (450) (2) 15
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 164 1,271 (78) 542
---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 299 2,316 9 70
Cash and cash equivalents,
at beginning of period 471 3,650 435 3,371
---------- ---------- ---------- ----------
Cash and cash equivalents,
at end of period 770 5,966 444 3,441
========== ========== ========== ==========
</TABLE>
Translations of amounts from Hong Kong Dollars (HK$) into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on March 31, 1998 of US$1.00=HK$7.75. No
representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars at that rate on March 31, 1997 or
at any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
cash flows.
3
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
The accompanying notes are an integral part of these financial statements.
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 February 23, 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 is principally engaged in the development and
sale of communication systems.
Acquisition of CML
On December 30, 1997, the Company acquired a 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing 4,806,000 shares
of common stock of par value $0.0001 each (after the reverse stock splits as
described in Note 15) to Acma 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
recapitalization. On this basis, the historical financial statements prior to
December 30, 1997 represent the consolidated financial statements of CML. The
historical shareholders' equity accounts of the Company as of December 31, 1995
and 1996 have been retroactively restated to reflect the issuance of 4,806,000
shares of common stock of par value $0.0001 each (after the effect of the
reverse stock splits as described in Note 15) in connection with the
acquisition.
3. Subsidiaries
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Company") as of March 31, 1998 were as follows:
4
<PAGE>
<TABLE>
<CAPTION>
Percentage
Place of of equity Principal
Name incorporation interest held activities
<S> <C> <C> <C>
Creative Master Limited Hong Kong 100% Manufacturing and
trading of collectible replica cars
Excel Master Limited Hong Kong 100% Trading of
collectible replica cars
Queenex Enterprises Limited Hong Kong 100% Manufacturing of collectible replica cars
Carison Limited Hong Kong 70% Manufacturing of molds
Techtime Industries Limited Hong Kong 55% Manufacturing of collectible replica cars
Donguan Chuangying Toys The PRC Note a Manufacturing of collectible replica cars
Factory Co., Ltd.
</TABLE>
Note -
a. Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006. Under the
joint venture contract dated September 10, 1994 and the supplemental contract
dated April 1, 1996, the Company'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 effective from September 10,1994. In view of their 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 and
the three months ended March 31, 1998, was approximately $64,000 and $27,000,
respectively. Accumulated amortization as of December 31, 1997 and the three
months ended March 31, 1998, was approximately $139,000 and $166,000
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 Company and one
or more other parties, with the rights and obligations of the joint venture
partners governed by a contract. If the Company 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 overheads.
5
<PAGE>
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 Company 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 investment
Investments held for the long-term are stated at market value. Income from
investments is accounted for to the extent of dividends received and receivable.
g. Net sales
Net sales represent the invoiced value of merchandise/molds supplied to
customers, net of sales returns and allowances. Sales are recognized upon
delivery of goods and passage of title to customers.
Deposits or advanced payments from customers prior to delivery of goods and
passage of title of merchandise/molds are recorded as deposits from customers.
h. Income taxes
The Company 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 shareholders' equity separately as
cumulative translation adjustments. Aggregate losses from foreign currency
transactions included in the results of operations for the year ended December
31, 1997 and the and the three months ended March 31, 1998, were approximately
$47,000 and $15,000, respectively.
6
<PAGE>
k. Earnings (Loss) per common share
Earnings (Loss) per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income (loss) for each
year by the weighted average number of shares of common stock outstanding during
the period, as if the common stock issued for the acquisition of CML (see Note
1) and the reverse stock splits (see Note 15) had been consummated prior to the
periods presented. The weighted average number of shares used to compute
earnings (loss) per common share is approximately 4,999,746 and 4,999,746 for
the three months ended March 31, 1997 and the three months ended March 31,1998,
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 Company's financial instruments consist of cash, cash equivalents, trade
receivables, short-term borrowings, capital leases and trade payables. The book
values of these instruments are considered to be representative of their fair
values.
5. Accounts receivable
Accounts receivable comprised:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Trade receivables 2,966 3,335
Less: Allowance for doubtful accounts (139) (139)
------- -------
Accounts receivable, net 2,827 3,196
</TABLE>
6. Deposits and prepayments
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Deposits for acquisition of molds 149 180
Rental and utility deposits 69 8
Prepayments 83 201
Others 6 0
----- -----
307 389
</TABLE>
7. Inventories
Inventories comprised:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months ended March 31, 1998
$'000 $'000
<S> <C> <C>
Raw materials 1,358 1,403
Work-in-process 722 662
Finished goods 959 1,156
------- -------
3,039 3,221
Less: Allowance for slow-moving and obsolete inventories
(111) (111)
------- -------
Inventories, net 2,928 3,110
</TABLE>
7
<PAGE>
8. Machinery, equipment and capital leases
Machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Machinery and equipment:
Machinery and tools 769 789
Leasehold improvements 1,033 1,037
Furniture and office equipment 455 459
Motor vehicles 21 21
Capital leases:
Machinery and tools 2,412 2,412
Furniture and office equipment 14 14
------- -------
Cost 4,704 4,732
Less: Accumulated depreciation
Machinery and equipment (1,066) (1,138)
Capital leases (483) (537)
------- -------
Machinery, equipment and capital leases, net 3,155 3,057
</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
is principally engaged in the sales of communication systems. The carrying cost
of the long-term investment represented:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<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>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Goodwill 949 949
Less: Accumulated amortization (139) (166)
----- -----
Goodwill, net 810 783
</TABLE>
8
<PAGE>
11. Short-term bank borrowings
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Overdrafts - -
Short-term loans 908 1,549
Import trust receipts loans 382 339
------- -------
1,290 1,888
</TABLE>
Short-term bank borrowings are denominated in Hong Kong dollars and bear
interest at the Hong Kong prime lending rate plus 1.0% to 4.3%, which ranged
from 10.5% to 14.5% per annum as of March 31, 1998. They were collaterized by
the Company's bank deposits of approximately $276,000 as of March 31, 1998, and
personal guarantees provided by Mr. Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong.
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 for the three months ended March 31, 1998, are as
follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED WEIGHTED
AMOUNT AMOUNT AVERAGE AVERAGE
OUTSTANDING OUTSTANDING INTEREST INTEREST
DURING THE DURING THE RATE AT THE RATE DURING
YEAR YEAR END OF YEAR THE YEAR
-------------- -------------- -------------- --------------
$'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%
============== ============== ============== ==============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED WEIGHTED
AMOUNT AMOUNT AVERAGE AVERAGE
OUTSTANDING OUTSTANDING INTEREST INTEREST
DURING THE DURING THE RATE AT THE RATE DURING
PERIOD PERIOD END OF PERIOD THE PERIOD
-------------- -------------- -------------- --------------
$'000 $'000
3 MONTHS ENDED
MARCH 31, 1998
- ------------------------
<S> <C> <C> <C> <C>
OVERDRAFTS 49 0 0% 14%
============== ============== ============== ==============
SHORT-TERM LOANS 1,346 1,212 11.10% 11%
============== ============== ============== ==============
IMPORT TRUST RECEIPTS
LOANS 339 323 11.60% 11.80%
============== ============== ============== ==============
</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>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Payable during the following period
- - Within one year 830 627
- - Over one year but not exceeding two years 195 163
- - Over two years but not exceeding three years 91 54
------- --------
Total minimum lease payments 1,116 844
Less: Amount representing interest (86) 53
------- --------
Present value of minimum lease payments 1,030 791
Less: Current portion (764) (588)
------- --------
Non-current portion 266 203
</TABLE>
13. Accrued liabilities
Accrued liabilities comprised:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Accruals for operating expenses
- - Salaries, wages and bonus 575 327
- - Subcontracting charges 463 330
- - Rentals 41 20
- - Others 120 124
Accruals for purchases of loose tools and consumables 269 423
Others 111 161
------- -------
1,579 1,385
</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%.
The contractual joint venture established in the PRC (Dongguan Chuangying Toys
Factory Co., Ltd.) is subject to PRC income taxes at a rate of 33% (30% state
income tax and 3% local income tax). However, the joint venture is exempted from
state income tax and local income tax for two years starting from the first year
of profitable operations and it is subject to a 50% reduction in state income
tax for the next three years. The first profitable year of operations for
Dongguan Chuangying Toys Factory Co., Ltd. was the year ended December 31, 1997.
If the tax holiday had not existed, the Company's income tax expenses would have
been increased by approximately $8,000 for the year ended December 31, 1997 and
$4,215 for the 3 months ended March 31, 1998.
10
<PAGE>
Provision for income taxes for the year ended December 31, 1997 and the 3 months
ended March 31, 1998 represent provisions for current Hong Kong profits tax. The
reconciliation of the United States federal income tax rate to the effective
income tax rate based on income (loss) before income taxes stated in the
consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
<S> <C> <C>
United States federal income tax rate 35.0% 35.0%
Non-taxable income arising from activities
which qualified as offshore (6.0%) (25%)
Non-taxable/non-deductible activities (5.8%) (3%)
Tax losses not recognized 7.7% 13.9%
Effect of different tax rates in foreign jurisdictions (20.1%) 9.1%
Effective income tax rate 10.8% 11.8%
</TABLE>
15. 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 of 193,745,200 shares
of common stock outstanding, 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 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 shareholders 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 resulting in 4,999,746 shares of common stock,
par value $0.0001 each, outstanding.
The effect of the one-for-one hundred reverse stock split, and the one-for-ten
reverse stock split have been reflected retroactively in the financial
statements and all earnings per share computations.
11
<PAGE>
16. Operating lease commitments
The Company has various operating lease agreements for office, factory and
staff quarters premises, which extend through 2006. Rental expenses for the year
ended December 31, 1997 and the 3 months ended March 31, 1998 were approximately
$602,000 and 176,000, respectively. Future minimum rental payments as of
December 31, 1997 and March 31, 1998, under agreements classified as operating
leases with non-cancelable terms, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Payable during the following period
- - Within one year 563 583
- - Over one year but not exceeding two years 487 563
- - Over two years but not exceeding three years 427 471
- - Over three years but not exceeding four years 448 431
- - Over four years but not exceeding five years 390 431
- - Thereafter 977 963
------- -------
3,292 3,442
</TABLE>
17. Retirement plan
The Company's employees in the PRC are all hired on a contractual basis and
consequently the Company 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 Company's defined contribution pension fund managed by an
independent trustee. Both the Company 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 retirement or leaving the Company
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 Company and the accrued interest thereon are used to reduce future
employer's contributions. The aggregate amount of the Company's employer
contributions (net of forfeited contributions) for the year ended December 31,
1997 was approximately $50,000 and for the 3 months ended March 31, 1998 was
13,000.
The Company has no other post-retirement or post-employment benefit plans.
18. Banking facilities
As of December 31, 1997 and March 31, 1998, the Company had banking facilities
of approximately $1,421,000 and $1,807,000, respectively, for overdrafts, loans
and trade financing. Unused facilities as of the same dates amounted to
approximately $99,000 and $79,000 respectively. These facilities were secured by
the Company's bank deposits of approximately $72,000 as of December 31, 1997,
and $276,000 as of March 30, 1998, and personal guarantees provided by Mr.
Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong.
12
<PAGE>
19. Related party transactions
a. The Company entered into the following transactions with related companies:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Management fee paid to Acma Strategic
Holdings Limited 115 34
</TABLE>
b. Details of amounts due to directors of the Company as of December 31, 1997
and March 31, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Mr. Sheck-Pui Kwok 612 575
Mr. Carl Ka-Wing Tong 249 149
----- -----
861 724
</TABLE>
The amounts due to directors are unsecured, non-interest bearing and without
pre-determined repayment terms.
c. Details of amount due from a related company as of December 31,1997 and March
31, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Queenex Enterprises Limited - -
</TABLE>
Queenex Enterprises Limited is a company in which Mr. Sheck-Pui Kwok and Mr.
Carl Ka-Wing Tong are directors. During the year ended December 31,1997, the
Company acquired a 100% equity interest in Queenex Enterprises Limited for
approximately $1,000. The amount due from the related company was unsecured,
non-interest bearing and without pre-determined repayment terms.
d. Details of amount due to parent company as of December 31, 1997 and
March 31, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <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, the Company's banking facilities were secured by
personal guarantees provided by Mr. Sheck-Pui Kwok and Mr. Carl Ka-Wing Tong.
20. Segmental analysis
a. Net sales
Net sales comprised:
<TABLE>
<CAPTION>
3 Months Ended March 31, 1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Sales of merchandise 2,795 4,560
Sales of molds 550 879
Others 141 157
------- -------
3,286 5,596
</TABLE>
13
<PAGE>
A substantial portion of Company's sales are made to the United States of
America.
b. Assets
Substantially all of the Company's assets are located in Hong Kong and the PRC.
c. Major customers
Details of individual customers accounting for more than 5% of the Company's
sales are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
MBI Inc. 63.2% 41%
Mattel Vendor Operations Asia Ltd. 14.6% 40%
Brookfield Collectors Guild 4.7% 5%
</TABLE>
21. Operating risks
a. Country risk
The Company's operations are conducted in Hong Kong and the PRC. Accordingly,
the Company'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 Company's
management does not believe that the transfer of sovereignty over Hong Kong will
have an adverse impact on the Company'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 Company'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
Company'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 Company 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 Company.
14
<PAGE>
c. Concentration of credit risk
Concentration of accounts receivable as of December 31, 1997 and March 31, 1998
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Five largest accounts receivable 92.1% 98.1%
</TABLE>
The Company 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. Other supplemental information
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
Year Ended December 31,1997 3 Months Ended March 31, 1998
$'000 $'000
<S> <C> <C>
Depreciation of machinery and equipment
- - owned assets 122 32
- - assets held under capital leases 347 54
Allowance for doubtful accounts 15 15
Provision for slow-moving and obsolete inventories 84 84
Write down of long-term investment - -
Interest expenses for
- - bank overdrafts and loans 107 40
- - capital lease obligations 109 30
Operating lease rentals for rented premises 602 70
Repairs and maintenance expenses 266 40
Net foreign exchange loss 47 15
</TABLE>
23. 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.
15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THE 1995 ACT SHAREHOLDERS AND
PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER
ANY FORWARD - LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY
ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED HEREIN. THESE FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES
RELATING TO THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY.
ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG
OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE
BUSINESS DECISIONS, AND THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE
DEVELOPMENT PROJECTS, ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT
ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE
COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING
STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE
INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS
CONTEMPLATED IN ANY OF THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN WILL BE
REALIZED. BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENT, THE IMPACT OF
WHICH MAY CAUSE THE COMPANY TO ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR
OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN
LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD - LOOKING
STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE
REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
Overview of Company's Business:
The Company, through its operating subsidiaries, is a mass manufacturer
of high quality die-cast replica racing and classic cars. These products are
collectibles and require a substantial degree of engineering, quality control
and hand-assembly expertise to produce. All of the Company's operations,
including the design engineering and manufacture of its products, sales,
marketing, and other corporate activities are conducted through the Company's
wholly-owned or majority-owned subsidiaries or joint ventures. The Company's
executive and administrative headquarters are in Hong Kong and its manufacturing
operations are located in the neighboring Guangdong Province of the People's
Republic of China (the "PRC").
The Company was incorporated on April 8, 1987 in the state of Delaware
under the name of "Davin Enterprises, Inc" a development stage company seeking
acquisitions. As of December 30, 1997, the Company consummated a transaction,
whereby the Company acquired all of the issued and outstanding shares of
Creative Master - Hong Kong in exchange for the issuance by the Company of
48,060,000 pre-split shares of restricted common stock to Creative Master - Hong
Kong shareholders pursuant to the Share Exchange Agreement (the "Agreement"),
dated as of December 15, 1997, by and between the Company and Creative Master -
Hong Kong (the "Closing"). As a result of the acquisition, there are
approximately 49,997,452 pre-reverse split shares of Common Stock issued and
outstanding. Prior to the acquisition of Creative Master - Hong Kong, the
Company had no revenue producing operations, but did have an ownership interest
of approximately 9% of a privately-owned Rochester, N.Y. based communication
systems company. Neither Creative Master -Hong Kong or the shareholders of
Creative Master -Hong Kong were parties affiliated with the Company prior to or
at the time of the acquisition of Creative Master - Hong Kong. At the Closing,
the then current management of the Company resigned and were replaced by the
current management of the Company. Subsequently, the Company changed its name to
"Creative Master International, Inc." in March, 1998, to reflect the new
business operations of the Company. The Company's organizational structure as of
March 31, 1998 is set forth below:
16
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC.
(A DELAWARE CORPORATION)
I 100%
I
CREATIVE MASTER LIMITED
(HONG KONG CORPORATION)
I
I
FIVE OPERATING SUBSIDIARIES:
1. TECHTIME LIMITED (HK CORP.) 55%
2. QUEENEX ENTERPRISES LIMITED (HK CORP.) 100%
3. CARISON LIMITED (HK CORP.) 70%
4. EXCEL MASTER LIMITED (HK CORP.) 100%
5. DONGGUAN TOYS FACTORY (PRC) 100%
The Company provides a comprehensive manufacturing service that enables
it to satisfy a customers' requirements at every stage in the production of its
products, including raw material sourcing, product development and engineering,
tool making, model making, computer-aided mold design and production, and
manufacturing and packaging of the finished product. This comprehensive,
one-stop production process allows the Company to effectively, act as an
in-house manufacturing division for its customers.
The Company's operating results in the past have fluctuated and those
results may fluctuate in the future. The Company ceases production for a
two-week period during January or February of each year due to the Chinese New
Year holiday, which has caused revenues during the first fiscal quarter of each
year to be lower than revenues during the other three quarters. The Company may
also experience fluctuations in quarterly sales and related net income compared
with other quarters due to the timing of receipt of orders from customers and
the shipment of products.
RESULTS OF OPERATION
Summary financial information Three months ended March 31,
- ----------------------------- ----------------------------
1998 1997
-------- --------
US$ US$
(Amounts in thousands)
Sales $ 5,596 $ 4,053
Gross Profit 1,774 877
Selling, general and
administrative expenses (852) (502)
Operating income 922 375
Income before income taxes 837 299
Provision for income taxes (99) (33)
Minority interests (131) (21)
Net income 607 245
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales for the three months ended March 31, 1998 were
$5,596,000, an increase of $1,543,000 or 38%, from $4,053,000 for the three
months ended March 31, 1997. Such increase was due 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 March
31, 1998 were $3,822,000, an increase of $646,000 or 20%, from $3,176,000 for
the three months ended March 31, 1997. Such increase was due to additional raw
material purchases to meet increased sales volume and manufacturing capacity.
GROSS PROFIT. Gross profit totaled $1,774,000 in three months ended
March 31, 1998, an increase of $897,000 or 102 %, from $877,000 in three months
ended March 31, 1998. Gross margin was 32% for the three months ended March 31,
1998 and 22 % for the three months ended March 31, 1997. The gross margin
increase in 1998 reflected the stabilization of operations as compared with the
manufacturing inefficiencies associated with new clients and new facilities in
1997.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $852,000 for the three months ended March 31,
1998, an increase of $350,000 or 70%, from $502,000 for the three months ended
March 31, 1997. Selling, general and administrative expenses constituted 15% of
net sales for the three months ended March 31, 1998 and 12% in three months
ended March 31, 1997. Selling, general and administrative expenses increased due
to an increase in administrative and personnel costs to support the increase in
sales and manufacturing capacity.
OPERATING INCOME. Operating income from operations was $922,000 for the
three months ended March 31, 1998, an increase of $547,000 or 146 %, from
$375,000 for the three months ended March 31, 1997. The increase is caused by
the stabilization of the gross margin in 1998.
INTEREST INCOME. Interest income was not material for the three months
ended March 31, 1998, as compared to $28,000 in the three months ended March 31,
1997. The decrease in interest reflects the utilization of cash to meet
increased sales and manufacturing capacity.
INTEREST EXPENSES. Interest expense was $70,000, or 0.01% of sales, for
the three months ended March 31, 1998 as compared to $54,000, or 0.01% of sales,
for the three months ended March 31, 1997. The increase in interest expenses was
attributable to higher interest rates and finance charges associated with
additional capital requirements needed to meet manufacturing needs.
OTHER INCOME (EXPENSE), NET. Other income (expense), net totaled
$32,000 in three months ended March 31, 1998. Other income (expense), net for
the three months ended March 31, 1997 was not material. The improvement in other
income is due to increased income from scrap sales.
AMORTIZATION OF GOODWILL. The amortization of goodwill for the Company
for the three months ended March 31, 1998 and March 31, 1997 was $23,000 and
$16,000 respectively.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
was $99,000 for the three months ended March 31, 1998, reflecting an effective
income tax rate of 12%, for the three months ended March 31, 1998. The Company's
provision for income taxes was $33,000 for the three months ended March 31,
1997, reflecting an effective income tax rate of 11%. The difference in the
effective tax rate was due to changes in contributions from subsidiaries with
minority interests.
NET INCOME. Based on the factors described above, net income was
$607,000 for the three months ended March 31, 1998, an increase of $362,000 or
148%, from $245 thousand in the three months ended March 31, 1997. Net income as
a percentage of sales for Company for three months ended March 31, 1998 and
March 31, 1997 was 11% and 6%, respectively. The primary reason for improvement
of the net profit margin is due to the stabilization of operations as compared
with the start-up situation of new clients and new facilities in 1997.
EBITDA. EBITDA for three months ended March 31, 1998 was $954,000, as
compared to $375,000 for the three months ended March 31, 1997. The increase in
EBITDA for the three months ended March 31, 1998 as compared to the three months
ended March 31, 1997 reflects an increase in sales volume of the Company's
products and production efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1998, the Company's operations provided
cash resources of $231,000. The Company's cash balance increased by $299,000 to
$770,000 at March 31, 1998, as compared to $444,000 at March 31, 1997. The
net working capital deficit decreased by ($734,000) to ($95),0000 at March 31,
1998, as compared to ($829,000) at December 31, 1997, and the current ratio at
March 31, 1998 was 0.98, as compared to 0.89 at December 31, 1997. Accounts and
bills receivable increased by $369,000 or 13% to $3,196,000 at March 31, 1998,
as compared to $2,827,000 at December 31, 1997 as result of sales volume
increases. Consistent with practices in the die-cast collectibles industry, the
Company offers accounts receivable terms to its customers. This practice has
created working capital requirements that the Company generally has financed
with net cash balances, internally generated cash flow and loans. The Company
has not experienced any significant problems with collection of its account
receivable balances.
The Company's inventories increased by $182,000 or 6% to $3,110,000 at March 31,
1998, as compared to $2,928,000 at December 31, 1997 as a result of increased
purchasing of materials to accommodate increased sales and manufacturing.
The Company's accounts payable and accrued liabilities increased by $202,000 or
6% to $3,689,000 at March 31, 1998, as compared to $3,487,000 at December 31,
1997. The increase in accounts payable was primarily due to increased purchases
of raw materials and packing materials for anticipated sales and the increase in
accrued liabilities was a result of manufacturing expansion.
For the three months ended March 31, 1998, additions to property, plant and
equipment aggregated $96,000 as compared to $24,000 at December 31, 1997. The
Company anticipates that additional expenditures in connection with the
continuing expansion and improvement of production facilities at the Dongguan
facility during the remainder of 1998 will be approximately $2,000,000, a
portion of which is expected to be funded by capital lease financing.
The Company anticipates that its operating cashflow, combined with cash on hand,
bank lines of credit and other external credit sources, and credit facilities
provided by affiliates or related parties, are adequate to satisfy the Company's
working capital requirements for the year ending of December 31, 1998. In
addition, any additional expansion of the Dongguan facility, the development or
acquisition of additional support facilities may require the use of debt or
equity by the Company.
FOREIGN EXCHANGE. All of the Company's sales are denominated either in
U.S. Dollars or Hong Kong Dollars. The largest portion of the Company's expenses
are denominated in Hong Kong Dollars, followed by Renminbi (an official currency
of China). The Company is subject to a variety of risks associated with changes
among the relative values of the U.S. Dollar, the Hong Kong Dollar and Renminbi.
The Company does not currently hedge its foreign exchange positions.
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$7.75 to
US$1.00. There can be no assurance that this link will be continued, although
the Company is not aware of any intention of the Hong Kong government or the PRC
to abandon the link. The PRC government sets the exchange rate between the
Renminbi and all other currencies. Over the last five years, the Renminbi has
experienced significant devaluation against most major currencies. If the value
of the Renminbi or the Hong Kong dollar decreases relative to the US Dollar,
such fluctuations may have a positive effect on the Company's results of
operations. 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
therefore would have a material adverse effect on the Company's business,
financial condition and results of operations.
INFLATION RISK. The annual inflation rate in Hong Kong was
approximately 8.8%, 8.2% and 6% in 1995, 1996 and 1997, respectively. The annual
inflation rate in the PRC was approximately 14.8%, 8.3% and 8% in 1995, 1996 and
1997, respectively. The Company does not consider that inflation in Hong Kong or
the PRC has had a material impact on its results of operations in recent years.
No assurance can be given that inflation in Hong Kong or the PRC will not have a
material adverse effect on the business, financial condition and results of
operations of the Company in the future.
YEAR 2000 ISSUE. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four digits to define the applicable
year. Computer programs that have sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Based on a recent internal
assessment, the Company does not anticipate that the cost of any needed
modifications will have a material effect on results of operations.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
<PAGE>
On March 12, 1998, the Company effected a 1-for-10 reverse stock split
of its common stock, which resulted in 4,999,746 shares outstanding.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
In March, 1998, the majority of the Company's shareholders voted by
their consent in writing to change the Company's name from "Davin Enterprises,
Inc." to "Creative Master International, Inc.", to increase the Company's
authorized capital stock to $60 million and to effect a 1-for-10 reverse stock
split of the company's common stock.
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
During the quarter ended March 31, 1998, the Company filed two reports
on Form 8-K, as follows: Form 8-K for the event dated December 30, 1997 with
respect to Items 1 and 2, and Form 8-K for the event dated December 31, 1997
with respect to Item 6.
19
<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.
(Registrant)
Date: May 29, 1998 /S/ Carl Tong
----------------------------------
Carl Tong, President
Date: May 29, 1998 /S/ Shing Kam Ming
----------------------------------
Shing Kam Ming,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 770
<SECURITIES> 0
<RECEIVABLES> 3196
<ALLOWANCES> 0
<INVENTORY> 3110
<CURRENT-ASSETS> 7476
<PP&E> 3121
<DEPRECIATION> 0
<TOTAL-ASSETS> 11381
<CURRENT-LIABILITIES> 7571
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 3549
<TOTAL-LIABILITY-AND-EQUITY> 11381
<SALES> 5596
<TOTAL-REVENUES> 5596
<CGS> 3822
<TOTAL-COSTS> 4674
<OTHER-EXPENSES> 24
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 837
<INCOME-TAX> 99
<INCOME-CONTINUING> 738
<DISCONTINUED> 0
<EXTRAORDINARY> (131)
<CHANGES> 0
<NET-INCOME> 607
<EPS-PRIMARY> .012
<EPS-DILUTED> .012
</TABLE>
