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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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.
(Name of small business issuer in its charter)
Delaware 11-2854355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Casey Ind. Bldg., 8th Floor N/A
18 Bedford Rd., Taikoktsui (Zip Code)
Kowloon, Hong Kong
(Address of principal executive offices)
Issuer's Telephone Number: 011-852-2396-0147
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 par value
Check whether the issuer (1) has 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of the
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $33,633,000
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 12, 1999 was approximately $10,417,833, based upon the
closing sale price of $5.75 as reported by The Nasdaq National Market on such
date.
There were 4,999,322 shares of the Company's common stock outstanding on March
12, 1999.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Proxy Statement
for its 1999 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant's fiscal
year, are incorporated herein by reference in Part III of this Report.
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TABLE OF CONTENTS
Part I
<TABLE>
<S> <C>
1. Description of Business............................................... 1
2. Description of Property............................................... 10
3. Legal Proceedings..................................................... 10
4. Submission of Matters to a Vote of Security Holders................... 10
Part II
5. Market for Common Equity and Related Stockholder Matters.............. 11
6. Management's Discussion and Analysis or Plan of Operation............. 11
7. Financial Statements.................................................. 16
8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................. 16
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................... 17
10. Executive Compensation............................................... 17
11. Security Ownership of Certain Beneficial Owners and Management....... 17
12. Certain Relationships and Related Transactions....................... 17
13. Exhibits and Reports on Form 8-K..................................... 17
</TABLE>
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This annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,"
"the Company believes," "management believes" and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including those set forth in
the discussion under "Description of Business," including the "Risk Factors"
described in that section, and "Management's Discussion and Analysis or Plan of
Operation." Our actual results may differ materially from results anticipated
in these forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
Creative Master International, Inc. (the "Company") is an independent
manufacturer of collectible-quality, die-cast replicas of cars, trucks, buses
and other items. Die-cast collectibles are distinguishable from die-cast toys
by their authentic design, exacting engineering and attention to detail,
including abundant use of identifiable brand names, logos and other licensed
marks. The die-cast products the Company manufactures are 1/9th 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 up to $200 or more. The Company's
customers are U.S. and European marketers and distributors of vehicle replicas
and other collectibles.
The Company's mission is to provide the highest level of product quality and
customer service among independent manufacturers of die-cast collectibles. The
Company offers its customers turnkey product development and manufacturing
capabilities that are customized to meet their specific needs. The Company's
process affords complete sourcing of raw materials, engineering, assembly,
quality control and final packaging of die-cast products in commercial
quantities. Depending on the customer's needs, the Company provides a self-
contained production area within one of its factories with tooling and other
production functions dedicated to manufacturing the customer's products
according to its particular design, engineering and quality requirements. This
approach permits customers to closely supervise and control all aspects of the
production process and to protect the confidentiality of their product design
and engineering. The Company's turnkey process enables its customers to shorten
the lead time from conceptual design to product delivery and to minimize
production costs while maintaining high quality and reliability.
All of the Company's manufacturing operations are conducted through Creative
Master Limited ("CML"), the Company's wholly-owned Hong Kong subsidiary, and
CML's subsidiaries. On December 30, 1997, CML completed an exchange
reorganization with Davin Enterprises, Inc., a public Company that was
incorporated in Delaware in April 1987. In March 1998, Davin Enterprises, Inc.
changed its name to Creative Master International, Inc.
Principal Customers
The Company's customers consist principally of specialty retailers, direct
marketers and other distributors of collectibles in the U.S. and Europe. These
include Danbury Mint (a division of MBI, Inc.) and Mattel Inc. In 1997, the
Company began manufacturing the popular Matchbox die-cast collectibles series
for Mattel. In the fourth quarter of 1997, Mattel purchased Tyco Hong Kong
Limited, for which the Company had been producing die-cast vehicle replicas
since 1996. Other customers include Action Performance Companies, Inc. (which
owns 100% of Brookfield Collectors Guild and has a controlling interest in
Paul's Model Art), First Gear, Hallmark Cards, Road Champs and Corgi Classic
Cars. The Company plans to reduce its dependence on its key customers by
continuing to diversify its customers, products and markets through new
manufacturing arrangements such as the arrangement with Lionel Trains and co-
development efforts with companies such as Alterscale described below under
"Products."
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The Company's sales transactions with its customers are based on purchase orders
received by the Company from time to time which are subject to cancellation.
Although the Company does not have any long-term agreements with any of its
clients, it believes that its relationships with its customers are excellent.
The following sets forth certain information with respect to the Company's
principal customers during 1998:
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------
Year Ended
Customer ----------
Customer Name Principal Product Category Since December 31, 1998
- ------------- ------------------------------ ------- -----------------
<S> <C> <C> <C>
. Danbury Mint(1) U.S. classic cars and trucks 1986 36.7%
. Mattel(2) Matchbox collectibles 1997 24.1%
. Action Performance(3) NASCAR racing cars
European Formula One
and Super Touring racing cars 1996 13.9%
. Corgi Classic Cars Hong Kong buses, United
Kingdom buses and airplanes 1996(4) 5.3%
. Road Champ(5) Police cars and other U.S. cars 1997 5.3%
</TABLE>
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(1) Danbury Mint is a division of MBI, Inc.
(2) Sales to Mattel are made indirectly through its Mattel Vendor Operations
Asia Ltd. subsidiary and include sales to Tyco Hong Kong Limited, which was
acquired by Mattel in 1997.
(3) Action Performance Companies, Inc. owns 100% of Brookfield Collectors Guild
and a controlling interest in Paul's Model Art.
(4) Until mid-1998, sales to Corgi Classic Cars were made indirectly through its
agent, Drumwell Limited.
(5) Road Champs is a subsidiary of JAKKS Pacific, Inc.
Products
Cars, Trucks and Buses. The Company produces a wide range of collectible die-
cast replicas of automobiles, including classic cars, European cars, Formula 1
racing cars, trucks and buses. These replicas are produced at various scales
from 1/9th to 1/64th of the original size. They typically retail for up to
$200, depending on the number of parts and the level of intricacy in the design.
The Company's replicas have up to 450 parts and quality finishing that results
in an authentic look that appeals to collectors and other enthusiasts.
Vintage Trains and Locomotives. In June 1998, the Company began working on
tooling for die-cast replicas of six vintage locomotives and trains for Lionel
Trains, a U.S. marketer and distributor of electric train sets and model
trains. The Company started shipping finished goods for the six initial models
in the last quarter of 1998. In October 1998, the Company received purchase
orders for tooling for an additional six Lionel train replicas. The Company
expects to begin shipping the related finished goods in the second and third
fiscal quarters of 1999. Depending on the success of the initial products, the
Company anticipates manufacturing additional locomotive and train products in
the future.
Outboard Motors and Marine Products. The Company has an arrangement with
Alterscale, to co-develop collectible marine replicas under license from the
owner of the Johnson and Evinrude brands. The Company has manufactured and sold
a limited run of approximately 2,000 of these replicas, and one of the Company's
customers is test marketing these replicas. The Company also is engaged in
discussions with other owners of marks for marine related products to discuss
licensing opportunities.
Marketing and Sales
The Company historically has not engaged in any significant marketing
activities, and has relied primarily on its reputation for quality and
efficiency among its customers to obtain new business. The Company's senior
executives work closely with its customers to develop new products to meet
consumer demand for die-cast collectibles.
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The Company generally has not sought to license the right to produce replicas of
particular classic cars or other products. The Company has an arrangement with
Alterscale, a Company engaged in the development of collectible marine replicas,
to develop and manufacture outboard motors under license from the owner of the
Johnson, Evinrude and Mercury brands. The Company may selectively license other
marks in the future, where such licensing would not compete with the licensing
efforts of the Company's customers. To the extent the Company obtains any
licenses to manufacture die-cast replicas, it will pursue arrangements with one
or more of its existing customers or others to market and distribute such
replicas.
Backlog
The Company's customers generally contact the Company six to eighteen months in
advance of product delivery, so that the Company can engineer and fabricate the
necessary molds tools for producing the die-cast product. Purchase orders are
typically received two to six months in advance of target delivery dates.
Purchase orders are subject to cancellation if the Company fails to meet its
production schedules.
Product Development and Manufacturing
The Company offers turnkey manufacturing capabilities, including complete raw
materials sourcing, computer-aided product engineering, model-making, mold-
making, manufacturing, assembling and packaging of finished products. The
Company can meet all of a customer's design engineering and manufacturing needs,
thus eliminating the need for intermediaries. By coordinating product
development and process design with production and packaging, the Company is
able to shorten the lead time from conceptual design to product delivery and to
lower production costs while maintaining high quality and reliability.
The long lead time required to develop new products and related tools and molds,
combined with each customer's financial commitment at the beginning of the
tooling process, provides the Company with an indication of prospective orders
for six to twelve months in advance.
The product production cycle occurs in four stages:
. Product development
. Model making
. Tooling
. Final production and assembly
The product development phase of the production cycle begins when a customer
provides the Company with photographs, drawings and other specifications for the
new product. The Company then works with the customer to design a product that
meets the customer's specifications and price point.
The Company believes that model making is critical to producing the highest
quality collectibles. During the model-making stage of the production cycle,
the Company's engineering staff uses computer-aided design systems to develop a
prototype scale model. The Company will include as many functioning moving
parts as possible, given the customer's desired price point. Examples of such
features are car doors, trunks and hoods that open, steerable wheels and working
suspension. The Company strives to ensure that the models it produces also have
an authentic build and finish. Once the prototype replica is ready, it must be
approved by the customer before the Company begins to fabricate the molds and
tools that will be used to manufacture the product in commercial quantities.
The Company can generally produce a prototype in one to three months.
Once the customer has approved a prototype, the Company begins the tooling
process, which typically requires three to twelve months. The tooling process
occurs in two stages. First, the Company produces tooling and molds that will
be used to fabricate each component part of the product. Next, the Company
tests the components and the assembled
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product produced with the new tools and molds. If necessary, the Company refines
and modifies the molds and tools before seeking customer approval to manufacture
the product. Upon receiving customer approval, the Company releases the molds
and tools to produce final products.
In the last stage of the production cycle, the Company produces the component
parts, then assembles, finishes, packages and ships the final products. The
die-casting, injection-molding and electrostatic painting areas of the Company's
facilities operate five and a half days per week on a two-shift per day basis.
The finishing, assembly and packing areas also run on a multi-shift basis.
These areas account for most of the total work force and production area at the
Company's facilities.
Typically, customers pay 50% of the Company's tooling and mold-making costs when
the tooling and mold-making process commences and an additional 25% of these
costs when the initial test products are made using the new molds and tools.
The Company receives payment for the final 25% of the tooling costs when the
tools and molds are released for commercial production.
The Company usually insures the tools and molds until they are approved by the
customer for production. At that point, the customer takes ownership and
assumes the cost of insuring the molds and tools.
Principal Suppliers and Sources of Supply
The Company uses zinc alloy and various plastic resins in its die-cast and
injection-molded production operations. The supply and demand for zinc alloy
and for both plastic resins and the petrochemical intermediates from which
plastic resins are produced are subject to cyclical and other market factors and
can fluctuate significantly. The Company acquires raw materials for its die-
cast production primarily from Australia and the United Kingdom. The Company's
standard practice is to maintain a supply of raw materials sufficient for
approximately two months of production. The Company anticipates that it will be
able to obtain sufficient supplies of raw materials as it expands its production
capacity and output.
Five of the Company's suppliers accounted for more than 5% of its supplies in
1998 as shown in the following table:
<TABLE>
<CAPTION>
Percentage of Total Raw
Component Supplied Material
Supplier Supplied Year Ended December 31, 1998
-------- --------- ----------------------------
<S> <C> <C>
. Manfield Coatings Co., Ltd. Paint 9.4%
. Lee Kee Metal Co., Ltd. Zinc Alloy 9.2%
. Genesis Off-set Printing Co., Ltd. Packaging 7.8%
materials
</TABLE>
The Company believes there are multiple sources of supply of these and other
raw materials used in the Company's business.
Facilities and Planned Expansion
The Company's growth is closely related to its manufacturing capacity. At
present, the Company operates four factories in the Dongguan region of Guangdong
Province, China, and a fifth factory is in the process of becoming operational.
Legal and administrative functions of these factories are conducted through the
Company's Chinese subsidiary.
Each of the Company's factories houses a self-contained manufacturing operation.
Each factory contains personnel and equipment to provide production planning,
engineering, management, decorative processes and final assembly and packaging.
In addition, as is the custom and practice in China, each factory has adjacent
dormitories to house the
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factory workers. The workers are provided housing, meals, work clothes and
medical care for which they pay only a nominal monthly amount. The Company also
pays for the cost of electricity, water supply and housekeeping services for the
dormitories. The Company's costs of providing these services are included in
cost of goods sold.
Factories No. 1, 2, 3, and 4 occupy an aggregate of approximately 417,000 square
feet of production area. The construction of the first phase of Factory No. 5,
was completed in January. The first phase is in the process of becoming
operational as of March 1999. The first phase will consist of workshop, office
and paint warehouse facilities in approximately 120,000 square feet. This
includes the China Corporate services building comprising approximately 18,000
square feet housing executive offices, training, R&D and QC facilities.
Construction of the second phase of Factory No. 5 is expected to be completed in
the second quarter of 1999. The second phase will be built to provide excess
capacity.
The Company works closely with its customers in order to understand and plan for
the customers' anticipated production needs. Plans for the expansion of the
Company's manufacturing facilities are based largely on the anticipated needs of
its primary customers. Adequate undeveloped land adjacent to the Company's
facilities in China permit it to expand as necessary. Typically, the Company
can complete new facilities within six months. This six-month time frame is
within the normal product development cycle, and the Company historically has
not experienced any significant delays in bringing additional capacity on- line
to meet increased customer demand.
Competition
The Company faces competition from toy companies and other independent
manufacturers of die-cast products with production facilities located in China.
Certain of the Company's customers, including Mattel and Road Champs, have their
own die-cast manufacturing facilities in China.
The Company competes primarily on the basis of quality, technical capabilities
and ability to meet customer delivery schedules. To a lesser extent, it
competes on the basis of price. Although some of the Company's competitors are
larger and have substantially more resources than the Company, based on the
preceding criteria the Company believes that it competes effectively with these
larger manufacturers. In addition, the Company believes that its exclusive
focus on manufacturing collectible-quality, die-cast replicas distinguishes it
from other competitors who manufacture both toy-grade products and collectible-
quality products.
The Company believes it possesses trade secrets relating to application and
sourcing of raw materials and other aspects of its production process that may
represent a competitive advantage. The Company does not characterize its
business as proprietary, however, and does not own any patents. The Company
typically relies on its customers to obtain licenses from manufacturers of the
products on which its replicas are based. The Company currently holds a license
to its Mercedes Benz SSKL replica, and it intends to selectively seek licenses
for certain new products, such as marine outboard motors and other products that
do not compete with the products of existing customers. Other than trade
secrets and the capital required for factory equipment and training, the Company
believes that there are no significant barriers to entry to the manufacture of
die-cast products. Accordingly, additional participants may enter the market at
any time. Many of the Company's existing or potential competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company.
Government Regulation
The Company is not engaged in a regulated industry. The Company is subject to
import regulations in China, where it imports supplies to manufacture tools,
molds and finished die-cast collectibles. The Company also is subject to export
regulations in China, because it exports all of its product to customers outside
of China. The Company believes that its import and export practices comply with
applicable regulations and that its business and results of operations are not
significantly impacted by these regulatory requirements.
The Company uses a variety of paints and oils in the manufacture and detailing
of its die-cast collectibles, and has established procedures for the proper
storage, use and disposal of such materials. The Company believes that it has
complied with all environmental regulations applicable to its business.
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Employees
As of December 31, 1998, the Company had approximately 5,300 employees in China,
all of which are full-time. Of these employees, approximately 4,600 were
production workers, 400 were administrative staff, 300 were engineers and
technicians. In addition, the Company employs approximately 70 people in Hong
Kong. As is customary for manufacturers in China, the Company's production
facilities include housing facilities for its workers. The Company is committed
to providing good working and living conditions for its employees in China. The
Company has experienced no significant labor stoppages and believes that the
relations with its employees are satisfactory.
The Company anticipates hiring 1,600 additional employees in connection with the
expansion of its manufacturing facilities. Historically, the Company has had no
difficulty in hiring additional employees, and it anticipates that it will be
able to hire additional employees in the future as needed in connection with the
growth of its business.
Research and Development
The Company did not incur research and development expenses during 1995, 1996 or
1997. Substantially all development costs associated with manufacturing
products for its customers are expensed as a cost of sales. The Company does
not rely on any proprietary technology. The Company intends to increase its
product development efforts, and will incur future research and development
expenses in connection with these efforts.
Risk Factors
In addition to the other information in this annual report, the following
factors should be considered carefully in evaluating the Company's business and
prospects:
DEPENDENCE ON IMPORTANT CUSTOMERS. Our business is concentrated among a limited
number of customers. In 1997, sales to Danbury Mint, a subsidiary of MBI,
accounted for approximately 64.2% of our net sales and sales to Mattel Vendor
Operations Ltd. and Tyco Hong Kong Limited, subsidiaries of Mattel, totaled
approximately 20.4% of net sales. In 1997, we sought to diversify our customer
base and our efforts resulted in several new customers in 1998, including
Hallmark Cards. In 1998, sales to Danbury Mint accounted for approximately 36.7%
of our net sales and sales to Mattel accounted for approximately 24.1% of our
net sales. Despite our diversification efforts, we expect that we will continue
to depend on sales to Danbury Mint and Mattel. If we lose any one of our major
customers, particularly Danbury Mint or Mattel, our business, financial
condition and results of operations would be materially adversely affected.
CONDUCTING BUSINESS IN CHINA. Our manufacturing facilities are located in the
Dongguan region of Guangdong Province, China, approximately 60 miles northwest
of Hong Kong. Therefore, we are subject to certain inherent risks of doing
business in China.
INTERNAL POLITICAL RISKS. Our manufacturing operations and assets in China are
subject to significant political and economic uncertainties. Changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our business,
results of operations and financial condition. Under its current leadership,
the Chinese government has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.
LOSS OF CHINESE FACILITIES. We conduct our manufacturing operations in China
through a contract processing arrangement with a Chinese subcontractor and a
contractual joint venture with a local Chinese partner. We plan to phase out
the contractual joint venture operations in favor of operating through a
contractual arrangement with a Chinese subcontractor. The legal existence of
this Chinese contractual joint venture expires in 2006, and we have no assurance
that it can be extended if the Company desired to extent it. If we cannot
extend the contract processing arrangement or the legal existence of the
contractual joint venture, we may be forced to move our manufacturing operations
outside of China and there can be no assurance that we would be able to continue
our manufacturing operations. In the event of such a disruption, our
profitability, competitiveness and market position could be materially adversely
affected.
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FOREIGN CORRUPT PRACTICES ACT. We are subject to the U.S. Foreign Corrupt
Practices Act, which generally prohibits U.S. companies from engaging in bribery
or other prohibited payments to foreign officials for the purpose of obtaining
or retaining business. Foreign companies, including some that may compete with
us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-
offs, theft and other fraudulent practices are common in China. We have
attempted to implement safeguards to prevent losses from such practices and to
discourage such practices by our employees and agents. There is no assurance,
however, that we will not suffer such losses or that our employees or other
agents will not engage in such conduct for which we might be held responsible.
LACK OF REMEDIES AND IMPARTIALITY UNDER CHINESE LEGAL SYSTEM. Unlike the U.S.,
China has a civil law system based on written statutes in which judicial
decisions have little precedential value. The Chinese government has enacted
some laws and regulations dealing with matters such as corporate organization
and governance, foreign investment, commerce, taxation and trade. However,
their experience in implementing, interpreting and enforcing these laws and
regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. These matters may be subject to
the exercise of considerable discretion by agencies of the Chinese government,
and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination.
NON-RENEWAL OF BUSINESS LICENSES. Our activities in China, including our
contractual joint venture, require business licenses. This requires a review
and approval of our activities by various national and local agencies of Chinese
government. There can be no assurance that the Chinese government will continue
to approve of our activities or grant or renew our licenses. Our inability to
obtain needed approvals or licenses would have a material adverse effect on our
business, financial condition and results of operations.
NEGATIVE EFFECTS OF TRADE DISPUTES BETWEEN THE U.S. AND CHINA. China currently
enjoys Most-Favored-Nation status from the U.S., under which the U.S imposes the
lowest applicable tariffs on Chinese exports to the U.S. The U.S. annually
reconsiders whether it should renew Most-Favored-Nation trading status for
China. In the past, the U.S. has had disputes with China relating to trade and
human rights issues and has considered imposing trade sanctions against China,
including the non-renewal of Most-Favored-Nation status. There can be no
assurance that the U.S. will renew the Most-Favored-Nation status with China in
future years or will not impose trade sanctions against China that involve
collectibles such as those we manufacture. Either event would cause an increase
in the cost of our products to our customers. This, in turn, could result in
lower demand for our manufacturing services by our U.S. customers and materially
adversely affect our business, financial condition and results of operations.
NON-RENEWAL AND ENFORCEMENT OF LEASES OF CHINESE FACILITIES. We operate our
Chinese factories under tenancy agreements with local Chinese government
agencies that expire between May 1999 and June 2006. We also lease dormitory
facilities under similar tenancy agreements that expire between May 1999 and
November 2000. The factories and dormitories that we are building will be
leased under similar agreements. The continuance and renewal of our tenancy
agreements and operations at our Chinese facilities depend on our relationship
with the local government. Our operations and prospects will be materially
adversely affected if the local government fails to honor the tenancy
agreements. We also may have difficulty enforcing our rights under the tenancy
agreements in China.
UNRECOVERABLE PROPERTY DAMAGE LOSSES. By U.S. standards, fire fighting,
disaster relief and assistance and other infrastructure is relatively
undeveloped in the Dongguan region of China, where our manufacturing facilities
are located. While we currently maintain property damage insurance covering our
manufacturing facilities, we have no business interruption insurance. Material
damage to, or the loss of, our manufacturing facilities due to fire, severe
weather, earthquake or other causes, even if insured against, could have a
material adverse effect on our business, financial condition and results of
operations. Furthermore, we may not be able to find suitable alternative
facilities if any of our factories were destroyed or become inoperable for any
reason.
NEGATIVE CHANGES IN POLITICAL OR ECONOMIC CONDITIONS RESULTING FROM TRANSFER OF
SOVEREIGNTY OVER HONG KONG. There can be no assurance that the political,
economic or commercial conditions in Hong Kong will remain stable or that the
transfer of sovereignty over Hong Kong will not have a material adverse effect
on our business, financial condition or results of operations. We maintain
headquarters in Hong Kong and conduct substantially all of our administrative
and sales operations there. The United Kingdom transferred
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sovereignty over Hong Kong to China on July 1, 1997, and Hong Kong became a
Special Administrative Region of China. According to the Basic Law of Hong Kong,
Hong Kong will have a high degree of autonomy for 50 years, except as to foreign
affairs and defense. Given the lack of precedent for interpreting and enforcing
this new law, there is some uncertainty about its effect on our business.
INSTABILITY OF CUSTOMER BASE RESULTING FROM INDUSTRY CONSOLIDATION. Our loss of
one or more important customers because of industry consolidation would have a
material adverse effect on our business, financial condition and results of
operations. The die-cast collectibles industry is fragmented and there appears
to be a trend toward consolidation among marketers and distributors of
collectibles. In the fourth quarter of 1997, Mattel acquired Tyco Hong Kong
Limited, which accounted for approximately 5.6% of our net sales in 1997. In
1998, Action Performance Companies, Inc., a marketer and distributor of NASCAR
die-cast replicas and related products, acquired Brookfield Collectors Guild and
a controlling interest in Paul's Model Art, two of our customers. We believe
that both Mattel and Action Performance currently intend to continue the
business relationships we have developed with these customers. However, the
change in ownership of these customers may adversely affect our ongoing
relationship with them.
CONCENTRATION OF CREDIT RISK. Our working capital position, financial condition
and results of operations depend heavily on the creditworthiness of our five
largest customers, which accounted for approximately 80% of our accounts
receivable at December 31, 1998. Our top five customers accounted for
approximately 92% of our accounts receivable at December 31, 1997. If one or
more of these customers does not pay us, our business, financial condition and
results of operations could be materially adversely affected.
DEPENDENCE ON INTRODUCTION OF NEW PRODUCTS BY CUSTOMERS; LACK OF MARKET
ACCEPTANCE. Our operating results and growth in net sales depend substantially
upon our customers' ability to develop and market new products and upon
continuing market acceptance of our customers' products. Our customers' failure
or delay in introducing new products could impair our results of operations and
limit our future growth. Changes in consumer tastes affect the market for die-
cast collectibles. Die-cast collectible products typically have limited life
cycles and our customers may discontinue them at any time. Accordingly, there
can be no assurance that our customers' products will achieve or maintain market
acceptance.
INCREASED DIFFICULTIES IN COMPETING. There can be no assurance that we will be
able to continue to compete successfully. We face significant competition from
toy companies and other independent manufacturers of die-cast products with
manufacturing facilities located primarily in China. There also are no
significant barriers to entering the die-cast manufacturing business, and if the
market for die-cast collectibles continues to grow, we expect increased
competition from other industry participants. Many of our existing and
potential competitors have significantly greater financial, technical,
manufacturing and marketing resources than we do.
LACK OF TRADE SECRET PROTECTION. We may not have adequate protection in the
event an officer or employee leaves our employ and goes into competition with
us. Although we plan to implement such agreements in the near future, our
executive officers and key employees are not subject to noncompetition
agreements or similar contractual obligations protecting the confidentiality of
our trade secrets or other information.
LOSS OF CUSTOMERS RESULTING FROM CUSTOMER MANUFACTURING CAPABILITIES. Certain
customers, including Mattel and Road Champ, manufacture and distribute their own
die-cast products in addition to marketing die-cast products that we manufacture
for them. Action Performance has a close business relationship with a large,
independent die-cast manufacturer that competes with us. There can be no
assurance that we will be able to continue our relationships with these
customers, or that other customers will not develop their own manufacturing
capabilities, thereby reducing or eliminating their need for our services. Such
events could have a material adverse effect on our business, financial condition
and results of operations.
OUR GROWTH MAY BE LIMITED BY CAPACITY AT PRODUCTION FACILITIES. Our ability to
grow is a function of our manufacturing capacity. If we were unable to increase
our manufacturing capacity on a timely basis and on commercially reasonable
terms, our growth would be materially adversely effected. We expect to continue
to require additional manufacturing capacity in the near future.
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FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS. We use a variety of paints
and oils in the manufacture and detailing of our die-cast collectibles. We have
established procedures for the proper storage, use and disposal of such
materials. To our knowledge, we have complied with all environmental
regulations applicable to our business. The failure to comply with such
regulations or to pass annual inspections at our facilities, however, could
materially adversely affect our business, results of operations and financial
condition.
CLOSING OF FACILITIES; FLUCTUATING RESULTS. Our production and net sales during
the first quarter of each year have historically been lower than in other
quarters, because in keeping with Chinese customs, each year we close our
facilities for two weeks during the month of January or February to celebrate
the Chinese New Year holidays. We expect this trend to continue in future years.
The shutdown of our operations for two weeks delays our responsiveness to
customer orders and shipments in the initial weeks of the year. The inability
to meet certain time schedules, even for short periods, could negatively impact
our competitiveness for customer business. The loss of customers for a single
project increases the likelihood of losing additional projects from such
customers, which, if it occurred, could have a material adverse affect on our
business. We also experience quarterly fluctuation in our sales due to the
timing of customer orders and product shipments. In addition, we incur
substantial tooling and other costs relating to the manufacturing of new
products from three to nine months in advance of when we receive the first
customer orders for new products. This long lead-time can contribute to
fluctuations in our quarterly operating results.
LOSSES FROM CHANGES IN CURRENCY EXCHANGE RATES. Any material increase in the
value of the Hong Kong dollar or yuan relative to the U.S. dollar would increase
our expenses, and could have a material adverse effect on our business,
financial condition and results of operations. All of our sales are denominated
either in U.S. dollars or Hong Kong dollars. Our expenses are denominated
primarily in Hong Kong dollars and renminbi, the Chinese currency, the basic
unit of which is the yuan. Since 1983, the Hong Kong government has maintained
a policy of linking the U.S. dollar and the Hong Kong dollar at an exchange rate
of approximately HK$7.80 to U.S.$1.00. There can be no assurance that this link
will be continued. In January 1994, the Chinese government established its
current floating exchange rate system, which resulted in an approximately 35%
devaluation of the renminbi against most major currencies and the yuan-to-U.S.
dollar exchange rate has largely stabilized since that time. A devaluation of
the Hong Kong dollar or yuan relative to the U.S. dollar would be likely to
reduce our expenses. However, any benefits we receive from a devaluation could
be offset if the devaluation results in inflation or political unrest.
Furthermore, if our sales in Europe increase, we may experience increased
currency risk.
POTENTIAL SECONDARY EFFECTS OF MARKET DECLINE IN EAST ASIA. Several countries
in East Asia, including Japan, South Korea, Thailand and Indonesia, have
experienced significant devaluations of their currencies and declines in the
value of their capital markets during the past twelve months. In addition,
these countries have experienced a number of bank failures and consolidations.
Hong Kong, where we conduct our sales and administrative activities, is in a
recession. Because virtually all of our products are sold into the U.S. and
Europe, which are not generally experiencing these declines, we believe that the
economic situation in East Asia will not materially affect the demand for our
products. Furthermore, because most of our products are, or at our request may
be, paid for in U.S. dollars, we believe that we are less susceptible to the
effects of a possible devaluation in the Hong Kong dollar or the yuan. However,
the decline in the currencies of East Asian countries may render our products
less competitive if competitors in East Asia are able to manufacture competing
products at a lower effective cost. There can be no assurance that our products
will continue to be competitive with the products of competitors from these
countries. Currency fluctuations or other effects of the economic downturn in
East Asia also may have a material adverse effect on our business, financial
condition and results of operations.
RISK OF STOCK PRICE VOLATILITY. In recent years and months, the stock market
has experienced significant price and volume fluctuations. These fluctuations,
which are often unrelated to the operating performances of specific companies,
have had a substantial effect on the market price of stocks, particularly stocks
of companies such as ours in the "small cap" category. It is also possible that
our operating results will not meet the expectations of our public market
analysts, which could have an adverse effect on the trading price of the common
stock. Accordingly, the market price of the common stock may fluctuate
substantially.
DEPENDENCE ON CONTINUED SERVICES OF MESSRS. TONG AND KWOK. Our success depends
to a significant extent upon the continued services of Carl Ka Wing Tong and Leo
Sheck Pui Kwok. If we lose the services of either of these executives, our
business could be materially adversely affected. Messrs. Tong and Kwok co-
founded Creative Master Limited, our wholly-owned Hong Kong subsidiary, in 1986
and have continuously served as the Chief
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Executive Officer and Chief Operating Officer, respectively, since that time.
Accordingly, Messrs. Tong and Kwok have unique experience, knowledge and
expertise in our management and direction. They also have served as the
principal contacts with our customers and have developed long-standing
relationships with them, and we believe that their continued involvement with
our customers is important to the maintenance of these relationships. We
maintain "key person" life insurance of approximately $2,000,000 on Mr. Tong and
approximately $1,500,000 on Mr. Kwok. However, there is no assurance that the
proceeds of this insurance would be sufficient to compensate us for their loss.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate and administrative offices occupy approximately 12,000
square feet of office space in Hong Kong. The Company subleases these
facilities at a cost of approximately $4,000 per month, pursuant to leases which
run through February 14, 2001 and May 15, 2001.
The Company's current manufacturing facilities (Factories No. 1, 2, 3, and 4)
contain an aggregate of approximately 683,000 square feet of manufacturing space
and dormitory space that can accommodate up to 5,300 workers. See "Description
of Business--Facilities and Planned Expansion." The Company leases the
factories from local Chinese government agencies under separate tenancy
agreements expiring from May 1999 to June 2006. The aggregate monthly rent for
its factories is approximately $40,000. The Company also leases dormitory space
to house its factory workers under similar agreements which expire between May
1999 and November 2000. The aggregate monthly rent for its dormitory facilities
is approximately $23,000. The Company financed the cost of constructing the
Dongguan facilities and believes that its willingness to do so will facilitate
the extension of its leases on such facilities. The Company expects to sign
leases for the phase one dormitory of Factory No. 5 before the end of the first
quarter of 1999 and has started construction on the phase two dormitory.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 30, 1998, the Company held a special meeting of the
stockholders. At the meeting, the stockholders approved the amendment and
restatement of the Company's Certificate of Incorporation to (1) reduce the
authorized capital stock of the Company from 60,000,000 shares to 30,000,000
shares, consisting of 25,000,000 shares of common stock, $.0001 par value per
share, and 5,000,000 newly authorized shares of preferred stock, par value
$.0001 per share; and (2) effect a three-for-four reverse stock split of the
Company's outstanding common stock. At least 3,375,025 shares voted in favor,
constituting a majority.
The stockholders also adopted the Company's 1998 Stock Option Plan. At
least 3,375,025 shares voted in favor, constituting a majority.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Beginning December 23, 1998, the Company's common stock was listed on the Nasdaq
National Market under the symbol "CMST." Previously, the Company's common
stock had been quoted on the OTC Electronic Bulletin Board under the symbol
"CVMI," and trading in the common stock has been limited and sporadic. The
following table shows the range of high and low bid quotations reported by the
OTC Electronic Bulletin Board in each fiscal quarter from January 1, 1997 to
September 30, 1998, and the high and low sales prices reported by Nasdaq for the
fiscal quarter ending December 31, 1998. The OTC Electronic Bulletin Board
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
10
<PAGE>
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
FISCAL 1997
Quarter Ended March 31, 1997 $N/A $N/A
Quarter Ended June 30, 1997 $0.27 $0.27
Quarter Ended September 30, 1997 $N/A $N/A
Quarter Ended December 31, 1997 $2.67 $0.27
FISCAL 1998
Quarter Ended March 31, 1998 $0.27 $0.27
Quarter Ended June 30, 1998 $0.03 $0.03
Quarter Ended September 30, 1998 $0.69 $0.69
Quarter Ended December 31, 1998 $6.00 $5.00
</TABLE>
- --------------------------------------------------------------------------------
As of March 15, 1999, there were approximately 1,186 record holders of the
common stock.
The Company has not paid any cash dividends on the common stock, and it
currently intends to retain any future earnings to fund the development and
growth of its business.
In December 1998, a total of 1,250,000 shares of Company's common stock was sold
to the public in an underwritten offering managed by Cruttenden Roth
Incorporated. The offering was completed on December 30, 1998, at a public
offering price of $5.00 per share. A selling stockholder granted the
underwriters a 45-day option to purchase 187,500 shares of common stock at $5.00
per share to cover any overallotments, and this option was subsequently
exercised in full. The public offering resulted in gross proceeds of $6,250,000
to the Company and $937,500 to the selling shareholder. Total offering related
expenses for the Company were $1,753,000, which includes $625,000 of
underwriting discounts and commissions, $187,500 of expenses paid to or for the
underwriters, and $940,500 in other expenses. After deducting total offering
related expenses, net offering proceeds to the Company were $4,497,000. From
the time of receipt through December 31, 1998, the Company allocated the net
proceeds from the offering to its working capital pending the planned use of the
proceeds as described in the registration statement relating to the offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,"
"the Company believes," "management believes" and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including those set forth in
the discussion under "Description of Business," including the "Risk Factors"
described in that section, and "Management's Discussion and Analysis or Plan of
Operation." Our actual results may differ materially from results anticipated
in these forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them.
Overview
The Company is an independent manufacturer of collectible-quality, die-cast
replicas of cars, trucks, buses and other items. All of the Company's business
and operations are conducted through Creative Master Limited, its wholly-owned
Hong Kong subsidiary ("CML"), and CML's subsidiaries. CML was co-founded in
1986 by Carl Ka Wing Tong and Leo Sheck Pui Kwok to produce die-cast replicas of
cars and other vehicles primarily for the collectibles industry. On December
30, 1997, CML completed an exchange reorganization with Davin Enterprises, Inc.,
a public Company that was incorporated in Delaware in April 1987. In March
1998, Davin Enterprises, Inc. changed its name to Creative Master
International, Inc.
Through the exchange reorganization, the Company acquired all of the outstanding
capital stock of CML from Messrs. Tong and Kwok and Acma Strategic Holdings.
Davin Enterprises, Inc. had no significant assets, liabilities, business or
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operations prior to the exchange reorganization. The acquisition of CML by the
Company on December 30, 1997 has been treated as a reverse acquisition since CML
is the continuing entity as a result of the exchange reorganization. On this
basis, the historical financial statements prior to December 30, 1997 represent
the consolidated financial statements of CML. See Note 2 of Notes to
Consolidated Financial Statements.
The Company's manufacturing operations in China are conducted by CML through
contract processing arrangements with a Chinese subcontractor and through a
contractual joint venture established in October 1994 between CML and a local
Chinese partner. The Company expects to phase out the operations of the
contractual joint venture, and instead conduct these operations through contract
processing arrangements. Most of the Company's operations will be conducted
through contract processing arrangements in 1999.
Historically, the Company has paid no taxes in China. Under Chinese law, the
contractual joint venture is exempted from China state and local income tax for
a two-year period starting from the first year that the contractual joint
venture is profitable. Following the initial two-year tax exemption, the
contractual joint venture would become subject to taxation in China beginning in
1999, but would receive a 50% reduction in its Chinese income taxes for the next
three years. The contract processing arrangement with the Chinese
subcontractor, however, is not currently subject to taxation in China. The
Company is subject to tax in Hong Kong at the statutory rate of 16% to 16.5%.
However, under current interpretations of Hong Kong tax law, a Hong Kong company
that derives revenues from manufacturing operations through contract processing
arrangements in China recognizes only 50% of this profit as taxable income in
Hong Kong.
Results of Operations
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0%
Cost of goods sold............................. 69.6 78.4 72.8
Gross profit................................... 30.4 21.6 27.2
Selling, general and administrative expenses... 18.2 11.8 15.2
Interest expense, net.......................... 1.0 0.6 0.7
Other expenses, net............................ 4.0 0.8 0.9
Income (Loss) before income taxes
and minority interests...................... 6.9 6.2 12.2
Minority interests............................. -- 0.5 2.0
Provision for income taxes..................... 1.1 0.8 1.1
Net income..................................... 5.8 4.9 9.1
</TABLE>
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Net Sales. The Company's net sales for the year ended December 31, 1998 were
$33,633,000, an increase of $17,422,000, or 107%, from $16,211,000 in 1997. The
increase reflected higher sales to existing customers.
Cost of Goods Sold. The Company's cost of goods sold for the year ended
December 31, 1998 was $24,490,000, an increase of $11,787,000, or 93%, from
$12,703,000 last year. This increase reflected an increase of $5,420,000 in
materials cost and an increase of $1,689,000 in salaries and other direct labor
costs. Cost of goods sold includes the cost of raw materials, subcontracting
charges for production of molds, direct labor costs, utilities and other energy
costs and depreciation and amortization of the Company's owned equipment and
other depreciable manufacturing assets. Cost of goods sold constituted 73% of
net sales for the year ended December 31, 1998, compared to 78% for the same
period
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in 1997. The decrease was primarily a result of increased sales volume and
efficiencies from better utilization of manufacturing capacity.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses totaled $5,113,000 for the year ended December 31,
1998, an increase of $3,192,000, or 166%, from $1,921,000 for the year ended
December 31, 1997. Selling, general and administrative expenses increased as a
percentage of net sales to 15% of net sales for the year ended December 31,
1998, as compared to 12% of net sales for the year ended December 31, 1997. This
increase as a percentage of sales was due primarily to the fact that certain
components of selling, general and administrative expenses, including the number
of general and administrative employees and their salaries, did not increase
proportionally with the increase in sales. The Company added dedicated staff to
handle the customer service for the customers added in the past two years and
to cope with the anticipated increase in business volume next year.
Selling expenses consist primarily of shipping expenses and inspection charges.
General and administrative expenses consist of salaries and other employee
expenses for the Company's administrative and product development staffs, the
majority of which are located in Hong Kong, and overhead expenses of the Hong
Kong office. Shipping expenses increased by $376,000 to $503,000 for the year
ended December 31, 1998, compared to $127,000 for the year ended December 31,
1997. This increase was primarily due to higher sales volume. Salaries
increased by $880,000 to $2,103,000 for the year ended December 31, 1998,
compared to $1,223,000 for the year ended December 31, 1997. This increase was
primarily due to the addition of new employees to the Company's administrative
and development staff in Hong Kong and increases in salaries of some existing
employees.
Interest Expense, Net. The Company's interest expense, net was $244,000 during
the year ended December 31, 1998, as compared to a net interest expense of
$104,000 during the year ended December 31, 1997. The increase was due to
increased borrowings under the Company's credit facilities to fund the expansion
of the Company's facilities and to fund the increase in business volume.
Minority Interests. Minority interests at December 31, 1998 totaled
approximately $677,000. 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
$354,000 for the year ended December 31, 1998, reflecting an effective income
tax rate of 9%. The Company's provision for income taxes for the year ended
December 31, 1997 was $130,000, reflecting an effective income tax rate of 13%
for the year ended December 31, 1997. The decrease in the effective tax rate to
9% for the year ended December 31, 1998 was due primarily to the net effect of
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 through contract processing arrangements in China
is taxed at 50% of Hong Kong's statutory tax rate.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. The Company's net sales for 1997 increased $2,157,000, or 15%, to
$16,211,000 from $14,054,000 for 1996. The increase was primarily due to sales
to a new customer.
Cost of Goods Sold. The Company's cost of goods sold for 1997 was approximately
$12,703,000, an increase of approximately $2,921,000, or 30%, from approximately
$9,782,000 for 1996. Such increase reflected higher sales volume, as well as
increases of approximately $949,000 in salaries and direct labor costs,
approximately $795,000 in sub-contracting charges for the production of molds
and approximately $233,000 in depreciation charges. Cost of goods sold
constituted 78% of net sales in 1997, compared to 70% in 1996. The increase was
primarily a result of staff increases and production inefficiencies associated
with the start-up of production of new customer orders and operations at the
Company's new manufacturing facilities.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses totaled approximately $1,921,000 in 1997, a decrease
of $631,000, or 25%, from approximately $2,552,000 in 1996. The decrease was
primarily the result of a higher acceptance rate of products by customers, which
resulted in lower repair costs for the Company, and reduced air freight charges
resulting from better compliance with customer delivery schedules. Air freight
charges, which are a component of the Company's shipping expenses, are typically
incurred only
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when the Company fails to meet customer delivery schedules. The higher
acceptance rate resulted from better quality control and an improvement in
meeting product delivery schedules. Selling, general and administrative expenses
constituted 12% of net sales in 1997 and 18% in 1996. The decrease was due
primarily to increased net sales in 1997.
Interest Expense, Net. The Company's net interest expense was $104,000 in 1997
compared to a net interest expense of $140,000 in 1996. The decrease in net
interest expenses resulted from an increase in interest income arising from
higher average bank balances and higher prevailing interest rates in 1997.
Minority interests were approximately $82,000 in 1997. There were no minority
interests in 1996.
Provision for Income Taxes. The Company's effective income tax rate was 13% in
1997 and 16% in 1996. The decrease in 1997 was primarily due to an increase in
the recognized tax losses contributed by the Company's Hong Kong subsidiaries.
Liquidity and Capital Resources
Prior to 1998, the Company had financed its operations through a combination of
cash from operations, bank financing and capital lease arrangements. In
December 1998, the Company completed a public offering of its common stock which
resulted in net proceeds to the Company of approximately $4,497,000. The
Company's operating activities provided cash of $4,907,000 in 1998 and
approximately $696,000 in 1997. Investing activities used approximately
$2,691,000 in 1998 and generated approximately $16,000 in 1997. The Company
generated approximately $2,368,000 of cash in financing activities in 1998 and
used $672,000 in 1997.
Working capital at December 31, 1998 was approximately $5,261,000 as compared to
a working capital deficit of approximately $829,000 at December 31, 1997. The
increase was primarily due to the Company's public offering in December and an
increase in inventories and accounts receivable. At December 31, 1998, net
accounts receivable totaled approximately $4,343,000, as compared to $2,827,000
at December 31, 1997. These increases were due primarily to increased sales.
Consistent with practice in the die-cast collectibles industry, the Company
offers 30 to 60 days accounts receivable terms to its customers. This practice
has created working capital requirements that the Company generally has financed
with a combination of internally generated cash flow and short-term borrowings
under bank credit facilities.
At December 31, 1998, the Company's five largest customers accounted for
approximately 80% of its accounts receivable. Creative Master actively monitors
the creditworthiness of its customers, and to date it has not experienced any
significant problems with collection of its accounts receivable. See Note 23 of
Notes to Consolidated Condensed Financial Statements.
The Company's accounts payable and accrued liabilities increased by
approximately $3,392,000, or 97%, to approximately $6,879,000 at December 31,
1998, as compared to approximately $3,487,000 at December 31, 1997. The
increase in accounts payable and accrued liabilities from December 1997 to
September 1998 was due primarily to the increase in the purchase of raw
materials and packing materials for anticipated sales.
The Company's inventories increased by approximately $859,000, or 29%, to
approximately $3,787,000 at December 31, 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 year ended December 31, 1998, additions to property, plant and equipment
were $3,226,000 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. As of December 31, 1998, the aggregate outstanding obligations
under all capital leases was approximately $461,000 as compared to approximately
$1,030,000 at December 31, 1997.
The Company repaid short-term bank loans of approximately $3,347,000 in 1998 and
obtained equipment lease financing in the aggregate amount of approximately
$757,000. The Company also obtained additional short-term bank loans in the
total amount of approximately $2,895,000 secured by the individual guarantees of
Messrs. Tong and Kwok and by the corporate guarantee of Acma Strategic Holdings
Limited, its principal stockholder.
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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
December 31, 1998, these lines of credit allowed for aggregate borrowings of up
to $2,259,000. As of December 31, 1998, the Company had approximately
$1,062,000 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 anticipates that its capital expenditures
will increase substantially in 1999 due to the planned expansion and improvement
of its manufacturing facilities. The Company expects that its principal sources
of cash will be the net proceeds of the recent offering, net cash from operating
activities and borrowings under existing lines of credit and potential new bank
lines. During 1999, the Company expects to apply the net proceeds of the recent
offering as follows: $3,100,000 (expansion and improvement of manufacturing
facilities), $500,000 (payment of capital lease obligations), $500,000
(repayment of short-term bank debt), and $397,000 (working capital and general
corporate purposes).
The Company believes that these sources will be adequate to meet the Company's
anticipated cash requirements for 1999. However, there can be no assurance that
these resources will be adequate to meet the Company's needs, particularly in
the event that the Company elects to further expand its manufacturing facilities
beyond the currently planned expansion. In the event that the Company requires
additional capital, it may issue additional equity securities, which could
result in dilution to existing stockholders, or borrow funds, which could
adversely affect operating results.
Inflation. The Company believes that inflation has not had a material impact on
its business in recent years.
Year 2000 Compliance
The Company has implemented a Year 2000 program aimed at ensuring that its
computer systems, applications and equipment will function properly beyond 1999.
As a part of this program, the Company conducted an assessment of its equipment
and machinery during August 1998. The Company's machinery (such as die-casting
and plastic-injection equipment and tempo printing machines) do not have timers
or date counters and, therefore, are not subject to Year 2000 problems. The
Company continuously seeks to upgrade and improve its computer systems and
software to better service customers and to support its growth. As a result,
all of the Company's computer systems and software have been recently acquired
or upgraded, and the Company believes they are already Year 2000 compliant,
though there can be no assurance in this regard.
Because the Company replaced or upgraded its computer systems and software in
conjunction with its normal business practices, it has not allocated additional
resources or attributed additional costs to Year 2000 compliance. The Company
will continue to assess and test newly purchased machinery and computer-related
hardware and software to ensure such items comply with Year 2000.
Another part of the Company's Year 2000 program is an assessment of Year 2000
compliance among its trading partners. We are planning to conduct systems
testing with the Company's trading partners during 1999. In conjunction with
the results of such systems testing, the Company will prepare contingency plans
to address the potential material problems. The costs of such testing and
contingency preparations are difficult to estimate accurately and will greatly
depend upon the Year 2000 readiness of the Company's trading partners. At
present, however, even assuming that its trading partners are not fully Year
2000 compliant, the Company believes that Year 2000 issues will not have a
material adverse effect on the Company's business or results of operations.
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.
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Seasonality
Each year, the Company ceases production for a two-week period due to the
Chinese New Year holiday, which occurs during late January or early February.
This holiday shutdown has typically resulted in lower revenues during the first
quarter of each year than during the other three quarters. Certain fixed costs,
however, continue despite the Company's closing. This reduction in revenues,
without a corresponding reduction in costs, diminishes liquidity during the
first quarter.
The Company experiences fluctuations in quarterly sales due to the timing of
receipt of orders from customers and product shipments. The Company also incurs
substantial tooling and other costs of manufacturing new products from three to
nine months in advance of obtaining the first customer orders for the new
product. This long lead time may contribute to fluctuations in the Company's
quarterly results of operations.
International Sales
The Company sells substantially all of its products to customers in the U.S.
and Europe. During the year ended December 31, 1998, approximately 13.5% of the
Company's net sales arose from sales to European customers, and in 1997
approximately 0.8% of the Company's net sales were attributable to sales to
European customers. The U.S. and European governments may, from time to time,
impose new quotas, duties, tariffs, or other charges or restrictions, or adjust
presently prevailing quota, duty or tariff levels, which could adversely affect
the Company's ability to continue to export products to the U.S. and Europe at
current or increased levels.
Accounting for Stock Options
The Board of Directors of the Company has adopted a 1998 Stock Option Plan under
which the Company has reserved a total of 420,000 shares of common stock for
issuance upon the exercise of options granted under the plan. On December 23,
1998 the Company granted stock options under the plan to certain directors,
officers, employees and consultants to purchase approximately 340,500 shares of
common stock at an exercise price equal to the market price of the common stock
on that date. The Company will be required to account for option grants in
accordance with the rules of the Financial Accounting Standards Board ("FASB").
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which established
the "fair value" method of accounting for stock-based compensation arrangements,
under which compensation cost is determined using the fair value of the stock
option at the grant date and the number of options vested, and is recognized
over the period in which the related services are rendered. For securities
issuances to employees, SFAS 123 also permits the use of the "intrinsic value
based" method as set forth in the Statement of Financial Accounting Standards
No. 116. At present, the Company intends to report all issuance to employees
using the intrinsic value based method for issuances to employees, as allowed by
SFAS 123. As further provided in SFAS 123, the Company will disclose the pro
forma effect of adopting the fair value based method.
Under SFAS 123, any transaction involving non-employees for which goods or
services is the consideration received in exchange for the issuance of equity
instrument, such as options, is to be recorded using the fair value method. The
fair value method states that the amount recorded is to be based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is a more reliable measure.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements and the reports and notes, which are
attached hereto beginning at page F-1, are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective April 30, 1998, Greenberg & Company, LLC, which had been the Company's
auditor prior to the exchange reorganization, resigned as the independent
accountants of the Company. The Company's board of directors approved the
appointment of Arthur Andersen & Co. as its new independent accountants on April
30, 1998.
16
<PAGE>
Greenberg & Company, LLC's report on the Company's financial statements for the
past two years did not contain an adverse opinion or disclaimer, and was not
modified as to uncertainty, audit scope or accounting principles during that
period. The Company did not have any disagreements with Greenberg & Company,
LLC on any matter of accounting principles, financial statements, auditing scope
or procedure during that period.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
-------
Number Description
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(2).
3.2 Bylaws of the Company (incorporated by reference to the exhibits of
the Company's registration statement (file no. 33-14521-NY)).
4 Specimen Stock Certificate of the Company(1).
10.1 Form of Indemnification Agreement with officers and directors(1).
10.2 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December 15,
1997(1).
10.3 Joint Enterprise Agreement between Creative Master Limited and
Dongguan Heng Li Trading Company dated September 10, 1994(1).
10.4 Supplement to Joint Enterprise Agreement between Creative Master
Limited and Dongguan Heng Li Trading Company dated April 1, 1996(1).
10.5 Processing Agreement by and between Creative Master Limited and
Dongguan Heng Li Zhen Trading Company dated June 18, 1998(2).
10.6 Entrepreneur Agreement by and among Creative Master Limited, Chen
Hao Qiang, Gan Zi Kuen and Wu Qing Su (undated)(1).
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
10.7 Letter to extend credit facilities from Hang Seng Bank Limited to
Creative Master Limited dated July 16, 1998(1).
10.8 Letter agreement to extend credit facilities between Hang Seng Bank
Limited and Creative Master Limited dated June 10, 1996(1).
10.9 Letter to extend credit facilities between Banque Nationale de
Paris Hong Kong Branch and Creative Master Limited dated April 21,
1997(1).
10.10 Letter agreement to extend credit facilities between Bank of China
Hong Kong Branch and Creative Master Limited dated May 25, 1992(1).
10.11 Letter agreement to extend credit facilities between Commonwealth
Finance Corporation Limited and Creative Master Limited dated December
20, 1997(1).
10.12 Consultancy Agreement between Creative Master Limited and Acma
Strategic Holdings Limited dated January 19, 1996 (incorporated by
reference to the Company's Form 10-KSB for fiscal 1998, filed on
September 2, 1998).
10.13 Consultancy Agreement between Carl Tong & Associates Management
Consulting Limited and Acma Strategic Holdings Limited dated January
19, 1996 (incorporated by reference to the Company's Form 10-KSB for
fiscal 1998, filed on September 2, 1998).
10.14 Joint and Several Guarantee By Individuals or Partners in a Firm
by and among Commonwealth Finance Corporation Limited, Carl Tong and
Leo Kwok dated March 30, 1993(1).
10.15 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Carl Tong dated March 30, 1993(1).
10.16 Guarantee to be Given by an Individual by and between Commonwealth
Finance Corporation Limited and Leo Kwok dated March 30, 1993(1).
10.17 Creative Master Limited Defined Contribution Scheme Rules
effective January 1, 1997(1).
10.18 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Excel Master Limited and Hang Seng Life Limited effective
January 1, 1997; and Excel Master Limited Defined Contribution Scheme
Rules(1).
10.19 Hang Seng Pooled Provident Plan Defined Contribution Policy by and
between Carison Limited and Hang Seng Life Limited effective January
1, 1997; and Carison Limited Defined Contribution Scheme Rules(1).
10.20 Service Agreement by and between Creative Master Limited and Leo
Sheck Pui Kwok dated January , 1996(1).
10.21 Factory and dormitory leases for CML No. 1(2).
10.22 Factory and dormitory leases for CML No. 2(2).
10.23 Factory and dormitory leases for CML No. 3(2).
10.24 Factory and dormitory leases for CML No. 4(2).
10.25 Factory and dormitory leases for CML No. 5(2).
10.26 Consulting Agreement between Henry Hai-Lin Hu, Business Plus
Consultants Limited and the Company dated August 18, 1998(2).
10.27 Import Material & Processing Agreement between Dongguang Process
Assembly Servicing Company and the Company dated November 10, 1995(2).
10.28 Lease of Unit B, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments Limited
dated April 3, 1997(2).
10.29 Lease of Unit A1, Casey Industrial Building, Kowloon, Hong Kong
between Excel Master limited and Fortune Wind Investments Limited(2).
10.30 Lease of Unit A2, Casey Industrial Building, Kowloon, Hong Kong
between Creative Master Limited and Fortune Wind Investments
Limited(2).
10.31 Loan Agreement dated January 31, 1996 between Carl Tong and Leo
Sheck Pui Kwok as lenders and Creative Master Limited as borrower in
the aggregate amount of H.K. $1,000,000(1).
10.32 Loan Agreement dated April 18, 1995 between Carl Tong and Sheck
Pui Kwok as lenders and Creative Master Limited as borrower in the
aggregate amount of H.K. $2,000,000(1).
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
10.33 Promissory Note, dated as of October 1, 1998, in the principal
amount of $227,118 from Creative Master Limited in favor of Carl Ka
Wing Tong(2).
10.34 Promissory Note, dated as of October 1, 1998, in the principal
amount of $493,889 from Creative Master Limited to Leo Sheck Pui
Kwok(2).
10.35 Lease of apartment from Wellholding Limited by Creative Master
Limited dated January 2, 1996(1).
10.36 1998 Stock Option Plan, as amended(3).
10.37 Form of Notice of Stock Option Grant and Stock Option Agreement
under the 1998 Stock Option Plan(3).
10.38 Standby Letter of Credit of Acma Ltd(2).
10.39 Guarantee of Carl Tong to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990(2).
10.40 Guarantee of Leo Kwok to Banque Nationale de Paris in favor of
Creative Master Limited dated June 13, 1990(2).
10.41 Deed of Guarantee of Carl Tong and Leo Kwok to Bank of China in
favor of Creative Master Limited(2).
10.42 Guarantee to be Given by a Limited Company by and between
Commonwealth Finance Corporation Limited and Acma Strategic Holdings
Limited dated July 14, 1997(2).
10.43 Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including the Representative's Warrant(3).
10.44 Underwriting Agreement, dated December 22, 1998, among the company and
the underwriters named therein(3).
16 Letter re: Change in Certifying Accountant (incorporated by
reference to the Company's Form 8-K dated April 30, 1998).
21 List of Subsidiaries(2).
27 Financial Data Schedule(3).
</TABLE>
- --------------------------------------------------------------------------------
(1) incorporated by reference to the Company's Form SB-2 filed on October 21,
1998.
(2) incorporated by reference to the Company's Form SB-2/A filed on November
25, 1998.
(3) filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1998.
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants................................... F-1
Consolidated Balance Sheets - As of December 31, 1997 and 1998............. F-2
Consolidated Statement of Operations - For the Years Ended
December 31, 1996, 1997 and 1998.......................................... F-3
Consolidated Statement of Cash Flows - For the Years Ended
December 31, 1996, 1997, and 1998......................................... F-4
Consolidated Statements of Change in Stockholders' Equity -
For the Years Ended December 31, 1996, 1997 and 1998...................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Creative Master International, Inc.:
We have audited the accompanying consolidated balance sheets of Creative Master
International, Inc. (a company incorporated in the State of Delaware, United
States of America; formerly known as Davin Enterprises, Inc.; "the Company") and
Subsidiaries ("the Group") as of December 31, 1997 and 1998, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for the years ended December 31, 1996, 1997 and 1998. The financial
statements as of December 31, 1997 and for the years ended December 31, 1996 and
1997 give retroactive effect to the acquisition of Creative Master Limited as a
reverse acquisition as described in Note 2 to the accompanying financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Master
International, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1996, 1997 and 1998, after giving retroactive effect to the acquisition of
Creative Master Limited as a reverse acquisition as described in Note 2 to the
accompanying financial statements, in conformity with generally accepted
accounting principles in the United States of America.
/s/ ARTHUR ANDERSEN & CO.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
March 25, 1999.
F-1
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1997 AND 1998
--------------------------------
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Note 1 9 9 7 1 9 9 8
---- ------- -------
$'000 $'000
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and bank deposits 20 471 5,055
Accounts receivable, net 5 2,827 4,343
Deposits and prepayments 6 307 681
Inventories, net 7 2,928 3,787
------ ------
Total current assets 6,533 13,866
Machinery, equipment and capital leases, net 8 3,155 5,663
Long-term investment 9 1 1
Deferred expenditures - 221
Goodwill 10 810 716
------ ------
Total assets 10,499 20,467
====== ======
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
- -----------------------------------
Current liabilities:
Short-term bank borrowings 11 1,290 1,062
Capital lease obligations, current portion 12 764 173
Accounts payable 1,908 3,965
Deposits from customers 560 136
Accrued liabilities 13 1,579 2,914
Loans from directors, current portion 21 861 222
Due to parent company 21 9 -
Taxation payable 14 68 133
Dividend payable 323 -
------ ------
Total current liabilities 7,362 8,605
Capital lease obligations, non-current portion 12 266 288
Loans from directors, non-current portion 21 - 444
Deferred taxation 14 57 220
------ ------
Total liabilities 7,685 9,557
------ ------
Minority interests 75 618
------ ------
Stockholders' equity:
Common stock, par value $0.0001:
. Authorized - 60,000,000 shares as of December 31, 1997 and
25,000,000 shares as of December 31, 1998
. Outstanding and fully paid - 3,749,322 shares as of December
31, 1997 and 4,999,322 shares as of December 31, 1998 17 1 1
Preferred stock, par value $0.0001:
. authorized - nil as of December 31, 1997 and 5,000,000
shares as of December 31, 1998
. outstanding - nil as of December 31, 1997 and 1998 17 - -
Additional paid-in capital 1,401 5,898
Retained earnings 1,337 4,393
------ ------
Total stockholders' equity 2,739 10,292
------ ------
Total liabilities, minority interests and stockholders'
equity 10,499 20,467
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Note 1 9 9 6 1 9 9 7 1 9 9 8
---- ------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C> <C>
Net sales 22 14,054 16,211 33,633
Cost of goods sold (9,782) (12,703) (24,490)
------- -------- --------
Gross profit 4,272 3,508 9,143
Selling, general and
administrative expenses (2,552) (1,921) (5,113)
Interest income - 112 39
Interest expense (140) (216) (283)
Other income (expenses), net (567) (137) 318
Gain on dilution of interest in a
subsidiary - - 77
Reorganization expense 15 - (284) -
Amortization of goodwill (44) (62) (94)
------- -------- --------
Income before income taxes and
minority interests 969 1,000 4,087
Provision for income taxes 14 (154) (130) (354)
------- -------- --------
Income before minority interests 815 870 3,733
Minority interests - (82) (677)
------- -------- --------
Net income 16 815 788 3,056
======= ======== ========
Earnings per common share 4.m
- Basic $ 0.23 $ 0.22 $ 0.81
======= ======== ========
- Diluted $ 0.23 $ 0.22 $ 0.81
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net income 815 788 3,056
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation of machinery and equipment 448 469 705
Net (gain) loss on disposals of machinery
and equipment 12 (6) 14
Net loss on disposal of short-term
investment 2 - -
Write-back of receivable from minority
interests (112) - -
Write-down of long-term investment 449 - -
Reorganization expense - 199 -
Gain on dilution of interest in a subsidiary - - (77)
Amortization of goodwill 44 62 94
Minority interests - 82 677
Deferred income taxes 37 58 163
(Increase) Decrease in operating assets-
Accounts receivable, net (766) (1,094) (1,516)
Deposits and prepayments (130) 7 (374)
Inventories, net (980) (1,161) (859)
Increase (Decrease) in operating liabilities-
Accounts payable 598 234 2,057
Deposits from customers - 560 (424)
Accrued liabilities 600 439 1,335
Due to parent company - 9 (9)
Taxation payable 31 50 65
----- ------ ------
Net cash provided by operating
activities 1,048 696 4,907
----- ------ ------
Cash flows from investing activities:
- -------------------------------------
Acquisition of machinery and equipment (804) (24) (2,470)
Proceeds from disposals of machinery and
equipment 8 - -
Proceeds from disposal of short-term
investment 12 - -
Net cash outflow from acquisition of a
subsidiary (29) (1) -
Increase in deferred expenditures - - (221)
Decrease (Increase) in due from a related
company (41) 41 -
----- ------ ------
Net cash (used in) provided by
investing activities (854) 16 (2,691)
----- ------ ------
</TABLE>
(To be continued)
F-4
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
(Continued)
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Cash flows from financing activities:
- -------------------------------------
Increase (Decrease) in bank overdrafts 25 (28) -
New short-term bank loans 564 1,097 2,895
Repayment of short-term bank loans (468) (825) (3,347)
Increase in import trust receipts bank loans 166 77 224
Repayment of capital element of capital
lease obligations (206) (605) (1,326)
(Decrease) Increase in loans from directors 34 (18) (195)
Decrease in due to a related company - (363) -
Dividend paid to minority interests of a
subsidiary - (7) (58)
Finance from minority interests of a
subsidiary - - 1
Dividend paid - - (323)
Proceeds from issuance of common stock - - 6,250
Common stock issuance expenditures - - (1,753)
------ ------ ------
Net cash provided by (used in)
financing activities 115 (672) 2,368
------ ------ ------
Effect of cumulative translation adjustments - (4) -
------ ------ ------
Net increase in cash and bank deposits 309 36 4,584
Cash and bank deposits, as of beginning of
year 126 435 471
------ ------ ------
Cash and bank deposits, as of end of year 435 471 5,055
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Accumulated other
comprehensive
Common stock income -
-------------------- cumulative
Number of Additional Retained translation
shares Amount paid-in capital earnings adjustments
--------- ------ --------------- -------- -----------------
$'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 3,605 1 1,202 57 7
Net income - - - 815 -
Translation adjustments - - - - (3)
----- ----- ------ ----- -----
Balance as of December 31, 1996 3,605 1 1,202 872 4
Effect of the exchange
reorganization 145 - - - -
Reorganization expense
contributed by stockholders
(Note 15) - - 199 - -
Net income - - - 788 -
Dividends - - - (323) -
Translation adjustments - - - - (4)
----- ----- ------ ----- -----
Balance as of December 31, 1997 3,750 1 1,401 1,337 -
Issuance of common stock 1,250 - 6,250 - -
Common stock issuance expenditures - - (1,753) - -
Net income - - - 3,056 -
----- ----- ------ ----- -----
Balance as of December 31, 1998 5,000 1 5,898 4,393 -
===== ===== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Amounts expressed in United States dollars unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- -------------------------------------------
Creative Master International, Inc. ("the Company") is incorporated in the State
of Delaware, United States of America. With effect from March 2, 1998, the
Company changed its name from Davin Enterprises, Inc. to Creative Master
International, Inc., the present one.
During the period from January 1, 1996 (the earliest date covered by these
financial statements) 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.
On December 30, 1997, the Company acquired 100% interest in Creative Master
Limited ("CML"; a company incorporated in Hong Kong) by issuing a total of
3,604,500 shares of common stock of par value $0.0001 each (after the reverse
stock splits and the redenominations of par value as described in Note 17) to
Acma Strategic Holdings Limited ("ASHL"; a company incorporated in Hong Kong),
Mr. Leo Sheck Pui Kwok and Mr. Carl Ka Wing Tong. ASHL is 90% owned by Acma
Ltd., a company incorporated in Singapore and listed on the Singapore Stock
Exchange Limited, and 10% owned by Mr. Carl Ka Wing Tong. CML and its
subsidiaries ("the CML Group") are principally engaged in the manufacturing of
collectible replica racing and classic cars for sale to customers in the United
States of America and Europe. The CML Group maintains its head office in Hong
Kong, where it coordinates sales and marketing, purchasing and administrative
functions. Its production facilities are located in Guangdong Province, the
People's Republic of China ("the PRC").
On December 24, 1998, the Company issued 1,250,000 shares of common stock, par
value $0.0001 each, for a cash consideration of $5 per share through a public
offering and raised net proceeds of approximately $4,497,000.
F-7
<PAGE>
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 represented the consolidated financial statements of
CML Group. The historical stockholders' equity accounts of the Company as of
December 31, 1995 and 1996 represented the 3,604,500 shares of common stock of
par value $0.0001 each (after the effect of the reverse stock splits and the
redenominations of par value as described in Note 17) issued in connection with
the acquisition. The original 145,310 shares of common stock of par value
$0.0001 each (after the effect of the reverse stock splits and the
redenominations of par value as described in Note 17) outstanding prior to the
exchange reorganization have been reflected as an addition in the historical
stockholders' equity account of the Company on December 30, 1997.
3. SUBSIDIARIES
- ------------------
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1998 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 70% Manufacturing of molds
(Note b)
Carison Engineering Limited Hong Kong 70% Manufacturing of molds
(Note c)
Techtime Industries Limited Hong Kong 55% Manufacturing of
collectible replica
products
Dongguan Chuangying Toys The PRC Note a Manufacturing of
Factory Co., Ltd. collectible replica
products
Creative Master Special The British 100% Dormant
Holdings Inc. Virgin Islands
</TABLE>
F-8
<PAGE>
3. SUBSIDIARIES (Cont'd)
- -----------------
Notes -
a. Dongguan Chuangying Toys Factory Co., Ltd. is a contractual joint venture
established in the PRC to be operated for 12 years until October 2006.
Under the joint venture contract dated September 10, 1994 and the
supplemental contract dated April 1, 1996, the 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.
b. Effective from April 15, 1998, Queenex Enterprises Limited changed its name
to Mastercraft Engineering Limited ("MEL"), the present one. Prior to April
14, 1998, MEL was 100% owned by the Group. On April 14, 1998, MEL issued
9,000 shares of common stock of par value $0.129 each (equivalent of HK$1
each) to three parties which are not involved in management of the Company
at par and 11,000 shares of common stock to the Group at par. As a result,
the Group's equity interest in MEL was diluted from 100% to 70%, and the
Group recognized a gain on dilution of approximately $77,000.
c. Effective from May 20, 1998, Carison Limited changed its name to Carison
Engineering Limited, the present one.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
a. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company,
its subsidiaries and its contractual joint venture which is considered as a
de facto subsidiary. All material intra-group balances and transactions
have been eliminated on consolidation.
b. Goodwill
--------
Goodwill, being the excess of cost over the fair value of the Group's share
of net assets of subsidiaries acquired, is amortized on a straight-line
basis over ten years. The amortization recorded during the years ended
December 31, 1996, 1997 and 1998 was approximately $44,000, $62,000 and
$94,000, respectively. Accumulated amortization as of December 31, 1997 and
1998 was approximately $139,000 and $233,000, respectively.
Management reviews and evaluates the recoverability of goodwill
periodically as part of its assessment of the recoverability of the Group's
share of net assets of subsidiaries to which it relates. The determinants
used for this evaluation include management's estimate of the asset's
ability to generate positive income from operations and positive cash flow
in future periods. In the opinion of the management, no material
impairment exists as of December 31, 1998.
F-9
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -----------------------------------------------
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
overheads.
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 off as incurred.
The Group recognizes an impairment loss on machinery and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not
produce sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of the asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair
value of the assets.
f. Long-term investments
---------------------
Investments in common stock held for the long-term are stated at fair
value, with the fair value limited to the net realizable value. Income
from investments is accounted for to the extent of dividends received and
receivable. Management assesses the carrying cost annually, taking into
account of operating results and future prospects of the long-term
investments. The write-downs recorded during the years ended December 31,
1996, 1997 and 1998 were approximately $449,000, nil and nil, respectively.
Accumulated write-down as of December 31, 1997 and 1998 was $684,000.
F-10
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -----------------------------------------------
g. Deferred expenditures
---------------------
Deferred expenditures represent pre-operating costs incurred for new
production facilities and are deferred and amortized on a straight-line
basis over three years. No amortization was recorded for the years ended
December 31, 1996, 1997 and 1998.
h. 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.
i. 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.
j. 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.
k. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standards No. 130,
"SFAS No. 130", which requires the Group to report all changes in equity
during a period, except for those resulting from investment by owners and
distribution to owners, in financial statements for the period in which
they are recognized. The Group has disclosed comprehensive income, which
encompasses net income and currency translation adjustments, in the
consolidated statements of changes in stockholders' equity and Note 17 to
the accompanying financial statements. Prior years financial statements
have been restated to conform to the SFAS No. 130 requirements.
F-11
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -----------------------------------------------
l. 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 from foreign currency transactions included in the
statements of operations for the years ended December 31, 1996, 1997 and
1998 were approximately $104,000, $47,000 and $16,000, respectively.
m. Earnings per common share
-------------------------
Basic earnings per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income for each year
by the weighted average number of shares of common stock outstanding during
the years, 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 17) had been consummated prior to the years presented.
The computation of diluted earning per common share is similar to basic
earnings per common share, except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if all dilutive securities outstanding during the years were
exercised.
The basic and diluted earnings per common share were the same for the years
presented because no dilutive securities were outstanding or exercisable as
of each year end. The numerator in calculating both basic and diluted
earnings per share for each year is the reported net income. The
denominator is based on the following weighted-average number of common
shares:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
<S> <C> <C> <C>
Basic 3,604,500 3,605,294 3,776,719
Diluted 3,604,500 3,605,294 3,776,719
</TABLE>
n. 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.
o. Fair value of financial instruments
-----------------------------------
All financial instruments of the Group are carried at cost, which
approximate their fair value.
F-12
<PAGE>
5. ACCOUNTS RECEIVABLE
- ------------------------
Accounts receivable comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Trade receivables 2,966 4,928
Less: Allowance for doubtful accounts (139) (585)
------- -------
Accounts receivable, net 2,827 4,343
======= =======
</TABLE>
6. DEPOSITS AND PREPAYMENTS
- -----------------------------
Deposits and prepayments comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Deposits for acquisition of moulds 149 219
Rental and utility deposits 69 229
Prepayments 83 224
Others 6 9
------- -------
307 681
======= =======
</TABLE>
7. INVENTORIES
- ----------------
Inventories comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Raw materials 1,358 1,753
Work-in-process 722 1,226
Finished goods 959 1,124
------- -------
3,039 4,103
Less: Allowance for slow-moving and obsolete
inventories (111) (316)
------- -------
Inventories, net 2,928 3,787
======= =======
</TABLE>
F-13
<PAGE>
8. MACHINERY, EQUIPMENT AND CAPITAL LEASES
- --------------------------------------------
Machinery, equipment and capital leases comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Machinery and equipment:
Machinery and tools 769 4,930
Leasehold improvements 1,033 1,415
Furniture and office equipment 455 827
Motor vehicles 21 85
Capital leases:
Machinery and tools 2,412 623
Furniture and office equipment 14 32
------ ------
Cost 4,704 7,912
Less: Accumulated depreciation
Machinery and equipment (1,066) (2,220)
Capital leases (483) (29)
------ ------
Machinery, equipment and capital leases, net 3,155 5,663
====== ======
</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 trading of communication systems. The carrying
cost of the long-term investment represented:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'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>
F-14
<PAGE>
10. GOODWILL
- -------------
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Goodwill 949 949
Less: Accumulated amortization (139) (233)
------- -------
Goodwill, net 810 716
======= =======
</TABLE>
11. SHORT-TERM BANK BORROWINGS
- -------------------------------
Short-term bank borrowings comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Short-term loans 908 456
Import trust receipts loans 382 606
----- -----
1,290 1,062
===== =====
</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% or the United
States prime lending rate plus 2.3%, which ranged from 10.0% to 14.5% per annum
as of December 31, 1998. They were collaterized by the Group's bank deposits of
approximately $457,000 as of December 31, 1998, personal guarantees provided by
Mr. Leo Sheck Pui Kwok and Mr. Carl Ka Wing Tong, mortgage over a real estate
property owned by Mr. Carl Ka Wing Tong, and corporate guarantee provided by
Acma Strategic Holdings Limited (see Note 20). 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
years ended December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Maximum amount Average amount Weighted average Weighted average
outstanding outstanding interest rate at interest rate
during the year during the year the end of year during the year
--------------- --------------- ---------------- ----------------
$'000 $'000
<S> <C> <C> <C> <C>
Year ended December 31, 1998
- ----------------------------
Overdrafts 49 6 - 14.2%
====== ====== ====== ======
Short-term loans 609 433 10.5% 11.6%
====== ====== ====== ======
Import trust receipts loans 1,426 990 10.0% 10.6%
====== ====== ====== ======
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%
====== ====== ====== ======
</TABLE>
F-15
<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>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Payable during the following period
- Within one year 830 221
- Over one year but not exceeding two years 195 215
- Over two years but not exceeding three years 91 105
----- ----
Total minimum lease payments 1,116 541
Less: Amount representing interest (86) (80)
----- ----
Present value of minimum lease payments 1,030 461
Less: Current portion (764) (173)
----- ----
Non-current portion 266 288
===== ====
</TABLE>
13. ACCRUED LIABILITIES
- ------------------------
Accrued liabilities comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Accruals for operating expenses
- Salaries, wages and bonus 575 1,251
- Subcontracting charges 463 471
- Rental expense 41 21
- Others 120 169
Accrual for common stock issuance expenditures - 100
Accruals for purchases of
- loose tools and consumables 269 588
- machinery and tools - 181
Others 111 133
----- -----
1,579 2,914
===== =====
</TABLE>
F-16
<PAGE>
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%.
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 entitled 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 Group's income tax expenses would
have been increased by approximately nil, $8,000 and $55,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Provision for income taxes comprised:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
<S> <C> <C> <C>
Current tax
- Hong Kong profits tax 117 72 191
Deferred tax 37 58 163
------- ------- -------
154 130 354
======= ======= =======
</TABLE>
The reconciliation of the United States federal income tax rate to the effective
income tax rate based on income before income taxes stated in the consolidated
statements of operations is as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
<S> <C> <C> <C>
United States federal income tax rate 35.0% 35.0% 35.0%
Non-taxable income arising from
activities which qualified as offshore (6.5%) (6.0%) (12.1%)
Non-taxable/non-deductible activities (4.8%) (3.6%) (1.2%)
Tax losses not recognized 15.8% 7.7% 6.0%
Effect of different tax rates in foreign
jurisdictions (23.6%) (20.1%) (19.0%)
----- ----- -----
Effective income tax rate 15.9% 13.0% 8.7%
===== ===== =====
</TABLE>
F-17
<PAGE>
14. INCOME TAXES (Cont'd)
- ---------------------------
Components of deferred tax liabilities as of December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Cumulative tax losses (42) (35)
Accumulated differences between taxation allowance and
depreciation expenses of machinery and equipment 99 263
Other timing differences - (8)
------- -------
57 220
======= =======
</TABLE>
15. REORGANIZATION EXPENSE
- ---------------------------
The reorganization expense comprised (i) the valuation of $199,000 of the
229,488 shares of common stock of the Company (after the effect of reverse stock
splits and the redenominations of par value as described in Note 17) transferred
from Mr. Leo Sheck Pui Kwok, Mr. Carl Ka Wing Tong and Acma Strategic Holdings
Limited, three of the Company's stockholders, to a consultant in return for his
services in connection with Company's acquisition of CML as described in Note 1
(note: these 229,488 shares are included in the 3,604,500 shares of common stock
issued in connection with the Company's acquisition of CML as described in Note
1), and (ii) other professional fees for the acquisition of CML.
16. COMPREHENSIVE INCOME
- -------------------------
Comprehensive income and its components, net of tax, comprised:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Net income 815 788 3,056
Other comprehensive income -
Translation adjustments (3) (4) -
----- ----- -----
Comprehensive income 812 784 3,056
===== ===== =====
</TABLE>
F-18
<PAGE>
17. SHARE CAPITAL AND STOCK OPTIONS
- ------------------------------------
a. Common stock
------------
During the period from January 1, 1996 (the earliest date covered by these
financial statements) to May 28, 1996, the Company had authorized share
capital of 250,000,000 shares of common stock, par value $0.0001 each, and
outstanding share capital of 193,745,200 shares of common stock, par value
$0.0001 each. On May 29, 1996, the Company effected a one-for-one hundred
reverse stock split and a redenomination of par value in share capital,
resulting in 1,937,452 shares of common stock, par value $0.0001 each,
outstanding. Also, on May 29, 1996, the authorized share capital of the
Company was decreased from 250,000,000 shares of common stock, par value
$0.0001 each, to 50,000,000 shares of common stock, par value $0.0001 each.
On December 30, 1997, the Company issued 48,060,000 shares of common stock
(after the one-for-one hundred reverse stock split as described above but
before the one-for-ten reverse stock split and the three-for-four reverse
stock split as described below), par value $0.0001 each, to the
stockholders of CML in connection with its acquisition of CML as described
in Note 1. On March 2, 1998, the authorized capital of the Company was
increased to 60,000,000 shares of common stock, par value $0.0001 each. On
March 12, 1998, the Company effected a one-for-ten reverse stock split and
a redenomination of par value in share capital, resulting in 60,000,000
share of common stock, par value $0.0001 each, authorized and 4,999,746
shares of common stock, par value $0.0001 each, outstanding. On December
14, 1998, the Company effected a three-for-four reverse stock split and a
redenomination of par value in share capital, resulting in 3,749,322 shares
of common stock, par value $0.0001 each, outstanding. Also, on December
14, 1998, the authorized share capital of the Company was decreased from
60,000,000 shares of common stock , par value $0.0001 each, to 25,000,000
shares of common stock, par value $0.0001 each, and 5,000,000 shares of
preferred stock, par value $0.0001 each.
On December 24, 1998, the Company issued 1,250,000 shares of common stock,
par value $0.0001 each, for a cash consideration of $5 per share through a
public offering and raised net proceeds of approximately $4,497,000.
The effects of the one-for-one hundred reverse stock split, the one-for-ten
reverse stock split, the three-for-four reverse stock split, and the
redenominations of par value in share capital have been reflected
retroactively in the financial statements and all earnings per common share
computations.
b. Options
-------
The Company has reserved an aggregate of 420,000 shares of common stock,
par value $0.0001 each, for issue under the Company's 1998 stock option
plan, which will expire in September 2008.
F-19
<PAGE>
17. SHARE CAPITAL AND STOCK OPTIONS (Cont'd)
- ------------------------------------
b. Options (Cont'd)
-------
In December 1998, the Company granted stock options under the 1998 stock
option plan to purchase 340,500 shares of common stock, par value $0.0001
each, at an exercise price of $5, which was equal to the public offering
price of its common stock on December 24, 1998. The stock options are
exercisable according to a pre-determined vesting schedule from 1999 to
2006.
The Company has determined that net income and earnings per share would not
be materially affected by the provisions of Statement of Financial
Accounting Standards No. 123 in respect of the accounting and disclosure
requirements using a fair value-based method of accounting for stock based
employee compensation plans.
18. OPERATING LEASE COMMITMENTS
- --------------------------------
The Group has various operating lease agreements for office, factory and staff
quarters premises, which extend through 2008. Rental expenses for the years
ended December 31, 1996, 1997 and 1998 were approximately $509,000, $602,000 and
$703,000, respectively. Future minimum rental payments as of December 31, 1998,
under agreements classified as operating leases with non-cancellable terms, are
as follows:
<TABLE>
<CAPTION>
1998
------
$'000
<S> <C>
Payable during the following period
- Within one year 686
- Over one year but not exceeding two years 599
- Over two years but not exceeding three years 606
- Over three years but not exceeding four years 549
- Over four years but not exceeding five years 522
- Thereafter 1,201
-----
4,163
=====
</TABLE>
F-20
<PAGE>
19. 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 years
ended December 31, 1997 and December 31, 1998 were approximately $50,000 and
$68,000, respectively.
The Group has no other post-retirement or post-employment benefit plans.
20. BANKING FACILITIES
- -----------------------
As of December 31, 1998, the Group had banking facilities of approximately
$2,259,000, for overdrafts, loans and trade financing. Unused facilities as of
December 31, 1998 amounted to approximately $1,197,000. These facilities were
secured by:
a. Pledges of the Group's bank deposits of approximately $457,000 as of
December 31, 1998;
b. Personal guarantees provided by Mr. Leo Sheck Pui Kwok and Mr. Carl Ka
Wing Tong;
c. Mortgage over a real estate property owned by Mr. Carl Ka Wing Tong; and
d. Corporate guarantee provided by Acma Strategic Holdings Limited.
F-21
<PAGE>
21. RELATED PARTY TRANSACTIONS
- -------------------------------
a. The Group entered into the following transactions with related companies:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Management fee paid to Acma Strategic
Holdings Limited 88 115 116
Consultancy/Management fees paid to Carl
Tong & Associate Management Consultancy
Limited* - - 61
Rental expenses paid to Wellholding Limited** 59 - -
Purchase of machinery and tools from
Faithera Engineering Limited*** - - 362
======= ======= =======
</TABLE>
* Carl Tong & Associate Management Consultancy Limited is beneficially
owned by Mr. Carl Ka Wing Tong.
** Wellholding Limited is beneficially owned by Mr. Leo Sheck Pui Kwok.
*** Faithera Engineering Limited is beneficially owned by certain minority
stockholders of Mastercraft Engineering Limited.
b. Details of loans from directors as of December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Mr. Leo Sheck Pui Kwok 612 435
Mr. Carl Ka Wing Tong 249 231
------ ------
Total loans from directors 861 666
Less: current portion (861) (222)
------ ------
Non-current portion - 444
====== ======
</TABLE>
The loans from directors are unsecured and non-interest bearing. Prior to
October 1, 1998, the loans from directors had no pre-determined repayment
terms. On October 1, 1998, the directors agreed to convert the outstanding
loan balances to term loans to be repayable by six equal semi-annual
installments commencing March 31, 1999.
F-22
<PAGE>
21. RELATED PARTY TRANSACTIONS (Cont'd)
- -------------------------------
c. Details of amount due to parent company as of December 31, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
$'000 $'000
<S> <C> <C>
Acma Strategic Holdings Limited 9 -
===== =====
</TABLE>
The amount due to parent company was unsecured, non-interest bearing and
without pre-determined repayment terms.
d. As of December 31, 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 a real estate property owned by Mr. Carl Ka Wing Tong;
and corporate guarantee provided by Acma Strategic Holdings Limited.
22. SEGMENTAL ANALYSIS
- -----------------------
The Group is principally engaged in one reportable segment of trading and
manufacturing of collectible replica products and related molds.
a. Net sales
---------
Net sales comprised:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Sales of collectible replica products 12,358 13,438 29,948
Sales of molds 1,667 2,678 3,380
Others 29 95 305
------ ------ ------
14,054 16,211 33,633
====== ====== ======
</TABLE>
Geographical analysis of net sales is as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
United States of America 14,054 16,089 29,085
Europe - 122 4,548
------ ------ ------
14,054 16,211 33,633
====== ====== ======
</TABLE>
F-23
<PAGE>
22. SEGMENTAL ANALYSIS (Cont'd)
- -----------------------
b. Assets
------
Substantially all of the Group's assets are located in Hong Kong and the
PRC.
c. Major customers
---------------
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
MBI Inc. 81.2% 64.2% 36.7%
Mattel Vendor Operations Asia Ltd. - 14.8% 24.1%
Paul's Model Art GmbH - - 8.2%
Action Performance Co. Inc./Brookfield
Collectors Guild 7.7% 4.7% 5.7%
Corgi Classics Limited - - 5.3%
Road Champs Ltd. - 3.6% 5.3%
Tyco Hong Kong Limited 5.1% 5.6% -
====== ====== ======
</TABLE>
d. Major suppliers
---------------
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Manfield Coatings Co., Ltd. 8.1% 9.0% 9.4%
Lee Kee Metal Co. Ltd. 0.7% 6.1% 9.2%
Genesis Off-set Printing Co., Ltd. 5.4% 8.5% 7.8%
Zinamet Co., Ltd. 2.7% 6.9% 3.7%
===== ===== =====
</TABLE>
F-24
<PAGE>
23. 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 stated in the Basic Law of the Hong Kong
SAR of the PRC, the Hong Kong SAR will have full economic autonomy and its
own legislative, legal and judicial systems for fifty years. The Group's
management does not believe that the transfer of sovereignty over Hong Kong
will have an adverse impact on the Group's financial and operating
environment. There can be no assurance, however, that changes in political
or other conditions will not result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The Group's results may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other things.
b. Dependence on strategic relationship
------------------------------------
The Group conducts its manufacturing operations through its contractual
joint venture established between the Company and a PRC party, and several
subcontracting agreements entered into with certain PRC parties. The
deterioration of any or all of these strategic relationships may have an
adverse effect on the operations of the Group.
c. Concentration of credit risk
----------------------------
Concentration of accounts receivable as of December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------- -------
<S> <C> <C>
Five largest accounts receivable 92.1% 80.1%
===== =====
</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.
F-25
<PAGE>
24. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -----------------------------------------------------
a. In March 1996, CML acquired an additional 19% equity interest in Carison
Engineering Limited for cash consideration of approximately $29,000. This
increase in the Group's equity interest in Carison Engineering Limited from
51% to 70%, resulted in goodwill amounting to approximately $139,000.
b. In October 1997, CML acquired a 100% interest in Mastercraft Engineering
Limited for a cash consideration of $1,000. Details of assets acquired and
liabilities assumed were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1997
-----------------
$'000
<S> <C>
Deposits and prepayments 110
Inventories 223
Machinery, equipment and capital leases 361
Bank overdrafts (3)
Short-term bank loans (184)
Accounts payable (162)
Accrued liabilities (161)
Due to a related company (363)
Capital lease obligations (297)
------
Net liabilities assumed as of the date of acquisition (476)
Goodwill 477
------
Consideration satisfied in cash 1
======
Net cash outflow:
Cash paid 1
======
</TABLE>
c. Cash paid for interest and income taxes comprised:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Interest 140 216 283
===== ===== =====
Income taxes 94 75 70
===== ===== =====
</TABLE>
d. Supplemental disclosure of investing activities:
During the years ended December 31, 1996, 1997 and 1998, the Group entered
into capital lease arrangements to purchase machinery and equipment with a
capital value of approximately $394,000, $835,000 and $757,000,
respectively.
F-26
<PAGE>
25. OTHER SUPPLEMENTAL INFORMATION
- -----------------------------------
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- -------
$'000 $'000 $'000
<S> <C> <C> <C>
Depreciation of machinery and equipment
- owned assets 275 122 404
- assets held under capital leases 173 347 301
Provision for/write-off of doubtful
accounts 98 15 553
Provision for slow-moving and obsolete
inventories 11 84 205
Write down of long-term investment 449 - -
Interest expenses for
- bank overdrafts and loans 85 107 152
- capital lease obligations 55 109 131
Operating lease rentals for rented
premises 509 602 703
Repairs and maintenance expenses 251 266 356
Net foreign exchange loss 104 47 16
===== ===== =====
</TABLE>
26. SUBSEQUENT EVENTS
- ----------------------
On February 10, 1999, the Company issued warrants to the representative
underwriter of the Company's public offering for a consideration of $125, to
purchase up to 125,000 shares of common stock of the Company at an exercise
price of $8.25 per share, which is equal to 1.65 times of the public offering
price of its common stock on December 24, 1998. The warrants are exercisable
for a period of four years beginning December 24, 1999.
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CREATIVE MASTER INTERNATIONAL
Date: March 30, 1999 By: /s/ CARL KA WING TONG
-----------------------------------
Carl Ka Wing Tong,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ CARL KA WING TONG Chairman of the Board, March 30, 1999
- --------------------------- President, and Chief Executive
Carl Ka Wing Tong Officer (principal executive
officer)
/s/ JOHN REMPEL Chief Financial Officer March 30, 1999
- --------------------------- (principal financial and
John Rempel accounting officer)
/s/ LEO SHECK PUI KWOK Chief Operating Officer and March 30, 1999
- --------------------------- Director
Leo Sheck Pui Kwok
/s/ CHOU KONG SENG Director March 30, 1999
- ---------------------------
Chou Kong Seng
/s/ CLAYTON K. TRIER Director March 30, 1999
- ---------------------------
Clayton K. Trier
/s/ STEVE GORDON Director March 30, 1999
- ---------------------------
Steve Gordon
</TABLE>
II-1
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit
-------
Number Description
------ -----------
<S> <C>
10.36 1998 Stock Option Plan, as amended.
10.37 Form of Notice of Stock Option Grant and Stock Option Agreement
under the 1998 Stock Option Plan.
10.43 Warrant Agreement between the Company and Cruttenden Roth
Incorporated, including the Representative's Warrant.
10.44 Underwriting Agreement, dated December 22, 1998, among the company
and the underwriters named therein.
27 Financial Data Schedule.
</TABLE>
II-2
<PAGE>
EXHIBIT 10.36
CREATIVE MASTER INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan (the
--------------------
"Plan") are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees,
Directors and Consultants and to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options are granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Creative Master International, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider (defined below) shall not cease to be an Employee in the case of (i)
any leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
2
<PAGE>
(r) "Option Grant" means a written agreement between the Company and
------------
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Grant is subject to the terms and conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(u) "Optionee" means the holder of an outstanding Option granted
--------
under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this Creative Master International, Inc. 1998 Stock
----
Option Plan.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 below.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 560,000 Shares (after giving effect to the 1-for-10
reverse stock split approved in March 1998). The Shares may be authorized but
unissued, or reacquired Common Stock. If an Option expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). However, Shares that have actually been issued under the Plan,
upon exercise of an Option, shall not be returned to the Plan and shall not
become available for future distribution under the Plan.
4. Administration of the Plan.
--------------------------
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
3
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options may from
time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of Option Grants for use under the Plan;
(v) to determine the terms and conditions, of any Option
granted hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or the Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal to
the amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by Optionees to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
4
<PAGE>
(xi) to construe and interpret the terms of the Plan and awards
granted and pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
------------
(a) Nonstatutory Stock Options may be granted to Service Providers.
Incentive Stock Options may be granted only to Employees.
(b) Each Option shall be designated in the Option Grant as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5(b),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option shall confer upon any Optionee any
right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate such relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Grant; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Grant.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
5
<PAGE>
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of(l) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Grant. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
6
<PAGE>
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option Grant)
from the person entitled to exercise the Option, and (ii) full payment for the
Shares with respect to which the Option is exercised. Full payment may consist
of any consideration and method of payment authorized by the Administrator and
permitted by the Option Grant and the Plan. Shares issued upon exercise of an
Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Shares, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such Shares promptly after the Option is exercised. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the Shares are issued, except as provided in Section 11 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Grant (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Grant). In the absence of a specified time in the
Option Grant, the Option shall remain exercisable for three (3) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Grant (of
at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Grant). In the absence of a specified time in
the Option Grant, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If after termination,
the Optionee does not exercise his or her Option within the time specified
7
<PAGE>
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Grant (or at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Grant) by the Optionee's estate
or by a person who acquires the right to exercise the Option by bequest or
inheritance. In the absence of a specified time in the Option Grant, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
8
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation of
such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option, the Optionee shall fully vest in and
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee in writing or electronically that the Option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option immediately
prior to the merger or sale of assets, the consideration (whether stock, cash,
or other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
- --------
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee to whom an Option is
so granted within a reasonable time after the date of such grant.
9
<PAGE>
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
14. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
15. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
16. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
17. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
10
<PAGE>
18. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options outstanding, and, in the case of an individual who
acquires Shares pursuant to the Plan, during the period such individual owns
such Shares, copies of annual financial statements. The Company shall not be
required to provide such statements to key employees whose duties in connection
with the Company assure their access to equivalent information.
10
<PAGE>
AMENDMENT NO. 1
TO THE
1998 STOCK OPTION PLAN
Section 8(ii)(A) is hereby deleted, so that Section 8(ii) now reads in its
entirety as follows:
"(ii) In the case of a Nonstatutory Stock Option granted to any Service
Provider, the per Share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant."
Secretary's Certificate
-----------------------
I, Shing Kam Ming, certify that I am the Corporate Secretary of Creative
Master International, Inc., a Delaware corporation, and that, as such I am
authorized to execute this Certificate on behalf of the Company, and do further
certify that attached hereto as Amendment No. 1 is a true and complete copy of
the amendment to the 1998 Stock Option Plan duly adopted by the Board of
Directors by unanimous written consent dated December 21, 1998, which amendment
has not been amended, modified, or rescinded and remains in full force and
effect.
Dated: March 3, 1999 /s/ Shing Kam Ming
-----------------------
Shing Kam Ming
Secretary
11
<PAGE>
EXHIBIT 10.37
CREATIVE MASTER INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT AND
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the capitalized terms used herein shall
have the meanings ascribed to them in the 1998 Stock Option Plan (the "Plan").
I. NOTICE OF STOCK OPTION GRANT
----------------------------
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Grant, as follows:
Optionee ___________________
Date of Grant ___________________
Exercise Price per Share ___________________
Total Number of Shares Granted ___________________
Type of Option: ___________________
Expiration Date: ___________________
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to
the following vesting schedule:
This Option shall vest and become fully exercisable with respect to
25% of the Shares covered by this Option on the date which is six months after
the date of grant of this Option. Thereafter, this Option will vest and become
fully exercisable with respect to the remaining 75% of the Shares covered by
this Option over a period of 42 months, on a pro rata basis at the end of each
subsequent month.
Termination Period:
------------------
If Optionee ceases to be a Service Provider (other than by reason of
Optionee's death or disability), this Option shall remain exercisable, to the
extent it is vested and exercisable as of the date Optionee ceases to be a
Service Provider, for three months after Optionee ceases
1.
<PAGE>
to be a Service Provider. If Optionee ceases to be a Service Provider by reason
of Optionee's death or disability, this Option shall remain exercisable, to the
extent it is vested and exercisable as of the date Optionee ceases to be a
Service Provider, for one year after Optionee ceases to be a Service Provider.
The Option shall terminate and be canceled with respect to the non-vested
portion thereof on the date Optionee ceases to be a Service Provider. In no
event may this Option be exercised after the Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Administrator of the Company hereby grants to
---------------
the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 13(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Grant, the terms and conditions of the Plan shall prevail. As a material
inducement to the Company for the grant of this Option, the optionee agrees to
enter into the Company's standard form of confidentiality and intellectual
property agreement if such an agreement has not already been executed.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO"). If no designation is made, this Option shall
be presumed to be an NSO.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be and become exercisable
-----------------
during its term in accordance with the Vesting Schedule set out in the Notice of
Grant and the applicable provisions of the Plan and this Option Grant.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
2.
<PAGE>
(c) Tax Withholding. As a condition to exercise of this Option, the
---------------
Company may require Optionee to pay over to the Company all applicable federal,
state and local taxes that the Company is required to withhold with respect to
the exercise of this Option. At the discretion of the Administrator and upon the
request of Optionee, the minimum statutory withholding tax requirements may be
satisfied by the withholding of shares of Common Stock of the Company otherwise
issuable to Optionee upon the exercise of this Option.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be:
-----------------
(a) by cash or check; or
(b) in the sole discretion of the Administrator and upon request of
the Optionee, by either of the following, or a combination thereof:
(1) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
or
(2) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee
for more than six (6) months on the date of surrender, and (ii) have a
Fair Market Value on the date of surrender equal to the aggregate
Exercise Price of the Exercised Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares
3.
<PAGE>
upon such exercise or the method of payment of consideration for such shares
would constitute a violation of any Applicable Law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Grant shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Certain U.S. Tax Consequences. Set forth below is a brief summary as
-----------------------------
of the date of this Option of some of the U.S. federal tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES AS TO ALL OF THE TAX CONSEQUENCES, INCLUDING NON-U.S.
TAX CONSEQUENCES, TO THE OPTIONEE OF SUCH EXERCISE OR DISPOSITION.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular U.S. federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
U.S. federal income tax liability upon the exercise of a Nonstatutory Stock
Option. The Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Shares on the date of exercise over the Exercise Price. If
Optionee is an Employee or a former Employee, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for U.S. federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and for at least two years after the Date of
Grant, any gain realized on disposition of the Shares will also be treated as
long-term capital gain for U.S. federal income tax purposes. If Shares
purchased under an ISO are disposed of within
4.
<PAGE>
one year after exercise or two years after the Date of Grant, any gain realized
on such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of the difference between the Exercise Price and the
lesser of (1) the Fair Market Value of the Shares on the date of exercise, or
(2) the sale price of the Shares. Any additional gain will be taxed as capital
gain, short-term or long-term depending on the period that the ISO Shares were
held.
(d) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Grant constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION GRANT,
THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH
HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT
AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and of the Information
Booklet relating to the Plan, and represents that he or she is familiar with the
terms and provisions thereof, and hereby accepts this Option subject to all of
the terms and provisions thereof. Optionee has reviewed the Plan and this
Option Grant in their entirety, has had an opportunity to obtain the advice of
counsel prior to executing this Option and fully understands all provisions of
the Option. Optionee hereby agrees to accept as binding, conclusive and final
all decisions or interpretations of the Administrator upon any questions arising
under the Plan or this Option Grant. Optionee further agrees to notify the
Company upon any change in the residence address indicated below.
5.
<PAGE>
OPTIONEE: CREATIVE MASTER INTERNATIONAL, INC.
By
- ------------------------------- ----------------------------------
Signature
- ------------------------------- ------------------------------------
Print Name Title
- -------------------------------
- -------------------------------
Residence Address
6.
<PAGE>
EXHIBIT A
1998 STOCK OPTION PLAN
EXERCISE NOTICE
Creative Master International, Inc.
Casey Ind. Bldg., 8th Floor
18 Bedford Rd, Taikoktsui
Kowloon, Hong Kong
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, ,
------------------ ----------------------------
the undersigned ("Optionee") hereby elects to exercise Optionee's option to
purchase shares of the Common Stock (the "Shares") of Creative Master
----------
International, Inc. (the "Company") under and pursuant to the 1998 Stock Option
Plan (the "Plan") and the Stock Option Grant dated
---------------------------
(the "Option Grant").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Grant.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Grant and agrees to abide
by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as otherwise provided in Section 11 of the Plan.
5. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7.
<PAGE>
6. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
7. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
8. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
9. Entire Agreement. The Plan and Option Grant are incorporated herein
----------------
by reference. This Agreement, the Plan, the Option Grant and the Investment
Representation Statement constitute the
8.
<PAGE>
entire agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the Company
and Optionee with respect to the subject matter hereof, and may not be modified
adversely to the Optionee's interest except by means of a writing signed by the
Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: CREATIVE MASTER INTERNATIONAL, INC.
By
- ------------------------------- ----------------------------------
Signature
- ------------------------------- ------------------------------------
Print Name Title
- ------------------------------- ------------------------------------
Date Received
- -------------------------------
Residence Address
9.
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: CREATIVE MASTER INTERNATIONAL, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial condition
and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only
and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933, as
amended (the "Securities Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, a legend prohibiting their transfer without the
consent of the Commissioner of Corporations of the State of California and any
other legend required under applicable state securities laws.
10.
<PAGE>
(c) Optionee is familiar with the provisions of Rule 144 promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly from the issuer
thereof, in a non-public offering subject to the satisfaction of certain
conditions. The Securities may be resold in certain limited circumstances
subject to the provisions of Rule 144, which requires the resale to occur not
less than one year after the later of the date the Securities were sold by the
Company or the date the Securities were sold by an affiliate of the Company,
within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made through a broker in
an unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and,
in the case of an affiliate, (2) the availability of certain public information
about the Company, (3) the amount of Securities being sold during any three
month period not exceeding the limitations specified in Rule 144(e), and (4) the
timely filing of a Form 144, if applicable.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the Securities and Exchange Commission has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
Signature of Optionee:
----------------------------------
Date: , 19
-------------------- --
11.
<PAGE>
EXHIBIT 10.43
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
December 30, 1998 is made and entered into by and between CREATIVE MASTER
INTERNATIONAL, INC., a Delaware corporation (the "Company"), and CRUTTENDEN ROTH
INCORPORATED (the "Warrantholder").
The Company agrees to issue and sell to the Warrantholder, and the
Warrantholder agree to purchase, for the price of $125.00, warrants, as
hereinafter described (the "Warrants") to purchase up to an aggregate of 125,000
shares (the "Shares") of the Company's Common Stock, $.0001 par value (the
"Common Stock"), in connection with a public offering (the "Public Offering") of
1,250,000 shares of Common Stock by the Company pursuant to that certain
underwriting agreement (the "Underwriting Agreement"), dated as of December 22,
1998 between and among the Company, ACMA Investments Pte., Ltd., (the "Selling
Stockholder") and the Warrantholder, as the representative of the underwriters
(the "Underwriters") in the Underwriting Agreement. The purchase and sale of
the Warrants shall occur on the Closing Date, as defined in the Underwriting
Agreement.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. Transferability and Form of Warrants.
1.1 Registration. The Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 Transfer. The Warrants and all rights thereunder shall be
transferable only on the books of the Company maintained for such purpose at its
principal office in Taikoktsui, Kowloon, Hong Kong, or wherever its principal
office may then be located, upon delivery thereof duly endorsed by the
Warrantholder or by its duly authorized attorney or representative, accompanied
by proper evidence of succession, assignment or authority to transfer, and upon
payment of any necessary transfer tax or other governmental charge imposed upon
such transfer. Upon any registration of transfer, the Company shall execute and
deliver new Warrants to the person entitled thereto.
1.3 Limitations on Transfer of the Warrants. Subject to the
provisions of Section 11 hereof, the Warrants shall not be sold, transferred,
assigned or hypothecated by the Warrantholder until December 22, 1999, except
(i) to an officer of the transferring Warrantholder, another Underwriter or
member of the selling group or officer of any of them; (ii) a successor to the
transferring Warrantholder in a merger or consolidation with such transferring
Warrantholder; (iii) a purchaser of all or substantially all of the transferring
Warrantholder's assets; or (iv) any person receiving the Warrants from one or
more of the persons listed in this subsection 1.3 at such person's or persons'
death pursuant to will, trust or the laws of intestate succession. The Warrants
may be combined or divided into a certificate or certificates representing the
right to purchase the same aggregate number of Shares, upon written request to
the Company specifying the names and denominations in which new Warrants are to
be issued. Unless the context indicates otherwise, the terms "Warrantholder" or
"Warrantholders" as used herein shall include any transferee or transferees of
the Warrants pursuant to this subsection 1.3, and the term "Warrants" as used
herein shall include any and all warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.4 Form of Warrants. The text of the Warrants and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President and attested to by its Secretary or an
Assistant Secretary. A Warrant bearing the signature of an individual who was at
any time the proper officer of the
<PAGE>
Company shall bind the Company, notwithstanding that such individual shall have
ceased to hold such office prior to the delivery of such Warrant or did not hold
such office on the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
1.5 Legend on Shares. Each certificate for Shares issued upon
exercise of the Warrants shall bear the following legend, unless, at the time of
exercise, such Shares are subject to a then effective Registration Statement
under the Securities Act of 1933, as amended (the "Act"):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT
BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN
COMPLIANCE WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE
ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act, of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
Section 2. Exchange of Warrant Certificate. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled such Warrantholder to purchase. Any Warrantholder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, with
signatures guaranteed, the certificate evidencing the Warrant to be so
exchanged. Thereupon, the Company shall execute and deliver to the person
entitled thereto a new Warrant certificate as so requested.
Section 3. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, the Warrantholder shall
have the right, at any time during the period commencing at 9:00 a.m.,
California Time, on December 22, 1999 and ending at 5:00 p.m., California Time,
on December 21, 2003 (the "Termination Date"), to purchase from the Company up
to the number of fully paid and nonassessable Shares to which the Warrantholder
may at the time be entitled to purchase pursuant to this Agreement, upon
surrender to the Company, at its principal office, of the certificate evidencing
the Warrants to be exercised, together with the purchase form on the reverse
thereof duly filled in and signed, with signatures guaranteed, and upon payment
to the Company of the Warrant Price (as defined in and determined in accordance
with the provisions of Sections 7 and 8 hereof), for the number of Shares in
respect of which such Warrants are then exercised, but in no event for less than
100 Shares (unless less than an aggregate of 100 Shares are then purchasable
under all outstanding Warrants held by a Warrantholder).
(b) Payment of the aggregate Warrant Price shall be made in cash, by
wire transfer, by certified or official bank check or through the use of
Appreciation Currency (as defined below), or any combination thereof. As soon as
practicable following surrender of the Warrants as described above and payment
of such Warrant Price, the Company shall issue and cause to be delivered to the
Warrantholder and in the name or names of the Warrantholder or, subject to
compliance with the provisions of Section 11(a) hereof, in such name or names as
the Warrantholder may designate, a certificate or certificates for the number of
full Shares so purchased upon the exercise of the Warrant, together with cash in
lieu of any fractional Shares otherwise issuable upon such surrender as provided
in Section 9 hereof. Such certificate or certificates shall be deemed to have
been issued, and any person so designated to be named therein shall be deemed to
have become a holder of record of such securities as of the date of surrender of
the Warrants and payment of the Warrant Price, as aforesaid, notwithstanding
that the certificate or certificates representing such
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securities shall not actually have been delivered or that the stock transfer
books of the Company shall then be closed. The Warrants shall be exercisable, at
the election of the Warrantholder, either in full or from time to time in part
and, in the event that a Warrant is exercised for less than all of the Shares
specified therein at any time prior to the Termination Date, a new certificate
evidencing the remaining portion of the Warrants will be issued by the Company.
(c) As used herein, "Appreciation Currency" shall mean the
consideration given by the surrender of Warrants in exchange for Shares. The
number of Shares to which the holder shall be entitled upon such surrender of
Warrants ("X") shall be determined by applying the following formula: X = N x
(($S - $W)/$S), where "N" is the number of Shares that would be received if the
Warrants surrendered were instead exercised for cash, "$S" is the Current Market
Price (as defined in section 9) per share of Common Stock and "$W" is the
Warrant Price defined in section 7 as adjusted and readjusted as set forth in
Section 8.
Section 4. Payment of Taxes. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of the Warrants or the
securities comprising the Shares; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the securities comprising the Shares.
Section 5. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and a bond of indemnity, if
requested, also satisfactory in form and amount at the applicant's cost.
Applicants for such substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
Section 6. Reservation of Shares. There has been reserved, and the Company
shall at all times keep reserved so long as the Warrants remain outstanding, out
of its authorized Common Stock, such number of shares of Common Stock as shall
be subject to purchase under the Warrants. The Company will supply every
transfer agent for the Common Stock and other securities of the Company issuable
upon the exercise of the Warrants with duly executed stock and other
certificates, as appropriate, for such purpose and will provide or otherwise
make available any cash which may be payable as provided in Section 9 hereof.
Section 7. Warrant Price. The price per Share at which Shares shall be
purchasable upon the exercise of the Warrants (the "Warrant Price") shall be
$8.25 subject to further adjustment pursuant to Section 8 hereof.
Section 8. Adjustment of Number of Shares. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
8.1 Adjustments. The number of Shares purchasable upon the exercise
of the Warrants shall be subject to adjustment as follows: In case the Company
shall (i) pay a dividend in Common Stock or make a distribution in Common Stock,
(ii) subdivide its outstanding Common Stock, (iii) combine its outstanding
Common Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its Common Stock other securities of the Company, the
Warrant Price and the number of Shares purchasable upon exercise of the Warrants
immediately prior thereto shall be proportionately adjusted so that the
Warrantholder shall be entitled to receive the kind and number of Shares or
other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised at the Warrant Price
immediately prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this subsection 8.1 shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
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For the purpose of this subsection 8.1, the term "Common Stock" shall
mean (i) the class of stock designated as the Common Stock of the Company at the
date of this Agreement, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par
value to par value.
8.2 No Adjustment for Dividends. Except as provided in subsection
8.1, no adjustment in respect of any dividends or distributions out of earnings
shall be made during the term of the Warrants or upon the exercise of the
Warrants.
8.3 Certificate of Adjustment. As soon as practicable following each
adjustment to the number of Shares purchasable upon the exercise of the Warrants
as herein provided, the Company shall cause to be mailed to the Warrantholder by
first class mail, postage prepaid, notice of such adjustment and a certificate
of the chief financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
8.4 Preservation of Purchase Rights upon Merger, Consolidation, etc.
In case of any consolidation of the Company with or merger of the Company into
another corporation (other than a merger with a subsidiary in which merger the
Company is the surviving corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in case
of any sale or conveyance to another corporation of the property, assets or
business of the Company as an entirety or substantially as an entirety, the
Company or such successor or purchasing corporation, as the case may be, shall
execute with the Warrantholder an agreement that the Warrantholder shall have
the right thereafter upon payment of the Warrant Price in effect immediately
prior to such action to purchase, upon exercise of the Warrants, the kind and
number of shares and other securities and property which it would have owned or
have been entitled to receive after the happening of such consolidation, merger,
sale or conveyance had the Warrants been exercised immediately prior to such
action. In the event of a merger described in Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase Shares under the Warrants shall terminate on
the date of such merger and thereupon the Warrants shall become null and void,
but only if the controlling corporation shall agree to substitute for the
Warrants its warrant which entitles the holder thereof to purchase upon its
exercise the kind and number of shares and other securities and property which
it would have owned or been entitled to receive had the Warrants been exercised
immediately prior to such merger. Any such agreements referred to in this
subsection 8.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 8
hereof. The provisions of this subsection 8.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
8.5 Par Value of Shares of Common Stock. Before taking any action
which would cause an adjustment effectively reducing the portion of the Warrant
Price allocable to each Share below the then par value per share of the Common
Stock issuable upon exercise of the Warrants, the Company will take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
Common Stock upon exercise of the Warrants.
8.6 Independent Public Accountants. The Company may retain a firm
of independent public accountants of recognized national standing (which may be
any such firm regularly employed by the Company) to make any computation
required under this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section 8.
8.7 Statement on Warrant Certificates. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at any
time in its sole discretion (which shall be conclusive), make any change in the
form
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of Warrant certificate that it may deem appropriate and that does not affect the
substance thereof; and any Warrant certificate thereafter issued, whether upon
registration of transfer of, or in exchange or substitution for, an outstanding
Warrant certificate, may be in the form so changed.
Section 9. Fractional Interests; Current Market Price. The Company shall
not be required to issue fractional Shares on the exercise of the Warrants. If
any fraction of a Share would, except for the provisions of this Section 9, be
issuable on the exercise of the Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the then Current Market Price per
share of Common Stock multiplied by such fraction.
For purposes of this Agreement, the term "Current Market Price" shall mean
(i) if the Common Stock is in the over-the-counter market and not in The Nasdaq
National Market nor on any national securities exchange, the average of the per
share closing bid price on the 30 consecutive trading days immediately preceding
the date in question, as reported by The Nasdaq Small Cap Market (or an
equivalent generally accepted reporting service if quotations are not reported
on The Nasdaq Small Cap Market), or (ii) if the Common Stock is traded in The
Nasdaq National Market or on a national securities exchange, the average for the
30 consecutive trading days immediately preceding the date in question of the
daily per share closing prices in The Nasdaq National Market or on the principal
stock exchange on which it is listed, as the case may be. For purposes of
clause (i) above, if trading in the Common Stock is not reported by The Nasdaq
Small Cap Market, the applicable bid price referred to in said clause shall be
the lowest bid price as reported in The Nasdaq Electronic Bulletin Board or, if
not reported thereon, as reported in the "pink sheets" published by National
Quotation Bureau, Incorporated, and, if such securities are not so reported,
shall be the price of a share of Common Stock determined by the Company's Board
of Directors in good faith. The closing price referred to in clause (ii) above
shall be the last reported sale price or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices, in
either case in The Nasdaq National Market or on the national securities exchange
on which the Common Stock is then listed.
Section 10. No Rights as Stockholder; Notices to Warrantholder. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon the Warrantholder or its transferees any rights as a stockholder of the
Company, including the right to vote, receive dividends, consent or receive
notices as a stockholder in respect of any meeting of stockholders for the
election of directors of the Company or any other matter. If, however, at any
time prior to the expiration of the Warrants and prior to their exercise, any
one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to Section
8.1; or
(b) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger or sale of its property, assets
and business as an entirety or substantially as an entirety) shall be proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 14 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive such notice
or any defect therein shall not affect the validity of any action taken with
respect thereto.
Section 11. Restrictions on Transfer; Registration Rights.
(a) The Warrantholder agrees that prior to making any disposition of
the Warrants or the Shares, including without limitation, to persons or entities
identified in clauses (i) through (iv), inclusive, of Section 1.3 hereof, other
than pursuant to a registration statement or other notification or post-
effective amendment thereto (hereinafter collectively a "Registration
Statement") filed by the Company with, and declared effective, by, the
Securities and
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Exchange Commission (the "Commission"), the Warrantholder shall give written
notice to the Company describing briefly the manner in which any such proposed
disposition is to be made and shall provide such other information as may
reasonably be required by the Company and counsel familiar with securities
matters to conclude that no Registration Statement under the Act is required
with respect to such disposition, and no such disposition shall be made if the
Company has notified the Warrantholder that in the opinion of counsel reasonably
satisfactory to the Company a Registration Statement under the Act is required
with respect to such disposition, and no such Registration Statement has been
filed by the Company with, and if necessary, declared effective, by the
Commission.
(b)(i) Whenever during the four-year period beginning on December 22,
1999 and ending on December 21, 2003, the Company proposes to file with the
Commission a Registration Statement under the Act (other than on Form S-4 or
Form S-8), it shall, at least 30 days prior to each such filing, give written
notice of such proposed filing to the Warrantholder, and each holder of Shares,
at his or her respective address as it appears on the records of the Company,
and shall offer to include and shall include in such filing any proposed
disposition of the Warrants and Shares upon receipt by the Company from such
holder, not less than 15 days prior to the proposed filing date, of a written
request therefor setting forth the number of Shares proposed to be included in
such registration and all other information with respect to such person
reasonably necessary to be included in such Registration Statement. In the event
that the managing underwriter for said offering advises the Company in writing
that the inclusion of such securities in the offering would be detrimental to
the offering, such securities shall nevertheless be included in the Registration
Statement, provided that the Warrantholder and each holder of Warrants and
Shares, desiring to have such securities included in the Registration Statement
agrees in writing, for a period of 90 days following such offering, not to sell
or otherwise dispose of such securities pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of at
least nine months following the expiration of such 90-day period.
(ii) In addition to any Registration Statement pursuant to
subparagraph (i) above, during the four-year period beginning on December 22,
1999 and ending on December 21, 2003 the Company will, as promptly as
practicable (but in any event within 60 days), after written request (the
"Request") by Cruttenden Roth Incorporated, or by a person or persons holding
(or having the right to acquire by virtue of holding the Warrants) at least 50%
of the shares of Common Stock which have been (or may be) issued upon exercise
of the Warrants, prepare and file at its own expense a Registration Statement
with the Commission and appropriate Blue Sky authorities sufficient to permit
the public offering of the Warrants and Shares, and will use its best efforts at
its own expense through its officers, directors, auditors and counsel, in all
matters necessary or advisable, to cause such Registration Statement to become
effective as promptly as practicable and to maintain such effectiveness so as to
permit resale of the Shares covered by the Request until the earlier of the time
that all such Shares have been sold or the expiration of one hundred twenty
(120) days from the effective date of the Registration Statement; provided,
however, that the Company shall only be obligated to file one such Registration
Statement under this Section 11(b)(ii).
(c) All fees, disbursements and out-of-pocket expenses (other than
Warrantholders' and holders' of Shares brokerage fees and commissions and legal
fees of counsel to the Warrantholder and holders of Shares, if any) in
connection with the filing of any Registration Statement under Section 11 (b)
(or obtaining the opinion of counsel and any no-action position of the
Commission with respect to sales under Rule 144) and in complying with
applicable securities and Blue Sky laws shall be borne by the Company. The
Company at its expense will supply any Warrantholder and any holder of Shares
with copies of such Registration Statement and the prospectus included therein
and other related documents any opinions and no-action letters in such
quantities as may be reasonably requested by the Warrantholder or holder of
Shares.
(d) The Company shall not be required by this Section 11 to file such
Registration Statement if, in the opinion of counsel for the Warrantholder and
holders of Shares and the Company (or, should they not agree, in the opinion of
another counsel experienced in securities law matters acceptable to counsel for
such holders and the Company), the proposed public offering or other transfer as
to which such Registration Statement is requested is exempt from applicable
federal and state securities laws and would result in all purchasers or
transferees obtaining securities which are not "restricted securities," as
defined in Rule 144 under the Act. This Section 11 shall terminate and be of
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no further force or effect at the first date as of which all of the Shares then
issuable upon exercise of the Warrants may be sold publicly pursuant to Rule 144
during any single 90-day period.
(e) The provisions of this Section 11 and Section 12 hereof shall
apply to the extent as provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
(f) The Company agrees that until all Shares have been sold under a
Registration Statement or pursuant to Rule 144 under the Act, it will use its
best efforts to keep current in filing all materials required to be filed with
the Commission in order to permit the holders of such securities to sell the
same under Rule 144.
Section 12. Indemnification.
(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 11 hereof, the Company agrees to
indemnify and hold harmless the Warrantholder or any holder of such Shares and
each person, if any, who controls the Warrantholder or any holder of such Shares
within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
reasonable attorneys' fees), to which the Warrantholder or any holder of such
Shares or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such Registration
Statement, or any related preliminary prospectus, final prospectus, or amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided, however, that
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the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Warrantholder or the holder
of such Shares or any person who controls the Warrantholder or any holder of
such Shares within the meaning of the Act specifically for use in the
preparation thereof. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Warrantholder and the holders of the Shares agree that they
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by the Warrantholder or such holder of Shares specifically for
use in the preparation thereof. This indemnity agreement will be in addition to
any liability which the Warrantholder or such holder of Shares may otherwise
have.
(c) Promptly after receipt by an indemnified party under this Section
12 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 12, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 12. In case any such action is brought against any
indemnified
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party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 12 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party shall have employed separate counsel in accordance
with the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 12(a)
or 12(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such proceeding.
Section 13. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) a Warrantholder or any
holder of the Shares or controlling person makes a claim for indemnification
pursuant to Section 12 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of Section 12 hereof provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
Warrantholder or any holder of the Shares or controlling person, then the
Company and any Warrantholder or any such holder of the Shares or controlling
person shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or a Warrantholder or holder of Shares
or controlling person on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and holders of such Shares and such controlling persons
agree that it would not be just and equitable if contribution pursuant to this
Section 13 were determined by pro rata allocation or by any other method which
does not take account of the equitable considerations referred to in this
Section 13. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 13 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
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Section 14. Notices. Any notice pursuant to this Agreement by the Company
or by a Warrantholder or a holder of Shares shall be in writing and shall be
deemed to have been duly given if delivered or mailed by certified mail, return
receipt requested:
(a) If to a Warrantholder or a holder of Shares addressed to
Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California
92612, Attention: Corporate Finance Department.
(b) If to the Company addressed to it at Casey Ind. Bldg, 8th Floor,
18 Bedford Rd., Taikoktsui, Kowloon, Hong Kong, Attention: Carl Ka Wing Tong,
President and Chief Executive Officer.
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
Section 15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholder, or the
holders of Shares shall bind and inure to the benefit of their respective
successors and permitted assigns hereunder.
Section 16. Survival of Representations and Warranties. All statements
contained in any schedule, exhibit, certificate or other instrument delivered by
or on behalf of the parties hereto in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive until the
earlier of December 21, 2003 or all Shares underlying Warrants are sold
initially following exercise thereof.
Section 17. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of said State.
Section 18. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrantholder and the holders of Shares any legal or equitable right, remedy or
claim under this Agreement. This Agreement shall be for the sole and exclusive
benefit of the Company, the Warrantholder and the holders of Shares.
Section 19. Entire Agreement. This Agreement and the exhibits hereto
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements and
understandings, both written and oral, between the parties with to the subject
matter hereof.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed,
all as of the day and year first above written.
CREATIVE MASTER INTERNATIONAL, INC.
By /s/ CARL TONG
---------------------------------------------
Print name: Carl Tong
Title: President and Chief Executive Officer
CRUTTENDEN ROTH INCORPORATED
By /s/ DAVID WALTERS
---------------------------------------------
Print name: David Walters
Title: Executive Vice President
-10-
<PAGE>
Exhibit A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER
EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE AGREEMENT
PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No. 001
REPRESENTATIVE'S WARRANTS
TO PURCHASE 125,000 SHARES OF COMMON STOCK
NO PAR VALUE PER SHARE
VOID AFTER 5:00 P.M.,
CALIFORNIA TIME, ON DECEMBER 21, 2003
CREATIVE MASTER INTERNATIONAL, INC..
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that, for value received, Cruttenden Roth Incorporated, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CREATIVE MASTER INTERNATIONAL, INC.. (the "Company"), at any time
during the period commencing at 9:00 a.m., California Time, December 22, 1999,
and before 5:00 p.m., California Time, on December 21, 2003, at the purchase
price per share of $8.25 (the "Warrant Price"), the number of shares of Common
Stock of the Company set forth above (the "Shares"). The number of shares of
Common Stock of the Company purchasable upon exercise of these Warrants shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at the option of the Warrantholder cash, by wire
transfer, by certified or official bank check or through the use of
"Appreciation Currency" as defined in the Representative's Warrant Agreement, or
any combination thereof.
The Warrants evidenced hereby represent the right to purchase an aggregate
of up to 125,000 Shares and are issued under and in accordance with a
Representative's Warrant Agreement, dated as December 30, 1998 (the
"Representative's Warrant Agreement"), between the Company and Cruttenden Roth
Incorporated are subject to the terms and provisions contained in the
Representative's Warrant Agreement, to all of which the Warrantholder by
acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional securities will be issued upon the exercise
of rights to purchase hereunder, but the Company shall pay the cash value of any
fraction upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject to the
limitations set forth in the Representative's Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a shareholder of the Company.
CREATIVE MASTER INTERNATIONAL, INC..
By /s/ CARL KA WING TONG
-------------------------------------
Carl Ka Wing Tong
President and Chief Executive Officer
Dated: December 30, 1998
ATTEST: [Seal]
Secretary: /s/ PAUL MO
-----------------
<PAGE>
CREATIVE MASTER INTERNATIONAL, INC..
PURCHASE FORM
CREATIVE MASTER INTERNATIONAL, INC..
Casey Ind. Bldg., 8th Floor
18 Bedford Rd., Taikoktsui
Kowloon, Hong Kong
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
__________ shares of Common Stock (the "Shares") provided for therein and
requests that certificates for the Shares be issued in the name of:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant Certificate for the balance of the Shares purchasable under
the within Warrant Certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.
Dated:____________
Name of Warrantholder or Assignee:_________________________________
(Please Print)
Address: ________________________________________________
________________________________________________
Signature: ______________________________________________
Note: The above signature must correspond with the name as written upon the face
of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed: ________________________________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
(Name and Address of Assignee Must Be Printed or Typewritten)
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
the within Warrants, hereby irrevocably constituting and appointing
______________ Attorney to transfer said Warrants on the books of the Company,
with full power of substitution in the premises.
Dated:____________ ______________________________________
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatever.
Signature Guaranteed: _________________________________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE>
EXHIBIT 10.44
CREATIVE MASTER INTERNATIONAL, INC.
UNDERWRITING AGREEMENT
December 22, 1998
Cruttenden Roth Incorporated
As Representative of the
Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92612
Ladies and Gentlemen:
Creative Master International, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the Underwriters named in Section 2(a)
hereof (the "Underwriters") an aggregate of 1,250,000 shares (the "Firm Shares")
of its authorized but unissued Common Stock, par value $0.0001 per share (the
"Common Stock"). Acma Investments Pte., Ltd. (the "Selling Stockholder"
proposes to grant to the Underwriters the option to purchase up to 187,500
additional shares of Common Stock (the "Option Shares") for the sole purpose of
covering over-allotments, if any, in connection with the sale of the Firm
Shares. The Firm Shares and any Option Shares purchased pursuant to this
Agreement are referred to in this Agreement as the "Shares." The Company also
proposes to sell to you individually, and not in your capacity as
Representative, five-year warrants (the "Representative's Warrants") to purchase
up to 125,000 shares of Common Stock (the "Representative's Warrant Stock").
The sale of the Representative's Warrants will be consummated in accordance with
the terms and conditions of the form of the Representative's Warrant Agreement
filed as an Exhibit to the Registration Statement. Cruttenden Roth Incorporated
is acting as representative of the several Underwriters, and in that capacity is
referred to in this Agreement as the "Representative."
The Company hereby confirms its agreement with the Underwriters as follows:
1. Representations and Warranties of the Company and the Selling
Stockholder.
(a) The Company and the Selling Stockholder, severally and not jointly,
each represents and warrants to, and agrees with, the Underwriters as follows:
(i) The Company meets the requirements for use of Form SB-2 under the
Securities Act of 1933, as amended (the "Securities Act"), and a registration
statement (Registration No. 333-65929) on Form SB-2 relating to the Shares, the
Representative's Warrants and the Representative's Warrant Stock, including such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under and in conformity with
the provisions of the Securities Act, and the rules and regulations (the "Rules
and
<PAGE>
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. If such registration
statement has not become effective upon execution of this Agreement, a further
amendment to such registration statement, including a form of final prospectus,
necessary to permit such registration statement to become effective will
promptly be filed by the Company with the Commission. If such registration
statement has become effective, a final prospectus containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the Rules
and Regulations will promptly be filed by the Company with the Commission in
accordance with Rule 424 of the Rules and Regulations (and in form and substance
reasonably satisfactory to the counsel for the Underwriters). The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the form
in which it became or becomes, as the case may be, effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
Registration Statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of the Registration Statement, shall also mean (from and
after the effectiveness of such amendment) the Registration Statement as so
amended. Any registration statement filed pursuant to Rule 462(b) under the
Rules and Regulations is herein called the "462(b) Registration Statement," and
after such filing the term "Registration Statement" shall include the Rule
462(b) Registration Statement. The term "Prospectus" as used in this Agreement
shall mean the prospectus relating to the Shares included in the Registration
Statement at the time it became effective, except that if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the Prospectus on file with the
Commission at the time the Registration Statement became or becomes, as the case
may be, effective, whether or not the revised prospectus is required to be filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations, the
term "Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use.
(ii) No stop order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus has been issued
and no proceedings for that purpose are pending or threatened or, to the best
knowledge of the Company, contemplated by the Commission; no stop order
suspending the sale of the Shares in any jurisdiction has been issued and no
proceedings for that purpose are pending or, to the best knowledge of the
Company, threatened or are contemplated; and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with.
(iii) The Company and each of its subsidiaries have been duly
incorporated or registered and are validly existing in good standing under the
laws of their respective jurisdiction of organization, have full corporate power
and authority to own or lease their respective properties and conduct business
as described in the Registration Statement and the Prospectus and as they are
currently conducting such business, and are duly qualified as a foreign
organization and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, condition
(financial or otherwise), prospects or results of operations of the Company and
its subsidiaries, taken as a whole). Except as disclosed in the Registration
Statement, the Company and each of its subsidiaries have obtained, are in
possession of, and operating in compliance with, all authorizations, licenses,
2
<PAGE>
certificates, consents, orders and permits from state, federal and other
regulatory authorities (including foreign governments) that are material to the
conduct of their respective business, all of which are valid and in full force
and effect. The Company owns the percentage of the outstanding capital stock of
each of its subsidiaries as set forth in Note 3 of the Notes to the Consolidated
Financial Statements included in the Registration Statement. The Company holds
such outstanding capital stock of each of its subsidiaries free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest of any
type, kind or nature. All issued and outstanding shares of capital stock or
other equity interest of each such subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and were not
issued in violation of or subject to any preemptive right, or other rights to
subscribe for or purchase shares or other equity interest.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any material
loss or interference with the Company's business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any court or
governmental action, order or decree, or any changes in the capital stock or
long-term debt of the Company or any of its subsidiaries, or any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or any material adverse change, or a development known to the Company
that might cause or result in a material adverse change, in or affecting the
general affairs, management, business, properties, condition (financial or
otherwise), prospects or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not described in the Registration Statement and
the Prospectus.
(v) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus, at the
time of filing thereof, conformed in all material respects to the requirement of
the Securities Act and the Rules and Regulations; when the Registration
Statement became or becomes, as the case may be, effective (the "Effective
Date"), when any 462(b) Registration Statement became or becomes effective, and
when the Prospectus is first filed (if required) in accordance with Rule 424(b),
and at all times subsequent thereto up to and at the "Closing Date" (as
hereinafter defined) and through any later date on which Option Shares are to be
purchased, as the case may be, the Registration Statement, the Rule 462(b)
Registration Statement and the Prospectus, and any amendments or supplements
thereto, will in all material respects conform to the requirements of the
Securities Act and the Rules and Regulations, and the Securities Exchange Act of
1934, as amended, (the "Exchange Act"), and the rules and regulations of the
Commission thereunder; on the Effective Date, the Registration Statement, and
any 462(b) Registration Statement, on the date it became or becomes effective,
did not or will not contain any untrue statement of a material fact and did not
or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and neither
the Registration Statement, any 462(b) Registration Statement, nor the
Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this Section 1(a)(v) shall apply to statements
in, or omissions from,
3
<PAGE>
the Registration Statement, and any 462(b) Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished to
the Company by or on behalf of the Underwriters specifically for use in the
Registration Statement or the Prospectus. There is no agreement, contract,
license, lease or other document required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed as required. The contracts so
described in the Prospectus are in full force and effect on the date hereof, and
neither the Company nor any of its subsidiaries, nor to the best knowledge of
the Company, any other party, is in material breach of or default under any such
contracts.
(vi) All of the outstanding shares of capital stock of the Company
(including the shares to be sold by the Selling Stockholder hereunder) have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all applicable securities laws (including any
applicable United States and state securities laws), were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company). The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted or
exercised thereunder, set forth in the Prospectus accurately and fairly present
the information shown therein with respect to such plans, arrangements, options
and rights. The Common Stock to be sold by the Company hereunder has been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable. Other than this Agreement, the Representative's
Warrants and the options and warrants to purchase the Common Stock described in
the Prospectus, there are no options, warrants or other rights outstanding to
subscribe for or purchase any shares of the Company's capital stock. There are
no preemptive rights or any restrictions upon the voting or transfer of any of
the Shares pursuant to the Company's Certificate of Incorporation or any other
governing document or agreement to which the Company or any of its subsidiaries
is a party or by which any of them may be bound. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any of the Shares or any
other capital stock of the Company.
(vii) The Company has full corporate right, power and authority to
enter into and perform its obligations under this Agreement and the
Representative's Warrant Agreement, and to issue, sell and deliver the Firm
Shares. This Agreement and the Representative's Warrant Agreement have each
been duly authorized, executed and delivered by the Company and constitute the
valid and binding agreements of the Company and each is enforceable against the
Company in accordance with their respective terms; except insofar as the
indemnification and contribution provisions hereunder may be limited by
applicable law, and except as the enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws or
judicial decisions relating to or affecting creditors' right generally or by
general equitable principles.
4
<PAGE>
(viii) Neither the Company nor any of its subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
Representative's Warrant Agreement, or the consummation of the transactions
contemplated by such agreements result in a violation of the Certificate of
Incorporation or other charter or governing documents of the Company or any of
its subsidiaries, or constitute a material default (with the giving of notice,
passage of time or otherwise) under any material obligation, agreement, covenant
or condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or any of
their properties may be bound or affected, nor will the performance by the
Company of its obligations under this Agreement or the Representative's Warrant
Agreement violate any law, rule, administrative regulation or decree of any
court or any governmental agency or body having jurisdiction over the Company,
its subsidiaries or any of their respective properties, or result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
material property or asset of the Company or any of its subsidiaries. Except
for permits and similar authorizations required under the Securities Act, the
Exchange Act or state securities or "Blue Sky" laws, and for such permits and
authorizations that have been obtained, no consent, approval, authorization or
order of any court, governmental agency or body or financial institution is
required in connection with the consummation of the transactions contemplated by
this Agreement or the Representative's Warrant Agreement.
(ix) The Company and each of its subsidiaries owns, or has valid
rights to use, all items of real and personal property which are material to the
business of the Company and its subsidiaries taken as a whole, free and clear of
all liens, encumbrances and claims that might materially interfere with the
business, properties, condition (financial or otherwise) or prospects of the
Company and its subsidiaries, taken as a whole.
(x) Except as described in the Prospectus, there is no litigation
or governmental proceeding to which the Company or any of its subsidiaries is a
party, or to which any property of the Company or any of its subsidiaries is
subject, which is pending, or to the best knowledge of the Company, contemplated
against the Company or any of its subsidiaries, that would have any material
adverse effect on, or would result in any material adverse change in the
business, properties, condition (financial or otherwise), prospects or results
of operations of the Company and its subsidiaries, taken as a whole, or that
would prevent consummation of the transactions contemplated by this Agreement or
the Representative's Warrant Agreement or that are required to be disclosed in
the Registration Statement.
(xi) Neither the Company nor any of its subsidiaries is in violation
of any law, order, ordinance, rule, regulation, writ, injunction, judgment or
decree of any court or governmental agency or body to which it or its properties
(whether owned or leased) may be subject, which violation would have a material
adverse effect on the business, properties, condition (financial or otherwise),
prospects or results of operations of the Company and its subsidiaries, taken as
a whole.
(xii) Each of the Company and each of its subsidiaries owns or
possesses adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names and
copyrights described or referred to in the Prospectus as owned by
5
<PAGE>
or used by any of them, or which are necessary for the conduct of their business
as described in the Prospectus; and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
business, properties, condition (financial or otherwise), prospects or results
of operations of the Company and its subsidiaries, taken as a whole.
(xiii) The Company has not taken, and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the rules and regulations of the Commission under the Exchange Act, or
otherwise, the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares. No bid or purchase by
the Company, and, to the best knowledge of the Company, no bid or purchase that
could be attributed to the Company (as a result of bids or purchases by an
"affiliated purchaser" within the meaning of Regulation M under the Exchange
Act) for or of the Common Stock, any securities of the same class or series as
the Common Stock or any securities immediately convertible into or exchangeable
for or that represent any right to acquire the Common Stock, is now pending or
in progress or will have commenced at any time prior to the completion of the
distribution of the Shares.
(xiv) Arthur Andersen & Co., whose report appears in the Registration
Statement and Prospectus, to the Company's knowledge are, and during the periods
covered by their report in the Registration Statement were, independent
accountants as required by the Securities Act and the Rules and Regulations.
The financial statements included in the Registration Statement, any Preliminary
Prospectus or the Prospectus present fairly the consolidated financial
condition, results of operations, cash flow and changes in stockholders' equity
of the Company and its subsidiaries at the dates and for the periods indicated,
and the financial statements included in the Registration Statement present
fairly the information required to be stated therein. Such financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States of America, applied on a consistent basis throughout the
periods presented, except as stated therein. The selected and summary financial
data included in the Registration Statement and the Prospectus present fairly
the information shown therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No financial statements or
schedules are required to be included in the Registration Statement other than
the financial statements and schedules appearing therein.
(xv) The books, records and accounts of the Company and each of its
subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and each of its
subsidiaries. The systems of internal accounting controls maintained by the
Company and each of its subsidiaries are sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
(A) to permit preparation of financial statements in conformity with generally
accepted accounting principles and (B) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
6
<PAGE>
(xvi) The Company has delivered to the Representative the written
agreement of each of its officers and directors and certain beneficial owners of
its Common Stock and/or securities exercisable or exchangeable for, or
convertible into, Common Stock (collectively, "Material Holders") to the effect
that each of the Material Holders will not, for a period of six months following
the Closing Date, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock and/or securities exercisable or
exchangeable for, or convertible into, Common Stock other than intra-family
transfers or transfers to trusts for estate planning purposes, without the prior
written consent of the Representative.
(xvii) No labor disturbance by the employees of the Company or any of
its subsidiaries exists or is imminent, nor is the Company aware of any existing
or imminent labor disturbance by the employees of any principal suppliers,
contract manufacturing organizations, manufacturers, authorized dealers or
distributors, in either case, where such labor disturbance would result in any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or prospects of the Company and its subsidiaries,
considered as a whole. No collective-bargaining agreement exists with any of
the Company's or any of the Company's subsidiaries' employees and, to the best
knowledge of the Company, no such agreement is imminent.
(xviii) Each of the Company and each of its subsidiaries has filed all
United States, state, local, Hong Kong, Peoples' Republic of China and other
foreign tax returns which are respectively required of the Company and each of
its subsidiaries to be filed, or has requested extensions thereof, and has paid
all taxes, including withholding taxes, penalties and interest, assessments,
fees and other charges to the extent that the same have become due and payable.
No material tax assessment or deficiency has been made or proposed against the
Company or any of its subsidiaries nor has the Company or any of its
subsidiaries received any notice of any such proposed assessment or deficiency.
(xix) Except as set forth in the Prospectus and except for
advancements of expenses in the ordinary course of business, none of which is
material, there are no outstanding loans, advances or guaranties of indebtedness
by the Company to or for the benefit of any of its "affiliates," as such term is
defined in the Rules and Regulations, or any of the officers or directors of any
of its subsidiaries, or any of the members of the families of any of them.
(xx) Neither the Company nor any of its subsidiaries has, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law; (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or allowed by all applicable
laws; or (iii) violated nor is it in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended.
(xxi) Neither the Company nor any of its subsidiaries has any
liability, known or unknown, matured or not matured, absolute or contingent,
assessed or unassessed, imposed or based upon any provision of, or has received
notice of any potential liability under, any law, rule or regulation, or the
civil or common law, or any tort, nuisance or absolute liability theory,
applicable to the Company or any of its subsidiaries, or under any code, order,
decree, judgment or injunction applicable to the Company or any of its
subsidiaries relating to public health or safety, worker health
7
<PAGE>
or safety or pollution, damage to or protection of the environment, including,
without limitation, laws relating to damage to natural resources, emissions,
discharges, releases or threatened releases of hazardous materials into the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), or otherwise relating to the
manufacture, processing, use, treatment, storage, generation, disposal,
transport or handling of hazardous materials, in each case that might cause or
result in a material adverse change in the business, properties, condition
(financial or otherwise), prospects or results of operations of the Company and
its subsidiaries, taken as a whole. As used herein, "hazardous material"
includes chemical substances, wastes, pollutants, contaminants, hazardous or
toxic substances, constituents, materials or wastes, whether solid, gaseous or
liquid in nature.
(xxii) The Company has not distributed and will not distribute prior
to the Closing Date or on or prior to any date on which the Option Shares are to
be purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Shares other than the Prospectus,
the Registration Statement and any other material which may be permitted by the
Securities Act and the Rules and Regulations.
(xxiii) The Common Stock has been approved for listing on the National
Market of The Nasdaq Stock Market (the "Nasdaq National Market"), subject to
official notice of issuance.
(xxiv) The Company is familiar with and has discussed with its United
States legal counsel the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules and regulations thereunder, and has in the past conducted,
and intends in the future to conduct, its affairs in such a manner as to ensure
that it will not become an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(xxv) The Representative's Warrants have been duly and validly
authorized, and when issued and delivered will be valid and binding obligations
of the Company in accordance with their terms; except insofar as the
indemnification and contribution provisions hereunder may be limited by
applicable law, and except as the enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws or
judicial decisions relating to or affecting creditors' right generally or by
general equitable principles; the Representative's Warrant Stock has been duly
and validly authorized for issuance upon exercise of the Representative's
Warrants, and when so issued will be validly issued, fully paid and non-
assessable; and no stockholder of the Company has any preemptive rights with
respect to the Representative's Warrants or the Representative's Warrant Stock.
(xxvi) The Company does not know of any facts which may adversely
affect its earnings, prospects or business which have not been fully disclosed
in the Prospectus.
(b) The Selling Stockholder represents and warrants to and agrees with the
several Underwriters that:
(i) The Selling Stockholder has valid and unencumbered title to the
Shares to be sold by the Selling Stockholder hereunder and has full right, power
and authority to enter into and
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<PAGE>
perform this Agreement and to sell, assign, transfer and deliver the Shares to
be sold by the Selling Stockholder hereunder.
(ii) The Selling Stockholder has duly executed and delivered, in the
form heretofore furnished to the Representative, an Irrevocable Custody
Agreement and Power of Attorney (the "Custody Agreement" appointing Carl Tong as
attorney-in-fact (the "Attorney") with Jersey Trust and Transfer Company as
custodian (the "Custodian"); the Custody Agreement constitutes a valid and
binding agreement on the part of the Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; and such Selling Stockholder's Attorney, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred to
in Section 5(m) hereof on behalf of the Selling Stockholder, to determine the
price to be paid by the several Underwriters to the Selling Stockholder as
provided in Section 2 hereof, to authorize the delivery of the Shares to be sold
by the Selling Stockholder under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Shares or a stock
power or powers with respect thereto, to accept payment therefor, and otherwise
to act on behalf of the Selling Stockholder in connection with this Agreement;
(iii) All authorizations, approvals and consents necessary for the
execution and delivery by the Selling Stockholder of the Custody Agreement, the
execution and delivery by or on behalf of the Selling Stockholder of this
Agreement and the sale and delivery of the Shares to be sold by the Selling
Stockholder hereunder, have been obtained and are in full force and effect; and
the Selling Stockholder has full right, power and authority to enter into this
Agreement and the Custody Agreement, and to sell, transfer and deliver the
Shares that may be sold by the Selling Stockholder hereunder.
(iv) Certificates in negotiable form for all Shares which may be sold
by the Selling Stockholder hereunder, together with a stock power or powers duly
endorsed in blank by the Selling Stockholder, have been placed in custody with
the Custodian for the purpose of effecting delivery hereunder.
(v) This Agreement has been duly executed and delivered by or on
behalf of the Selling Stockholder and is a valid and binding agreement of the
Selling Stockholder, enforceable against the Selling Stockholder in accordance
with its terms; except insofar as the indemnification and contribution
provisions hereunder may be limited by applicable law, and except as the
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws or judicial decisions relating to or affecting
creditors' right generally or by general equitable principles.
(vi) Upon the delivery of and payment for such Shares to be sold by
the Selling Stockholder hereunder in good faith and without notice of any
adverse claim within the meaning of Article VIII of the Uniform Commercial Code,
the several Underwriters will acquire valid title to the Shares to be sold by
the Selling Stockholder free and clear of any encumbrances created by or known
to the Selling Stockholder.
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<PAGE>
(vii) The consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not result in a material breach of any of
the terms or provisions of, or constitute a material default under, any material
agreement, indenture or other instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder is, or the certificates for the Shares
to be sold by the Selling Stockholder hereunder are, bound or, to the best of
the knowledge of the Selling Stockholder, any statute, ruling, decree, judgment,
order or regulation of any governmental authority having jurisdiction over the
Selling Stockholder or the property of the Selling Stockholder, or, if the
Selling Stockholder is other than a natural person, result in any violation of
any provisions of the charter, bylaws or other organizational documents of the
Selling Stockholder.
(viii) The Selling Stockholder has not taken, directly or indirectly,
any action designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement and, other than as permitted by the
Act, the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and the
sale of the Shares.
(ix) All information furnished by or on behalf of the Selling
Stockholder relating to the Selling Stockholder, its parent and affiliates, the
Common Stock of the Selling Stockholder, and the Shares that is contained in the
representations and warranties of the Selling Stockholder in the Custody
Agreement or set forth in the Registration Statement and the Prospectus is, and
at the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date, and
on any later date on which Option Shares are to be purchased, was or will be,
true, correct and complete, and does not, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, will not, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make such information not misleading.
(x) The Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, and will advise its Attorney and the Representative prior to the Closing
Date and on any later date on which any Option Shares are to be purchased, if
any statement to be made on behalf of the Selling Stockholder in the certificate
contemplated by Section 5(m) would be inaccurate if made as of the date on which
such Shares are to be purchased.
(xi) The Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares; the Selling Stockholder
does not have, or has waived prior to the date hereof, any registration right or
other similar right to participate in the offering made by the Prospectus, other
than such rights of participation as have been satisfied by the participation of
the Selling Stockholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Stockholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or
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<PAGE>
other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(xii) Except for the Option Shares if the over-allotment is exercised,
the Selling Stockholder will not, for a period of six months following the
Closing Date, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock and/or securities exercisable or
exchangeable for, or convertible into, Common Stock without the prior written
consent of the Representative
2. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions set forth
in this Agreement, the Company agrees to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company at a
purchase price of $4.50 per Firm Share, the number of Firm Shares set forth
opposite such Underwriter's name in Schedule A hereto.
(b) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions set forth
in this Agreement, including the terms set forth below, the Selling Stockholder
grants an option to the Underwriters to purchase from the Selling Stockholder
all or any portion of 187,500 Option Shares at the same price per Share as the
Underwriters shall pay for the Firm Shares. Said option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time on or before the 45/th/ day after
the date of the Prospectus upon written, telecopied or telegraphic notice by the
Representative to the Selling Stockholder setting forth the aggregate number and
class of Option Shares as to which the Underwriters are exercising the option
and the settlement date. The Option Shares shall be purchased severally, and not
jointly, by each Underwriter, if purchased at all, in the same proportion that
the number of Firm Shares to be purchased by such Underwriter bears to the total
number of Firm Shares to be purchased by the Underwriters under Section 2(a),
above, subject to such adjustments as the Representative in its absolute
discretion shall make to eliminate any fractional shares. Delivery of
certificates for the Option Shares, and payment therefor, shall be made as
provided in Section 2(c) and Section 2(d) below.
The certificates in negotiable form for the Option Shares have been placed
in custody (for delivery under this Agreement) under the Custody Agreement. The
Selling Stockholder agrees that the certificates for the Option Shares of the
Selling Stockholder so held in custody are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Stockholder
for such custody, including the Power of Attorney, is to that extent irrevocable
and that the obligations of the Selling Stockholder hereunder shall not be
terminated by the act of the Selling Stockholder or by operation of law, whether
by the death or incapacity of the Selling Stockholder or the occurrence of any
other event, except as specifically provided herein or in the Custody Agreement.
If the Selling Stockholder should die or be incapacitated, or if any other such
event should occur, before the delivery of the certificates for the Option
Shares hereunder, the Option Shares to be sold by the Selling Stockholder shall,
except as specifically provided herein or in the Custody Agreement, be delivered
by the Custodian in accordance with the terms and conditions of this Agreement
as if
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<PAGE>
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
(c) Delivery of certificates for the Firm Shares and the Option Shares
(if the option granted by the Selling Stockholder in Section 2(b) above shall
have been exercised not later than 10:00 a.m., New York time, on the date two
business days preceding the Closing Date), and payment therefor shall be made at
the office of Cruttenden Roth Incorporated,18301 Von Karman, Suite 100, Irvine,
California 92612, at 10:00 a.m., New York time, on the later to occur of (i) the
fourth business day after the date of this Agreement, (ii) the third business
day after the date the Firm Shares are first offered to the public, or (iii) as
provided in Section 8 of this Agreement. The date and hour of delivery and
payment for the Firm Shares are referred to in this Agreement as the "Closing
Date." As used in this Agreement, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and not permitted by law or executive order to be closed.
(d) If any of the options granted by the Selling Stockholder in
Section 2(b) above shall be exercised after 10:00 a.m., New York time, on the
date two business days preceding the Closing Date, delivery of certificates for
the Option Shares, and payment therefor, shall be made at the office of
Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California
92612, at 10:00 a.m., New York time, on the date specified by the Representative
(which date shall not be earlier than four and not later than 10 full business
days after the exercise of said option, nor in any event prior to the Closing
Date, and such time and date is referred to herein as the "Option Closing
Date"). Time shall be of the essence and delivery at the time and place
specified in this subsection (d) is a further condition to your obligations
hereunder.
(e) Payment of the purchase price for the Firm Shares and the Option
Shares by the Underwriters, less any reimbursable expenses provided for in
----
Section 4(a) of this Agreement and the non-accountable expense allowance
provided for in Section 4(b) of this Agreement, shall be made by certified or
official bank check or checks drawn in next-day funds, payable to the order of
the Company with regard to the Firm Shares, and to the Selling Stockholder (or
the Custodian for the account of the Selling Stockholder) with regard to the
Option Shares (and the Company and the Selling Stockholder agree not to deposit
or permit deposit of any such check in the bank on which drawn until the day
following the date of its delivery to the Company or the Custodian, as the case
may be) or by wire transfer to the account of the Company or the Selling
Stockholder pursuant to wire transfer instructions provided by the Company and
such Selling Stockholder. Such payment shall be made upon delivery of
certificates for the Shares to you for the account of the Underwriters.
Certificates for the Shares to be delivered to you shall be registered in such
name or names and shall be in such denominations as the Representative may
request at least two business days before the Closing Date, in the case of Firm
Shares, and at least one business day prior to the Option Closing Date, in the
case of the Option Shares. Such certificates will be made available to the
Representative for inspection, checking and packaging at such office or such
other location as you may reasonably request, not less than one full business
day prior to the Closing Date or, in the case of the Option Shares, by 3:00
p.m., New York time, on the first business day preceding the date of purchase.
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<PAGE>
(f) It is understood that the Underwriters propose to offer the Shares
for sale to the public as soon as the Representative deems it advisable to do so
(the "Public Offering"). The Firm Shares are to be initially offered to the
public at the public offering price set forth in the Prospectus (the "Public
Offering Price"). The Underwriters may from time to time thereafter change the
public offering price and other selling terms.
(g) The statements in the first, third, seventh and last paragraphs
under the caption "Underwriting" in any Preliminary Prospectus and in the final
form of Prospectus filed pursuant to Rule 424(b) constitute the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement.
3. Further Agreements of the Company. The Company covenants and agrees
with the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to counsel for the Underwriters) pursuant to Rule 424(b)
within the time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will not file the Prospectus,
any amended Prospectus, any amendment of the Registration Statement or
supplement to the Prospectus or make any filing under Rule 462(b) of the Rules
and Regulations without advising the Representative of, and furnishing the
Underwriters with copies thereof a reasonable time prior to the proposed filing
of, such amendment or supplement and without obtaining the prior consent of the
Representative to such filing. The Company will prepare and file with the
Commission, promptly upon the request of the Representative, any amendment to
the Registration Statement or supplement to the Prospectus that may be necessary
or advisable in connection with the distribution of the Shares by you, and use
its best efforts to cause the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any amendment
thereof shall have become effective, (iii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company will use its best
efforts to prevent the issuance of any such stop order or suspension and, if
issued, to obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
each of you and your counsel a conformed copy of the Registration Statement as
filed and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a conformed
copy of each 462(b) Registration Statement and post-effective
13
<PAGE>
amendment, if any, to the Registration Statement (together with, in each case,
all exhibits thereto unless previously furnished to you) and all documents filed
by the Company with the Commission under the Exchange Act and deemed to be
incorporated by reference into any Preliminary Prospectus or the Prospectus, and
will also deliver to you, for distribution to the Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (excluding
exhibits) so that one copy of each may be distributed to each Underwriter, (ii)
as promptly as possible deliver to the Underwriters, at such office or offices
as you may designate, as many copies of any Preliminary Prospectus and the
Prospectus as you may reasonably request and (iii) thereafter from time to time
during the period in which a prospectus is required by law to be delivered by an
Underwriter or a dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended Prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or a dealer any event shall occur as a
result of which it is necessary to supplement or amend the Prospectus in order
to make the Prospectus not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser of the Shares, or if it shall be
necessary to amend or to supplement the Prospectus to comply with the Securities
Act or the Rules and Regulations, the Company will forthwith prepare and file
with the Commission a supplement to the Prospectus or an amended Prospectus so
that the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances existing
at the time such Prospectus is delivered to such purchaser, not misleading, and
so that it then will otherwise comply with the Securities Act and the Rules and
Regulations. If, after the public offering of the Shares by the Underwriters
and during such period, the Underwriters shall propose to vary the terms of
offering thereof by reason of changes in general market conditions or otherwise,
you will advise the Company in writing of the proposed variation, and, if in the
opinion either of counsel for the Company or of counsel for the Underwriters
such proposed variation requires that the Prospectus be supplemented or amended,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the Shares
may be sold by the Underwriters to use the Prospectus, as from time to time
amended or supplemented, in connection with the sale of the Shares in accordance
with the applicable provisions of the Securities Act and the Rules and
Regulations for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any 462(b) Registration
Statement, post-effective amendment to the Registration Statement and any
supplement to the Prospectus or any amended Prospectus proposed to be filed.
(f) The Company will cooperate with you and your counsel in the
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or a dealer,
in keeping such qualifications in good standing under said securities or Blue
Sky laws; provided, however, that the Company shall not be obligated to file any
general consent
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<PAGE>
to service of process or to qualify to do business as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares.
(g) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to you, and to each Underwriter who
may so request in writing, copies of all periodic and special reports furnished
to stockholders of the Company, of all information, documents and reports filed
with Commission, any securities exchange or the National Association of
Securities Dealers, Inc. and of all press releases and material news items or
articles in respect of the Company, its products or affairs released or prepared
by the Company (other than promotional and marketing materials disseminated
solely to customers and potential customers of the Company in the ordinary
course of business); and any additional information concerning the Company or
its business which you may reasonably request.
(h) As soon as practicable, but not later than the 45th day following
the end of the fiscal quarter first ending after the first anniversary of the
Effective Date, the Company will make generally available to its securities
holders and furnish to the Underwriters an earnings statement or statements in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees that it will cause each of its executive
officers and directors and those other Material Holders designated by the
Representative prior to the date of this Agreement to enter into agreements with
the Representative to the effect that they will not, directly or indirectly,
without your prior written consent, sell, offer, contract to sell, grant any
option to purchase, or otherwise dispose of any shares of Common Stock, or any
securities convertible into, exchangeable for or exercisable for Common Stock,
or any rights to purchase or acquire Common Stock (other than intra-family
transfers or transfers to trusts for estate planning purposes) for a period of
six months after the Closing Date.
(j) The Company will apply the net proceeds from the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus and will file such reports with the Commission with respect to the
sale of the Shares and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
(k) The Company will, prior to the date of this Agreement, and at all
times thereafter, unless such securities are then listed on a national
securities exchange, use its best efforts to cause the Shares and
Representative's Warrant Stock to be included for quotation on the Nasdaq
National Market, and the Company will comply with all registration, filing,
reporting and other requirements of the Exchange Act and the Nasdaq National
Market which may from time to time be applicable to the Company. The Company
further agrees not to delist from the Nasdaq National Market without the
Representative's approval, unless required to do so by the Nasdaq National
Market. As soon as practicable after the Shares become eligible therefor, the
Company will apply for listing in one or more securities manuals (such as
Moody's Over-the-Counter Industrial Manual or Standard & Poor's Corporation
Description Manual).
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(l) The Company will use its best efforts to maintain insurance of the
types and in the amounts which it deems adequate for its business and consistent
with insurance coverage maintained by companies of similar size and engaged in
similar businesses, including, but not limited to, general liability insurance
covering all real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against. The Company will use its best efforts to obtain and maintain a
reasonable amount of Directors and Officers liability insurance from a reputable
insurer, and the level of coverage as well as the identity of the insurer shall
be reasonably acceptable to the Representative.
(m) In accordance with the Representative's Warrants, the Company
agrees, upon its receipt from the Representative of the sum of $125.00 in
payment therefor, to deliver to the Representative on the Closing Date upon
completion of the purchase and sale of the Shares pursuant to Section 2 of this
Agreement, the Representative's Warrants representing the right to purchase up
to 125,000 shares of Common Stock at a price equal to 165% of the offering price
per share of Common Stock to the public as set forth on the cover page of the
Prospectus.
(n) The Company shall use its best efforts to retain in their current
positions the individuals named as executive officers under the caption
"Management" in the Registration Statement for a reasonable period after the
consummation of the Public Offering.
(o) The Company shall, following the Closing Date, amend its Bylaws to
provide that it will use its best efforts to at all times maintain at least two
(2) independent directors (that is directors that are not officers of the
Company, who are neither related to its officers nor represent concentrated or
family holdings of the Company's shares, and who, in the view of the Company's
board of directors, are free of any relationship that would interfere with the
exercise of independent judgement (the "Independent Directors"). The
Independent Directors shall constitute a majority of the Company's audit and
compensation committees.
(p) Except in connection with acquisitions or shares of Common Stock
issuable upon exercise of options or warrants outstanding prior to the Closing
Date and except for the grant of options to its officers and employees under the
Company's 1998 Stock Option Plan at an exercise price equal to the Public
Offering Price per share, during the period of the offering, and for a period of
six months from the Closing Date, the Company will not (i) sell or otherwise
dispose of any securities of the Company (except pursuant to the Company's
employee benefit plans described in the Registration Statement) or (ii) purchase
any shares of capital stock of the Company (except for fractional shares
purchased pursuant to the recently approved 3-for-4 reverse stock split of the
Company's Common Stock), without your prior written consent.
(q) During the period of two (2) years commencing with the date of
this Agreement, the Company's Chief Executive Officer or Chief Financial Officer
will visit the United States investor community twice each year, stopping once
on the West Coast, once on the East Coast, and once in the Midwest on each trip,
as reasonably directed by the Representative.
(r) The Company will instruct its transfer agent to provide you with
copies of the Depository Trust Company stock transfer sheets on a weekly basis
for a period of six months from the Closing Date and on a monthly basis
thereafter for six additional months.
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(s) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Representative's Warrants.
4. Fees and Expenses. The Company agrees with each Underwriter that:
(a) The Company shall pay all costs and expenses incident to the
purchase, sale and delivery of the Shares, including without limitation, all
fees and expenses of filing the Registration Statement with the SEC and the
NASD; all Blue Sky fees and expenses, including legal fees and expenses, if any,
of the Underwriters' counsel (which shall undertake all such Blue Sky matters);
fees and disbursements of counsel and accountants for the Company; printing and
mailing costs, including costs of printing the Registration Statement, any
amendments thereto, all underwriting documents, Blue Sky memoranda and a
reasonable quantity of prospectuses as determined by the Representative; the
Company's road show cost and expenses; and the cost of preparing a total of four
(4) sets of bound volumes of the Public Offering documents for the
Representative and Underwriters' counsel. The Company shall also pay for the
cost of advertising the Public Offering, including the cost of "tombstone" ads
in various financial and news publications or other promotional material as
directed by the Representative and shall pay for all other expenses for
advertising undertaken at the Company's request, including graphic slide costs.
The Underwriters shall pay the fees and disbursements of its counsel, with the
exception of the Blue Sky fees described above, and the Representative's road
show costs and expenses. Any additional expenses incurred as a result of the
sale of the Shares by the Selling Stockholder will be borne by the Company. The
provisions of this Section 4(a) are intended to relieve the Underwriters from
the payment of the expenses and costs which the Selling Stockholder and the
Company, as the case may be, have agreed to pay, but shall not affect any
agreement which the Selling Stockholder and the Company may make, or may have
made, for the sharing of any of such expenses and costs. Such agreements shall
not impair the obligations of the Company and the Selling Stockholder hereunder
to the several Underwriters.
(b) In addition to its obligations under Section 4(a) above, the
Company agrees with the Representative to pay the Representative a non-
accountable expense allowance equal to three percent (3%) of the aggregate
Public Offering Price of the Shares sold by them in the Public Offering. Such
allowance, less $50,000 which was paid to the Representative by the Company as
an advance against non-accountable expenses, shall be paid to the Representative
by the Company, as provided in Section 2(d) of this Agreement. The
Representative agrees to repay to the Company any portion of the $50,000 paid by
the Company for non-accountable expenses that has not been utilized by the
Representative in connection with the Public Offering on an accountable basis.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless you, and you agree to indemnify and hold
harmless, the Company from and against any losses, claims, damages or
liabilities, (which shall, for all purposes of this Agreement, include, but not
be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees), to which the indemnified party may become subject
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is entitled to
a finder's fee in
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connection with the proposed offering by reason of such person's or entity's
influence or prior contact with the indemnifying party.
(d) In addition to its other obligations under Section 7(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in Section 7(a)
hereof, it will pay the Underwriters on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to pay the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to time in
The Wall Street Journal which represents the base rate on corporate loans posted
by a substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(e) In addition to its other obligations under Section 7(b) hereof,
the Selling Stockholder agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 7(b) hereof relating to the Selling Stockholder, it will pay the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Selling
Stockholder's obligation to pay the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Stockholder, together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(f) In addition to its other obligations under Section 7(c) hereof,
the Underwriters agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding described in Section
7(c) hereof, it will reimburse the Company and the Selling Stockholder on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Underwriters' obligation to reimburse
the Company and the Selling Stockholder for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Company and the Selling
Stockholder shall promptly return such payment to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company and the
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Selling Stockholder within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(g) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 4(d), (e) and (f)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD in Los
Angeles County, California. Any such arbitration may be commenced by service of
a written demand for arbitration or a written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 4(d), (e) and (f)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 7(a), 7(b) and 7(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 7(e) hereof.
5. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Shares shall be subject, in the sole
discretion of the Representative, to the accuracy as of the date of execution of
this Agreement, the Closing Date and the date on which the Option Shares are to
be purchased, as the case may be, of the representations and warranties of the
Company and the Selling Stockholder set forth in this Agreement, to the accuracy
of the statements of the Company and its officers made in any certificate
delivered pursuant to the terms of this Agreement, to the performance by the
Company and the Selling Stockholder of all of its obligations to be performed
under this Agreement at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be, and to the following
additional conditions:
(a) The Registration Statement shall have become effective, (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective) and, at the Closing
Date, or, with respect to the Option Shares, the date on which such Option
Shares are to be purchased, no stop order suspending the effectiveness of the
Registration Statement or any qualification or exemption from qualification for
the sale of the Shares in any jurisdiction shall have been issued and no
proceedings for that purpose shall have been instituted or threatened; and any
request for additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Underwriters and their
counsel.
(b) The Underwriters shall have received from Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, counsel for the Underwriters, an
opinion dated the Closing Date, with respect to such matters related to the
Public Offering as the Underwriters may reasonably require, and the Company
shall have furnished counsel for the Underwriters with the legal opinion of its
counsel and all other documents which it may request for the purpose of enabling
it to pass upon such matters.
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(c) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Troy & Gould Professional Corporation, United States counsel for the
Company, addressed to the Underwriters and dated the Closing Date or such later
date, to the effect set forth in Annex A to this Agreement.
(d) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of Angela Wang & Co., Hong Kong counsel for the Company, addressed to
the Underwriters and dated the Closing Date or such later date, to the effect
set forth in Annex B to this Agreement.
(e) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased, as the case may be, the
opinion of The Fada Law Firm, Peoples' Republic of China counsel for the
Company, addressed to the Underwriters and dated the Closing Date or such later
date, to the effect set forth in Annex C to this Agreement.
(f) In addition, on any Option Closing Date, you shall have received
the opinion of Angela Wang & Co., counsel for the Selling Stockholder, addressed
to the Underwriters and dated the Option Closing Date, covering the matters set
forth in Annex D to this Agreement.
(g) You shall be satisfied that there has not been any material change
in the market for securities in general or in political, financial or economic
conditions from those reasonably foreseeable as to render it impracticable in
your sole judgment to make a public offering of the Shares, or a material
adverse change in market levels for securities in general (or those of companies
in particular) or financial or economic conditions which render it inadvisable
to proceed.
(h) You shall have received on the Closing Date and on any Option
Closing Date on which Option Shares are purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the Chief
Executive Officer and the Chief Financial Officer of the Company, stating that:
(i) the representations and warranties of the Company set forth
in Section 1 of this Agreement are true and correct with the same force and
effect as if expressly made at and as of such date, and the Company has complied
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best of their knowledge, are
threatened under the Securities Act;
(iii) the Common Stock has been duly designated for listing on the
Nasdaq National Market beginning no later than the time Firm Shares are first
offered to the public; and
(iv) (A) they have carefully examined the Registration Statement
in the form in which it originally became effective and the Prospectus and any
supplements or amendments thereto, and that, as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct in all material respects, and the Registration Statement did not omit
20
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to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading, and the Prospectus did not omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstance under which they
were made, not misleading, (B) since the Effective Date, no event has occurred
that should have been set forth in a supplement or amendment to the Prospectus
that has not been set forth in such a supplement or amendment, (C) since the
respective dates as of which information is given in the Registration Statement
in the form in which it originally became effective and the Prospectus contained
therein, there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the business,
properties, condition (financial or otherwise), capitalization, prospects or
results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
and, since such dates, except in the ordinary course of business, neither the
Company nor any of its subsidiaries has entered into any material transaction
not referred to in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, (D) there are not any
pending or known threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed in
the Registration Statement and the Prospectus, and (E) there are not any license
agreements, contracts, leases or other documents that are required to be filed
as exhibits to the Registration Statement that have not been filed as required.
(i) You shall have received on the Closing Date and on any Option
Closing Date later date on which Option Shares are to be purchased, as the case
may be, a letter from Arthur Andersen & Co., addressed to the Company and the
Underwriters, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, confirming that they are independent
certified public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than five (5) business days prior to the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, (i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be, and
(ii) setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes in
the facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from
Arthur Andersen & Co. shall be addressed to or for the use of the Underwriters
in form and substance satisfactory to the Underwriters and shall (i) represent,
to the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth its opinion with respect to its
examination of the balance sheet of the Company as of December 31, 1996 and 1997
and related statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1995, 1996 and 1997, (iii) state that Arthur
Andersen & Co. has performed the procedure set out
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in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information as described in SAS 71 on the financial statements of the
Company for each of the nine-month periods ended September 30, 1997 and 1998,
and (iv) address other matters agreed upon by Arthur Andersen & Co. and you. In
addition, you shall have received from Arthur Andersen & Co. a letter addressed
to the Company and made available to the Underwriters stating that its review of
the Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of its examination of the Company's
financial statements as of December 31, 1997 did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(j) The Common Stock has been duly designated for listing on the
Nasdaq National Market effective no later than the time Firm Shares were first
offered to the public.
(k) On or prior to the Closing Date, you shall have received from the
Company's officers and directors and all Material Holders executed lock-up
agreements covering the matters described in Section (1)(xvi) of this Agreement.
(l) On the Closing Date, the Company shall have issued the
Representative's Warrant Agreement and Representative's Warrants, substantially
in the form filed as Exhibit 4.2 to the Registration Statement; and on the
Closing Date, concurrently with the purchase and sale of the Shares, the Company
shall have issued, sold and delivered the Representative's Warrants to the
Representative.
(m) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Selling Stockholder or the
Attorney to the effect that, as of the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by the Selling
Stockholder herein are not true or correct in any material respect on the
Closing Date or on any later date on which Option Shares are to be purchased, as
the case may be; or
(ii) The Selling Stockholder has not complied with any obligation
or satisfied any condition which is required to be performed or satisfied on the
part of the Selling Stockholder at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may be.
(n) The Company and the Selling Stockholder shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, or officers of the Selling
Stockholder (when the Selling Stockholder is not a natural person)), as to the
accuracy of the representations and warranties of the Company and the Selling
Stockholder set forth in this Agreement, as to the performance by the Company
and the Selling Stockholder of its obligations under this Agreement and as to
the other conditions concurrent and precedent to the obligations of the
Underwriters under this Agreement.
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All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, counsel for the Underwriters. The
Company and the Selling Stockholder will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
If any of the conditions specified in this Section 5 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Underwriters and its counsel, this Agreement and all
obligations of the Underwriters hereunder may be canceled by the Underwriters
at, or at any time prior to, the Closing Date or (with respect to the Option
Shares) prior to the Option Closing Date upon which the Option Shares are to be
purchased, as the case may be. Notice of such cancellation shall be given to
the Company in writing or by telephone, telecopy or telegraph confirmed in
writing. Any such termination shall be without liability of the Company or the
Selling Stockholder to the Underwriters (except as provided in Section 4 or
Section 7 of this Agreement) and without liability of the Underwriters to the
Company or the Selling Stockholder (except to the extent provided in Section 7
of this Agreement).
6. Conditions of the Obligation of the Company. The obligations of the
Company and the Selling Stockholder to sell and deliver the Shares required to
be delivered as and when specified in this Agreement shall be subject to the
condition that at the Closing Date or (with respect to the Option Shares) the
date upon which the Option Shares are to be purchased, no stop order suspending
the effectiveness thereof shall be in effect and no proceedings therefor shall
be pending or threatened by the Commission.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriters
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of the Company herein contained,
(ii) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action, or (iv) any untrue statement
or alleged untrue statement of a material fact contained in any application or
other document, or any amendment or supplement thereto, executed by the Company
or based upon
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written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or Blue Sky
laws thereof or filed with the Commission or any securities association or
securities exchange, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, such
Preliminary Prospectus or the Prospectus, or any such amendment or supplement
thereto, in reliance upon, and in conformity with, written information relating
to any Underwriter furnished to the Company by such Underwriter, directly or
through you, specifically for use in the preparation thereof and, provided
further, that the indemnity agreement provided in this Section 7(a) with respect
to any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of material
fact or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 3(c) hereof. The indemnity agreements of the Company contained in
this Section 7(a) and the representations and warranties of the Company
contained in Section 1 of this Agreement shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
The indemnity agreement in this Section 7(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any of the Underwriters within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Company may otherwise have.
(b) The Selling Stockholder agrees to indemnify and hold harmless the
Underwriters against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any breach of any representation, warranty, agreement or covenant of the Selling
Stockholder herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 7(b) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company or such Underwriter, directly or through you, by the Selling
Stockholder specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal
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or other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided further,
that the indemnity agreement provided in this Section 7(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been sent or
given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 3(c) hereof. The indemnity agreement of the Selling Stockholder
contained in this Section 7(b) and the representations and warranties of the
Selling Stockholder contained in Section 1 of this Agreement shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Shares.
The indemnity agreement in this Section 7(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any of the Underwriters within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Selling Stockholder may otherwise have.
(c) The Underwriters severally agree, each in proportion to the number
of Firm Shares to be purchased by such Underwriter bears to the total number of
Firm Shares to be purchased pursuant to section 2(a) hereof, to indemnify and
hold harmless the Company and the Selling Stockholder, against any losses,
claims, damages or liabilities, joint or several, to which the Company or the
Selling Stockholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of such Underwriter herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 7(c) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof, and agrees to reimburse the Company and the Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 7(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, the Selling Stockholder, and each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the Act or the
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Exchange Act. This indemnity agreement shall be in addition to any liabilities
which the Underwriters may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 7, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 7. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 7 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 7(a),
7(b) or 7(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 7
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they
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<PAGE>
may be subject (after contribution from others) in such proportion so that the
Underwriters are responsible for the portion represented by the percentage that
the underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholder are responsible for the remaining portion in
proportion to the number of Shares sold by each; provided, however, that (i) the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount and non-accountable expense allowance (less the
Underwriters' actual out-of-pocket expenses on an accountable basis, including
legal fees and expenses) applicable to the Shares purchased by such Underwriter
in excess of the amount of damages which such Underwriter has otherwise required
to pay and (ii) no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. The contribution
agreement in this Section 7(e) shall extend upon the same terms and conditions
to, and shall inure to the benefit of, each person, if any, who controls any of
the Underwriters, the Company or the Selling Stockholder within the meaning of
the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 7, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 7, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 7 and further agree not to attempt to
assert any such defense.
8. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters, but nothing herein shall relieve a defaulting underwriter from
liability for its default.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase but nothing herein shall relieve a defaulting underwriter from
liability for its default. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within
27
<PAGE>
twenty-four (24) hours (including non-business hours) another underwriter or
underwriters (which may include any nondefaulting Underwriter) satisfactory to
the Company. If no such underwriter or underwriters shall have been substituted
as aforesaid by such postponed Closing Date, the Closing Date may, at the option
of the Company, be postponed for a further twenty-four (24) hours, if necessary,
to allow the Company the privilege of finding another underwriter or
underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 8, (i) the Company shall have the right
to postpone the time of delivery for a period of not more than seven (7) full
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (ii) the respective number of Firm Shares to be purchased by
the remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 8, neither the Company nor the Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 4
and 7 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholder and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or the Selling Stockholder (except to the
extent provided in Sections 4 and 7 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 8.
9. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as you shall release the Shares to the
public. If you shall not have released the Shares prior to 5:00 p.m., New York
time, on the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without liability on
the part of the Underwriters to the Company or the Selling Stockholder, except
as set forth in Section 4 and Section 7 of this Agreement. By giving notice as
set forth in Section 10 of this Agreement before the time this Agreement becomes
effective, you, as Representative, may prevent this Agreement from becoming
effective without liability of any party to the other parties, except that the
Company and the Selling Stockholder shall remain obligated to pay costs and
expenses to the extent provided in Section 4 and Section 7 of this Agreement. If
the Registration Statement has been declared effective prior to the
28
<PAGE>
date of this Agreement, this Agreement shall become effective upon execution and
delivery by you, the Company and the Selling Stockholder (which may be by power-
of-attorney).
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company and the Selling Stockholder
(which may be through power-of-attorney) at any time on or prior to the Closing
Date or, with respect to the purchase of the Option Shares, on or prior to any
later date on which the Option Shares are to be purchased, as the case may be,
if prior to such time any of the following has occurred or, in your opinion, is
likely to occur: (i) after the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change or
development involving a prospective adverse change in or affecting particularly
the condition (financial or otherwise) of the Company and its subsidiaries
considered as a whole or the earnings, prospects or business affairs of the
Company and its subsidiaries considered as a whole, whether or not arising in
the ordinary course of business, which would materially impair the investment
quality of the offered securities; or (ii) if there shall have been the
engagement in major hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, or any outbreak of major hostilities or
other national or international calamity or crisis or material adverse change in
economic or political conditions, if the effect of such outbreak, calamity,
crisis or material adverse change in economic or political conditions on the
financial markets of the United States would, in your sole judgment, make the
offering or delivery of the Shares impracticable, or (iii) if there shall have
been suspension of trading in securities generally or a material adverse decline
in value of securities generally on the New York Stock Exchange, the American
Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, or (iv) if there shall have been the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of, or commencement of any proceeding or investigation
by, or change in material substantive policy by, any court, legislative body,
agency or other foreign or domestic governmental authority which in your sole
judgment materially and adversely affects or will materially adversely affect
the business, operations or prospects of the Company and its subsidiaries
considered as a whole, or (v) if there shall have been the declaration of a
banking moratorium by United States, New York or California state authorities,
or (vi) if there shall have been the taking of any action by any United States,
state or local government or agency in respect of its monetary or fiscal affairs
which in your reasonable judgment has a material adverse effect on the
securities markets in the United States or (vii) existing international monetary
conditions shall have undergone a material change which, in your sole judgment,
makes the offering or delivery of the Shares impracticable. If this Agreement
shall be terminated pursuant to this Section 9, there shall be no liability of
the Company or the Selling Stockholder to the Underwriters and no liability of
the Underwriters to the Company or the Selling Stockholder (except to the extent
provided in Section 4 or Section 7 of this Agreement); provided, however, that
in the event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses of the Company incident to
the performance of the obligations of the Company under this Agreement,
including all costs, expenses and advances referred to in Section 4 of this
Agreement.
10. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by either telecopier or telegraph and, if to
the Underwriters, shall be mailed, telecopied or telegraphed or delivered to
Cruttenden Roth Incorporated ,18301 Von Karman, Suite
29
<PAGE>
100, Irvine, California 92612 (telecopier: (949) 852-9603) Attention: Managing
Director Corporate Finance; and if to the Company or the Selling Stockholder,
shall be mailed, telecopied, telegraphed or delivered to Casey Ind. Bldg., 8/th/
Floor, 18 Bedford Road, Taikoksui, Kowloon, Hong Kong (telecopier: (852) 2789-
1737). All notices given by telecopy or telegraph shall be promptly confirmed
by letter.
11. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company, the Selling Stockholder and the Underwriters and,
with respect to the provisions of Section 4 and Section 7 of this Agreement, the
several parties (in addition to the Company, the Selling Stockholder and the
Underwriters) indemnified under the provisions of said Section 4 and Section 7,
and their respective personal representatives, successors and assigns. Nothing
in this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Shares from the Underwriters.
12. Miscellaneous. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company,
the Selling Stockholder or their respective directors, officers or controlling
persons thereof, and (c) delivery and payment for the Shares under this
Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but all of which together shall constitute one and
the same instrument.
13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE, AND TO BE PERFORMED, SOLELY WITHIN THAT STATE.
14. Submission to Jurisdiction and Waiver of Immunity and Inconvenient
Forum. Subject to the arbitration provisions of 4(g), the Company and the
Selling Stockholder agree that any and all disputes arising in connection with
this Underwriting Agreement and the transactions contemplated by this
Underwriting Agreement, including the offer and sale of the Firm Shares and the
Option Shares, may be brought in any state or federal court of record located in
the County of Los Angeles, State of California. By its signature to this
Agreement, the Company and the Selling Stockholder irrevocably submit to the
jurisdiction of the state and federal courts located in the County of Los
Angeles, State of California, in any legal action or proceeding relating to this
Underwriting Agreement and the transactions contemplated by this Underwriting
Agreement, including the offer and sale of the Firm Shares and the Option
Shares.
The Company and the Selling Stockholder irrevocably waive all immunity from
jurisdiction, attachment and execution, whether on the basis of sovereignty or
otherwise, to which each of them respectively might otherwise be entitled in any
legal action or proceeding in any state or federal
30
<PAGE>
court located in the County of Los Angeles, State of California. The Company
and the Selling Stockholder irrevocably waive, to the fullest extent permitted
by law, any objection which it may now or hereafter have to any suit, action or
proceeding relating to this Underwriting Agreement and the transactions
contemplated by this Underwriting Agreement, including the offer and the sale of
the Firm Shares and the Option Shares, being brought in the federal or state
courts located in the County of Los Angeles, State of California, and hereby
further irrevocably waive any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
31
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholder and the Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Stockholder and the
Underwriters.
Very truly yours,
CREATIVE MASTER INTERNATIONAL, INC.
By: /s/ CARL TONG
--------------------------------
Name: Carl Tong
Title: President and Chief Executive Officer
ACMA INVESTMENTS PTE., LTD.
By: /s/ CARL TONG
--------------------------------
Carl Tong
Attorney-in-fact
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CRUTTENDEN ROTH INCORPORATED
By: /s/ DAVID WALTERS
----------------------
Name: David Walters
Title: Executive Vice President
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm
Shares to
be
Underwriters Purchased
- ------------ -----------
<S> <C>
Cruttenden Roth Incorporated.................................... 325,000
Josephthal & Co., Inc. 325,000
-----------
Advest, Inc. 100,000
-----------
W.J. Nolan & Company, Inc. 100,000
-----------
EBI Securities Corporation 100,000
-----------
First Montauk Securities Corp. 100,000
-----------
Scott & Stringfellow, Inc. 100,000
-----------
Oberweis Brokerage, Inc. 100,000
-----------
Total........................................................... -----------
1,250,000
===========
</TABLE>
<PAGE>
Annex A
Matters to be Covered in the Opinion of
Troy & Gould Professional Corporation
United States Counsel for the Company
(1) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Each of
the Company and each of its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions in the United
States, if any, in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure so
to qualify would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(2) The Company has the corporate power to own, lease and operate its
properties and to conduct its business as described in the Prospectus.
(3) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable and to such counsel's knowledge have not been issued in violation
of any preemptive right, co-sale right, right of first refusal or other similar
right.
(4) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights to
registration of such shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have, with respect to the
offering contemplated hereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement, or have included securities in the Registration
Statement pursuant to the exercise of such rights.
(5) The Shares to be issued and sold by the Company will be, upon issuance
and delivery against payment therefor in accordance with the terms of the
Agreement, duly authorized and validly issued and fully paid and nonassessable
and, will not have been issued in violation of any preemptive right,
registration right, co-sale right, right of first refusal or other similar right
set forth in the Certificate of Incorporation or Bylaws of the Company, or any
other contract agreement or document of which such counsel has knowledge.
(6) The Company has corporate power and authority to enter into the
Agreement and the Representative's Warrant Agreement and to issue, sell and
deliver the Shares to the Underwriters.
(7) The Agreement and the Representative's Warrant Agreement each has been
duly authorized by all necessary corporate action on the part of the Company and
each has been duly executed and delivered by the Company and, assuming due
authorization, execution and delivery
A-1
<PAGE>
by the Representative, are the valid and binding agreements of the Company,
except insofar as the indemnification and contribution provisions of such
agreements may be limited by public policy concerns, and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or judicial decisions relating to or affecting
creditors' rights generally or by general equitable principles.
(8) The performance of the Agreement and the Representative's Warrant
Agreement and the consummation of the transactions contemplated thereby will
not result in the breach or violation of any of the terms and provisions of the
Company's Certificate of Incorporation or Bylaws, or to the best of such
counsel's knowledge, result in the breach or violation of any of the terms and
provisions of, or constitute a default under, any material indenture, mortgage,
deed of trust, loan agreement, bond, debenture, note agreement or other evidence
of indebtedness, or any lease, license, contract or other agreement or
instrument known to such counsel to which the Company is a party or by which any
of its properties are bound, or to the best of such counsel's knowledge, (other
than performance of the Company's indemnification and contribution obligations
under such agreements, concerning which no opinion need be expressed) any
applicable statute, rule or regulation or, to the best of such counsel's
knowledge, any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company or over any of its properties or
operations; provided, however, that no opinion need be rendered concerning state
securities or Blue Sky laws.
(9) No authorization, approval or consent of any governmental authority or
agency of the United States of America is necessary in connection with the
consummation of the transactions contemplated by the Agreement and the
Representative's Warrant Agreement, except such as have been obtained under the
Securities Act or such as may be required under the rules and regulations of the
National Association of Securities Dealers, Inc., or under state securities or
Blue Sky laws in connection with the purchase and the distribution of the Shares
by the Underwriters.
(10) To the best knowledge of such counsel, neither the Company nor any of
its subsidiaries is presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of their properties are bound which is material to the financial
condition, earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise;
(11) The Representative's Warrant Stock has been duly and validly
authorized for issuance upon exercise of the Representative's Warrants and when
so issued in accordance with the terms thereof will be validly issued, fully
paid and non-assessable; and, to such counsel's knowledge no stockholder has any
preemptive rights with respect to the Representative's Warrant Stock.
(12) All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusion under the laws of the United States of
America or the State of Delaware, has been reviewed by us and is a fair summary
of such matters and conclusions.
A-2
<PAGE>
(13) The form of certificate evidencing the Common Stock complies with
Delaware law.
(14) The Registration Statement has become effective under the Securities
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for that purpose have been instituted or are
pending or, to the best knowledge of such counsel, threatened under the
Securities Act.
(15) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be described
or referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that are not described or referred to
therein and filed as required.
(16) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements, financial and
statistical data included therein, as to which such counsel need express no
opinion) as of the effective date of the Registration Statement, complied as to
form in all material respects with the requirements of the Securities Act and
the applicable Rules and Regulations.
(17) To the best knowledge of such counsel, the Common Stock conforms in
all material respects to all statements in relation thereto contained in the
Prospectus.
(18) The description in the Registration Statement and the Prospectus of
the Certificate of Incorporation and Bylaws of the Company and of statutes and
contracts are accurate in all material respects and fairly present in all
material respects the information required to be presented by the Securities Act
and the Rules and Regulations.
(19) There are no legal or governmental proceedings pending or, to the best
knowledge of such counsel, threatened against the Company or any of its
subsidiaries in any jurisdiction in the United States of a character which are
required to be disclosed in the Registration Statement or the Prospectus by the
Securities Act or the applicable Rules and Regulations, other than those
described therein.
(20) The information in the Prospectus under the captions "Description of
Capital Stock" and "Shares Eligible For Future Sale," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by such
counsel and is a fair summary of such matters and conclusions.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Underwriters, Underwriters' counsel and the independent public accountants of
the Company, at which conferences the contents of the Registration Statement and
the Prospectus and related matters were discussed, and although they have not
(with the exception of the matters covered in paragraphs (12), (13) and (20) of
their opinion) independently checked or verified the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, the
Registration Statement (except as to financial statements, financial data and
supporting schedules
A-3
<PAGE>
contained therein, as to which such counsel need express no opinion) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or the States of California or Delaware
upon opinions of local counsel, and as to questions of fact upon representations
or certificates of officers of the Company, and of government officials, in
which case their opinion is explicitly to state that they are so relying thereon
and that they have no knowledge of any material misstatement or inaccuracy in
such opinions, representations or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Underwriters, and to Underwriters' Counsel.
A-4
<PAGE>
Annex B
Matters to be Covered in the Opinion of
Angela Wang & Co.
Hong Kong Counsel for the Company
1. Each of Creative Master Limited, Excel Master Limited, Carison
Engineering Limited, Techtime Industries Limited, Mastercraft Engineering
Limited (formerly Queenex Enterprises Limited) (the "Hong Kong subsidiaries")
has been duly registered and is validly existing as a limited liability company
in good standing under the laws of Hong Kong.
2. Each of the Hong Kong subsidiaries has the corporate power and
authority to own, lease and operate its properties and to conduct its business
in the manner currently conducted and as proposed to be conducted respectively
as described in the Prospectus.
3. The description in the Registration Statement and the Prospectus of
each of the Hong Kong subsidiaries and the relationship between the Company and
the Hong Kong subsidiaries is accurate in all material respects, and fairly
presents in all material respects the information set forth therein.
4. The Company owns all of the outstanding capital stock of each Hong
Kong Subsidiary except for Mastercraft Engineering Limited, Carison Engineering
Limited and Techtime Limited of which it owns 70%, 70% and 55%, respectively.
All of the issued and outstanding capital stock of each of the Hong Kong
subsidiaries has been duly and validly authorized and issued, is fully paid and
nonassessable, is not owned or held and has not been issued in violation of any
preemptive rights contained in the charter documents of the respective Hong Kong
Subsidiary and, to such counsel's knowledge, to the extent owned by the Company,
is owned directly by the Company free and clear of any lien, encumbrance, claim,
security interest, restriction or transfer.
5. To such counsel's knowledge, there are no outstanding options,
warrants, calls, rights or other agreements or commitments with respect to the
purchase or sale of any capital stock of any of the Hong Kong subsidiaries.
6. Those contracts which are included as exhibits to the Registration
Statement and which are made or to be performed in, or stated to be governed by
the law of, Hong Kong are valid and enforceable under Hong Kong law.
7. No authorization, approval or consent of any governmental authority or
agency of Hong Kong is necessary in connection with the consummation of the
transactions contemplated by the Agreement and the Representative's Warrant
Agreement.
8. There are no legal or governmental proceedings pending or, to the best
knowledge of such counsel, threatened against the Company or any of the Hong
Kong subsidiaries other than those, if any, described in the Registration
Statement or the Prospectus.
B-1
<PAGE>
9. To the best of such counsel's knowledge, none of the Hong Kong
subsidiaries is presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or other agreement or
instrument to which each such respective company is a party or by which any of
their respective properties are bound which is material to the financial
condition, earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise.
10. All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusions under the laws of Hong Kong has been
reviewed by such counsel and is a fair summary of such matters and conclusions.
11. Under the laws of Hong Kong, the submission to Jurisdiction and Waiver
of Immunity and Inconvenient Forum clause of Section 14 of the Agreement is
valid and binding upon the Company.
In addition, such counsel shall state that although they have not (with the
exception of the matters covered in paragraph 10 of their opinion) independently
checked or verified the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus relating to the
Company and its operations in Hong Kong, nothing has come to the attention of
such counsel that caused them to believe that, at the time the Registration
Statement became effective, the Registration Statement (except as to financial
statements, financial data and supporting schedules contained therein) contained
any untrue statement of a material fact, or omitted to sate a material fact
required to be stated therein or necessary to make such statements not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact to be stated therein or necessary to make such statements, in light of the
circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the companies which are the
subject of said opinion, and of government officials in which case their opinion
is explicitly to state that they are so relying thereon and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificates so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' counsel.
B-2
<PAGE>
Annex C
Matters to be Covered in the Opinion of
The Fada Law Firm
China Counsel for the Company
1. Dongguan Heng Li Zhen Trading Company has been duly organized and is
validly existing in good standing under the laws of China.
2. Dongguan Heng Li Zhen Trading Company has the legal capacity,
necessary power and authority to execute and perform its obligations under the
Joint Enterprise Agreement, dated September 10, 1994, the Supplement, dated
April 1, 1996, to the Joint Enterprise Agreement, and the Processing Agreement
dated June 18, 1998 (the "Joint Enterprise Agreements").
3. Dongguan Process Assembly Servicing Company has the right and power to
enter into with Creative Master Limited the Processing Agreement, dated June 11,
1995 and the Supplement dated November 11, 1995. Dongguang Process Assembly
Servicing Company has the right and power to enter into with Creative Master
Limited the Import Material & Processing Agreement dated November 10, 1995.
4. The Joint Enterprise Agreements have been validly executed by Dongguan
Heng Li Zhen Trading Company and Creative Master Limited and duly approved by
the Chinese government which constitute valid and binding obligations of each of
the two parties, enforceable in accordance with their terms and conditions under
the law of China.
5. Each local Chinese government agency has the right and power to enter
into the manufacturing leases, which are filed as exhibits to the Registration
Statement, and each factory and dormitory lease has been validly executed and
constitutes the valid and binding obligations of the parties, enforceable in
accordance with their respective term and conditions under the laws of China.
6. The Dongguan Chuangying Toys Factory Co., Ltd. has been duly organized
as a limited liability company and is validly existing in good standing under
the laws of China.
7. Dongguan Chuangying Toys Factory Co., Ltd. has the right and power to
own, lease and operate its properties and to conduct its business as described
in the Prospectus, including the right and power to execute and perform its
obligations under the Joint Enterprise Agreement, dated September 10, 1994.
8. No authorization, approval or consent of any governmental authority or
agency of China is necessary in connection with the consummation of the
transactions contemplated by the Agreement and the Representative's Warrant
Agreement.
9. The Company and [list subsidiaries party to the factory and dormitory
leases and Joint Enterprise and Processing Agreements] are in possession of, and
operating in China in compliance with such authorizations, licenses,
certificates, orders and permits as may be required from
C-1
<PAGE>
applicable regulatory authorities in China which are material to the conduct of
their business, all of which are valid and in full force and effect; neither the
Company nor [list subsidiaries party to the factory and dormitory leases and
Joint Enterprise and Processing Agreements] is in default in the performances or
observance of any material obligation, agreement covenant or condition contained
in any bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument known to such counsel to which
the Company or [list subsidiaries party to the factory and dormitory leases and
Joint Enterprise and Processing Agreements] is a party or by which any of them
or their properties may be bound, in each case that might cause or result in a
material adverse change in the business, properties, condition (financial or
otherwise), prospects or results of operations of the Company and its
subsidiaries, taken as a whole; and neither the Company nor [list subsidiaries
party to the factory and dormitory leases and Joint Enterprise and Processing
Agreements] is in material violation of, or liable under, any law, order, rule,
regulation, writ, injunction, judgement or decree of any court, government or
governmental agency or body of China having jurisdiction over the Company or
[list subsidiaries party to the factory and dormitory leases and Joint
Enterprise and Processing Agreements] or over any of their properties;
10. All of the information in the Prospectus, to the extent constituting
matters of law or legal conclusions under the laws of China has been reviewed by
such counsel and is a fair summary of such matters and conclusions;
11. There are no legal or governmental proceedings pending or, to such
counsel's knowledge, threatened against the Company or [list subsidiaries party
to the factory and dormitory leases and Joint Enterprise and Processing
Agreements].
12. Under Chinese law, the submission to Jurisdiction and Waiver of
Immunity and Inconvenient Forum clause of Section 14 of the Agreement is valid
and binding upon the Company.
13. All translations of documents from Chinese to English which were
provided to counsel for the Underwriters and which are included as exhibits to
the Registration Statement are complete and accurate translations in all
material respects.
In addition, such counsel shall state that although they have not (with the
exception of the matters covered in paragraph 10 of their opinion) independently
checked or verified the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus relating to the
Company and its operations in China, nothing has come to the attention of such
counsel that caused them to believe that, at the time the Registration Statement
became effective, the Registration Statement (except as to financial statements,
financial data and supporting schedules contained therein) contained any untrue
statement of a material fact, or omitted to sate a material fact required to be
stated therein or necessary to make such statements not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Prospectus (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact to be stated
therein or necessary to make such statements, in light of the circumstances
under which they were made, not misleading.
C-2
<PAGE>
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the companies which are the
subject of said opinion, and of government officials in which case their opinion
is explicitly to state that they are so relying thereon and that they have no
knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificates so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' counsel.
C-3
<PAGE>
Annex D
Opinion of Counsel to
Selling Stockholder
1. The Agreement and the Irrevocable Custody Agreement [and Power of
Attorney] have been duly and validly authorized, executed and delivered by such
Selling Stockholder and each is a valid and binding obligation of such Selling
Stockholder, enforceable against it in accordance with its terms except as
rights to indemnity and contribution may be limited by Federal or state
securities laws and judicial decisions and except as enforcement (i) may be
limited by bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally and (ii) is subject to general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
2. To the best knowledge of such counsel, such Selling Stockholder has
all requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits of and from all courts and all public, governmental or regulatory
agencies and bodies, as required for the execution, delivery and performance of
this Agreement, the Irrevocable Custody Agreement [and Power of Attorney] and
the consummation of the transactions contemplated hereby and thereby, except for
(A) such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters,
as to which counsel need express no opinion and (B) such as have been made or
obtained under the Act.
3. Upon the delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to the Agreement, you will receive good, valid and
marketable title to the Shares purchased from such Selling Stockholder, to such
counsel's knowledge, free and clear of all liens, encumbrances, claims, security
interests, restrictions on transfer, stockholders' agreements, voting trusts and
other defects in title created by or known to such Selling Stockholder.
4. The execution, delivery and performance of this Agreement, the
Irrevocable Custody Agreement [Power of Attorney] by such Selling Stockholder
and the consummation of the transactions contemplated hereby and thereby will
not violate or conflict with, to the best knowledge of such counsel, any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over any of such
Selling Stockholder or any of their properties or assets.
5. The statements in the Prospectus under the caption "Principal
Stockholders and Selling Stockholder," insofar as such statements constitute a
summary of matters referred to therein with respect to such Selling Stockholder,
fairly present the information with respect to such matters.
D-1
<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, 1998 (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,055
<SECURITIES> 0
<RECEIVABLES> 4,928
<ALLOWANCES> 585
<INVENTORY> 3,787
<CURRENT-ASSETS> 13,866
<PP&E> 7,912
<DEPRECIATION> 2,249
<TOTAL-ASSETS> 20,467
<CURRENT-LIABILITIES> 8,605
<BONDS> 0
0
0
<COMMON> 5,899
<OTHER-SE> 4,393
<TOTAL-LIABILITY-AND-EQUITY> 20,467
<SALES> 33,633
<TOTAL-REVENUES> 33,633
<CGS> 24,490
<TOTAL-COSTS> 24,490
<OTHER-EXPENSES> 5,056
<LOSS-PROVISION> 553
<INTEREST-EXPENSE> 283
<INCOME-PRETAX> 4,087
<INCOME-TAX> 354
<INCOME-CONTINUING> 3,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,056
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
