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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-12
CREATIVE MASTER INTERNATIONAL, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment of Filing Fee (Check the appropriate box):
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/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock, $.0001 par value, of Creative Master
International, Inc.
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
21,500,000 shares of the Common Stock of Creative Master
International, Inc.
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
$3.9375 per share, based on the average of the high and
low prices reported on the NASDAQ National Market System
on May 5, 2000 for the Common Stock of Creative Master
International, Inc.
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$84,656,250
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(5) Total fee paid:
One-fiftieth of one percent of $84,656,250 = $16,931.25
----------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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CREATIVE MASTER INTERNATIONAL, INC.
CASEY INDUSTRIAL BUILDING, 8TH FLOOR
18 BEDFORD ROAD, TAIKOKTSUI
KOWLOON, HONG KONG
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE , 2000
Notice is hereby given that the Annual Meeting of Stockholders of Creative
Master International, Inc., a Delaware corporation ("CMI"), will be held at
, on June , 2000, at 10:00 A.M., local time, for the following
purposes, as more fully described in the attached Proxy Statement:
(1) To approve the issuance of shares of our Common Stock to the owners
of PacificNet.com LLC ("PNC"), in accordance with the Share Exchange
Agreement, dated as of February 17, 2000, among CMI, PNC and the owners of
PNC, and the Supplement to Share Exchange Agreement, dated as of April 29,
2000, among CMI, PNC and the owners of PNC, pursuant to which CMI will
acquire sole ownership of PNC in exchange for the issuance of 21,500,000
shares of our Common Stock to the owners of PNC (the "PNC Acquisition.").
(2) To elect four directors to serve until our next Annual Meeting of
stockholders and until their successors are duly elected and qualified.
(3) To approve an amendment to our Certificate of Incorporation to
change our name to "PacificNet.com, Inc." upon consummation of the PNC
Acquisition.
(4) To approve an amendment to our Certificate of Incorporation to
increase the number of shares of Common Stock we are authorized to issue
from 25,000,000 to 125,000,000.
(5) To approve an amendment to our 1998 Stock Option Plan to increase
the number of shares of Common Stock we can issue upon the exercise of
options granted under the plan from 650,000 to 5,000,000.
(6) To ratify the appointment by the Board of Directors of Arthur
Andersen & Co. as our independent auditors for the fiscal year ending
December 31, 2000.
(7) To transact such other business as may properly be brought before
the Annual Meeting or any and all adjournments thereof.
Your attention is directed to the accompanying Proxy Statement. Stockholders
of record at the close of business on May , 2000 will be entitled to notice
of, and to vote at, the meeting and any adjournment thereof.
Please sign, date and complete the enclosed proxy and return it promptly in
the accompanying pre-addressed envelope, whether or not you expect to attend the
Annual Meeting. A majority of the outstanding shares of Common Stock must be
represented (in person or by proxy) at the Annual Meeting in order that business
may be transacted. Therefore, your promptness in returning the enclosed proxy
will help to ensure a quorum is present. A stockholder who executes and returns
the accompanying proxy may revoke it at any time before it is voted at the
Annual Meeting by following the procedures set forth in the attached Proxy
Statement.
By Order of the Board of Directors
Shing Kam Ming
Secretary
Kowloon, Hong Kong
May , 2000
PLEASE SIGN AND DATE THE ENCLOSED FORM OF PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED RETURN ENVELOPE IN ORDER TO ENSURE THAT YOUR SHARES ARE REPRESENTED.
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TABLE OF CONTENTS
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INTRODUCTION................................................ 1
General................................................... 1
Outstanding Securities and Voting Rights.................. 1
Proxy Voting.............................................. 2
Revocation................................................ 2
Risk Factors.............................................. 2
PROPOSAL NO. 1--APPROVAL OF ISSUANCE OF SHARES IN PNC
ACQUISITION............................................... 3
Introduction.............................................. 3
Summary of Principal Terms................................ 3
Background of the PNC Acquisition......................... 3
Reasons for the PNC Acquisition........................... 7
Opinion of RCP, Fairness Adviser to CMI................... 7
Terms of the Share Exchange Agreement and Supplement...... 10
Appointment of Directors and Officers Following the PNC
Acquisition............................................. 14
Vote Required for Approval of the PNC Acquisition......... 14
Absence of Appraisal Rights............................... 14
Certain Federal Income Tax Consequences................... 14
Accounting Treatment...................................... 14
Antitrust Matters......................................... 15
Description of CMI........................................ 15
Description of PNC........................................ 16
Risks Related to the Business of PNC...................... 27
Risks Related to the PNC Acquisition...................... 33
SELECTED FINANCIAL DATA..................................... 36
CMI Selected Financial Data............................... 36
PNC Selected Financial Data............................... 37
Unaudited Pro Forma Condensed Combined Financial
Statements.............................................. 37
PROPOSAL NO. 2--ELECTION OF DIRECTORS....................... 42
Nominees.................................................. 42
Management and Directors of CMI........................... 42
Arrangements and Understandings with Directors............ 43
Board Meetings and Committees............................. 43
Board Compensation........................................ 44
Compensation Committee Interlocks and Insider
Participation........................................... 44
PROPOSAL NO. 3--APPROVAL OF AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO CHANGE OUR NAME TO "PACIFICNET.COM, INC."
UPON CONSUMMATION OF THE PNC ACQUISITION.................. 44
Reason for Proposal....................................... 45
PROPOSAL NO. 4--APPROVAL OF AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED COMMON STOCK..... 45
Current Use of Shares..................................... 45
Rights of Additional Common Stock......................... 45
Effect of Proposal........................................ 46
Reason for Proposal....................................... 46
PROPOSAL NO. 5--APPROVAL OF AMENDMENT OF THE 1998 STOCK
OPTION PLAN............................................... 47
Description of 1998 Plan.................................. 47
Summary of Certain U.S. Federal Income Tax Consequences... 48
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PROPOSAL NO. 6--RATIFICATION OF INDEPENDENT AUDITORS........ 49
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................... 49
COMPENSATION OF EXECUTIVE OFFICERS.......................... 50
Executive Compensation.................................... 50
Summary Compensation Table................................ 50
Option Grants in 1999..................................... 50
Option Exercises in 1999 and Fiscal Year-End Option
Values.................................................. 50
Aggregate Fiscal Year-End Option Values................... 51
Employment Agreements..................................... 51
1998 Stock Option Plan.................................... 52
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION.............................................. 52
PERFORMANCE GRAPH........................................... 53
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
OF 1934................................................... 54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 57
STOCKHOLDER PROPOSALS AT THE NEXT ANNUAL MEETING OF
STOCKHOLDERS.............................................. 58
EXPERTS..................................................... 58
OTHER MATTERS............................................... 58
WHERE YOU CAN FIND MORE INFORMATION......................... 58
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 59
APPENDIX A--SHARE EXCHANGE AGREEMENT........................ A-1
APPENDIX B--SUPPLEMENT TO SHARE EXCHANGE AGREEMENT.......... B-1
APPENDIX C--FAIRNESS OPINION................................ C-1
APPENDIX D--FINANCIAL STATEMENTS OF PNC..................... D-1
APPENDIX E--PROPOSED AMENDMENT TO CERTIFICATE OF
INCORPORATION TO CHANGE NAME TO "PACIFICNET.COM, INC.".... E-1
APPENDIX F--PROPOSED AMENDMENT TO CERTIFICATE OF
INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK......... F-1
</TABLE>
ii
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CREATIVE MASTER INTERNATIONAL, INC.
CASEY INDUSTRIAL BUILDING, 8TH FLOOR
18 BEDFORD ROAD, TAIKOKTSUI
KOWLOON, HONG KONG
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JUNE , 2000
GENERAL
The enclosed proxy is solicited by the Board of Directors of Creative Master
International, Inc., a Delaware corporation ("CMI"), for use at our Annual
Meeting of Stockholders (the "Annual Meeting") to be held at , at
10:00 A.M., local time, on June , 2000, and at any adjournment or postponement
thereof. This Proxy Statement and the accompanying proxy card are first being
mailed to the stockholders of CMI on or about May , 2000.
We will pay for the cost of this solicitation, including the cost of
preparing and mailing the Notice of Annual Meeting, this Proxy Statement and the
enclosed proxy. We expect to reimburse brokerage houses, fiduciaries, nominees
and others for their out-of-pocket expenses in forwarding proxy materials to
beneficial owners of stock held in their names. Our directors, officers and
employees may solicit proxies by telephone or in person without additional
compensation.
OUTSTANDING SECURITIES AND VOTING RIGHTS
Only holders of record of our Common Stock at the close of business on May
, 2000 will be entitled to notice of and to vote at the Annual Meeting. On
that date, we had shares of Common Stock outstanding. Each share of
Common Stock is entitled to one vote at the Annual Meeting with respect to each
matter to be voted on. Holders of Common Stock are not entitled to cumulate
votes in the election of directors. Under applicable law and our Certificate of
Incorporation and bylaws, if a quorum is present at the Annual Meeting: (i) for
matter 2, the four nominees for election to the Board of Directors who receive
the greatest number of votes cast for the election of directors by the shares
present in person or represented by proxy will be elected directors,
(ii) matters 1, 5 and 6 listed in the accompanying Notice of Annual Meeting of
Stockholders will be approved if a majority of the votes cast on the matter are
cast in favor of such matter, and (iii) matters 3 and 4 listed in the
accompanying Notice of Annual Meeting of Stockholders will be approved if a
majority of the shares entitled to vote are cast in favor of such matter.
The presence at the Annual Meeting, either in person or by proxy, of the
holders of a majority of the shares of Common Stock outstanding on the record
date is necessary to constitute a quorum for the transaction of business.
Abstentions will be counted for purposes of determining the presence of a quorum
and will have the same effect as negative votes. Broker non-votes also will
count towards establishing a quorum. Broker non-votes will not affect the
outcome of matters 1, 5 and 6, but will have the same effect as a negative vote
for matters 3 and 4. Neither abstentions nor broker non-votes will have any
effect upon the outcome of voting with respect to the election of directors.
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PROXY VOTING
Shares for which proxy cards are properly executed and returned will be
voted at the Annual Meeting in accordance with the directions noted thereon, or
in the absence of directions to the contrary, will be voted "FOR" the following:
(1) To approve the issuance of shares of Common Stock to the owners of
PacificNet.com LLC ("PNC"), in accordance with the Share Exchange
Agreement, dated as of February 17, 2000, among CMI, PNC and the owners
of PNC (the "Share Exchange Agreement"), and the Supplement to Share
Exchange Agreement, dated as of April 29, 2000, among CMI, PNC and the
owners of PNC (the "Supplement"), pursuant to which CMI will acquire sole
ownership of PNC in exchange for the issuance of 21,500,000 shares of
Common Stock to the owners of PNC (the "PNC Acquisition").
(2) To elect four directors to serve until our next Annual Meeting of
stockholders and until their successors are duly elected and qualified.
(3) To approve an amendment to our Certificate of Incorporation to change
our name to "PacificNet.com, Inc." upon consummation of the PNC
Acquisition.
(4) To approve an amendment to our Certificate of Incorporation to increase
the number of shares of Common Stock we are authorized to issue from
25,000,000 to 125,000,000.
(5) To approve an amendment to our 1998 Stock Option Plan to increase the
number of shares of Common Stock we can issue upon the exercise of
options granted under the plan from 650,000 to 5,000,000.
(6) To ratify the appointment by the Board of Directors of Arthur
Andersen & Co. as our independent auditors for the fiscal year ending
December 31, 2000.
We do not expect that any matter other than those referred to in this Proxy
Statement will be brought before the Annual Meeting. If, however, other matters
are properly presented, the persons named as proxies will vote in accordance
with their discretion with respect to such matters.
REVOCATION
If you give us a proxy, you may revoke it at any time before we use it by
either delivering to the Secretary a written notice of revocation or a duly
executed proxy card bearing a later date, or by attending the Annual Meeting and
voting in person (attendance at the Annual Meeting without voting, by itself,
will not serve to revoke a proxy). If, however, your shares are held of record
by a broker, bank or other nominee and you wish to vote in person at the Annual
Meeting, you must obtain from the record holder a proxy issued in your name.
RISK FACTORS
Please see pages 27 through 35 for a discussion of some of the risks
associated with the business of PNC and Proposal No. 1--Approval of Issuance of
Shares in PNC Acquisition.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT OR DETERMINED IF THIS PROXY STATEMENT IS ACCURATE OR INADEQUATE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROPOSAL NO. 1
APPROVAL OF ISSUANCE OF SHARES IN PNC ACQUISITION
INTRODUCTION
This section of the Proxy Statement describes, among other things, the
material aspects of the PNC Acquisition, the Share Exchange Agreement and the
Supplement. The following description should be read in conjunction with the
Share Exchange Agreement and the Supplement, which are attached as Appendices A
and B to this Proxy Statement and are incorporated herein by reference. You
should read the Share Exchange Agreement and the Supplement carefully.
SUMMARY OF PRINCIPAL TERMS
Upon the completion of the PNC Acquisition (the "Closing"):
- the owners of PNC (the "PNC Members") will surrender and assign to CMI all
membership interests in PNC ("Membership Interests") issued and
outstanding immediately prior to the Closing; and
- CMI will issue to the PNC Members, pro rata in accordance with their
relative ownership of Membership Interests, an aggregate of 21,500,000
shares of Common Stock.
As a result of this exchange, PNC will become a wholly-owned subsidiary of CMI
and the PNC Members will become the principal stockholders of CMI, holding in
excess of 80% of the Common Stock expected to be outstanding immediately
following the Closing.
Following the Closing, CMI's primary business focus will be PNC's
business-to-business electronic commerce services and solutions, instead of
CMI's current business of manufacturing collectible-quality, die-cast replicas
of cars, trucks, buses and other items. PNC has indicated its interest in
disposing of CMI's current business following completion of the PNC Acquisition.
In light of this, a management group led by CMI's Chief Executive Officer,
Mr. Carl Tong, has indicated an interest in negotiating a purchase of the
current business. However, neither CMI nor PNC have entered into any formal
understanding or arrangement with respect to a disposition of the current
business, nor is any such disposition a condition to the PNC Acquisition.
In addition to certain other conditions, it is a condition to the obligation
of the PNC Members to consummate the PNC Acquisition that, prior to the Closing,
CMI's Certificate of Incorporation be amended to increase the number of
authorized shares of Common Stock from 25,000,000 to 125,000,000. This item is
included elsewhere in this Proxy Statement, under "Proposal No. 4--Approval of
Amendment to the Certificate of Incorporation to Increase the Authorized Common
Stock."
BACKGROUND OF THE PNC ACQUISITION
CMI completed an offering of 1,250,000 shares of Common Stock to the public
at $5.00 per share in December 1998, and the Common Stock was listed for trading
at that time on the NASDAQ National Market System. During the ensuing six
months, despite CMI's efforts, CMI was unable to attract any significant
institutional interest in its Common Stock nor any sell-side analyst coverage,
other than Roth Capital Partners (formerly, Cruttenden Roth) ("RCP"), the firm
that managed the public offering. The volume of shares traded and the price were
both lower than what CMI's senior management, the Board and Acma Ltd. ("Acma"),
CMI's principal stockholder, had anticipated.
In a June 1999 meeting of the Board of Directors in Hong Kong, this subject
was discussed in detail and management was requested to place added emphasis,
through Financial Relations Board ("FRB"), its investor relations adviser, in
expanding research coverage, the number of market makers in the Common Stock and
overall company visibility in the U.S. public equity markets. The objective was
to create a more active and liquid market for the Common Stock. It was believed
that CMI's
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pending acquisition of Sinar, a designer and marketer of computer and video game
peripherals, might stimulate some interest from the investment community.
At a CMI Board meeting in Los Angeles in July 1999, management reported that
it had not achieved any measurable success in attracting analyst or investor
attention, despite continued efforts. The investment community in the United
States was becoming increasingly focused on technology companies and seemed
unconcerned with CMI's business and prospects. Micro-cap manufacturing
companies, particularly those with Asian operations, were not in favor. The
price of the Common Stock had not appreciated meaningfully since the public
offering and the average daily trading volume remained anemic. Given this
scenario, the Board discussed a number of strategies designed to enhance
long-term stockholder value, including a strategic merger, a stock repurchase by
CMI or a shift to an Asian market for the trading of the Common Stock, and
management was asked to further analyze and evaluate these possible strategies.
Shortly thereafter, Mr. Tong, CMI's Chief Executive Officer, and Mr. K. S.
Chou, Finance Director of Acma and a director of CMI, began exploring the
possibility of listing the stock of CMI's wholly-owned subsidiary, Creative
Master Limited ("CML"), on an Asian stock exchange (e.g., Singapore or Hong
Kong) and selling shares in the subsidiary in order to raise cash to buy-back
the Common Stock of CMI in the U.S., convert the Common Stock into CML shares or
otherwise move the listing of the Common Stock from the NASDAQ. For
confidentiality purposes, this plan was referred to by CMI senior management and
Board members as "Project Creation." Discussions were held with attorneys in the
U.S. and Hong Kong to review the feasibility of Project Creation, and a
preliminary proposal on the listing of CML in Singapore was received in
September 1999 from an investment banking firm based in Singapore.
At a CMI Board meeting held on October 5, 1999, Messrs. Tong and Chou
reported on the potential merits and the progress of the plan to list and sell
shares of CML in Asia. The Board authorized management to continue to explore
this plan, with the directive that the principal objective of the plan be to
enhance the long-term value of the public stockholders' investment in CMI, which
was trading around $4.00 per share at this time, 20% below the public offering
price.
During the next 90 days, Messrs. Tong and Chou continued discussions with
investment bankers and attorneys concerning Project Creation. However, it became
increasingly apparent that Project Creation, while still considered a viable way
to increase stockholder value and raise capital for CMI, would be complex and
time consuming. In addition, CMI's reported third quarter earnings were below
expectations and, by December, it was expected that fourth quarter earnings
would also be below revised expectations. This contributed to a further decline
in CMI's stock price during this time.
During the fourth quarter of 1999, Mr. Tong began to explore the possibility
of converting CMI into a technology company, since this sector was enjoying high
visibility and high valuations in the public equity markets. Either directly or
through intermediaries, he began contacting certain private Internet start-up
firms with an Asian presence about the possibility of a reverse merger with CMI,
whereby the Internet company would have a publicly-traded vehicle in the United
States and a group led by Mr. Tong would purchase the current business of CMI.
Only one of these conversations progressed to a discussion of specific terms. In
that particular case, both Mr. Tong and Mr. Chou believed that the valuation
suggested by the Internet company did not leave enough value for CMI's
stockholders and those discussions ended in December 1999.
In early January 2000, Mr. Tong became aware of PNC and its business
strategy through a consultant that had provided services for both CMI and PNC. A
meeting was arranged in Hong Kong during the final week of January 2000, where
Mr. Carl Tong met Mr. Tony Tong (no relation), President and Co-Chief Executive
Officer of PNC. The two men discussed a number of business issues, including a
possible reverse takeover of CMI through a stock-for-stock acquisition of PNC by
CMI, but no specific terms were mentioned.
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Following this meeting of the chief executives, the parties provided each
other certain requested information, and a meeting was arranged in Singapore on
February 2, 2000 to further discuss a possible transaction between the
companies. Attending that meeting were Mr. Oei Hong Leong, Chairman of the Board
of Governors of PNC and Chairman of China Strategic Holdings Limited ("CSH"),
PNC's principal owner, Dr. Choo Yeow Ming, an advisor to CSH, Mr. S. P. Quek,
Chairman of Acma, CMI's principal stockholder, Mr. K. S. Chou and Mr. Carl Tong.
At this meeting, specific terms and conditions of a reverse merger transaction
were negotiated and it was generally agreed that the PNC Members would receive
18 million shares of Common Stock of CMI in exchange for all their Membership
Interests in PNC.
On February 3, 2000, in a telephone conversation, Messrs. Carl Tong and Chou
informed CMI's independent directors, Messrs. Gordon and Trier, about the
discussions and negotiations concerning PNC. Mr. Chou followed up on that same
day with a memorandum to Messrs. Gordon and Trier outlining matters discussed
during the call, including key terms of the transaction with PNC. Mr. Chou also
noted in his memorandum the desire by certain management stockholders and Acma
to purchase the current manufacturing business of CMI subsequent to completion
of the acquisition of PNC. The conclusion reached by these directors, as
summarized in Mr. Chou's memorandum, was to authorize Mr. Carl Tong to
investigate the feasibility of the transaction with lawyers and investment
bankers in the U.S. and to meet further with principals from PNC to negotiate
the transaction, but take no action binding on CMI without the consent of the
full Board.
On February 12, 2000, a meeting was held in Los Angeles to (a) introduce the
senior management team of PNC to Mr. Carl Tong and provide him with additional
information about PNC's business strategy and (b) negotiate a share exchange
agreement among CMI, PNC and the PNC Members. Attending that meeting were
Mr. Tony Tong and several other members of the senior management team of PNC,
Mr. Oei and Dr. Choo, representing PNC and its Members. Mr. Carl Tong attended
on behalf of CMI. The specific terms and conditions of the Share Exchange
Agreement were negotiated by the parties during the meeting. The PNC
representatives expressed their belief that the number of shares to be received
by PNC Members should be increased from 18 to 21 million, and Mr. Carl Tong
agreed to consider this request and discuss it with Acma representatives and his
fellow Board members. Subsequent to this meeting, Mr. Carl Tong confirmed to the
PNC representatives that the 21 million shares would be acceptable.
On February 17, 2000, the CMI Board met by conference call to review the
Share Exchange Agreement and a draft press release announcing the proposed
transaction. Copies of these documents had been previously circulated to the CMI
directors. Mr. Carl Tong explained why he believed that this transaction was in
the best interests of all CMI stockholders. Mr. Carl Tong noted that the Share
Exchange Agreement had been signed by PNC and the PNC Members and that he had
signed the Share Exchange Agreement on behalf of CMI that morning, but the
transaction was subject to approval by the Board of Directors of CMI and could
be withdrawn if the Board so desired. After full discussion, the Board agreed
that the proposed transaction with PNC had considerable merit, subject to CMI's
due diligence review.
Legal counsel to CMI, participating on the call, advised that a supplemental
agreement be negotiated and entered into among the parties in order to
(a) clarify certain of the terms and conditions not fully defined in the Share
Exchange Agreement and (b) add additional terms and conditions that were not
covered in the Share Exchange Agreement, but which are customary in this type of
transaction. The Board agreed and these matters were disclosed in the public
announcement that was released on that same day in the U.S.
During the CMI Board meeting on February 17, 2000, legal counsel also noted
that management directors and Mr. Chou, representing Acma, might be perceived to
have a conflict-of-interests due to their expressed interest in purchasing the
current business of CMI assuming the transaction with PNC
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were to be consummated. Legal counsel therefore suggested, and the Board
concurred with, the formation of a Special Committee of the Board of Directors
of CMI (the "Special Committee") consisting of Messrs. Gordon and Trier. The
Special Committee was authorized by the Board to conduct due diligence with
respect to the merits of the transaction and to engage professional advisors to
assist with the due diligence.
At the February 17, 2000 Board meeting, Mr. Chou expressed his intention to
resign as a director of CMI for reasons unrelated to the proposed acquisition of
PNC. The Board accepted Mr. Chou's resignation on February 17, 2000.
During the following three weeks, the Special Committee (a) engaged
independent counsel, (b) met with legal counsel to PNC and CMI to better
understand the need for and proposed content of a supplement to the Share
Exchange Agreement (the "Supplement"), (c) met with independent auditors engaged
by PNC to examine and report on its financial statements as of and for the
period from inception to December 31, 1999, in order to understand the scope of
the audit, intended audit procedures and any anticipated accounting or financial
reporting issues or problems, (d) met with senior management of PNC to review
PNC's business strategy, marketing and sales plan and financial projections, and
(e) interviewed several firms to perform a detailed review of the transaction
and advise the Board as to its fairness to CMI stockholders from a financial
viewpoint.
In a CMI Board meeting held on March 8, 2000, also attended by counsel for
CMI and counsel for the Special Committee, the Board adopted a resolution
formally defining the responsibilities, authority and compensation of the
Special Committee. Messrs. Gordon and Trier reported on the Special Committee's
activities as noted above. In addition, the Special Committee's recommended, and
the Board unanimously agreed, that RCP be retained to advise CMI and the Special
Committee as to the fairness of the transaction. It was noted that RCP had
previously performed investment banking services for CMI, currently provides the
only research coverage of CMI and owns warrants to purchase 125,000 shares of
CMI Common Stock at $8.25 per share. The Special Committee expressed its opinion
that RCP's knowledge of CMI and its business were an asset and, based on
interviews with RCP professionals to be assigned to the engagement, the Special
Committee concluded that RCP could perform the fairness review and issue an
opinion in a competent, professional and unbiased manner. Finally, during that
meeting, the CMI Board unanimously approved the Share Exchange Agreement,
subject to the preparation of the Supplement, which the Special Committee was
authorized to negotiate on CMI's behalf. The Supplement was to be in a form and
content satisfactory to the Special Committee and to the Board as a whole, and
was deemed necessary to clarify certain conditions to the consummation of the
Share Exchange Agreement (including approval of CMI's stockholders and receipt
of a favorable fairness opinion) and set forth certain additional customary
terms and conditions of the proposed acquisition of PNC.
On March 23, 2000, the CMI Board, with legal counsel present, met by
conference call to review, among other things, the progress of the Supplement,
timing of the proposed acquisition of PNC and the terms of the engagement of RCP
as fairness advisor. On April 12, 2000, the Board met again and approved the
Supplement, which had been negotiated on behalf of CMI by legal counsel and the
Special Committee, subject to the receipt of certain supporting schedules to be
provided by PNC. The principal change effected by the Supplement was to increase
the number of share of CMI Common Stock to be issued to the owners of PNC from
21,000,000 to 21,500,000, or in excess of 80% of the Common Stock of CMI
expected to be outstanding as of completion of the acquisition. In addition, it
was agreed that the CMI shares to be issued in the PNC Acquisition would not be
registered under the Securities Act of 1933.
On April 26, 2000, the Special Committee members met in the offices of RCP
in Newport Beach, California, to review the methodology used and the findings
and conclusions reached by RCP during the work they performed to reach an
opinion as to the fairness of the proposed acquisition to the
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stockholders of CMI from a financial point of view. The other directors of CMI
joined the meeting by conference call, as did counsel for CMI and for the
Special Committee. Refer to the section below entitled "Opinion of RCP, Fairness
Advisor to CMI" and to Appendix C, which contains the full text of RCP's opinion
letter. In addition, the Special Committee reported during the meeting that all
schedules to the Supplement and other information requested from PNC had been
received in satisfactory form. Therefore, the Board authorized Mr. Carl Tong to
sign the Supplement. The Supplement was subsequently signed by CMI, PNC and each
of the PNC Members as of April 29, 2000.
REASONS FOR THE PNC ACQUISITION
As mentioned above, after substantial analysis, the Board of Directors of
CMI reached the conclusion during the latter half of 1999 that the U.S. public
equity markets were not the optimum listing location to raise future capital and
achieve the maximum long-term value for CMI's stockholders. CMI, as an
Asian-based, micro-cap NASDAQ company, has been unable to attract sufficient
investor interest to achieve adequate liquidity in the trading volume of its
stock. As a result, orders to purchase or sell CMI stock tend to result in
substantial swings in the trading price. This makes CMI a less attractive
investment for institutional and larger retail investors, thereby exacerbating
the problem. The Board believes that this situation will continue, since NASDAQ
market makers and micro-cap investors, for the most part, seem likely to
continue to focus the vast majority of their attention and capital on the
technology sector, particularly Internet-based companies, and take a negative,
short-term view of CMI's recent decline in profitability.
Over the long term, if CMI were to remain a die-cast manufacturing company
listed on the NASDAQ, the Board believes that CMI's access to capital at a
reasonable cost would be impaired. In addition, CMI would continue to incur
costs associated with maintaining such a listing which are disproportionate to
the value received, given the fixed, recurring regulatory requirements in the
U.S. as compared to CMI's relatively low market valuation. By redefining CMI as
an Internet-based company with a focus on trans-Pacific electronic commerce, the
Board believes that stockholders may achieve higher long-term value for their
investment in CMI Common Stock.
For all of the foregoing reasons, and based, in part, upon the advice of RCP
described below, the Board believes that the PNC Acquisition is fair to CMI's
stockholders from a financial point of view.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ISSUANCE OF
SHARES OF COMMON STOCK IN THE PNC ACQUISITION
OPINION OF RCP, FAIRNESS ADVISOR TO CMI
On April 26, 2000, RCP met with the Special Committee of the Board of
Directors of CMI and then with the full Board, and delivered its opinion,
subsequently confirmed in writing, that, as of such date, the transaction as
documented in the Share Exchange Agreement and the Supplement was fair from a
financial point of view to the holders of CMI Common Stock.
The full text of the written opinion of RCP, dated April 26, 2000, which
sets forth, among other things, the assumptions made, matters considered and
limitations on the review undertaken in connection with the opinion, is attached
hereto as Appendix C and is incorporated herein by reference. CMI stockholders
are urged to, and should, read such opinion in its entirety. RCP's opinion is
directed to the Board and addresses only the fairness of the PNC Acquisition
pursuant to the Share Exchange Agreement and the Supplement from a financial
point of view to the CMI stockholders as of the date of the opinion. It does not
address any other aspect of the PNC Acquisition and does not constitute a
recommendation to any CMI stockholder as to how to vote at the Annual Meeting.
In connection with its opinion, RCP reviewed, among other things:
(1) the Share Exchange Agreement and the Supplement;
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(2) the registration statement of CMI on Form SB-2 dated December 23,
1998, related to the public offering of CMI Common Stock, including the
prospectus therein;
(3) annual reports to stockholders and annual reports on Form 10-KSB of
CMI for the two years ended December 31, 1999;
(4) certain other communications from CMI and PNC to their respective
stockholders and owners;
(5) certain internal financial analyses and forecasts for CMI and PNC
prepared by their respective management; and
(6) certain estimates of pro forma financial performance of CMI and PNC
prepared by their respective management.
RCP also held discussions with members of the senior management of CMI and
PNC regarding the strategic rationale for, and the potential benefits of, the
contemplated transaction and the past and current business operations, financial
condition and future prospects of their respective companies. RCP reviewed the
reported price and trading activity for CMI Common Stock, compared certain
financial information for CMI and PNC with similar information for certain other
companies, the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the Internet industry,
specifically, and in other industries, generally, and performed such other
studies and analyses as RCP considered appropriate.
RCP relied upon the accuracy and completeness of all of the financial and
other information discussed with or reviewed by it and has assumed such accuracy
and completeness for purposes of rendering its opinion. In addition, RCP did not
make an independent evaluation or appraisal of the assets and liabilities of CMI
or PNC, and RCP was not furnished with any such evaluation or appraisal. RCP was
not requested to solicit, and did not solicit, interest from other parties with
respect to an acquisition of, or other business combination involving, CMI.
The following is a summary of certain of the financial analyses used by RCP
in connection with providing its opinion to CMI's Board of Directors.
COMPARISON OF SELECTED COMPANIES
RCP compared certain financial information of CMI with publicly available
information of a group of collectible-quality manufacturers and marketers,
including:
- Zindart Limited; and
- Action Performance Companies, Inc.
RCP determined the market capitalization for each of the foregoing companies
based upon the closing price per share as of April 19, 2000, using publicly
available information. RCP then arrived at a range of comparable company
multiples for CMI by (1) dividing such market capitalizations by projected
earnings and cash flow, and (2) dividing such market capitalization, plus net
debt, by earnings before interest, taxes, depreciation and amortization, in each
case, for each of the foregoing companies for the year 2000 based upon publicly
available research analysts' estimates.
RCP compared certain financial information of PNC with publicly available
information of a group of Internet companies engaged in facilitating
business-to-business e-commerce, including:
- Ariba, Inc.
- Checkfree Holdings Corporation
- Commerce One, Inc.
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- Freemarkets, Inc.
- Proxicom, Inc.
- PurchasePro.com
- Silknet Software, Inc.
- Ventro Corporation
- VerticalNet, Inc.
RCP also compared certain financial information of PNC with publicly
available information of a group of Internet consulting companies, including:
- Agency.com Limited
- IXL Enterprises, Inc.
- MarchFirst, Inc.
- Razorfish, Inc.
- Scient Corporation
RCP determined the market capitalization for each of the foregoing companies
based upon the closing price per share as of April 19, 2000, using publicly
available information. RCP then arrived at a range of comparable company
multiples for PNC by dividing such market capitalizations by projected sales, in
each case, for each of the foregoing companies for the year 2000 and year 2001
based upon publicly available research analysts' estimates.
RCP also performed a discounted cash flow analysis to provide insight into
the value of CMI and PNC based on projected earnings and capital requirements
and cash flows generated by those companies. RCP performed this analysis using a
discount rate reflecting a weighted average cost of capital of 34.7% and 43.0%
and perpetual growth rates of 4.0% and 15.0% for CMI and PNC, respectively.
RCP did not consider comparable transactions, since there is no publicly
available information regarding any recent transactions similar to the PNC
Acquisition.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, may create an incomplete view of the processes
underlying RCP's opinion. In arriving at its fairness determination, RCP
considered the results of all such analyses. No company used in the above
analyses as a comparison is directly comparable to PNC or CMI. The analyses were
prepared solely for purposes of RCP providing its opinion to the CMI Board as to
the fairness to CMI's stockholders from a financial point of view of the
transaction pursuant to the Share Exchange Agreement and the Supplement, and
they do not purport to be appraisals or necessarily reflect the prices at which
the business or securities actually may be sold.
Analyses based upon forecasts of future results, which are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. As described above, RCP's opinion to
CMI's Board was one of several factors taken into consideration by CMI's Board
in making its determination to approve and adopt the Share Exchange Agreement
and the Supplement thereto.
The foregoing summary describes material financial analyses used by RCP in
connection with providing its opinion to CMI's Board on April 26, 2000, but does
not purport to be a complete
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description of the analysis performed by RCP and is qualified by reference to
the written opinion of RCP set forth in Appendix C hereto.
RCP, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. RCP is familiar with CMI,
having provided certain investment banking services to CMI from time to time,
including having acted as managing underwriter of the public offering of CMI
Common Stock in December 1998. RCP holds warrants to purchase 125,000 shares of
CMI Common Stock at an exercise price of $8.25 per share which it received as
part of its underwriting compensation.
Pursuant to a letter agreement dated March 21, 2000, CMI engaged RCP to act
as its financial advisor in connection with the PNC Acquisition. Pursuant to the
terms of this engagement letter, RCP's fee will total $175,000. Of such fee,
$75,000 was paid upon delivery of RCP's fairness opinion and $100,000 is payable
upon the issuance of an updated fairness opinion as of the closing of the PNC
Acquisition. CMI has also agreed to reimburse RCP for its reasonable
out-of-pocket expenses, including attorney's fees and disbursements, and to
indemnify RCP against certain liabilities, including certain liabilities under
the federal securities laws.
TERMS OF THE SHARE EXCHANGE AGREEMENT AND SUPPLEMENT
It is anticipated that the PNC Acquisition will be completed as soon as
practicable following the Annual Meeting, assuming all the conditions set forth
in the Share Exchange Agreement and the Supplement have been satisfied or
waived.
SHARE EXCHANGE
Upon the Closing, the PNC Members will surrender and assign to CMI all of
the Membership Interests issued and outstanding immediately prior to the
Closing, and CMI will issue to the PNC Members, pro rata in accordance with
their relative ownership of Membership Interests, an aggregate of 21,500,000
shares of Common Stock. If, as a result of the foregoing, any of the PNC Members
would receive a fractional share of Common Stock, such fractional share will be
rounded up to the nearest whole share of Common Stock. As a result of this
exchange, PNC will become a wholly-owned subsidiary of CMI and the PNC Members
will become the principal stockholders of CMI, holding in excess of 80% of the
Common Stock expected to be outstanding immediately following the Closing.
EXCHANGE PROCEDURES
At the Closing, CMI will deliver to the PNC Members certificates
representing the Common Shares to which they are entitled, as provided above,
against the PNC Members' delivery to CMI of all of the issued and outstanding
Membership Interests, free and clear of all liens, claims and encumbrances.
REPRESENTATIONS AND WARRANTIES
The Share Exchange Agreement and the Supplement contain various
representations and warranties of CMI, PNC and the PNC Members relating, among
other things, to the following:
- due organization, existence, good standing and similar corporate
matters;
- capital and organizational structure;
- power and authority to enter into the Share Exchange Agreement and the
Supplement and related matters;
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- financial statements;
- absence of material changes or events since September 30, 1999 (by CMI)
and December 31, 1999 (by PNC and PNC Members);
- title to assets;
- pending or threatened litigation;
- intellectual property (by PNC Members);
- documents and reports filed with the SEC and the accuracy and
completeness of the information contained therein (by CMI);
- material contracts;
- consents and approvals required by law in connection with the PNC
Acquisition;
- the absence of conflicts, violations and defaults under CMI's
Certificate of Incorporation and PNC's articles of organization,
respectively, CMI's bylaws and PNC's operating agreement, respectively,
and other agreements and documents; and
- no brokers representing either party.
The Supplement also contains representations and warranties of each PNC
Member relating to, among other things, the ownership of PNC Membership
Interests, that the shares of Common Stock to be issued at the Closing are being
acquired solely for investment purposes and not with a view to their
distribution, the transfer restrictions to which such shares of Common Stock
will be subject under Federal securities laws, and the waiver of any preemptive
right, right of first refusal and similar rights.
All of the representations and warranties will survive the Closing for a
period of two years.
CONDUCT OF BUSINESS PENDING THE PNC ACQUISITION
CMI, PNC and the PNC Members have agreed that, pending the PNC Acquisition,
CMI and PNC will conduct their businesses in the ordinary course and in such a
manner so that the representations and warranties in the Share Exchange
Agreement and the Supplement will continue to be true and correct as of the
Closing as if made at and as of the Closing.
PNC has agreed that, prior to Closing, it will not sell or issue any
Membership Interests or other ownership interest in PNC or any option, warrant
or other right to purchase or acquire any Membership Interests or other
ownership interest in PNC, or any securities convertible into or exchangeable
for Membership Interests, unless (a) PNC provides at least three days prior
written notice to CMI and (b) the recipient of such Membership Interests or
other ownership interest in PNC or any option, warrant or other right, enters
into an appropriate amendment or supplement to the Share Exchange Agreement and
the Supplement by which it (i) agrees to be a party to the Share Exchange
Agreement and the Supplement, (ii) makes the same representations and warranties
to CMI as are made by the PNC Members under the Share Exchange Agreement and the
Supplement, and (iii) agrees to sell and assign to CMI at the Closing, in
exchange for its pro rata share of the consideration to be paid to the PNC
Members, any and all Membership Interests it may own or have the right to
acquire. The notice requirement set forth above does not apply to the issuance
of any Membership Interests pursuant to any currently outstanding option or
other commitment enumerated on Schedule 3.1(b) to the Supplement.
PNC currently has options or subscription rights outstanding to several
parties under which such parties may acquire an aggregate of 3,000,000
Membership Interests in exchange for a total consideration of $8,500,000
($6,000,000 in cash and certain securities valued by the parties at $2,500,000).
Prior to the Closing, it is required that the holders of such options and
subscription rights
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exercise in full (or forfeit such rights), which would entitle these persons to
receive approximately 5,250,000 of the 21,500,000 shares of CMI Common Stock to
be issued at the Closing. For further information concerning these options and
subscription rights, see the notes to the financial statements of PNC as of
December 31, 1999, contained in Appendix D attached hereto, and the "Unaudited
Pro Forma Condensed Combined Financial Statements" below.
CONDITIONS PRECEDENT TO THE PNC ACQUISITION
The obligations of CMI and the PNC Members under the Share Exchange
Agreement and the Supplement are subject to the satisfaction of various
conditions on or before the Closing. Each of the parties may waive the
nonfulfilment of conditions to its own obligations. These conditions include:
- accuracy of representations and warranties on and as of the Closing;
- performance in all material respects of the Share Exchange Agreement
and the Supplement by the other parties;
- the Share Exchange Agreement, the Supplement and the PNC Acquisition
having been duly approved by the requisite vote of CMI stockholders in
accordance with applicable law and the Certificate of Incorporation and
bylaws of CMI;
- the shares of CMI Common Stock to be issued to the PNC Members having
been authorized for listing on the NASDAQ National Market upon official
notice of issuance;
- all authorizations, consents, orders, declarations or approvals of, or
filings with, any governmental entity, which the failure to obtain,
make or occur would have the effect of making the PNC Acquisition or
any of the transactions contemplated hereby illegal or would have a
material adverse effect on either of CMI or PNC (assuming the PNC
Acquisition had taken place), having been obtained or made;
- no suit, action or proceeding by a governmental entity or any other
person as a result of the Share Exchange Agreement or the Supplement or
any of the transactions contemplated therein which would have a
material adverse effect on either CMI or PNC (assuming that the PNC
Acquisition shall have occurred) or which seeks to prevent or restrict
the consummation of the PNC Acquisition or seeks monetary damages in
connection therewith; and
- no court or other governmental entity having jurisdiction over CMI or
PNC, or any of their respective subsidiaries, having enacted, issued,
promulgated, enforced or entered any law, rule, regulation, executive
order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of
making the Share Exchange Agreement, the Supplement, the PNC
Acquisition or any of the transactions contemplated thereby illegal.
The obligation of CMI under the Share Exchange Agreement and the Supplement
are subject to additional conditions at or prior to the date of Closing. CMI may
waive the nonfulfilment of these conditions. These conditions include:
- any and all securities convertible into or exchangeable for PNC
Membership Interests, and any and all other contracts, rights, options,
warrants and other rights to purchase or otherwise acquire any PNC
Membership Interests or securities convertible into or exchangeable
therefor having been exercised in full or terminated without any
liability on the part of PNC;
- counsel for PNC having delivered to CMI its opinion, in form and
content satisfactory to CMI, to the effects set forth in Exhibit 2 to
the Supplement, and CMI having received such
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opinions of counsel to the PNC Members as it may reasonably request
with respect to the due authorization, execution and delivery of the
Share Exchange Agreement and the Supplement and the enforceability
thereof against the PNC Members;
- the CMI Board of Directors having received, as of the Closing, the
advice and written opinion, in form and content satisfactory to it, of
RCP, its fairness adviser, to the effect that the PNC Acquisition is
fair to the CMI stockholders from a financial point of view; and
- all outstanding indebtedness of the PNC Members to PNC having been
repaid in full.
The obligation of the PNC Members under the Share Exchange Agreement and the
Supplement are subject to additional conditions at or prior to the date of
Closing. The PNC Members may waive the nonfulfilment of these conditions. These
conditions include:
- CMI's Certificate of Incorporation having been amended to adopt the
changes to CMI's capital structure described above under "Summary of
Principal Terms";
- counsel to CMI having delivered to the PNC Members its opinion, in form
and content satisfactory to PNC, to the effects set forth in Exhibit 1
to the Supplement; and
- all but one of the directors of CMI having submitted their resignations
to CMI to be held in escrow and to become effective at the Closing.
FEES AND EXPENSES
The Share Exchange Agreement provides that each party shall bear its own
direct and indirect expenses incurred in connection with the negotiation and
preparation of the Share Exchange Agreement and the consummation and performance
of the transactions contemplated therein, including, without limitation, the
fees and expenses of all attorneys, brokers, investment bankers, accountants,
agents, advisors, finders and other professionals incurred in connection
therewith, acting on behalf of such party. The Supplement provides that all
expenses incurred by or on behalf of PNC and the PNC Members in connection with
the PNC Acquisition and related transactions will be expenses of PNC and PNC
will pay the same.
TERMINATION
The Share Exchange Agreement provides that, in the event of a material
breach or inaccuracy in the representations or other terms of the Share Exchange
Agreement, the nonbreaching party may terminate the Share Exchange Agreement by
providing written notice of the breach. If the breach is not cured within 10
calendar days, the Share Exchange Agreement will be terminated, with no further
obligations of the parties.
The Supplement provides that the Share Exchange Agreement and the Supplement
may be terminated at any time prior to the Closing, whether before or after any
approval of the matters presented in connection with the PNC Acquisition by the
CMI stockholders:
- by mutual written consent of CMI, PNC and all the PNC Members; or
- by CMI on the one hand, or PNC or the PNC Members holding, in
aggregate, a majority of the Membership Interests on the other hand, if
the PNC Acquisition has not been effected on or prior to the close of
business on September 30, 2000; provided, however, that the right to
terminate under this provision will not be available to any party whose
failure to fulfill any of its obligations contained in the Share
Exchange Agreement and the Supplement has been the cause of, or
resulted in, the failure of the PNC Acquisition to have occurred on or
prior to the aforesaid date.
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APPOINTMENT OF DIRECTORS AND OFFICERS FOLLOWING THE PNC ACQUISITION
The PNC Acquisition is conditioned upon, among other things, CMI receiving
resignations from all but one of its present directors at the Closing. As a
result, assuming the four director nominees under "Proposal No. 2--Election of
Directors" are elected by the stockholders, Messrs. , and
intend to resign as directors at the Closing, and it is expected than
Mr. , will continue as a director. If the PNC Acquisition is consummated,
it is expected that the size of the Board of Directors will be increased to
[insert number] members, Messrs. , and will resign, and
[insert number] designees of the current PNC Members will be appointed to the
Board as follows:
- [Name]
- [Names, etc.]
For biographical information concerning the above persons, refer to
"Description of PNC--Executive Management and Governors." Following their
appointment, the new directors would serve until the 2001 annual meeting of the
stockholders of CMI.
Following the PNC Acquisition, it is expected that the officers of PNC, as
set forth below under "Description of PNC--Executive Management and Governors,"
will be appointed by the newly constituted Board of Directors as the executive
officers of CMI. The present executive officers of CMI, as set forth below under
"Proposal No. 2--Election of Directors--Management and Directors of CMI," are
all expected, following the Closing, to resign their offices and positions with
CMI and assume similar positions as the executive officers and management of
CMI's wholly-owned manufacturing subsidiary, Creative Master Limited.
VOTE REQUIRED FOR APPROVAL OF THE PNC ACQUISITION
Approval of the PNC Acquisition will require the affirmative vote of a
majority of the votes cast on the proposal. Senior management of CMI and certain
affiliated stockholders who own in the aggregate shares of Common Stock
representing approximately 63% of the number of shares entitled to vote at the
Annual Meeting have indicated their intention to vote in favor of the PNC
Acquisition. As a result, it is expected that the PNC Acquisition will be
approved at the Annual Meeting without regard to the votes cast by other
stockholders.
ABSENCE OF APPRAISAL RIGHTS
Stockholders of CMI will have no appraisal or dissenter's rights in
connection with the PNC Acquisition.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
It is anticipated that, for U.S. Federal income tax purposes, (i) the PNC
Acquisition will constitute a nontaxable exchange under Section 351 of the
Internal Revenue Code of 1986, as amended, and (ii) no taxable gain or loss will
be recognized by CMI, PNC or the PNC Members. The PNC Acquisition will have no
tax impact on CMI's current stockholders.
ACCOUNTING TREATMENT
For accounting purposes, the PNC Acquisition will be accounted for as a
purchase and be treated as a reverse acquisition since the PNC Members will
control over 80% of the total shares of Common Stock of CMI expected to be
outstanding after the Closing. Therefore, for purposes of the "Unaudited Pro
Forma Condensed Combined Financial Statements" appearing elsewhere in this Proxy
Statement, the 4,999,322 shares of CMI Common Stock outstanding throughout 1999
are treated as an addition to stockholders' equity as of the assumed effective
date of the PNC Acquisition The parties to the PNC
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Acquisition reached a definitive agreement on April 29, 2000, and the CMI shares
will therefore be valued for accounting purposes based on the average closing
price of CMI's Common Stock as quoted on the NASDAQ National Market System for
the period from April 25, 2000 through May 4, 2000, inclusive, which was $3.89.
The assets and liabilities of CMI will be adjusted to their estimated fair
values, and the excess of the calculated purchase price of approximately
$19.4 million over such estimated fair values will be allocated to goodwill for
accounting purposes.
After the Closing, CMI's primary business focus will be the
business-to-business electronic commerce services and solutions of PNC, instead
of its current focus on manufacturing die-cast replicas. PNC has indicated its
interest in disposing of CMI's current business following completion of the PNC
Acquisition, and it is likely that these assets and operations will be
classified as a Discontinued Operation for accounting purposes at that time. In
light of this, a management group led by CMI's Chief Executive Officer,
Mr. Carl Tong, has indicated an interest in negotiating a purchase of the
current business. However, neither CMI nor PNC have entered into any formal
understanding or arrangement with respect to a disposition of the current
business, and such a disposition is not a condition to the acquisition of PNC.
For further information concerning the accounting treatment of the proposed
PNC Acquisition, see the discussion and financial information contained below
under "Unaudited Pro Forma Condensed Combined Financial Statements." Also, see
"Risks Related to the PNC Acquisition--There is No Assurance That We Will Be
Able to Sell the Current Business of CMI Following the PNC Acquisition or, If
So, At What Price" and "Risks Related to the PNC Acquisition--The Purchase
Method of Accounting Will Have a Negative Effect on Future Reported Earnings."
ANTITRUST MATTERS
The PNC Acquisition is not subject to the pre-filing requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and does not pose any
antitrust concerns.
DESCRIPTION OF CMI
We are a leading independent manufacturer of collectible-quality, die-cast
replicas of cars, trucks, buses and other items. In addition, during 1999, we
developed a proprietary line of die-cast marine products, including boats and
engines. 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 we manufacture are 1/6th to 1/160th scale and include as many
as 450 parts, including numerous moveable parts. They are marketed and
distributed by our customers primarily to collectors, hobbyists and enthusiasts
at retail prices ranging from $20 to $200 or more. Our customers are primarily
U.S. and European marketers and distributors of vehicle replicas and other
collectibles, including Danbury Mint (MBI), Paul's Model Art, Mattel, Action
Performance, First Gear, Corgi Classics, Road Champs and Hallmark Cards.
With the acquisition of the Sinar Industrial Limited group of companies
("Sinar") in July 1999, we expanded our range of products to computer and
interactive video game peripherals ("CGPs"). Sinar designs and markets a variety
of game controllers for various game platforms such as Nintendo, Sony
PlayStation & PC. The range of products includes a wide variety of ergonomically
designed joysticks, joypads, steering wheels, light guns, cable products and
multimedia peripherals. Sinar's products are distributed and sold primarily in
the United States, Europe, and Asia. The new products compliment our die-cast
collectibles by broadening the product lines of some of our existing customers.
These products also appeal to an end customer with similar demographics to our
collectors. In the past, Sinar has designed and marketed its products, but
outsourced all manufacturing to third-party vendors. Beginning in the first
quarter of 2000, some of the CGPs are being manufactured in our Dongguan
facilities. We provide our experience in manufacturing and production control to
ensure product quality and enhance margins.
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Our mission is to provide the highest level of product quality and customer
service among independent manufacturers of die-cast collectibles and computer
and video game peripherals. We offer our customers turnkey product development
and manufacturing capabilities that are customized to meet their specific needs.
Our vertically integrated process affords complete sourcing of raw materials,
engineering, assembly, quality control and final packaging of products in
commercial quantities. Depending on the customer's needs, we provide a
self-contained production area within one of our 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. Our turnkey process enables our 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 our manufacturing operations are conducted through Creative Master
Limited ("CML"), our wholly-owned Hong Kong subsidiary, and its subsidiaries.
CML was co-founded in 1986 by Mr. Carl Tong and Mr. Leo Kwok. Our manufacturing
facilities are located in the Dongguan region of Guangdong Province, the
People's Republic of China ("PRC"), approximately 60 miles northwest of Hong
Kong. The Dongguan facilities contain over 550,000 square feet of manufacturing
space plus housing and related facilities for approximately 6,000 workers.
For a further description of our business, including a discussion of the
risks inherent in such business, and detailed financial information,
stockholders are urged to read our Annual Report on Form 10-KSB for the year
ended December 31, 1999, a copy of which is included with this Proxy Statement.
Our principal executive offices are located at Casey Industrial Building,
8th Floor, 18 Bedford Road, Taikoktsui, Kowloon, Hong Kong.
DESCRIPTION OF PNC
OVERVIEW AND HISTORY
Founded in July 1999, PNC is engaged in developing, marketing and supporting
full-service business-to-business ("B2B") e-commerce solutions for Asian
businesses and other companies that are involved or seek to become more involved
in trans-Pacific B2B trade.
PNC's principal focus to date has been on designing the "PacificNet.com
Solution" and establishing and entering into strategic relationships with Asian
and North American business partners and e-commerce solution providers. PNC's
business strategy is to offer Asian businesses complete e-commerce solutions,
including front-end services such as Web site design, hosting, product database
development and management, and shopping cart applications, and back-end
services such as order processing and transaction payment processing. PNC has
developed a proprietary e-commerce solution called eMerchant 2000 for small and
medium sized Asian businesses. A substantial number of small and medium-sized
enterprises ("SME's") have signed on to use eMerchant 2000, and installations
are currently in progress, primarily in Hong Kong and the PRC. In addition, PNC
has been engaged to develop B2B e-commerce solutions for certain strategic
partners and other major Asian companies. PNC's U.S. office is developing
specific solutions as well as strategic partnerships to facilitate trans-
Pacific B2B trade for its North American customers and partners. These
activities are described in detail below.
PNC was organized under Minnesota law as a limited liability company in July
1999. In November 1999, PNC's Asian operations were organized as a wholly-owned
subsidiary based in Hong Kong ("PacificNet.com Limited"). PNC's Asian
headquarters and operations are located in Hong Kong. PNC's U.S. headquarters
and operations are located in Minneapolis, Minnesota. PNC currently
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has sales and development offices in Minneapolis, Vancouver, Hong Kong, Shanghai
and Kuala Lumpur, Malaysia.
Two of PNC's principal owners, B2B Limited (a wholly-owned subsidiary of
CSH) and Fortune E-Commerce Limited (a wholly-owned subsidiary of Fortune
Tele.com Holdings Ltd.--"Fortune Tele.com"), have agreed to actively promote and
use PNC's e-commerce solutions and services within their affiliated companies.
CSH and Fortune Tele.com are both listed companies in Hong Kong (HKSE: 0235 and
GEM: 8040, respectively), and CSH is the majority stockholder in China Tire
Holdings Ltd. (NYSE: TIR). China Tire is one of the largest tire manufacturers
in the PRC, with a share of approximately 10%, or $316 million, of the domestic
tire market in the PRC. Although no written agreements are currently in place,
it is anticipated that PNC will build a B2B portal site for China Tire's
products and develop China Tire's procurement system. These Asian-based
companies are all significant in size and scope of operations, and the continued
support of PNC by the chairmen of these two companies, both of whom are expected
to become directors of CMI if the PNC Acquisition is consummated, is an integral
part of PNC's business strategy.
In April 2000, PNC entered into a joint venture agreement with APP China
Group Limited ("APP China"), a wholly-owned subsidiary of Asia Pulp & Paper
(NYSE: PAP), to create a corporation owned 51% by PNC and 49% by APP China, to
be the exclusive provider of e-commerce solutions and services to APP China. In
addition, APP China agreed to make an investment in PNC valued at $5 million.
Asia Pulp & Paper is a majority-owned subsidiary of the Sinar Mas Group, one of
the largest diversified holding companies in Asia with direct and indirect
investments in over 300 Asian manufacturers, finance companies and basic
industries. The Chairman of PNC, who is also the Chairman of CSH, has a brother
and sister who are officers in the Sinar Mas Group.
In March 2000, PNC entered into a joint venture agreement with Leginet Sdn.
Bhd., a majority-owned subsidiary of Ng Tiong Seng Corporation Sdn. Bhd.
("NTSC"), a large holding company with interests in numerous Malaysian
businesses. The purpose of the agreement is to create a corporation,
PacificNet-NTSC.com, owned 60% by NTSC and 40% by PNC, to provide
business-to-business and business-to-consumer e-commerce products and services
solutions and services for the Malaysian market.
In April 2000, PNC acquired North America China Trade Centre Corp.
("NACTC"), a Canadian company based in Vancouver, British Columbia, providing
trans-Pacific trade promotion services to over 1,000 Chinese companies, and PNC
entered into an agreement with Canadian Metropolitan Properties Corp. to manage
the operations of NACTC.
The transactions and relationships discussed above are described in greater
detail below under "Strategic Relationships."
PNC's offices are located at the following locations:
- Asian Headquarters and Operations--15th and 29th Floors, Aon Insurance
Tower, 3 Lockhart Road, Wanchai, Hong Kong.
- US Headquarters and Operations--3405 Annapolis Lane North, Minneapolis,
Minnesota 55447.
- PacificNet.com China Limited (joint venture with APP China)--19th Floor
Financial Square, 333 Jiujiang Road, Shanghai, PRC 200001.
- PacificNet-NTSC.com Sdn. Bhd. (joint venture with NTSC)--Lot 10383,
Jalan Sungai Jati, 41000 Klang, Selangor Darul Ehsan, Kuala Lumpur,
Malaysia.
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THE PACIFICNET.COM SOLUTION
PNC develops, markets, licenses and supports comprehensive solutions that
are designed to allow its customers to engage in business-to-business (primary
focus) and business-to-consumer (secondary) Internet commerce. The "PacificNet
Solution" is a combined technology and services offering focused on three
distinct markets: enterprise customers, SME's and Internet community managers.
PNC offers customers a comprehensive and integrated solution for eTailing,
eProcurement and eDistribution. A summary of the eMerchant2000 technology
platform offerings, functionality and current status follows:
<TABLE>
<S> <C>
ETAILING
Storefront Completed
Product Catalogue Completed
Shopping Cart Completed
Auction In-Progress
Forum In-Progress
Chat Room In-Progress
Guest Book In-Progress
Reports Completed
Shop Administration Completed
EPROCUREMENT
Buying Office In-Progress
Supplier Directory In-Progress
Suppliers' Catalogues In-Progress
Forward Auction In-Progress
Office Administration In-Progress
EDISTRIBUTION
Sales Office In-Progress
Buyer Directory In-Progress
Product Catalogue In-Progress
Reverse Auction In-Progress
Office Administration In-Progress
</TABLE>
SERVICES OFFERED THROUGH PNC AND ITS BUSINESS PARTNERS
<TABLE>
<S> <C>
PAYMENT TRANSACTION PROCESSING
Online Transaction Processing In-Progress
Payment on Delivery In-Progress
LOGISTICS SUPPORT SERVICES
Warehousing In-Progress
Order Processing In-Progress
Real-Time Order Tracking System In-Progress
Delivery In-Progress
MEMBER SERVICES MANAGEMENT
Call Centre In-Progress
Order Message Log In-Progress
Administration Centre In-Progress
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
TRADE INFORMATION MANAGEMENT
Trade-related News In-Progress
Research Reports In-Progress
Trade Event Diary In-Progress
Bulletin Board In-Progress
Advertising In-Progress
SYSTEMS INTEGRATION SERVICES In-Progress
Integrate existing MRP/ERP/ASP
Systems
CONSULTANCY SERVICES Available
Provide Customized e-Commerce Solutions to augment the above services/features,
including:
Implementation Approach
Project Management
Methodologies and Tools
SKILL TRANSFER In-Progress
Provision of training for Administrators, Technical Staff, and Key Users
TECHNICAL SUPPORT HELPDESK In-Progress
Provision of Technical Support online, via facsimile, or telephone
</TABLE>
The PacificNet.com Solution for e-commerce is designed to produce the
following benefits to buyers and sellers:
- enabling buyers to reduce their cost of goods sold and increase their
operating margins by transacting directly with the seller through the
PacificNet.com Solution;
- enabling sellers to commence e-commerce activities within a very short
time frame;
- enabling sellers to implement customer-specific pricing, update product
information and introduce new products without being limited by catalog
publication cycles; and
- providing both buyers and sellers with an automated solution for trade
finance processing (automated letters of credit, documentation
authorization), shipment consolidation, warehousing and distribution.
INDUSTRY OPPORTUNITY AND EXPECTED GROWTH IN INTERNET USAGE IN ASIA AND THE
PRC
With an ever-increasing number of users, both in the United States and
internationally, the Internet has emerged as a significant mass communications
medium. International Data Corporation ("IDC") estimates that the number of
individuals worldwide with access to the Internet reached approximately
200 million as of the end of 1999. Zona Research Inc. estimates that the
combined Internet and Intranet software market increased from $342 million in
1995 to $3.3 billion in 1998.
PNC management believes that the next major phase of Internet growth will be
driven by the emergence of commerce and other interactive business applications
of the Web. Businesses are seeking ways to take advantage of the fact that other
businesses with which they need to interact, including customers, suppliers and
distributors, are increasingly using the Internet. Traditionally, many large
companies built private networks to communicate with their largest customers,
suppliers and distributors. Today, the Internet's worldwide accessibility can
make Internet-based data communications highly efficient, virtually
instantaneous, cost effective and available to organizations of all sizes.
PNC management believes that an opportunity exists to create Internet
communications solutions to allow commerce to be conducted more efficiently
between companies in the United States and their trade partners in developing
countries. PNC has chosen to focus on trans-Pacific electronic commerce
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<PAGE>
because of the sustained growth in trade that is forecast between these two
regions and because of the Asian relationships of its members and strategic
partners. In addition, Internet usage, while presently in its infancy in Asian
countries (non-Japanese), is expected to grow over the next several years.
IDC estimates that non-Japanese Asian e-commerce reached $2 billion in 1998,
and predicts that this figure will grow to $32.6 billion in 2003. PNC management
believes that much of this growth in B2B e-commerce in Asia will be driven by
SME's in both North America and Asia that are seeking to break down
international barriers in order to reach more potential customers, suppliers and
business partners and to compete more effectively. According to IDC, Internet
penetration by small business is likely to reach 70% by 2002.
Businesses involved in international trade and the sourcing and selling of
products and services in many countries are bound to encounter disparate
currencies, laws and languages. These factors pose unique challenges for cross
border communications, logistics and customs, and also offer a unique
opportunity for a company like PNC focused on making trans-Pacific trade more
economical and efficient through the use of electronic commerce. According to a
Goldman Sachs survey, the key growth drivers for the B2B market in Asia are
affected by a variety of factors, including:
- as existing and emerging markets in Asia adopt B2B, it creates a
network effect that further accelerates B2B adoption;
- as Western companies adopt B2B, they force adoption among their Asian
trading partners;
- Asian governments are actively intervening to encourage or enforce B2B
adoption; and
- as an increasing number of businesses upgrade from mainframes to client
server systems, these platforms lend themselves to diverse B2B
application.
The PRC is a key geographic market for PNC, where much of its initial
marketing efforts have been focused. According to a joint study of Strategic
Group and BDA (China), the PRC is the fastest growing Internet market in Asia
and the number of Chinese Internet users grew from 2.1 million in 1998 to
approximately 6.7 million in 1999. The PRC's Internet user base is expected to
exceed 33 million by 2003, growing at an average annual rate of nearly
60 percent over the next five years. This will create significant new
opportunities for PNC to utilize its solutions and services to enable companies
in the PRC to expand trade with companies in North America and vice versa.
BUSINESS STRATEGY
In addition to completing the PacificNet.com Solution, the key components of
PNC's business strategy are as follows:
- Create marketing and distribution alliances with strategic Asian and
North American based companies that can generate services revenue and
create traffic using the PacificNet.com Solution. This is initially
being accomplished with the support and assistance of certain key PNC
Members with substantial business activities and relationships in Asia.
As PNC continues to grow, management is increasingly focusing on
additional strategic alliances with third party providers that can
utilize PNC's solutions and services or that can provide content or
services for its front-end or back-end solutions.
- Generate services revenue for providing solutions to businesses that
enable them to communicate effectively and securely over the Internet,
generate licensing revenue for the client's use of PNC's proprietary
technology and, most importantly, generate transaction-based revenue
for ongoing transactions that businesses complete using the
PacificNet.com Solution.
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- Focus on SME's as a significant portion of the target customer market.
These businesses are less likely to have the internal resources
necessary to implement e-commerce solutions on their own. In addition,
management of PNC believes that there will be less competition in
serving this market.
- Establish customer awareness of the "PacificNet.com" name and
association of this name with the brand of e-commerce solutions and
services that PNC offers. This will be accomplished through
participation at trade shows and similar events, increased advertising
once more of the PacificNet.com Solution is functional and through word
of mouth as PNC continues to build a reputation for quality service
with existing customers.
- Recruit, train, motivate and retain highly skilled managers and
employees, particularly in sales and marketing and software
engineering. Implementing PNC's business strategy and managing the
anticipated growth in PNC's business will require a significant
investment in human resources. PNC presently has approximately 56
full-time employees and is actively recruiting additional personnel.
COMPETITION
Competition for electronic commerce products and services is intense. PNC
management expects that competition to continue to intensify. Barriers to entry
are minimal, and competitors can launch new Web sites at a relatively low cost.
PNC management believes that the principal competitive factors for
business-to-business e-commerce solutions are breadth and scope of solution,
depth of supplier content, interoperability with existing information technology
systems, scalability, functionality, ease-of-use, ease-of-implementation, total
cost of ownership and installed base of referenceable customers. Many of PNC's
competitors have greater brand recognition and greater financial, marketing and
other resources. This may place PNC at a disadvantage in responding to
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives.
Many e-commerce companies offer similar functionality to that of PNC's
products and services; however, management believes that PNC can compete
effectively by offering a comprehensive, integrated solution of both front-end
order processing management and back-end fulfillment capability. Competition is
most intense in the front-end electronic shopping mall capability that PNC
offers. Electronic mall capability includes a common Web site, electronic
catalogue of products for sale and online ordering capability. Manufacturers
generally pay a fee to list products for sale at these sites. The following
companies offer similar electronic mall functionality: MeetChina.com, Global
Sources, Merchandise Online.com, CETrade.com, RedTagBiz.com, RedTag.com,
Alibabas.com, BizBuyer.com, Trade Sources.com, Tradepac.com, AsiaTrade.com,
Asianproducts.com, Asiamfrs.com, Asia4Sale.com and Web Connection.
PNC will likely face intensified competition for business and for
opportunities to create strategic alliances from various sources, several of
which are concentrating their efforts in trans-Pacific trade, like PNC. To date,
this includes companies involved in or offering (a) supplier and buying
consortiums, (b) Internet-based enabling technologies and (c) service
integrators. The supplier and buying consortiums offer direct-to-manufacturer
solutions and electronic mall functionality, and they principally include the
companies mentioned in the prior paragraph. Those competitors offering
Internet-based enabling technologies often have an industry-based focus that may
include a single industry or multiple industries that can best utilize a
particular technology, and examples of these types of companies include Ventro,
VerticalNet, SciQuest and Anderson Unicom Group. Other competitors in this area
offer broader Internet-based enabling technologies for horizontal trans-Pacific
B2B commerce, and they include Ariba and Commerce One. In addition, PNC may face
competition from traditional enterprise resource planning technology companies
with broad-based strategies relating to the Internet, including
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<PAGE>
SAP and Oracle. Finally, PNC competes with traditional service integrators
focused on enabling customers with Internet access for electronic commerce,
including Scient, Andersen Consulting and IBM. Internet holding companies,
including venture funds with Internet incubators such as Internet Capital Group,
CMGI and Pacific Century Cyberworks, also have or are developing portfolio
companies that are focused on identifying technologies and integrated solutions
to accelerate the delivery of electronic commerce.
Unlike most of its competitors, PNC competes for a share of a customer's
procurement budget by offering an end-to-end, one-stop shopping, e-commerce
solution. PNC has built a team with knowledge in Web solutions, system design,
e-commerce operations, logistics, payment support and ERP integration services
in order to provide its customers with cost effective, efficient and pragmatic
end-to-end solutions. PNC's management believes that the comprehensive nature of
its solutions, its specific focus on trans-Pacific trade, primarily for SME's,
and the scope and depth of its strategic relationships and alliances, many of
which are already in place, will give it a competitive advantage with customers
in its target markets.
STRATEGIC RELATIONSHIPS
Since inception, PNC has sought to create strategic relationships with Asian
and North American entities for the use/development of the PacificNet.com
Solution.
ASIA ONLINE. In 1999, PNC entered into a Strategic Partnering and
Distribution Agreement for the marketing, promotion and sale of PNC's e-commerce
products and services to Asia Online and its members. Asia Online is a leading
Asian Internet Service Provider ("ISP"). Asia Online provides Internet-related
communications services and productivity tools to facilitate communications
among Asians and people with an interest in Asia worldwide. Asia Online offers a
variety of Internet-related services including dial-up Internet access, leased
lines, ISDN, roaming, Web development and hosting services, advertising and
e-commerce capabilities. Through its technology partnerships, Asia Online plans
to offer Internet-based communications solutions including voice-over-IP,
Internet fax and Web-based Intranets/Extranets to domestic and international
customers. Asia Online is credited with a number of Internet industry firsts.
These include being the first ISP to establish direct links to other Asian
countries, the first to set up its own facility in the U.S. to better distribute
Asian content to an American audience and the first company in the world to
license RealAudio for the Internet.
HONG KONG PRODUCTIVITY COUNCIL. In 1999, PNC entered into an e-commerce
Development and Partnership Cooperation Agreement covering up to 400 existing
Hong Kong businesses for the use of PNC's services and solutions. The Hong Kong
Productivity Council ("HKPC") is a multi-disciplinary organization established
by statute in 1967 to promote increased productivity and the use of more
efficient methods throughout Hong Kong's business sectors. HKPC is governed by a
council representing managerial, labor, academic and professional interests, as
well as a number of government departments concerned with productivity issues.
HKPC and its subsidiary companies employ about 600 consultants and staff, and
provide a multitude of services to approximately 4,000 companies each year.
FORTUNE TELE.COM. In 1999, PNC entered into a Strategic Investment, Joint
Venture and Alliance Partnership Agreement with Fortune Tele.com, whereby
Fortune Tele.com represents and assists PNC in the marketing, sales and
promotion of PNC's e-commerce products and services to Fortune Tele.com's
existing customers, distributors, resellers, business partners and holding
companies. Fortune Tele.com is an investor in PNC and owns approximately 10% of
the fully diluted Membership Interests of PNC outstanding as of April 30, 2000.
Fortune Tele.com, a listed company on the Hong Kong Stock Exchange Growth
Enterprise Market Board, is among the leading distributors of mobile phones and
accessories in the PRC. In addition, Fortune Tele.com is a leading service
provider of wireless multimedia communications products and services in the PRC
and Hong Kong through the integration of its diverse distribution network with
e-commerce applications using wireless access protocol and
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<PAGE>
other Internet technology. Complementary retailing and marketing services are
provided through an extensive network of franchised shops and authorized
"Fortune Tele.com" dealer's shops, spread across cities and provinces in the
PRC. After-sales services are available through authorized agents' service
centers in such major cities as Beijing, Shanghai, Guangzhou and Jiangmen.
Fortune Tele.com has strategic business relationships with Nokia, Philips and
Alcatel, and acts as the exclusive distributor for a number of these top-selling
cellular phone manufacturers.
MARQUETTE.COM. In January 2000, PNC entered into a Co-Development and
Strategic Alliance Arrangement with marquette.com companies for the development
of an automated "International Trade Finance Solution" as well as the mutual
sales, promotion and marketing efforts of PNC and Marquette products and
services. When completed, the co-developed International Trade Finance Solution
will automate substantially all aspects of international trade including letters
of credit, document certification and authentication.
INTERELATE. In January 2000, PNC entered into a Co-Development and
Strategic Alliance Arrangement with Interelate for the development of e-commerce
customer analytic capabilities as part of the PacificNet.com Solution.
Management anticipates that upon completion of this development PNC would have
the capability to match buyers with sellers on the basis of predefined product
criteria including price, quality, packaging and delivery lead times. PNC
anticipate that this significant investment in technology will contain in excess
of 10 million products, buyers and sellers.
NACTC. PNC has acquired all of the common stock of NACTC, which provides
trans-Pacific trade promotion services to approximately 1,000 Chinese companies.
PNC also entered into an agreement with Canadian Metropolitan Properties Corp.
("Canadian") pursuant to which Canadian will manage the assets and obligations
of NACTC for a minimum term of one year and, as one of its obligations under the
management agreement, Canadian has agreed to cause a minimum of 800 PRC-based
companies to register with PNC's B2B Internet service. PNC will manage all of
the Internet-related activities and transactions for the PRC-based companies
registered by Canadian. The total obligation of PNC to Canadian under this
management agreement is approximately $1.1 million, payable over 12 months.
APP CHINA. In January 2000, PNC and APP China entered into a letter of
intent and in March 2000 the parties signed an agreement under which APP China
has subscribed to purchase 1,000,000 Membership Interests of PNC for a total
price of $5,000,000, consisting of $2,500,000 in cash and 334,225 unregistered
shares of common stock of Asia Pulp & Paper (NYSE: PAP), the parent company of
APP China. The parties have agreed that, for purposes of this transaction, the
assigned value of the Asia Pulp & Paper shares is $2,500,000. As an integral
part of this transaction, and with the aim of becoming mainland China's leading
e-commerce solutions and services provider, APP China and PNC entered into a
partnership agreement in April 2000 to form a joint venture enterprise, in which
PNC will invest $510,000 in cash and take 51% of the equity and APP China will
invest $490,000 in cash for the remaining 49% stake. The joint venture will
provide e-commerce Website development and information technology products and
services to businesses in the PRC. The complete package will be aimed at helping
Chinese enterprises to adapt rapidly and use technology to compete more
effectively with more established companies. In the launch phase during the next
three months, PNC will custom-package its eMerchant2000 products with other
proprietary e-commerce software to service APP China's 100-plus retail outlets
in the PRC. These projects will be used as benchmarks for marketing solutions
for other affiliated companies and businesses throughout the PRC.
PACIFICNET-NTSC.COM SDN. BHD. On March 24, 2000, PNC entered into a joint
venture agreement with Leginet Sdn. Bhd., a majority-owned subsidiary of Ng
Tiong Seng Corporation Sdn. Bhd. ("NTSC"), to create a corporation,
PacificNet-NTSC.com, owned 60% by NTSC and 40% by PNC, to provide
business-to-business and business-to-consumer e-commerce solutions and services
for the Malaysian market. The Managing Director of PacificNet-NTSC.com is
Jeffrey Ng Chin Heng, who is
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also the Managing Director of NTSC. NTSC is a large, well-established Malaysian
holding company with four listed companies on the Malaysia Stock Exchange.
NTSC's principal activities include property investment, management services,
rubber and shoe manufacturing, trading and ladies' lingerie.
FIRST ECOM.COM In April 2000, First Ecom.com and PNC began the design of a
safe, easy and fast e-payment solution between merchants and consumers through
participating banks and financial institutions. As a global provider of
electronic payment processing, First Ecom.com seeks to provide these services to
merchants and financial institutions worldwide. Through strategic partnerships
with banks, ISPs, e-commerce product suppliers, system integrators and
storefront solution providers, the combined PNC-First Ecom.com solution will
process credit card transactions made over the Internet in multiple currencies,
either domestically or offshore.
NETLIFE. In March 2000, PNC selected Netlife as a strategic partner to
assist in the development of online payment solutions. From personalized home
page design to order and inventory management, to customer database and secure
payment facilities, the PNC/Netlife ServerPOS package will be designed to
deliver a complete "all in one" secure e-commerce solution.
IBM HONG KONG. In March 2000, PNC began partnering with IBM Hong Kong to
jointly pursue electronic commerce activities by bundling the PacificNet.com
Solution with IBM servers and hardware.
TELEWIDE ENTERPRISES LIMITED. In April 2000, PNC commenced a project to
integrate its eMerchant2000 solution with Telewide's software to provide online
credit card clearing service. Telewide is an e-commerce payment solution
provider for SME's. Its integrated package, Automated Secured Internet Shopping
Services ("ASISS"), is designed to help merchants accepting credit cards for
purchases over the Internet. ASISS checks the format of the card number and
makes further security checks to validate the authenticity of the cardholder
information.
KERRY LOGISTICS LIMITED AND M.POS (HK) LIMITED. In April 2000, PNC, Kerry
Logistics and M.POS (HK) Limited formed an alliance to launch a business-to-door
("B2D") e-commerce solution for the Hong Kong market. B2D is a solution that
fully integrates the Web storefront, payment and logistics platforms with
M.POS's mobile terminals. Using this process, credit card numbers are no longer
required to be transferred via the Internet; instead, the payment transaction
will be processed upon receipt of the goods using a mobile POS terminal.
PROPERTIES
PNC's U.S. corporate headquarters are located in an office facility in
Plymouth (Minneapolis), Minnesota, where it leases approximately 3,000 square
feet for a monthly fee of $2,750 under a month-to-month lease that expires in
May 2000. PNC is in the process of evaluating new locations for its U.S.
corporate headquarters.
PNC's Asian headquarters and development center are located in Wanchai, Hong
Kong, where it leases approximately 8,000 square feet for a combined monthly fee
of approximately $16,000 under two leases that expire in December 2001 and May
2002, respectively. The total obligation under these leases is approximately
$400,000. PNC maintains most of its computer systems in this facility.
NACTC, PNC's recently-acquired Canadian operation, has a sales and marketing
office located in Vancouver, British Columbia, which space is provided pursuant
to a management agreement with Canadian Metropolitan Properties Corp.
For specific addresses of PNC's principal properties, see "Description Of
PNC--Overview and History" above.
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<PAGE>
PNC effectively has sales offices in the United States located in
Minneapolis, Pittsburgh, Los Angeles, Oklahoma City, Atlanta and Miami. All of
PNC's sales professionals located in these facilities are commissioned
independent contractors who operate out of their home offices. PNC has no lease
arrangements for these facilities.
EMPLOYEES
As of April 30, 2000, PNC had 56 employees and contractors, all of which
were full-time. Forty-five of these individuals were located in Hong Kong and 11
were in the United States. PNC considers its relationships with employees to be
good. None of PNC's employees are covered by collective bargaining agreements.
EXECUTIVE MANAGEMENT AND GOVERNORS
The executive management and Governors of PNC, and their ages and positions,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
GOVERNORS
Oei Hong Leong........ 51 Governor (Chairman)
Tony Tong............. 32 Governor, Co-Chief Executive Officer of PNC
Richard Hui........... 31 Governor, Co-Chief Executive Officer of PNC
Catherine Ma.......... 34 Governor, CSH Representative
Simon Chu............. 32 Governor, CSH Representative
Li Ling Xiu........... 36 Governor, CSH Representative
Paul Chow............. 38 Governor, Asia--Business Development
Steve Lau............. 37 Governor, Fortune Tele.com Representative
MANAGEMENT
Sally Li.............. 29 Asia--Operations
Alfonso Oi Ip Fung.... 41 Asia--Business Development
Charles W. Mueller.... 41 U.S.--Finance
Kenley A. Tarter...... 40 U.S.--Sales and Marketing
</TABLE>
OEI HONG LEONG has been the Chairman of PNC's Board of Governors since
November 1999. Mr. Oei is the founder and Chairman (1991 to present) of Hong
Kong-listed China Strategic Holdings Limited (HKSE:235) ("CSH"), which includes
several listed companies, including China Tire Holdings Ltd. (NYSE:TIR) ("China
Tire"), and MRI Holdings Ltd. (ASE:MRI), an Australian listed company. From 1971
to 1980, Mr. Oei was the Managing Director of the Sinar Mas Group. Mr. Oei left
the Sinar Mas Group in 1980 to lead Singapore-based United Industrial Corp. and
Singapore Land. In 1991, Mr. Oei moved to Hong Kong and acquired what is now
CSH. Mr. Oei has also been the chairman of more than 40 Sino-foreign joint
ventures in the PRC.
TONY TONG is a co-founder of PNC and has served as a Governor and its co-CEO
since inception in July 1999. Mr. Tong is also a Director and Co-Founder of
TalentSoft Inc., a private company which provides e-commerce consulting, service
and Internet software application products, where Mr. Tong was the chief
architect of the company's software products Talentsoft Web and Web+Shop. From
March 1997 to November 1999, Mr. Tong served as the Chief Technology Officer and
VP of Strategic Development and International Business at Vallon, Inc, an
Internet Web site development and e-commerce service company. Vallon is the
provider of Net Propulsion, an Internet Web site design and e-commerce
full-service solution for small and medium sized businesses. Prior to joining
Vallon, Mr. Tong was the Chief Information Officer of DDS, Inc., an SAP
consulting firm. From 1992 to 1995, Mr. Tong served as Project Leader and
Consultant at Andersen Consulting, Fingerhut Corporation and Target Stores
(Dayton Hudson Corporation). Mr. Tong is the inventor, designer, and patent
holder of
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Patent Number 6,012,066 (granted by the U.S. Patent and Trademark Office),
Computerized Work Flow System, an Internet Web-based workflow management system
for automated Web site creation and process management.
RICHARD HUI is a co-founder and co-CEO of PNC and has managed its Asian
operations since inception in July 1999. From 1992 to late 1999, Mr. Hui was the
CEO of Talent Information Management HK Limited and Pacific Internet Limited,
both of which are Internet consulting firms based in Hong Kong. There, Mr. Hui
also served as the Chief Technology Officer of the IT School Intranet project in
1998, which established Intranet and Internet educational systems for schools in
Hong Kong. Mr. Hui has also been a Director of Hong Kong listed Fortune Tele.com
since October 1999. Mr. Hui is the husband of Ms. Sally Li, who is responsible
for Asian operations of PNC.
CATHERINE MA has served as a Governor of PNC since November 1999. Ms. Ma is
a chartered secretary and has over 12 years of working experience in the company
secretarial profession. Ms. Ma joined CSH as its Secretary in 1991 and currently
serves as its Executive Director (1995 to present) in charge of all corporate
development. Before joining CSH, Ms. Ma had worked for Peat Marwick and other
Hong Kong listed companies in legal and corporate affairs. Presently, Ms. Ma is
also a director of all listed subsidiaries and related companies of CSH.
SIMON CHU has served as a Governor of PNC since November 1999. In January
2000, Mr. Chu was appointed Director for Business Development of CSH. From 1998
to 1999, Mr. Chu was the Executive Director, Vice Chairman, and President of PRC
Operations of Hong Kong listed Tricom Holdings Limited (now Pacific Century
Cyberworks Limited). Mr. Chu also serves as a director of Hong Kong listed China
Online Holdings Limited since 1999.
LI LING XIU has served as a Governor of the Company since November 1999.
Ms. Li joined CSH as Deputy General Manager--China Division in 1994, and has
held the title of Group Deputy General Manager since 1996, during which time she
was actively involved in the establishment and operation of more than 40 joint
venture manufacturing companies. Ms. Li has also been a Vice President of China
Tire since 1996.
STEVE LAU has served as a Governor of PNC since November 1999. Mr. Lau is
the founder of Fortune Tele.com, one of the largest distributors of cellular
phones and provider of related services in the PRC, and has held the titles of
Chairman and CEO since 1993. Prior to establishing Fortune, Tele.com, Mr. Lau
was employed by the Hutchison Group, a large telecommunications company in Hong
Kong, and later represented Hutchinson China as a consultant providing advice
for development of Hutchison's operations in the PRC.
PAUL CHOW has served as a Governor of PNC since February 2000. Mr. Chow is a
full-time consultant to and functions as the Director of Business Development
for PNC's Asian subsidiary, PacificNet.com Limited. Previously, Mr. Chow was
from 1989 to 1999 Managing Director of Elegance Textile (HK) Ltd., an industrial
concern based in Hong Kong and the PRC with manufacturing interests in textiles,
clothing and printing plants. From 1985 to 1988, Mr. Chow held the title of
Manager, Corporate Banking at Standard Chartered Bank PLC, in its Hong Kong
office. From 1983 to 1985, Mr. Chow was the Deputy Manager of Hua Jay Joint
Venture Co. Ltd. ("Hua Jay"), one of the first Sino-foreign joint venture
companies. Hua Jay developed and marketed the first turnkey industrial park in
the PRC located in the Shenzhen Special Economic Zone.
SALLY LI is a co-founder of PNC and has served as a Governor since
July 1999. Ms. Li has also managed the Asian operations of PNC since July 1999.
From 1995 to late 1999, Ms. Li was the General Manager of an Internet consulting
company, Talent Information Management (HK) Ltd. ("TIM"), which she co-founded,
and was responsible for product development and marketing communications.
Ms. Li has been a director of TIM since 1995. Ms. Li is the wife of Mr. Richard
Hui, who is a Co-CEO of PNC.
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ALFONSO OI IP FUNG is a full-time consultant to PNC and has been involved in
PNC's business development efforts in Asia since November 1999. Mr. Fung is
self-employed and is a specialist in the assessment of legal costs under the
Hong Kong legal system. In 1988, Mr. Fung published a computer software program
for preparing legal bills and licensed it to the Hong Kong Government. Mr. Fung
is a non-executive director of Fortune Tele.com.
CHARLES W. MUELLER has been involved in U.S. finance matters for PNC since
November 1999. From 1996 until joining PNC, Mr. Mueller served as the General
Manager of the North American Consulting Group for Information Advantage, a
business intelligence technology company. Prior to this, Mr. Mueller spent
14 years with Price Waterhouse (3 years) and Arthur Andersen/Andersen Consulting
(11 years).
KENLEY A. TARTER has been handling U.S. Sales and Marketing for PNC since
January 2000. From 1996 through January 2000, Mr. Tarter served as the
Vice-President of International Business Development for Heller Financial (NYSE:
HF), a large commercial finance organization. Prior to this, Mr. Tarter served
as an International Trade Specialist for several organizations including the
U.S. Department of Commerce (3 years), Potomoc World Trading (2 years) and the
Washington International Trade Association (3 years).
RISKS RELATED TO THE BUSINESS OF PNC
If the PNC Acquisition is consummated, PNC will become a wholly-owned
subsidiary of CMI, and CMI's primary focus will be the business of PNC, rather
than CMI's existing business. The management and governors of PNC have expressed
their intention to divest CMI of its current business (see "Description of CMI"
above) in order to devote all of their time and attention to the
business-to-business electronic commerce services and solutions of PNC. In light
of this, a management group led by CMI's Chief Executive Officer, Mr. Carl Tong,
has indicated an interest in negotiating a purchase of the current business.
However, neither CMI nor PNC have entered into any formal understanding or
arrangement with respect to a disposition of the current business, nor is any
such disposition a condition to the PNC Acquisition. Stockholders of CMI should
carefully read the following risks related to the business of PNC, since this
business will become CMI's primary focus if the PNC Acquisition is consummated
and it will be CMI's only focus if the current manufacturing business is sold
subsequent to the Closing.
PNC HAS A LIMITED OPERATING HISTORY AND ANTICIPATES CONTINUED LOSSES FOR THE
FORESEEABLE FUTURE
PNC has only a limited operating history on which investors can base
evaluations of its business and prospects. In addition, its prospects must be
considered in light of the risks and uncertainties inherent in and traditionally
encountered by companies in an early stage of development in new and rapidly
evolving markets.
PNC was founded and commenced operations in July 1999. Its focus to date has
been primarily on designing the "PacificNet.com Solution" and creating strategic
relationships. From inception through December 31, 1999, revenues were only
$49,000. Although management of PNC expects revenues to grow rapidly during 2000
and thereafter, there can be no assurance that this will be the case.
Since PNC commenced operations, it has incurred losses. For the period from
inception through December 31, 1999, losses totaled $384,000. Expenditures have
been increasing and are expected to continue to increase substantially in all
areas, particularly in solution development and sales and marketing. Management
of PNC expects to continue to incur losses for at least the next two years.
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PNC may never be profitable or, if it becomes profitable, it may be unable
to sustain profitability. Its limited operating history makes predicting future
operating results, including operating expenses, very difficult. In order to
increase revenue and achieve profitability, PNC must, among other things:
- complete development of the PacificNet.com Solution;
- increase market acceptance of its solutions and services;
- successfully execute its strategic partner alliance strategy;
- develop and maintain awareness of its brands;
- attract, integrate, motivate and retain qualified personnel;
- continue to build financial and operational infrastructure; and
- offer high quality customer service and support.
The ability to increase revenue and achieve profitability also depends on a
number of factors outside PNC's control, including the extent to which:
- competitors develop competing e-commerce services and solutions;
- strategic alliance and other marketing partners dedicate resources or
otherwise give priority to promoting PNC's products and services; and
- PNC maintains access to significant amounts of capital.
Many of these risks are separately discussed below.
PNC'S COMPLETE SOLUTION IS STILL UNDER DEVELOPMENT
Since inception, PNC's principal focus has been on designing the
"PacificNet.com Solution" and creating strategic relationships with Asian and
North American business partners and solution providers. A listing of the
components within the PacificNet.com technology solution and a status of each
component as of March 2000 can be found in the discussion under "PNC
Business--Status of the Solution."
Currently, PNC is able to offer substantially all of the e-commerce setup
components for license and is generating services revenue from such activities.
If the PacificNet.com Solution is not fully implemented on a timely basis, PNC's
business, financial condition and operating results could be materially
adversely affected.
THERE IS NO ASSURANCE OF MARKET ACCEPTANCE OF PNC'S PRODUCTS
PNC believes that a significant contributing factor in its initial growth
has been the ability to create and maintain strong relationships with the
community of Web developers that initially reacted favorably to PNC's business
strategy and have or are likely to adopt PNC's products. This community of early
adopters demands rapid improvements in the performance, features and reliability
of products, as well as a high level of customer service. If PNC's products do
not continue to satisfy the Web developer community or otherwise fail to sustain
sufficient market acceptance, its business, financial condition and operating
results could be materially adversely affected. Due in part to the emerging
nature of the Web development products market and the substantial resources
available to many market participants, PNC management believes there is a
time-limited opportunity to achieve and maintain maximum market share in this
market.
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PNC'S BUSINESS STRATEGY DEPENDS ON THE GROWTH OF THE INTERNET AND THE
SECURITY OF BUSINESS TRANSACTIONS CONDUCTED OVER THE INTERNET
PNC's business would be adversely affected if B2B Internet usage does not
continue to grow. Internet usage may be inhibited by a number of reasons, such
as:
- lack of infrastructure and insufficient technical capabilities;
- security concerns;
- inconsistent quality and ease of service; and
- lack of availability of cost-effective, high-speed service.
If B2B Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If such outages or delays
frequently occur in the future, Internet usage, as well as usage of PNC's
solutions, could be adversely affected.
Concerns regarding the security of confidential business information
transmitted over the Internet prevents many potential customers from engaging in
online transactions. If PNC does not add sufficient security features to future
product releases, its products may not gain market acceptance or there may be
additional legal exposure to PNC. PNC has included basic security features in
its products to protect the privacy and integrity of customer data, such as
password requirements for access to portions of its vertical trade communities.
However, PNC does not currently use sophisticated authentication technology or
encryption, which transforms information into a "code" designed to be unreadable
by third parties, to protect confidential information such as credit card
numbers. As part of the development of its total PacificNet.com Solution, PNC
intends to license encryption technology to protect confidential transaction
data.
Internet infrastructure is potentially vulnerable to electronic break-ins,
viruses or similar problems. If a person circumvents PNC's security measures, he
or she could misappropriate proprietary information or cause interruptions in
PNC's operations. Security breaches that result in access to confidential
information could damage PNC's reputation and expose it to a risk of loss or
liability. PNC may be required to make significant unplanned investments and
efforts to protect against or remedy security breaches. If PNC does not
adequately address security issues and the concerns of its customers and
potential customers in this area, its business, financial condition and
operating results could be materially adversely affected.
THERE IS INTENSE COMPETITION FOR THE E-COMMERCE SOLUTIONS THAT PNC OFFERS
Competition for electronic commerce products and services is intense. PNC
expects that competition will continue to intensify in all areas of e-commerce,
including those serviced by PNC. Barriers to entry are minimal, and competitors
can launch new Web sites and introduce new products and services at a relatively
low cost. PNC competes for a share of a customer's procurement budget by
offering an end-to-end e-commerce solution. However, competitors may develop
Internet products or services that are superior to, or have greater market
acceptance than, PNC's solutions. Many of PNC's competitors have greater brand
recognition and greater financial, marketing and other resources than PNC. This
may place PNC at a disadvantage in responding to competitors' pricing
strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives. If PNC is unable to compete successfully,
its business, financial condition and operating results could be materially
adversely affected.
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PNC'S MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE WHICH MAY BE
DIFFICULT FOR PNC TO KEEP UP WITH IN A COST-EFFECTIVE MANNER
PNC's market is characterized by rapid technological change and frequent new
product announcements. Significant technological advances in the future could
render PNC's existing and planned e-commerce solutions technology obsolete. To
be successful, PNC must adapt to a rapidly changing market by continually
improving the responsiveness, services and features of its solutions. PNC's
success will depend, in part, on its ability to license leading technologies
useful in its business, enhance existing services and develop new services and
technology that address the needs of its customers. PNC will also need to
respond to technological advances and emerging industry standards in a
cost-effective and timely manner. If PNC is unable to successfully respond to
these rapid changes and new developments or does not respond in a cost-effective
manner, PNC's business, financial condition and operating results could be
materially adversely affected.
CAPACITY LIMITS ON PNC'S TECHNOLOGY, TRANSACTION PROCESSING SYSTEM AND
NETWORK HARDWARE AND SOFTWARE MAY BE DIFFICULT TO PROJECT AND PNC MAY NOT BE
ABLE TO MEET INCREASED USE
As traffic to PNC's Web site and use of its solutions increase, PNC must
expand and upgrade its technology, transaction processing systems and network
hardware and software. PNC may not be able to accurately project the rate of
increase in traffic for these channels. In addition, PNC may not be able to
expand and upgrade systems and network hardware and software capabilities to
accommodate increased use of its vertical trade communities. If PNC does not
appropriately upgrade its systems and network hardware and software in a
cost-effective manner and on a timely basis, its business, financial condition
and operating results could be materially adversely affected.
THERE IS LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY
PNC's success depends to a significant degree upon the development and
protection of its software, solutions, deployment methodologies and other
proprietary technology. The software industry has experienced widespread
unauthorized reproduction of software products. The unauthorized reproduction of
PNC's proprietary technology could enable third parties to benefit from PNC's
technology without paying for it. PNC attempts to protect proprietary technology
primarily through:
- trade secret, copyright and trademark laws;
- license agreements;
- employee and third party non-disclosure agreements; and
- limiting access to and distribution of PNC's documentation and other
proprietary information.
The steps PNC has taken to protect its proprietary technology may be
inadequate. Existing trade secret, copyright and trademark laws offer only
limited protection. In addition, PNC relies in part on "shrinkwrap" and
"clickwrap" licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. Moreover, the laws of the
PRC and other countries in which PNC markets its products may afford little or
no effective protection of intellectual property. Other companies could
independently develop similar or superior technology without violating PNC's
proprietary rights. Any misappropriation of PNC's technology or the development
of successful competitive technology could have a material adverse effect on
PNC's business, financial condition and operating results. If PNC had to resort
to legal proceedings in order to enforce its intellectual property rights, the
proceedings could be burdensome and expensive and could involve a high degree of
uncertainty as to the ultimate outcome, particularly in developing countries.
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PNC attempts to avoid infringing known proprietary rights of third parties
in its solution development efforts. However, PNC does not conduct comprehensive
patent searches to determine whether the technology used in its products
infringes patents held by third parties. In addition, it is difficult to proceed
with certainty in a rapidly evolving technological environment in which there
may be numerous patent applications pending, many of which are confidential when
filed, with regard to similar technologies. If PNC were to discover that one of
its products violated third party proprietary rights, there can be no assurance
that PNC would be able to obtain licenses on commercially reasonable terms to
continue offering the product without substantial reengineering or that any
effort to undertake such reengineering would be successful. From time to time,
third parties may claim that PNC's products or technology infringe their patents
or other proprietary rights. Any such claim could cause PNC to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract PNC's management from its business. Furthermore, a party making such a
claim could secure a judgment that required PNC to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent PNC from selling certain products. Any of these events could have a
material adverse effect on PNC's business, financial condition and operating
results.
THERE IS RISK OF PRODUCT DEFECTS AND PRODUCT LIABILITY
Software products as complex as PNC's may contain undetected errors or
result in failures when first introduced or when new versions are released. Such
errors are frequently discovered shortly after introduction of a new product or
a new release of an existing product, but could be discovered at any point in a
product's life cycle. Despite testing by PNC and its customers, errors may occur
in a product offering after commencement of commercial shipments. The occurrence
of these errors could result in loss of or delay in revenue, loss of market
share, failure to achieve market acceptance, diversion of development resources,
injury to PNC's reputation, or damage to PNC's efforts to build brand awareness,
any of which could have a material adverse effect on PNC's business, operating
results and financial condition.
The occurrence of errors in PNC's software and solutions might also result
in potential liability to customers. Many of the applications developed and
deployed with PNC's products are critical to the operations of customers'
businesses and provide benefits that may be difficult to quantify. Any failure
in a customer's application could result in a claim for substantial damages
against PNC, regardless of its responsibility for such failure. Although PNC
maintains general liability insurance, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
claims against PNC that exceed available insurance coverage or changes in PNC's
insurance policies, including premium increases or the imposition of specific
exclusions, large deductibles or coinsurance requirements, could materially
adversely affect PNC's business, financial condition and operating results.
PNC'S CURRENT MARKETING AND DISTRIBUTION ALLIANCES MAY NOT GENERATE THE
EXPECTED NUMBER OF NEW CUSTOMERS OR MAY BE TERMINATED
PNC has developed marketing and distribution alliances with Asian and North
American based companies that can create traffic using the PacificNet.com
Solution. The success of these relationships depends on the amount of increased
traffic PNC will receive from alliance partners. While these relationships may
be owned or controlled by strategic investors in PNC or under a long-term
strategic alliance agreement, these arrangements may not generate the expected
number of new customers and transaction fee revenue. In addition, there can be
no assurances that PNC will be able to renew these marketing and distribution
alliance agreements. If these agreements fail to yield and sustain the
anticipated traffic or if any of these agreements are terminated, PNC's
business, financial condition and operating results could be materially
adversely affected.
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PNC NEEDS TO DEVELOP ADDITIONAL MARKETING AND DISTRIBUTION ALLIANCES
As part of its business strategy, PNC is seeking to enter into additional
partnerships with strategic alliance partners, including Internet service
providers, enterprise resource planning software providers and search engine
providers to increase traffic to PNC's e-commerce solutions. There can be no
assurances that PNC will be able to enter into any new partnerships. If PNC is
unable to enter into new arrangements, demand for its e-commerce solutions
services and transaction-based revenues may not increase and this could
materially adversely affect PNC's business, financial condition and operating
results.
PNC NEEDS TO DEVELOP BRAND RECOGNITION OF THE "PACIFICNET.COM" NAME
To be successful, PNC must establish customer awareness of the
"PacificNet.com" brand of e-commerce solutions and services. If brand awareness
is not achieved, it could decrease the attractiveness of PNC's channel and
solutions to existing and potential customers, which could result in decreasing
transaction-based revenues. Management of PNC believes that brand recognition
will become increasingly more important in the future with the growing number of
companies engaged in B2B e-commerce. If brand awareness and customer confidence
in the "PacificNet.com" name is not fully developed or becomes diluted in the
future, users may not perceive the products and services of PNC to be of high
quality. This could hinder or prevent PNC from achieving its business strategy
and materially adversely affect PNC's business, financial condition and
operating results.
PNC NEEDS TO EXPAND ITS SALES FORCE AND INCREASE THE NUMBER OF CHANNEL
PARTNERS
To increase revenue, PNC believes that it must increase the size of its
direct sales force and the number of its indirect channel partners. There is
intense competition for sales personnel among e-commerce companies, and there
can be no assurance that PNC will be successful in recruiting, training,
motivating and retaining sales personnel. Even if PNC is able to recruit
sufficient numbers of sales persons, there will be a delay between the time
persons are hired and the time they become effective and fully productive, if at
all, as they become familiar with PNC's products, customers and markets.
Likewise, PNC may not be able to market its products effectively and existing or
future channel partners may choose to devote greater resources to marketing and
supporting the products of other companies. Any of these factors could have a
material adverse effect on PNC's business, financial condition and operating
results.
PNC IS GROWING RAPIDLY AND RECRUITING QUALIFIED PERSONNEL AND EFFECTIVELY
MANAGING THAT GROWTH MAY BE DIFFICULT
PNC expects to grow rapidly both by adding new products and hiring new
managers and employees. This growth is likely to place a significant strain on
PNC's resources and systems, much of which are still in development. To
effectively manage growth, PNC must implement systems, effectively recruit
qualified new employees and train and manage all its human resources.
PNC's success depends in part upon its ability to attract, train, motivate
and retain highly skilled employees, particularly sales and marketing personnel,
software programmers and engineers and supervisory personnel. Qualified
personnel are in great demand throughout the technology industry. The failure to
attract and retain the personnel that are integral to PNC's direct sales,
product development, service and support teams may limit the rate at which PNC
can generate sales and develop new products or product enhancements.
Since PNC has been in existence less than year, all of its senior management
and employees are relatively new to their positions. However, members of senior
management have significant experience in complimentary businesses and
technologies over an extended period. There can be no assurances that a
sufficient number of qualified personnel can be employed by PNC or that
management will be
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able to effectively or successfully manage the anticipated growth. If this is
the case, PNC's business, financial condition and operating results could be
materially adversely affected.
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH PNC'S INTERNATIONAL OPERATIONS
Establishment and expansion of international operations has required
significant management attention and resources since the founding of PNC. A
significant amount of PNC's current and anticipated future revenues are and are
expected to be derived from Asia. In that regard, PNC maintains development and
operations centers in Asia. PNC's international operations are subject to
additional risks, including the following which, if not planned and managed
properly, could materially adversely affect PNC's business, financial condition
and operating results:
- language barriers and other difficulties in staffing and managing
foreign operations;
- legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade barriers;
- longer customer payment cycles and greater difficulties in collecting
accounts receivable;
- uncertainties of laws and enforcement relating to the protection of
intellectual property;
- seasonal reductions in business activity; and
- potentially uncertain or adverse tax consequences.
In addition, changes in the political and overall economic conditions of the
Asian region, which are outside the control of management, could have a material
adverse effect on PNC's business, operating results and financial condition.
PNC has historically conducted transactions with customers outside the
United States in U.S. dollars. Payroll and other costs of foreign operations are
payable in foreign currencies, primarily Hong Kong dollars and Chinese Renminbi.
To the extent future revenue is denominated in foreign currencies, PNC would be
subject to increased risks relating to foreign currency exchange rate
fluctuations that could have a material adverse affect on its business,
financial condition and operating results. To date, PNC has not engaged in any
hedging transactions in connection with its international operations.
RISKS RELATED TO THE PNC ACQUISITION
Stockholders of CMI should be aware that, if the PNC Acquisition is
consummated, there will be additional risks inherent in an investment in the
Common Stock of CMI that do not presently exist.
THE MARKET PRICE OF OUR COMMON STOCK COULD BECOME HIGHLY VOLATILE AS A
RESULT OF THE PNC ACQUISITION
The market price of our Common Stock may experience significant volatility
as a result of the PNC Acquisition. PNC operates in the technology sector and
public companies in this sector, particularly Internet start-ups with little
operating history, have been subject to dramatic swings in the trading price of
their stocks.
WE WILL REQUIRE ADDITIONAL CAPITAL
PNC will require substantial additional capital to finance its anticipated
growth and fund possible acquisitions or investments in complementary
businesses, technologies or product lines. The amount of capital required will
depend on many factors such as:
- demand for our services and solutions;
- the timing of and extent to which PNC invests in new technology;
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- the level and timing of revenue;
- the expenses of sales and marketing and new product development;
- the success and related expense of increasing brand awareness;
- opportunities to acquire or invest in businesses, technologies or
products that could advance PNC's business strategy and yield an
attractive return; and
- the costs involved in maintaining and enforcing intellectual property
rights.
Since inception, PNC's investments and operating losses have been financed
through sales of equity interests. PNC currently has no available bank lines of
credit or other established sources of capital. On a pro forma basis as of
December 31, 1999, assuming all options and subscription rights to acquire
Membership Interests are converted (as required by the Share Exchange Agreement
and the Supplement), PNC had approximately $10 million in cash. PNC management
is forecasting substantial capital expenditures and negative cash flow from
operations over the next two years as it builds its business and completes the
PacificNet.com Solution.
To the extent that current capital resources are insufficient to fund future
activities, PNC will need to raise additional funds through public or private
financing. However, additional funding, if needed, may not be available on
attractive terms, or at all. The inability to raise capital when needed could
have a material adverse effect on PNC's business, financial condition and
operating results.
THE INTERESTS OF PNC'S PRINCIPAL STOCKHOLDERS MAY CONFLICT WITH PNC'S
INTERESTS AND THE INTERESTS OF OTHER STOCKHOLDERS
PNC has transactions with affiliates on a regular, recurring basis. Such
transactions are an integral part of its business strategy and are anticipated
to become increasingly more significant in the future. CSH, through the
ownership interests held by its chairman and its wholly-owned subsidiary, B2B
Limited, is the principal owner of PNC. CSH has representation on PNC's Board of
Governors and is expected to also have representation on the Board of Directors
of CMI if the PNC Acquisition is consummated. Fortune Tele.com is also a
significant owner of PNC that has representation on PNC's Board of Governors and
is expected to have representation on the Board of Directors of CMI if the PNC
Acquisition is consummated. CSH and Fortune Tele.com have agreed to actively
promote and use PNC's e-commerce solutions and services within their affiliated
companies, and they are both anticipated to be significant customers of PNC. See
"Description Of PNC--Overview and History" and "Description Of PNC--Significant
Relationships." As a result of their significant stock ownership and board
representation while at the same time being significant customers of PNC, CSH
and, to a lesser extent, Fortune Tele.com are in a position to significantly
affect PNC's corporate actions in a manner that could conflict with the
interests of PNC and other stockholders. In addition, the continued support of
PNC by the chairmen of these two companies, both of whom are expected to become
directors of CMI if the PNC Acquisition is consummated, is an integral part of
PNC's business strategy and will be a key factor in its future success.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO SELL THE CURRENT BUSINESS OF
CMI FOLLOWING THE PNC ACQUISITION OR, IF SO, AT WHAT PRICE
The management and governors of PNC have expressed their intention to divest
CMI of its current manufacturing business following the consummation of the PNC
Acquisition. A sale of this business would allow the management of PNC to devote
all of their time and attention to the business-to-business electronic commerce
services and solutions of PNC. In addition, if cash is involved in all or a
portion of the proceeds, such a sale would provide additional funds that could
be invested in the electronic commerce business. In light of this, a management
group led by CMI's Chief Executive Officer, Mr. Carl Tong, has indicated an
interest in negotiating a purchase of the current business.
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However, neither CMI nor PNC have entered into any formal understanding or
arrangement with respect to a disposition of the current business, nor is any
such disposition a condition to the PNC Acquisition. As a result, there can be
no assurances that such business will be sold following the PNC Acquisition or,
if sold, at what price and under what terms and conditions. If the PNC
Acquisition is consummated, there is a risk that the senior management of PNC,
who will become the senior management of CMI, and the newly-constituted Board of
Directors of CMI, which will consist principally of former governors of PNC,
will have to devote attention to the current manufacturing business (with which
they are unfamiliar) in order to negotiate and manage a sale of this business
or, if a sale at an acceptable price cannot be consummated, to oversee the
management of this business.
THE PURCHASE METHOD OF ACCOUNTING WILL HAVE A NEGATIVE EFFECT ON FUTURE
REPORTED EARNINGS
The PNC Acquisition will be accounted for under the purchase method of
accounting as a reverse takeover, since the owners of PNC will control over 80%
of the total shares of Common Stock of CMI expected to be outstanding
immediately after the Closing. The total purchase price calculated under this
accounting method has been allocated on a preliminary basis to the assets and
liabilities of CMI, resulting in approximately $8.2 million of goodwill. See
"Unaudited Pro Forma Condensed Combined Financial Statements." While the
amortization of goodwill over the following 10 years will have no effect on
CMI's operating cash flow, such amortization is expected to have an adverse
effect on CMI's reported earnings per share. The allocation of purchase price is
subject to change pending a final determination of the value of the assets
acquired and liabilities assumed as of the effective date of the reverse
takeover. If the current manufacturing business of CMI is held for sale
following the PNC Acquisition as discussed in the risk factor above, management
expects that such sale will result in a significant loss after considering the
previously referred to goodwill. However, in such a case, there would be no
future amortization charges.
35
<PAGE>
SELECTED FINANCIAL DATA
CMI SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table includes selected historical financial data for CMI
which is derived in part from and should be read in conjunction with CMI's
audited financial statements, including the notes thereto, contained in CMI's
Form 10-KSB for the year ended December 31, 1999, which is incorporated by
reference herein.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $9,982 $14,054 $16,211 $33,633 $40,668
Cost of goods sold................ 7,878 9,782 12,703 24,490 30,740
Gross profit...................... 2,104 4,272 3,508 9,143 9,928
Selling, general and
administrative expenses......... 2,394 2,552 1,921 5,113 5,961
Income (loss) before income taxes
and minority interests.......... (507) 969 1,000 4,087 4,146
Net income (loss)................. (559) 815 788 3,056 2,681
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share
before cumulative effect of
accounting change............... $(0.16) $ 0.23 $ 0.22 $ 0.81 $ 0.58
Cumulative effect of accounting
change.......................... -- -- -- -- (0.04)
Net income (loss) per common share
after cumulative effect of
accounting change............... $(0.16) $ 0.23 $ 0.22 $ 0.81 $ 0.54
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets.................................. $6,752 $10,499 $20,467 $22,450
Long-term obligations--capital lease, non
current portion............................. 245 266 288 104
Stockholders' equity.......................... 2,079 2,739 10,292 12,859
</TABLE>
36
<PAGE>
PNC SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for PNC
which is derived from and should be read in conjunction with PNC's audited
financial statements as of December 31, 1999, including the notes thereto, which
are attached hereto as Appendix D.
<TABLE>
<CAPTION>
JULY 8, 1999
(INCEPTION)
TO DECEMBER 31, 1999
--------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 48,805
Cost of services.......................................... 14,221
Selling, general and administrative expenses.............. 428,543
Net income (loss)......................................... (383,544)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................................. $4,264,656
Long-term obligations..................................... --
Members' equity........................................... 4,022,466
</TABLE>
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
give effect to the PNC Acquisition using the purchase method of accounting,
including the pro forma adjustments described in the accompanying notes. The
proposed acquisition of PNC by CMI will be treated as a reverse acquisition,
since the owners of PNC will control over 80% of the total shares of Common
Stock of CMI expected to be outstanding immediately after the Closing, as a
result of the exchange of 21,500,000 shares of CMI for all of the Membership
Interests of the PNC Members. Therefore, for purposes of the Unaudited Pro Forma
Condensed Combined Financial Statements, the 4,999,322 shares of CMI Common
Stock outstanding throughout 1999 are treated as an addition to stockholders'
equity as of the assumed effective date of the PNC Acquisition, as discussed in
the following paragraph.
The Unaudited Pro Forma Condensed Combined Statement of Operations combines
the operations of CMI for the year ended December 31, 1999 and PNC for the
period from inception (July 8, 1999) to December 31, 1999, based on the audited
historical financial statements of each company, after giving effect to the PNC
Acquisition under the purchase method of accounting and the assumptions and
adjustments described in the accompanying notes, as though the PNC Acquisition
had occurred on January 1, 1999. The Unaudited Pro Forma Condensed Combined
Balance Sheet combines the balance sheet of CMI as of December 31, 1999 with the
balance sheet of PNC as of December 31, 1999, and is presented to give effect to
the PNC Acquisition as if it occurred on that date.
The pro forma financial information does not purport to be indicative of the
results that would have been reported if the operations and management of CMI
and PNC had been combined for the period presented, nor is it indicative of
future results. After the Closing, CMI's primary business focus will be the
business-to-business electronic commerce services and solutions of PNC, instead
of its current focus on manufacturing die-cast replicas. PNC has indicated its
interest in disposing of CMI's current business following completion of the PNC
Acquisition, and it is likely that these assets and operations will be
classified as a Discontinued Operation for accounting purposes at that time. In
light of this, a management group led by CMI's Chief Executive Officer,
Mr. Carl Tong, has indicated an interest in negotiating a purchase of the
current business. However, neither CMI nor PNC have entered into any formal
understanding or arrangement with respect to a disposition of the current
37
<PAGE>
business, and such a disposition is not a condition to the acquisition of PNC.
As a result, for purposes of preparing the following Unaudited Pro Forma
Condensed Combined Financial Statements, no effect has been given to the fact
that the current business of CMI may be held for sale after the Closing.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PROFORMA
CMI PNC NOTES ADJUSTMENTS COMBINED
---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 40,668 $ 48 -- $ 40,716
Cost of goods sold..................... (30,740) (14) -- (30,754)
Gross profit........................... 9,928 34 -- 9,962
Selling, general and administrative
expenses............................. (5,961) (428) -- (6,389)
Amortization of goodwill............... (105) -- (b) (817) (922)
Other operating income (expenses)...... 333 (17) -- 316
Income (loss) from operations.......... 4,195 (411) (817) 2,967
Interest and other income, net......... (49) 27 -- (22)
Income (loss) before income taxes and
minority interests................... 4,146 (384) (817) 2,945
Provision for income taxes............. (437) -- -- (437)
Minority interests..................... (827) -- -- (827)
Cumulative effect of accounting
change............................... (201) -- -- (201)
Net income (loss)...................... $ 2,681 $(384) $ (817) $ 1,480
Basic and diluted earnings per common
share................................ $ .54 -- $ (.48) $ .06
Average number of shares outstanding
for basic and diluted earnings per
share................................ 4,999,322 -- 21,500,000 26,499,322
</TABLE>
See the accompanying notes to these Unaudited Pro Forma Condensed Combined
Financial Statements.
38
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PROFORMA
CMI PNC NOTES ADJUSTMENTS COMBINED
---------- ---------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and bank deposits................. $ 1,500 $4,061 (a) $ 6,047 $11,608
Accounts receivable, net............... 4,718 35 4,753
Inventories, net....................... 4,691 -- -- 4,691
Deposits and prepayments............... 1,384 59 -- 1,443
------- ------ ------- -------
Total current assets................... 12,293 4,155 6,047 22,495
Long-term investments.................. (a) 2,500 2,500
Machinery, equipment and capital
leases, net.......................... 9,316 109 -- 9,425
Goodwill, net.......................... 841 -- (b) 8,168 8,168
(841)
------- ------ ------- -------
Total assets........................... $22,450 $4,264 $15,874 $42,588
======= ====== ======= =======
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Short-term bank borrowings............. $ 1,150 $ -- $ -- $ 1,150
Capital lease obligations, current
portion.............................. 202 -- -- 202
Accounts payable....................... 3,368 86 -- 3,454
Other accrued expenses................. 2,888 156 (c) 750 3,794
------- ------ ------- -------
Total current liabilities.............. 7,608 242 750 8,600
Capital lease obligations,
non-current.......................... 104 -- -- 104
Loans from directors................... 240 -- -- 240
Deferred taxes......................... 399 -- -- 399
Minority interests..................... 1,240 -- -- 1,240
Stockholders' equity................... 12,859 4,022 (b) (12,859) 32,005
(b) 19,436
(a) 8,547
------- ------ ------- -------
Total liabilities, minority interests
and stockholders' equity............. $22,450 $4,264 $15,874 $42,588
======= ====== ======= =======
</TABLE>
See the accompanying notes to these Unaudited Pro Forma Condensed Combined
Financial Statements.
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASES OF PRO FORMA PRESENTATION
On April 29, 2000, PNC and its members entered into a definitive agreement
with CMI under which CMI will acquire all the Membership Interests of PNC in
exchange for 21,500,000 shares of CMI's Common Stock. The agreement requires
that all outstanding options and rights to acquire additional membership
interests in PNC must be exercised prior to the Closing. For accounting
purposes, the acquisition of PNC by CMI will be treated as a reverse
acquisition, since the owners of PNC will control over 80% of the total shares
of Common Stock of CMI expected to be outstanding immediately after the Closing.
The consummation of the proposed transaction is subject to approval by CMI's
stockholders, receipt of an updated opinion from CMI's fairness advisor as of
the closing date and other customary conditions. If the transaction is
consummated, it is anticipated that the primary business focus of the combined
company will be PNC's business-to-business electronic commerce services and
solutions. PNC has indicated its interest in disposing of CMI's current business
following completion of the proposed acquisition, and it is likely that these
assets and operations will be classified as a Discontinued Operation for
accounting purposes at that time.
The purchase price allocation, which is preliminary and therefore subject to
change based on further appraisals and analysis of CMI's net tangible assets, is
as follows as of December 31, 1999 (amounts in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMOUNT AMORTIZATION USEFUL LIFE
-------- ------------ -----------
<S> <C> <C> <C>
Purchase Price Allocation
Tangible net assets of CMI as of December 31, 1999........ $12,018 -- n/a
Less: Estimated acquisition costs......................... (750) -- n/a
Goodwill.................................................. $ 8,168 $817 10 years
------- ----
Total estimated purchase price.............................. $19,436 --
=======
</TABLE>
Goodwill, which represents the excess of the purchase price of an investment
in an acquired business over the fair value of the underlying net identifiable
assets, is to be amortized on a straight-line basis over an estimated life of
10 years. In applying the purchase method of accounting, the total estimated
purchase price of $19.4 million was calculated based on the average closing
price of CMI's Common Stock as quoted on the NASDAQ National Market System for
the period from April 25, 2000 through May 4, 2000, inclusive ($3.89),
multiplied by the number of CMI shares outstanding throughout 1999 (4,999,322).
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. PRO FORMA ADJUSTMENTS
A description of each pro forma adjustment follows:
(a) Represents cash to be received by PNC from the sale of membership
interests, exercise of options or subscriptions for membership interests
and repayment of receivables from PNC members, which must occur as a
condition precedent to closing of the proposed transaction with CMI, from
the following sources (proceeds in thousands):
<TABLE>
<CAPTION>
PARTY TERMS PROCEEDS
- ----- -------------------------------------- --------
<S> <C> <C>
Existing governors of PNC.... Exercise of options to subscribe to $2,500
1,000,000 Membership Interests at
$2.50 per unit
B2B Limited.................. Exercise of options to subscribe to 1,000
1,000,000 Membership Interests at
$1.00 per unit
APP China.................... Sale of 1,000,000 Membership Interests 5,000
at $5.00 per unit; proceeds to be
received are comprised of $2.5 million
in cash and restricted securities with
an assigned value of $2.5 million
Existing members of PNC...... Repayment of amounts receivable 47
Total proceeds....................................................... $8,547
Composition of Proceeds:
Cash............................................................... $6,047
Long-term investments.............................................. $2,500
</TABLE>
- ------------------------
(b) Represents recording of the preliminary purchase price allocation in the
balance sheet and the amortization of goodwill in the income statement.
See Note 1 for a description of how the preliminary purchase price was
calculated and the resulting goodwill.
(c) Represents total estimated acquisition costs of $750,000 to be incurred
in connection with the PNC Acquisition, primarily legal and professional
fees.
3. PRO FORMA NET INCOME PER SHARE
The pro forma net income (loss) per share is based on the weighted average
number of shares of CMI Common Stock outstanding during 1999 (4,999,3222) and
the 21,500,000 shares of Common Stock to be issued to the members of PNC. There
is no difference in basic and dilutive net income (loss) per share.
41
<PAGE>
PROPOSAL NO. 2
ELECTION OF DIRECTORS
NOMINEES
At the Annual Meeting, four directors, who will constitute the entire Board
of Directors, are to be elected. As described below under "Arrangements and
Understandings with Directors," it is anticipated that, of the nominees, only
Mr. will continue to serve as a director following the PNC
Acquisition. All nominees for the Board of Directors currently serve as
directors, have consented to being named herein and have agreed to serve, if
elected, pending completion of the PNC Acquisition. The nominees are as follows:
Carl Ka Wing Tong
Leo Sheck Pui Kwok
Steve Gordon
Clayton K. Trier
We will vote the proxies "FOR" the election of all of the above-named
nominees unless you indicate that the proxy shall not be voted for all or any
one of the nominees. Nominees receiving the highest number of affirmative votes
cast, up to the number of directors to be elected, will be elected as directors.
If for any reason any nominee should, prior to the Annual Meeting, become
unavailable for election as a director, the proxies will be voted for such
substitute nominee, if any, as may be recommended by management. In no event,
however, shall the proxies be voted for a greater number of persons than the
number of nominees named.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE FOUR PERSONS
NOMINATED FOR DIRECTOR HEREIN
MANAGEMENT AND DIRECTORS OF CMI
The following table sets forth certain information regarding our executive
officers, directors and key employee:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS(1) AGE POSITION
- ----------------------------------- -------- ------------------------------------------
<S> <C> <C>
Carl Ka Wing Tong......................... 49 President, Chief Executive Officer and
Chairman of the Board
Leo Sheck Pui Kwok........................ 44 Chief Operating Officer and Director
John Rempel............................... 44 Chief Financial Officer and Assistant
Secretary
Shing Kam Ming............................ 38 Senior Vice-President, Controller, and
Secretary
Steve Gordon.............................. 45 Director
Clayton K. Trier.......................... 48 Director
</TABLE>
- ------------------------
(1) Each of our executive officers also serves in various corresponding
capacities with Creative Master Limited, our wholly-owned Hong Kong
subsidiary ("CML"), or subsidiaries of CML.
Carl Ka Wing Tong has been our Chairman, Chief Executive Officer and
President since December 1997. He also served as Secretary from December 1997 to
September 1998 and as Chief Financial Officer from September 1998 to
November 1998. He also serves as a director of Acma Strategic Holdings Limited.
Mr. Tong co-founded CML in 1986. From 1993 to 1995, he also served as Chief
Financial Officer of ZIC Holdings Limited, the holding company of Zindart
Industrial Co. Ltd., a manufacturer of toys and collectibles. Prior to founding
CML, from 1985 to 1987, Mr. Tong was Vice President of Citibank, N.A.'s
Institutional Banking, Specialized Finance Group. In addition, from 1977 to
1985, Mr. Tong was a certified public accountant with Arthur Andersen & Co. in
United Kingdom
42
<PAGE>
and Hong Kong, where his last position was Senior Manager, Audit Division. He is
a certified public accountant in Hong Kong and a chartered accountant in the
United Kingdom.
Leo Sheck Pui Kwok has been our Chief Operating Officer and a director of
CMI since December 1997. Mr. Kwok co-founded CML in 1986. Before founding CML,
Mr. Kwok worked for the Hallmark Group in Asia from 1980 to 1987, where his last
position was as the Chief Merchandise Manager.
John Rempel has been our Chief Financial Officer since November 1998 and our
Assistant Secretary since February 1999. Prior to joining CMI, from 1995 to
November 1998, Mr. Rempel founded and managed the consulting division of Infocan
Computer (HK) Limited, an information technology solution provider, specializing
in financial and material requirements planning system design and
implementation. Between 1990 and 1995, Mr. Rempel was the Chief Financial
Officer of a division of Lai Sun Group, a publicly-listed company in Hong Kong.
He is a Canadian Chartered Accountant and a Fellow of the Hong Kong Society of
Accountants. Mr. Rempel served with Arthur Andersen & Co. in Canada and Bermuda
from 1978 to 1981 and with Ernst & Whinney in Hong Kong from 1982 to 1985.
Shing Kam Ming has been our Senior Vice-President since January 1998 and our
Secretary since February 1999. He also served as Chief Financial Officer until
September 1998, when he was appointed Controller. Mr. Shing joined CML in
March 1993 as Manager--Finance and Administration.
Steve Gordon has been a director of CMI since February 1999. Mr. Gordon has
been a principal of, and performed the functions of chief executive officer for,
TFS Limited, a direct response marketing and fulfillment services company, since
1995. Before joining TFS Limited, Mr. Gordon served as a Division Director of
MBI, Inc., from 1985 to 1995, where he was responsible for certain die-cast
products.
Clayton K. Trier has been a director of CMI since February 1999. Since 1997,
Mr. Trier has been a private investor. Mr. Trier also currently serves as a
director of Pentacon, Inc. (NYSE: JIT). From 1993 through 1997, Mr. Trier served
as the Chairman and Chief Executive Officer of U.S. Delivery Systems, a
NYSE-listed local delivery company with offices nationwide. He founded U.S.
Delivery Systems in 1993. U.S. Delivery Systems was acquired by Corporate
Express Inc. in March 1996. From 1987 to 1991, Mr. Trier was co-Chief Executive
Officer and President of Allwaste, Inc., a NYSE-listed company engaged in waste
management. Mr. Trier was a Certified Public Accountant with Arthur Andersen &
Co. in Houston, Texas and Hong Kong from 1974 to 1987, and was a partner there
from 1983 to 1987.
ARRANGEMENTS AND UNDERSTANDINGS WITH DIRECTORS
The PNC Acquisition is conditioned upon, among other things, the
resignations of the current directors of CMI, other than Mr. , who is
expected to continue as a director following the PNC Acquisition. As a result,
at the Closing, Messrs. , and intend to resign as directors
and it is expected that their replacements will be appointed by Mr. , the
remaining director, in accordance with the wishes of the PNC Members. Following
their appointment, any new directors would serve until the 2001 annual meeting
of stockholders of CMI. If the PNC Acquisition is consummated, it is expected
that the size of the Board of Directors will be increased to [insert number]
members, Messrs. , and will resign, and [insert number]
designees of the current PNC Members will be appointed to the Board. See above
under "Appointment of Directors and Officers Following the PNC Acquisition" in
Proposal No. 1.
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1999, the Board of Directors met
seven times. Each incumbent director who was a director during the past fiscal
year attended all meetings of the Board of
43
<PAGE>
Directors. The Board of Directors established audit and compensation committees
in February 1999. We have no other standing committees of our Board of
Directors. A Special Committee of the Board of Directors was formed on
February 17, 2000, consisting of Messrs. Gordon and Trier, CMI's non-management
directors, for the purpose of evaluating the possible acquisition of PNC; see
"Background of the PNC Acquisition."
The audit committee's charter states that the responsibilities of the audit
committee shall include: nominating CMI's independent auditors and reviewing any
matters that might impact the auditors' independence from CMI; reviewing plans
for audits and related services; reviewing audit results and financial
statements; reviewing with management the adequacy of CMI's system of internal
accounting controls, including obtaining from independent auditors management
letters or summaries on such internal accounting controls; determining the
necessity and overseeing the effectiveness of the internal audit function;
reviewing compliance with the U.S. Foreign Corrupt Practices Act and CMI's
internal policy prohibiting insider trading in its Common Stock; reviewing
compliance with SEC requirements for financial reporting and disclosure of
auditors' services and audit committee members and activities; reviewing
related-party transactions for potential conflicts of interest; and reviewing
with corporate management and internal and independent auditors the policies and
procedures with respect to corporate officers' expense accounts and perquisites,
including their use of corporate assets. Our audit committee currently consists
of Messrs. Gordon and Trier. The audit committee met four times during 1999.
The compensation committee's charter states that it is the responsibility of
the compensation committee to make recommendations to the Board of Directors
with respect to all forms of compensation paid to our executive officers and to
such other officers as directed by the Board and any other compensation matters
as from time to time directed by the Board. Our stock option plan, however, is
currently administered by the full Board of Directors. Our compensation
committee currently consists of Messrs. Tong, Gordon, and Trier. The
compensation committee met one time during 1999.
BOARD COMPENSATION
We reimburse each director for reasonable expenses incurred in attending
meetings of our Board of Directors and pay each non-employee director a fee of
$1,300 for each meeting attended by such director. Non-employee directors who
serve on board committees are paid a fee of $300 for each committee meeting
attended. Directors also are eligible to receive grants of options under our
1998 Stock Option Plan. Concurrent with our public offering on December 23,
1998, we granted to each of Mr. Gordon and Mr. Trier fully-vested stock options
to purchase 7,500 shares of Common Stock at an exercise price of $5.00 per
share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1999, the full Board decided all matters
related to compensation. Messrs. Tong, Kwok, Trier and Gordon and Chou Kong Seng
each served as a director for all or part of 1999 and participated in
deliberations concerning executive officer compensation. There are no interlocks
between CMI and other entities involving CMI's executive officers and directors
who served as executive officers or directors of other entities.
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO CHANGE OUR NAME TO
"PACIFICNET.COM, INC." UPON CONSUMMATION OF THE PNC ACQUISITION
The Board of Directors has approved, and recommends that the stockholders
approve, adoption of an amendment to our Certificate of Incorporation which
would, upon consummation of the PNC
44
<PAGE>
Acquisition, change our corporate name from "Creative Master
International, Inc." to "PacificNet.com, Inc." Assuming approval of Proposal
No. 1, if this Proposal No. 3 is approved by the stockholders, it will become
effective upon the consummation of the PNC Acquisition by the filing of an
appropriate certificate of amendment to our Certificate of Incorporation with
the Secretary of the State of Delaware.
REASON FOR PROPOSAL
As discussed in Proposal No. 1, in the Supplement we agreed to call our
Annual Meeting of stockholders as promptly as practicable for the purpose of
having our stockholders vote with respect to several items, one of which is the
changing of the name of CMI to the name specified by PNC, which is
"PacificNet.com, Inc." If the acquisition of PNC is consummated, it is
anticipated that our primary business focus in the future will be PNC's
business-to-business electronic commerce services and solutions, instead of our
current business of manufacturing collectible-quality, die-cast replicas. As a
result, the Board believes that the change of CMI's name upon consummation of
the acquisition will better reflect our business going forward. The name change
is not, however, a condition precedent to the obligations of CMI or PNC to
consummate the PNC Acquisition.
This summary of information concerning the amendment is qualified in its
entirety by reference to the proposed amendment itself, a copy of which is
attached hereto as Appendix E. For purposes of filing a certificate of amendment
with the Delaware Secretary of State, assuming the amendment is approved, the
text of the amendment may be combined into a single certificate of amendment
with the text of the other amendment for which approval is sought under Proposal
No. 4.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS AMENDMENT TO THE CERTIFICATE
OF INCORPORATION
PROPOSAL NO. 4
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
INCREASE THE AUTHORIZED COMMON STOCK
The Board of Directors has approved, and recommends that stockholders
approve, adoption of an amendment to our Certificate of Incorporation which
would increase the number of authorized shares of Common Stock from 25,000,000
shares to 125,000,000 shares. If this proposal is approved by the stockholders,
it will become effective upon filing of an appropriate certificate of amendment
to our Certificate of Incorporation with the Secretary of the State of Delaware.
If the PNC Acquisition is not approved at the Annual Meeting, the Board reserves
the right not to proceed with this amendment.
CURRENT USE OF SHARES
As of May 5, 2000, 4,999,322 shares of Common Stock were outstanding, and
the Board had reserved an aggregate of 775,000 shares reserved for future
issuance, including (a) 650,000 shares reserved for issuance upon exercise of
outstanding options granted or to be granted under our 1998 stock option plan,
and (b) 125,000 shares reserved for issuance upon exercise of outstanding
warrants. As a result, we currently have approximately 19,225,678 authorized but
unissued and unreserved shares of Common Stock available for future issuance.
Pursuant to the PNC Acquisition, 21,500,000 shares of Common Stock are to be
issued to the PNC Members. Thus, we need additional authorized shares of Common
Stock to complete the PNC Acquisition.
RIGHTS OF ADDITIONAL COMMON STOCK
The additional Common Stock to be authorized would have rights identical to
currently outstanding Common Stock. Approval of this proposal would not affect
the rights of the holders of currently outstanding Common Stock, except for
effects incidental to the PNC Acquisition and to other
45
<PAGE>
possible future issuances of additional shares, such as potential dilution of
earnings per share and voting rights of current holders of Common Stock. The
Common Stock has no preemptive rights.
EFFECT OF PROPOSAL
If this proposal is approved, the increased number of authorized shares of
Common Stock, over and above those to be issued in the PNC Acquisition, will be
available for issuance, from time to time, for such purposes and consideration
and on such terms as the Board may approve, and no further vote of our
stockholders will be sought except as required by applicable law or by the rules
of the NASDAQ Stock Market, on which the Common Stock is traded. Pursuant to the
requirements of the NASDAQ Stock Market, stockholder approval is required (in
addition to the initial authorization of the shares) for the issuance of shares
of Common Stock (or securities convertible into Common Stock) under certain
circumstances. These circumstances include, among other things, the issuance, in
connection with an acquisition, of a number of shares equal to 20% or more of
the number of shares outstanding before such issuance, the adoption of certain
types of stock option or purchase plans or other arrangements in which stock may
be acquired by our officers or directors, and certain issuances that would
result in CMI undergoing a change of control.
The existence of additional authorized shares of Common Stock could have the
effect of rendering more difficult or discouraging hostile takeover attempts.
Other than our issuance of shares of Common Stock in connection with the PNC
Acquisition, however, the Board is not aware of any existing or planned effort
to accumulate material amounts of Common Stock, or to acquire CMI by means of a
merger, tender officer, solicitation of proxies in opposition to management, or
otherwise, or to change CMI's management, nor is the Board aware of any person
having made any offer to acquire our Common Stock or assets.
REASON FOR PROPOSAL
The increase in authorized shares of Common Stock is necessary to enable us
to complete the PNC Acquisition if Proposal No. 1 is approved as expected.
Following the PNC Acquisition, the availability of additional shares of Common
Stock for issuance will afford us with flexibility in the future by increasing
the number of authorized but unissued shares of Common Stock available for
possible acquisitions, financing requirements, stock splits and other corporate
purposes.
The amendment to our Certificate of Incorporation increasing the authorized
shares of Common Stock, if approved by stockholders, will be effective upon the
execution and filing of a certificate of amendment with the Delaware Secretary
of State.
As discussed above under Proposal No. 1, the increase in the authorized
Common Stock prior to the closing date of the PNC Acquisition is one condition
precedent to the obligation of the PNC Members to consummate the PNC
Acquisition. If the increase is not approved by the stockholders, the PNC
Acquisition cannot be completed.
This summary of information concerning the amendment is qualified in its
entirety by reference to the proposed amendment itself, a copy of which is
attached hereto as Appendix F. For purposes of filing a certificate of amendment
with the Delaware Secretary of State, assuming the amendment is approved, the
text of the amendment may be combined into a single certificate of amendment
with the text of the other amendment for which approval is sought under Proposal
No. 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS AMENDMENT TO THE CERTIFICATE
OF INCORPORATION
46
<PAGE>
PROPOSAL NO. 5
APPROVAL OF AMENDMENT TO THE 1998 STOCK OPTION PLAN
In 1998, the Board of Directors adopted and the CMI stockholders approved
our 1998 Stock Option Plan (the "1998 Plan") under which 420,000 shares of
Common Stock were reserved for purchase thereunder. The 1998 Plan was
subsequently amended by the Board of Directors in December 1998. In June 1999,
the Board of Directors approved an amendment to the 1998 Plan to increase the
number of shares reserved under the plan by 230,000 shares. The amendment was
subsequently approved by our stockholders on July 16, 1999. As of May 5, 2000,
options were outstanding under the 1998 Plan to purchase a total of 332,250
shares of Common Stock, and an additional 317,750 shares remained available for
future grants under the 1998 Plan.
The Board of Directors has approved, and recommends that stockholders
approve, adoption of a further amendment to the 1998 Plan to increase the number
of shares reserved under the plan from 650,000 to 5,000,000. Under the terms of
the 1998 Plan, this amendment does not require the approval of our stockholders.
Nevertheless, unless the amendment is approved by holder of a majority of the
shares of Common Stock present at the Annual Meeting, either in person or by
proxy, any options granted in excess of the 650,000 shares previously approved
by the stockholders would not be eligible for treatment as incentive stock
options ("ISOs"). Consequently the Board is asking stockholders to approve the
amendment in order to allow the flexibility to grant additional ISOs under the
1998 Plan. We agreed in the Supplement to set forth this proposal to amend the
1998 Plan. This proposal is not, however, a condition precedent to the
obligation of the PNC Members to consummate the PNC Acquisition.
The 1998 Plan is designed to attract and retain the best available personnel
for positions of responsibility and to provide incentives to such personnel to
promote the success of the business. The Board believes the amendment will be
necessary to ensure that sufficient shares are available under the 1998 Plan to
reward and motivate existing employees and to attract new employees in the
future if the PNC Acquisition is consummated. PNC, as a privately-held company,
has no stock option plan nor any options outstanding for key executives and
employees. It is common for companies in the Internet industry, such as PNC, to
offer significant numbers of options to employees. Assuming the PNC Acquisition
is consummated, it is our understanding that the newly-formed Board of Directors
intends to continue to use the 1998 Plan as the vehicle to grant stock options
to employees. If the combined company does not have the ability to grant
significant additional tax-favored options under the 1998 Plan, it may impair
the combined company's ability to motivate and attract new employees, which
could have a material adverse effect on the combined company's competitive
position and financial performance.
If the PNC Acquisition is not approved at the Annual Meeting, the Board
reserves the right not to proceed with this amendment.
The Board has no current plan or arrangement to issue any particular number
of options.
DESCRIPTION OF 1998 PLAN
The 1998 Plan provides for the grant to directors, officers, employees and
consultants of CMI (including its subsidiaries) of options to purchase shares of
Common Stock. The 1998 Plan may be administered by the Board of Directors or a
committee of the Board of Directors (in either case, the "Committee"), which has
complete discretion to select the optionees and to establish the terms and
conditions of each option, subject to the provisions of the 1998 Plan. Options
granted under the 1998 Plan may be "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonqualified options. To date, all options granted have been nonqualified
options.
47
<PAGE>
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Common Stock as of the date of grant (110% of the
fair market value if the grant is to an employee who owns more than 10% of the
total combined voting power of all classes of our capital stock). The Code
currently limits to $100,000 the aggregate value of Common Stock that may be
acquired in any one year pursuant to incentive stock options under the 1998 Plan
or any other option plan adopted by CMI. Nonqualified options may be granted
under the 1998 Plan at an exercise price of not less than 100% of the fair
market value of the Common Stock on the date of grant. Nonqualified options also
may be granted without regard to any restriction on the amount of Common Stock
that may be acquired pursuant to such options in any one year.
Subject to the limitations contained in the 1998 Plan, options granted under
the 1998 Plan will become exercisable at such times and in such installments
(but not less than 20% per year) as the Committee shall provide in the terms of
each individual stock option agreement. The Committee must also provide in the
terms of each stock option agreement when the option expires and becomes
unexercisable, and may also provide that the option expires immediately upon
termination of employment for any reason.
Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then exercisable
would terminate three months (three years in the case of termination by reason
of death or disability) following termination of employment. Any options which
were not exercisable on the date of such termination would immediately terminate
concurrently with the termination of employment.
The Board of Directors may at any time amend, alter, suspend or terminate
the 1998 Plan. No amendment, alteration, suspension or termination of the 1998
Plan will impair the rights of any optionee, unless mutually agreed otherwise
between the optionee and the Committee, which agreement must be in writing and
signed by the optionee and CMI. Termination of the 1998 Plan will not affect our
ability to exercise the powers granted to it hereunder with respect to options
granted under the 1998 Plan prior to the date of such termination.
Options granted under the 1998 Plan may not be exercised more than ten years
after the grant (five years after the grant if the grant is an incentive stock
option to an employee who owns more than 10% of the total combined voting power
of all classes of our capital stock). Options granted under the 1998 Plan are
not transferable and may be exercised only by the respective grantees during
their lifetime or by their heirs, executors or administrators in the event of
death. Under the 1998 Plan, shares subject to cancelled or terminated options
are reserved for subsequently granted options. The number of options outstanding
and the exercise price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalizations, stock splits or stock
dividends. The 1998 Plan is effective for ten years, unless sooner terminated or
suspended.
SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
Incentive stock options granted under the 1998 Plan will be afforded
favorable U.S. federal income tax treatment under the Code. If an option is
treated as an incentive stock option, the optionee will recognize no income upon
grant or exercise of the option unless the alternative minimum tax rules apply.
Upon an optionee's sale of the shares (assuming that the sale occurs at least
two years after grant of the option and at least one year after exercise of the
option), any gain will be taxed to the optionee as long-term capital gain. If
the optionee disposes of the shares prior to the expiration of the above holding
periods, then the optionee will recognize ordinary income in an amount generally
measured as the difference between the exercise price and the lower of the fair
market value of the shares at the exercise date or the sale price of the shares.
Any gain or loss recognized on such a premature sale of the shares in excess of
the amount treated as ordinary income will be characterized as capital gain or
loss.
48
<PAGE>
All other options granted under the 1998 Plan will be nonstatutory stock
options and will not qualify for any special tax benefits to the optionee. An
optionee will not recognize any taxable income at the time he or she is granted
a nonstatutory stock option. However, upon exercise of the nonstatutory stock
option, the optionee will recognize ordinary income for federal income tax
purposes in an amount generally measured as the excess of the then fair market
value of each share over its exercise price. Upon an optionee's resale of such
shares, any difference between the sale price and the fair market value of such
shares on the date of exercise will be treated as capital gain or loss and will
generally qualify for long-term capital gain or loss treatment if the shares
have been held for more than one year. Recently enacted legislation provides for
reduced tax rates for long-term capital gains based on the taxpayer's income and
the length of the taxpayer's holding period.
The foregoing does not purport to be a complete summary of the U.S. federal
income tax considerations that may be relevant to holders of options or to CMI.
It also does not reflect provisions of the income tax laws of any municipality,
state or foreign country in which an optionee may reside, nor does it reflect
the tax consequences of an optionee's death.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE
STOCK OPTION PLAN
PROPOSAL NO. 6
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has adopted a resolution appointing Arthur
Andersen & Co. as our independent public accountants for the fiscal year ending
December 31, 2000. Arthur Andersen & Co. currently serves as independent public
accountants for both CMI and PNC. Stockholder ratification of the selection of
Arthur Andersen & Co. as our independent public accountants is not required by
our bylaws or otherwise. Nevertheless, the Board is submitting the selection of
Arthur Andersen & Co. to the stockholders for ratification as a matter of good
corporate practice. If the stockholders fail to ratify the selection, the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Board in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if it determines that
such a change could be in the best interests of CMI and its stockholders. We do
not expect representatives from Arthur Andersen & Co. to be present at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF ARTHUR
ANDERSEN & CO. AS OUR INDEPENDENT PUBLIC ACCOUNTANTS
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective April 30, 1998, Greenberg & Company, LLC, which had previously
been CMI's auditor prior to the exchange reorganization between CML's
stockholders and Davin Enterprises, Inc. (which resulted in the current CMI),
resigned as our independent accountants. Our Board of Directors approved the
appointment of Arthur Andersen & Co. as its new independent accountants on
April 30, 1998, and this appointment was subsequently ratified by our
stockholders on July 16, 1999.
Greenberg & Company, LLC's report on our 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. We
did not have any disagreements with Greenberg & Company, LLC on any matter of
accounting principles, financial statements, auditing scope or procedure during
that period.
49
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by our Chief Executive Officer during the year ended December 31, 1999
and three other executive officers (together, the "named executive officers")
whose compensation exceeded $100,000 for that year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS--
ANNUAL COMPENSATION SECURITIES
--------------------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(#)
- --------------------------- -------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Carl Ka Wing Tong.................... 1999 $227,000(1) -- -- --
President and Chief 1998 $177,000(2) -- -- 112,500 shares
Executive Officer 1997 $115,000(3) -- -- --
Leo Sheck Pui Kwok................... 1999 $113,000 -- $82,000(4) --
Chief Operating Officer 1998 $ 77,000 $27,000 $84,000(4) 82,500 shares
1997 $ 46,000 $ 4,000 $61,000(4) --
John Rempel.......................... 1999 $136,000 -- -- --
Chief Financial Officer 1998 $ 8,000(5) -- -- 22,500 shares
and Assistant Secretary 1997 -- -- -- --
Shing Kam Ming....................... 1999 $115,000 -- -- --
Senior Vice-President, 1998 $ 96,000 -- -- 22,500 shares
Controller and Secretary 1997 $ 70,000 -- -- --
</TABLE>
- ------------------------
(1) Represents fees paid to Carl Tong & Associate Management Consultancy
Limited. See "Certain Relationships and Related Transactions--Tong
Consulting Arrangement."
(2) Represents $116,000 in compensation paid to Acma Strategic Holdings Limited
for consulting services and $61,000 in fees paid to Carl Tong & Associate
Management Consultancy Limited. See "Certain Relationships and Related
Transactions--Tong Consulting Arrangement."
(3) Represents compensation paid to Acma Strategic Holdings Limited for
consulting services. See "Certain Relationships and Related
Transactions--Tong Consulting Arrangement."
(4) Represents a residence allowance. See "Employment Agreements."
(5) Mr. Rempel joined CMI in November 1998.
OPTION GRANTS IN 1999
We did not grant any stock options to any named executive officer during
1999.
OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
No options were exercised by any named executive officer during 1999.
50
<PAGE>
AGGREGATE FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS HELD AT FISCAL MONEY OPTIONS AT FISCAL
YEAR-END(#) YEAR END($)(1)
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Carl Ka Wing Tong.............................. 40,179 72,321 $0 $0
Leo Sheck Pui Kwok............................. 29,464 53,036 $0 $0
John Rempel.................................... 8,036 14,464 $0 $0
Shing Kam Ming................................. 8,036 14,464 $0 $0
</TABLE>
- ------------------------
(1) The option exercise price in each case exceeded the fair market value per
shared based on the closing price of $2.563 reported by the NASDAQ National
Market on December 31, 1999.
EMPLOYMENT AGREEMENTS
We previously were a party to a consulting agreement with Acma Strategic
Holdings Limited, which in turn entered into a consulting agreement with Carl
Tong & Associate Management Consultancy Limited, a company beneficially owned by
Carl Ka Wing Tong, pursuant to which Mr. Tong acted as Managing Director of Acma
Strategic Holdings Limited and performed certain other duties, including acting
as our President and Chief Executive Officer. We discontinued our arrangement
with Acma Strategic upon completion of our public offering on December 23, 1998,
and Associate Management assumed the duties previously performed by Acma
Strategic. The terms of these agreements are described under "Certain
Relationships and Related Transactions--Tong Consulting Arrangement." Consulting
arrangements such as our arrangement with Mr. Tong are commonplace in Hong Kong.
In January 1996, we entered into a service agreement with Leo Sheck Pui Kwok
pursuant to which he was appointed as an executive officer of CMI, effective as
of February 1, 1996, for a term of three years. The appointment automatically
renews for a one-year term on each anniversary beginning on February 1, 1999,
unless either party provides six months written notice to terminate the
agreement. The agreement provides that Mr. Kwok would receive a salary of
$46,000 and a stated bonus for the first year and that, thereafter, his salary,
bonus and benefits would be subject to annual review by the Board. In addition,
we provide Mr. Kwok with a residence allowance.
In January 1997, CML, our wholly-owned Hong Kong subsidiary, adopted a
defined contribution pension plan which is available to all of our Hong Kong
employees with at least three months of continuous service. Participating
employees may make monthly contributions to the pension plan of up to 5% of each
employee's base salary, with matching contributions by CMI. The Hong Kong
employees (or their beneficiaries) are entitled to receive their entire
contribution and our matching contributions, with accrued interest thereon, upon
retirement or death of the employee. Upon resignation or termination (other than
for serious misconduct), employees are entitled to receive their entire
contributions to the pension plan, with accrued interest thereon, plus the
vested portion of our matching contributions. A participating employee becomes
fully vested with respect to 30% of our matching contributions to the pension
plan after completing three years of service with CMI and becomes vested with
respect to an additional 10% of our matching contributions for each year of
continuous service thereafter through year ten. CML's subsidiaries, Excel Master
Limited and Carison Engineering Limited, have each adopted substantially
identical pension plans for their employees. Any forfeited contributions made by
CMI and the accrued interest thereon are used to reduce future employer's
contributions. The aggregate amount of our contributions (net of forfeited
contributions) for the years ended December 31, 1997, 1998 and December 31, 1999
was approximately $50,000, $68,000 and $103,000, respectively.
51
<PAGE>
Our employees in the PRC are all hired on a contractual basis and
consequently we have no obligation for pension liabilities to these employees.
1998 STOCK OPTION PLAN
Pursuant to our 1998 Stock Option Plan, 650,000 shares of Common Stock are
currently authorized for issuance upon the exercise of options designated as
either (1) options intended to constitute incentive stock options under the
Internal Revenue Code of 1986, as amended, or (2) non-qualified options. Under
the 1998 Plan, we may grant incentive stock options to our employees and
officers. We may grant non-qualified options to our consultants, directors
(whether or not they are employees), employees or officers.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF OUR PREVIOUS OR
FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT
OF 1934 THAT MIGHT INCORPORATE THIS PROXY STATEMENT OR FUTURE FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN WHOLE OR IN PART, THE FOLLOWING REPORT
AND THE PERFORMANCE GRAPH WHICH FOLLOWS WILL NOT BE DEEMED TO BE INCORPORATED BY
REFERENCE INTO ANY SUCH FILING.
The following Report of the Board of Directors on Executive Compensation
describes the compensation policies and rationale applicable to our executive
officers with respect to the compensation paid to such executive officers for
the year ended December 31, 1999.
The Board's compensation committee (the "Compensation Committee") recommends
and reviews the compensation paid to our executive officers; our stock option
plan, however, is currently administered by the full Board of Directors. The
Compensation Committee currently consists of Carl Ka Wing Tong, Steve Gordon and
Clayton K. Trier. The current Board of Directors consists of Mr. Tong, Leo Sheck
Pui Kwok, Mr. Gordon and Mr. Trier. Mr. Tong serves as our President and Chief
Executive Officer. Mr. Kwok serves as our Chief Operating Officer. Mr. K. S.
Chou also served as a director during 1999.
During the year ended December 31, 1999, we paid consulting fees in the
amount of $227,000 to Carl Tong & Associate Management Consultancy Limited
("Associate Management"), a company beneficially owned by Mr. Tong, pursuant to
an agreement with Associate Management pursuant to which Mr. Tong serves as our
President and Chief Executive Officer. These consulting fees are reflected as
compensation to Mr. Tong in the summary compensation table above under
"Executive Compensation." These types of arrangements are not uncommon in Hong
Kong. For more on this arrangement, see below under "Certain Relationships and
Related Transactions--Tong Consulting Arrangement."
Subject to existing contractual obligations, the base salaries of our
executives are fixed based on job responsibilities and a limited review of
compensation practices for comparable positions at corporations which compete
with CMI in its business or are of comparable size and scope of operations in
Hong Kong. Bonuses for our executives are not determined through the use of
specific criteria. Rather, the Compensation Committee bases bonuses on CMI's
overall performance, profitability, working capital management and other
qualitative and quantitative measurements. In determining the amount of bonuses,
if any, to be awarded, the Compensation Committee considers our net sales growth
and profitability for the applicable period and each executive's contribution to
our success. The Compensation Committee's decisions are based primarily on
informal judgments believed to be fair and reasonable and in the best interests
of CMI and our stockholders. For the year ended December 31, 1999, no bonuses
were paid to CMI's executive management.
52
<PAGE>
The Board believes that equity ownership by executive officers provides
incentive to build stockholder value and aligns the interests of executive
officers with the interests of stockholders. Effective upon the successful
completion of CMI's public offering in December 1998, stock options covering a
total of 340,500 options were granted at the public offering price of $5.00 per
share to 21 people, including 112,500 to Mr. Tong and 82,500 to Mr. Kwok. Under
CMI's current stock option plan, a total of 650,000 shares of Common Stock were
available for the granting of stock options, and it was the Board's intent to
review job responsibilities, individual performance, current option position and
other criteria and, where applicable, grant additional options in 2000. However,
under the terms of the pending acquisition agreement with PNC, no options will
be granted prior to the Closing.
The Board considers awarding stock option grants on a periodic basis. The
Board believes that these additional grants provide an incentive for executive
officers and other key employees to remain with CMI. Under our current stock
option plan, options are granted at the market price of the Common Stock on the
date of grant and, consequently, will have value only if the price of the Common
Stock increases over the exercise price. In determining the size of the periodic
grants, the Board of Directors will consider various factors, including the
amount of any prior option grants, the executive's or employee's performance
during the current fiscal year and his or her expected contributions during the
succeeding fiscal year.
The foregoing report on executive compensation is provided by the Board of
Directors as a whole: Carl Ka Wing Tong, Leo Sheck Pui Kwok, Steve Gordon and
Clayton K. Trier.
PERFORMANCE GRAPH
The chart below sets forth a line graph comparing the performance of our
Common Stock against the NASDAQ Market Index and an index consisting of
companies sharing our Standard Industrial Classification (SIC) Code ("SIC Code
Index") for the period from December 23, 1998 (the date on which the market
price of our Common Stock was first quoted by the NASDAQ National Market)
through December 31, 1999. The indices assume that the value of an investment in
our common stock and each index was 100 on December 23, 1998 and that dividends,
if any, were reinvested.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREATIVE MASTER SIC NASDAQ
<S> <C> <C> <C>
International, Inc. Code Index Market Index
12/23/98 100.00 100.00 100.00
12/31/98 120.00 100.00 100.00
3/31/99 120.00 110.94 111.72
6/30/99 120.00 114.35 121.57
9/30/99 81.25 88.61 123.55
12/31/99 57.66 67.60 182.47
</TABLE>
53
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
executive officers and persons who own more than 10% of a registered class of
our equity securities to file reports of ownership and changes in ownership with
the Securities and Exchange Commission (the "Commission"). Directors, executive
officers and greater than 10% stockholders are required by the Commission's
regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of the forms furnished to us and the
representations made by the reporting persons to us with respect to any required
Form 5 filings, we believe that during the year ended December 31, 1999, its
directors, officers and 10% stockholders complied with all filing requirements
under Section 16(a) of the Exchange Act.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of CMI Common Stock
as of April 29, 2000 by (i) each person known by CMI to beneficially own 5% or
more of the outstanding shares of Common Stock, (ii) each of our directors,
(iii) each of the named executive officers, and (iv) all of our directors and
executive officers as a group. The table also sets forth the expected beneficial
ownership of Common Stock immediately following (and assuming) consummation of
the PNC Acquisition by the foregoing persons and the PNC Members.
The information set forth in the table and accompanying footnotes has been
furnished by the named beneficial owners.
<TABLE>
<CAPTION>
EXPECTED CMI OWNERSHIP
ASSUMING CONSUMMATION OF THE
CMI OWNERSHIP AS OF APRIL 29, 2000 PNC ACQUISITION
----------------------------------- --------------------------------
AMOUNT AND NATURE OF AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF BENEFICIAL OWNERSHIP PERCENT
NAME AND ADDRESS (NUMBER OF SHARES)(1) CLASS (NUMBER OF SHARES)(1) OF CLASS
- ---------------- --------------------- ----------- --------------------- --------
<S> <C> <C> <C> <C>
Carl Ka Wing Tong(2)................ 308,370 6.1% 308,370 1.2%
Leo Sheck Pui Kwok(3)............... 601,778 9.4% 601,778 2.3%
Steve Gordon(4)..................... 8,500 * 8,500 *
Clayton K. Trier(4)................. 17,500 * 17,500 *
Acma Ltd.(5)........................ 2,364,430 47.3% 2,364,430 8.9%
B2B Ltd.(6)......................... -- -- 7,000,000 26.4%
Tony Tong(7)........................ -- -- 3,062,500 11.6%
Oei Hong Leong(8)................... -- -- 2,012,500 7.6%
Fortune E-Commerce Ltd.(9).......... -- -- 1,837,500 6.9%
APP China Group Limited(10)......... -- -- 1,750,000 6.6%
Richard Hui(11)..................... -- -- 1,662,500 6.3%
Sally Li(12)........................ -- -- 1,137,500 4.3%
Paul Chow(13)....................... -- -- 1,050,000 4.0%
Alfonso Oi Ip Fung(14).............. -- -- 525,000 2.0%
Simon Chu(15)....................... -- -- 175,000 *
Li Ling Xiu(16)..................... -- -- 175,000 *
Steve Lau(17)....................... -- -- 175,000 *
Catherine Ma(18).................... -- -- 175,000 *
Charles W. Mueller(19).............. -- -- 105,000 *
Kenley A. Tarter(20)................ -- -- 32,800 *
All directors and executive officers
as group.......................... 959,586(21) 18.7% 10,596,170(22) 40.0%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the shares shown. Except as indicated by
footnote and subject to community property laws where applicable, to our
54
<PAGE>
knowledge, the stockholders named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. Unless otherwise indicated, the address of each
person is c/o CMI at Casey Industrial Building, 8(th) Floor, 18 Bedford
Road, Taikoktsui, Kowloon, Hong Kong.
(2) Includes 50,223 shares issuable upon the exercise of stock options which
will be exercisable within 60 days of April 29, 2000. Mr. Tong is a Managing
Director and 10% stockholder of Acma Strategic Holdings Limited. As such,
Mr. Tong shares investment and voting power with respect to the shares shown
as beneficially owned by Acma Strategic Holdings Limited (see note 5 below).
Mr. Tong disclaims beneficial ownership of such shares, however.
(3) Of the shares shown, 564,948 are held of record by Superego, Inc., a British
Virgin Islands company beneficially owned by Mr. Kwok. Includes 36,830
shares issuable to Mr. Kwok upon the exercise of stock options which will be
exercisable within 60 days of April 29, 2000.
(4) Includes 7,500 shares issuable upon the exercise of currently exercisable
stock options.
(5) The shares shown as being owned by Acma Ltd. consist of 1,838,157 shares
held of record by Acma Strategic Holdings Limited and an additional 526,273
shares held of record by Acma Investments Pte., Ltd., a wholly-owned
subsidiary of Acma Ltd. Acma Investments Pte., Ltd. is a 90% stockholder of
Acma Strategic Holdings Limited. The address of Acma Ltd. is 17 Jurong Port
Road, Singapore 619092.
(6) B2B Ltd.'s address is 52/F Bank of China Tower, 1 Garden Road, Hong Kong.
(7) Includes 1,400,000 shares owned by Sino Mart Management Ltd., a company of
which Mr. Tong is sole owner. Mr. Tong's address is c/o PNC at 3405
Annapolis Lane North, Suite 8, Minneapolis, MN 55447.
(8) Mr. Leong's address is c/o B2B Ltd., 52/F Bank of China Tower, 1 Garden
Road, Hong Kong.
(9) The address of Fortune E-Commerce Ltd, is Room 1502-7, 15/F Tower A. Regent
Centre, 63 Wo Yi Hop Road, Kwai Chung, N.T., Hong Kong.
(10) APP China Group Limited's address is [insert].
(11) Includes 875,000 shares representing 50% of the shares owned by Green
Plant, Inc., a company of which Mr. Hui is 50% owner. Mr. Hui's address is
c/o PNC at 3405 Annapolis Lane North, Suite 8, Minneapolis, MN 55447.
Mr. Hui is the husband of Ms. Sally Li, who is also listed in the table
above.
(12) Includes 875,000 shares representing 50% of the shares owned by Green
Plant, Inc., a company of which Ms. Li is 50% owner. Ms. Li's address is c/o
PNC at 3405 Annapolis Lane North, Suite 8, Minneapolis, MN 55447. Ms. Li is
the wife of Mr. Richard Hui, who is also listed in the table above.
(13) Includes 875,000 shares owned by Alpha One Limited, a company of which
Mr. Chow is sole owner. Mr. Chow's address is c/o PNC at 3405 Annapolis Lane
North, Suite 8, Minneapolis, MN 55447.
(14) Consists of shares owned by Pure Technology International Ltd., a company
of which Mr. Fong is sole owner. Mr. Fong's address is c/o PNC at 3405
Annapolis Lane North, Suite 8, Minneapolis, MN 55447.
(15) Mr. Chu's address is c/o PNC at 3405 Annapolis Lane North, Suite 8,
Minneapolis, MN 55447.
(16) Ms. Xiu's address is c/o PNC at 3405 Annapolis Lane North, Suite 8,
Minneapolis, MN 55447.
(17) Mr. Lau's address is c/o Fortune E-Commerce Ltd., Room 1502-7, 15/F Tower
A, Regent Centre, 63 Wo Yi Hop Road, Kwai Chung, N.T., Hong Kong.
(18) Ms. Ma's address is c/o B2B Ltd., 52/F Bank of China Tower, 1 Garden Road,
Hong Kong.
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(19) Consists of shares underlying currently exercisable options granted by
Mr. Tony Tong to Mr. Mueller.
(20) Consists of shares underlying currently exercisable options granted by
Mr. Tony Tong to Mr. Tarter.
(21) Represents the aggregate holdings of seven persons. Includes 125,491 shares
issuable upon the exercise of stock options which will be exercisable within
60 days of April 29, 2000.
(22) Represents the aggregate holdings of thirteen persons. Includes 125,491
shares issuable upon the exercise of stock options which will be exercisable
within 60 days of April 29, 2000.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CARL TONG CONSULTING ARRANGEMENT
In January 1996, we entered into a consulting agreement with Acma Strategic
Holdings Limited, one of our principal stockholders, under which Acma Strategic
was to receive an annual consulting fee of approximately $106,000. Acma
Strategic is a private investment company whose only investment is its ownership
of our Common Stock. Mr. Tong is a director and 10% stockholder of Acma
Strategic. In addition, under the terms of the agreement, CMI, at its
discretion, paid Acma Strategic a performance bonus of up to 2.5% of our
consolidated net after-tax profits. During 1998, we paid consulting fees in the
amount of $116,000 to Acma Strategic for consulting services provided pursuant
to this consulting agreement.
Acma Strategic entered into a consulting agreement with Carl Tong &
Associate Management Consultancy Limited ("Associate Management"), a company
beneficially owned by Mr. Tong, pursuant to which Mr. Tong serves as a director
of Acma Strategic and performs such other duties as requested by Acma Strategic,
including acting as our President and Chief Executive Officer. Associate
Management received all amounts paid by CMI to Acma Strategic during 1996, 1997
and 1998.
We discontinued our arrangement with Acma Strategic upon completion of our
public offering on December 23, 1998, and Associate Management assumed the
duties previously performed by Acma Strategic. During 1999, we paid consulting
fees in the amount of $227,000 to Associate Management. This is reflected as
compensation to Mr. Tong in the summary compensation table above under
"Executive Compensation."
TFS CONSULTING AGREEMENT
In 1996, we entered into a one-year, annually renewable consulting agreement
with TFS Limited. Steve Gordon, a director of CMI, is the principal owner of and
performs the functions of chief executive officer for TFS Limited. During 1998
and 1999, we paid $179,000 and $172,000, respectively, to TFS Limited.
LOANS TO CML
Messrs. Kwok and Tong had outstanding certain non-interest bearing loans to
CML in the amounts of $438,000 and $232,000, respectively, as of September 30,
1998. The loans were repayable on demand. As of October 1, 1998, the principal
amounts of the outstanding loans were converted into unsecured, non-interest
bearing term loans which are due and payable in six equal semi-annual
installments commencing March 31, 1999 and ending September 30, 2001. As of
December 31, 1999, the aggregate outstanding balance of the loans was $321,000
and $186,000, respectively.
In addition, in 1997, Acma Strategic advanced $9,000 on CML's behalf, which
was repaid, without any interest, in January 1998.
LOANS FROM CML
During 1995, 1996 and 1997, Mr. Tong borrowed certain amounts from CML. The
maximum balance of such loans at any one time was $124,000. The loans were
non-interest bearing and were repayable on demand. All loan transactions ceased
upon the completion of our exchange reorganization in December 1997. The loans
were repaid in full in September 1998.
GUARANTEES OF CMI DEBT
As of December 31, 1999, we had credit facilities with Hang Seng Bank,
Banque Nationale de Paris and Commonwealth Finance Corporation Limited of
$258,000, $356,000, and $1,291,000, respectively, some of which Messrs. Tong and
Kwok personally guarantee. The facilities also are secured by a mortgage on
certain real property owned by Mr. Tong. Additionally, Acma Strategic
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guarantees certain of our debt. As of December 31, 1999, we had outstanding
balances under such facilities in an aggregate amount of approximately
$1,150,000. We are currently attempting to eliminate the guarantees of
Messrs. Tong and Kwok and Acma Strategic.
STOCKHOLDER PROPOSALS AT THE NEXT ANNUAL MEETING OF STOCKHOLDERS
Stockholder proposals submitted for inclusion in our Proxy Statement and
form of proxy relating to our 2001 Annual Meeting of Stockholders must be
received by , 2001. If we are not notified of a stockholder proposal
by , 2001, then the proxies held by our management may provide the
discretion to vote against such stockholder proposal, even though such proposal
is not discussed in the Proxy Statement. Stockholder proposals should be
submitted to Chief Financial Officer, Creative Master International, Inc., Casey
Ind Bldg., 8th Floor, 18 Bedford Rd., Taikoktsui, Kowloon, Hong Kong.
EXPERTS
The financial statements of CMI as of December 31, 1999 and 1998, and for
each of the years in the three-year period ended December 31, 1999, have been
incorporated by reference in this Proxy Statement in reliance upon the reports
of Arthur Andersen & Co. LLP, independent public accountants, and upon their
authority as experts in accounting and auditing.
The financial statements of PNC as of December 31, 1999, and for the period
from July 8, 1999 (inception) to December 31, 1999, have been included in this
Proxy Statement in reliance upon the report of Arthur Andersen LLP, independent
public accountants, and upon their authority as experts in accounting and
auditing.
OTHER MATTERS
We know of no other matters that are likely to be brought before the Annual
Meeting. If, however, other matters not now known or determined properly come
before the Annual Meeting, the persons named as proxies in the enclosed proxy
card or their substitutes will vote such proxy in accordance with their
discretion with respect to such matters.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Stockholders may read and copy any reports, statements
or other information that we file at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information about the public reference rooms. Our
public filings are also available from commercial document retrieval services
and at the Internet Web site maintained by the SEC at http://www.sec.gov.
The SEC allows us to "incorporate by reference" information into this Proxy
Statement, which means that we can disclose important information to
stockholders by referring them to another document filed separately with the
SEC. The information incorporated by reference is deemed to be part of this
Proxy Statement, except for any information superseded by information contained
directly herein. This Proxy Statement incorporates by reference the documents
set forth below that we have previously filed with the SEC. These documents
contain important information about CMI and its financial condition.
- our Annual Report on Form 10-KSB for the year ended December 31, 1999, and
the first amendment thereto on Form 10-KSB/A.
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
- our Current Reports on Form 8-K, filed on March 8, 2000 and May , 2000.
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Additional documents that we may file with the SEC between the date of this
Proxy Statement and the date of the Annual Meeting are also incorporated by
reference. These include any periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as any proxy statements.
You can obtain any of the documents incorporated by reference in, but not
included with, this Proxy Statement from us without charge, excluding all
exhibits unless we have specifically incorporated by reference an exhibit in
this Proxy Statement, by requesting them in writing or by telephone from the
following address:
Creative Master International, Inc.
Attn: John Rempel
Casey Industrial Building, 8(th) Floor
18 Bedford Road, Taikoktsui
Kowloon, Hong Kong
Telephone: 852-2396-0147
STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROXY STATEMENT TO VOTE THEIR SHARES AT THE ANNUAL MEETING.
NO ONE HAS BEEN AUTHORIZED TO PROVIDE ANY INFORMATION THAT IS DIFFERENT FROM
WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
, 2000. STOCKHOLDERS SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT
DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT NOR THE ISSUANCE OF COMMON
STOCK IN THE PNC ACQUISITION WILL CREATE ANY IMPLICATION TO THE CONTRARY.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
When used in this Proxy Statement, the words "estimate," "project,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements, which speak only as of the date of this Proxy
Statement. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in such
forward-looking statements. Such risks and uncertainties include those risks,
uncertainties and risk factors identified under the heading "Proposal
No. 1--Risks Related to the PNC Acquisition." We do not undertake any obligation
to publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
THE STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, AND RETURN PROMPTLY
THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE
<TABLE>
<S> <C>
May , 2000 By Order of the Board of Directors,
Shing Kam Ming
Secretary
</TABLE>
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APPENDIX A
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT ("Agreement") is dated as of February 17, 2000
by and between Creative Master International, Inc. ("Company") and Tony Tong,
Wan Sang Hui, Lee Li, James Mullin, John Farrell, Paul Poung-Hwa Chow, Fung Oi
Ip Alfonso, Oei Hong Leung, Fortune E-Commerce Limited, B2B Limited
(collectively, "Shareholders"), the owner of PacificNet.com LLC ("PNC") and PNC.
RECITALS
WHEREAS, Shareholders own 100% of the issued and outstanding stock of PNC
(the "Shares"), and;
WHEREAS, PNC is a Minnesota limited liability company and is engaged in the
business of providing Internet business-to-business and business-to-consumer
e-commerce services, e-commerce software application and other e-commerce
related services.
WHEREAS, Company is a Delaware incorporated US public company, currently
traded on the NASDAQ National Market under the symbol CMST, and;
WHEREAS, Company desires to acquire the Shares and Shareholders desire to
exchange the Shares for newly issued stock in the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and terms contained
herein and in reliance upon the representations and warranties hereinafter set
forth, the parties agree as follows:
I. EXCHANGE OF THE SHARES AND CONSIDERATION
1.01 SHARES BEING EXCHANGE. Effective at the closing of this Agreement
(the "Closing"), and subject to the terms and conditions of this Agreement,
Shareholders shall assign, transfer and deliver to the Company all of the
Shares.
1.02 CONSIDERATION. Subject to the terms and conditions of this Agreement,
and in consideration of the assignment and delivery of the Shares to the
Company, the Company shall at Closing issue to Shareholders under/or their
designees, and Shareholders and/or their designees shall purchase, acquire
and/or accept from the Company, 21,000,000 shares in the Company (the
"Consideration").
1.03 CLOSING. The Closing of the transaction contemplated by this
Agreement (the "Closing") shall take place at the offices of Troy & Gould or
other such place as mutually agreed upon, following by the necessary Company
shareholders approval procedures.
1.04 METHOD OF CLOSING. The method of closing shall require the parties to
satisfy the conditions specified in Section 6.
II. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS AND PNC
Shareholders and PNC represent and warrant to the Company as follows, as of
the closing:
2.01 ORGANIZATION. PNC is a corporation duly organized, validly existing
and in good standing under the laws of Minnesota. PNC has the corporate power
and authority to carry on its business as presently conducted; and is qualified
to do business in all jurisdictions where the failure to be so qualified would
have a material adverse effect on its business.
2.02 CAPITALIZATION.
(a) All issued and outstanding shares of PNC are duly authorized,
validly issued, issued for value, fully paid and non-assessable.
Shareholders own 100% of all the shares in PNC.
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(b) There are no outstanding preferred stock, options, warrants, or any
other rights to purchase any securities of PNC. Company acknowledges and
agrees that any outstanding options, warrants, and other rights to purchase
securities in Shareholders shall be transferred to Company on an equivalent
basis, at the time of closing.
2.03 AUTHORITY. Shareholders have full power and authority to enter into
this Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, have been duly authorized and approved by
Shareholders and no other corporate proceedings on the part of PNC and/or
Shareholders are necessary to authorize this Agreement and the transactions
contemplated hereby.
2.04 FINANCIAL INFORMATION. The Financial Information provided by
Shareholders to Company is accurate and no misleading, to the best of
Shareholders' knowledge.
2.05 LITIGATION. There is no litigation, proceeding or investigation
pending or threatened against PNC affecting any of its properties, subsidiaries,
or assets that might result, either in any case or in the aggregate, in any
adverse change in the business, operations, affairs or condition of PNC or its
properties or assets, or that might call into question the validity of this
Agreement, or any action taken or to be taken pursuant hereto.
2.06 ASSETS. Shareholders have good and marketable title to their shares
in PNC, and PNC has good and marketable title to all of its assets and
properties now carried on its books.
2.07 CONTRACTS AND UNDERTAKINGS. PNC and its subsidiary business
operations are not in material default, or alleged to be in material default,
under any Contract or Undertaking.
2.08 NO CONFLICT. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with or
result in a breach of any form or provision of, or constitute a default under,
the Articles of PNC, or any agreement, contract or instrument to which PNC is a
party or by which it or any of its assets are bound.
2.09 ACCURACY. No document furnished to the Company by or on behalf of the
Company in connection with the transactions contemplated hereby, contains any
untrue statement of a material fact or when taken as a whole omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.
2.10 FINANCIAL STATEMENTS AND TAX FILINGS. The financial statements of PNC
(the "Financial Statements") submitted to the Company (a) were prepared in
accordance with the books and records of PNC; (b) were prepared in accordance
with generally accepted accounting principles consistently applied; (c) are
accurate and fairly present PNC's financial condition and the results of its
operations as of the relevant dates thereof and for the periods covered thereby;
(d) contain and reflect all necessary adjustments and accruals for a fair
presentation of PNC's financial condition and the results of its operations for
the periods covered by the said financial statements; and (e) contain and
reflect adequate provisions for all reasonably anticipated liabilities with
respect to the period(s) then ended.
2.11 ABSENCE OF MATERIAL CHANGES. Since December 31, 1999, except as
described in any Exhibit hereto or as required or permitted under this
Agreement, there has not been any material negative change in the condition
(financial or otherwise) of the properties, assets, liabilities or business of
Company, except changes in the ordinary course of business which, individually
and in the aggregate, have not been materially adverse.
2.12 COMPLIANCE WITH LAW. PNC has in all material respects complied with
and is now in all material respects in compliance with, all relevant laws
applicable to PNC. The transfer of PNC stock contemplated by this Agreement will
take place in compliance with relevant laws applicable to such transfer.
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III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Shareholders as follows, as of
the Closing:
3.01 ORGANIZATION.
(a) The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Delaware, has the corporate
power and authority to carry on its business as presently conducted and is
qualified to do business in all jurisdictions where the failure to be so
qualified would have a material adverse effect on the business of the
Company.
(b) Copies of the Certificate of Incorporation and the Article and
Bylaws of the Company, supplied to PNC prior to closing, are complete and
correct copies of the Articles of Incorporation and the Bylaws of the
Company as amended and in effect on the date hereof. All minutes of meetings
and actions in writing without a meeting of the Board of Directors and
shareholders of the Company are contained in the minute book of the Company
and no minutes or actions in writing without a meeting have been excluded in
such minute book.
3.02 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock. 5,500,000 shares will be
issued and outstanding prior to the closing. In addition, there are 340,500
stock options outstanding, at $5 per share, subject to specific vesting terms.
All outstanding shares are duly authorized, validly issued, fully paid and
non-assessable. Except for that described above, there are no outstanding shares
of capital stock or other securities or other equity interests of the Company or
rights of any kind to acquire stock, other securities or other equity interests.
3.03 AUTHORITY. The Company has full power and authority to enter into
this Agreement and to carry out the transactions contemplated herein.
3.04 FINANCIAL STATEMENTS. The Company's financial statements have been
prepared in accordance with US generally accepted accounting principles. The
Company is not subject to any material undisclosed liability or obligation of
any nature, whether absolute, accrued, contingent, or otherwise and whether due
or to become due.
3.05 LITIGATION. There is no litigation, proceeding, government inquiry,
or investigation pending or to the knowledge of the Company, threatened against
the Company affecting any of its properties or assets, or, to the knowledge of
the Company that might result, either in any case or in the aggregate, in any
material adverse change in the business, operations, affairs or condition of the
Company or any of its properties or assets, or that might call into question the
validity of this Agreement, or any action taken or to be taken pursuant hereto.
3.06 TITLE TO ASSETS. The Company has good and marketable title to all of
its assets and properties now carried on its books including those reflected in
the balance sheet contained in the Company's financial statements, free and
clear of all liens, claims, charges, security interests or other encumbrances,
except as described in the balance sheet included in the Company's finance
statements or on any Exhibits attached hereto.
3.07 CONTRACTS AND UNDERTAKINGS. The Company is not in material default,
or alleged to be in material default, under any Contract and, to the knowledge
of the Company, no other party to any Contract to which the Company is a party
is in default thereunder nor, to the knowledge of the Company, does there exist
any condition or event which, after notice or lapse of time or both, would
constitute a default by any party to any such Contract.
3.08 NO CONFLICT. The execution and delivery of this Agreement and the
consummation of the transaction contemplated hereby will not conflict with or
result in a breach of any term or provision of, or constitute a default under,
the Certificate of Incorporation or Bylaws of the Company, or any
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agreement, contract or instrument to which the Company is a party or by which it
or nay of its assets are bound.
3.09 ACCURACY. No public filing, certificate or other document furnished
to Shareholders by or on behalf of the Company in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact or when taken as a whole omits to state a material fact necessary in order
to make the statements contained herein or therein not misleading.
3.10 FINANCIAL STATEMENTS. The financial statements of the Company (the
"Financial Statements") set forth in its public filings (a) were prepared in
accordance with the books and records of the Company; (b) were prepared in
accordance with generally accepted accounting principles consistently applied;
(c) are accurate and fairly present the Company's financial condition and the
results of its operations as of the relevant dates thereof and for the periods
covered thereby; (d) contain and reflect all necessary adjustments and accruals
for a fair presentation of the Company's financial condition and the results of
its operations for the periods covered by the said financial statements; and
(e) contain and reflect adequate provisions for all reasonably anticipated
liabilities with respect to the period(s) then ended.
3.11 ABSENCE OF MATERIAL CHANGES. Since the September 30, 1999 SEC
Form 10QSB filing, except as described in any Exhibit hereto or as required or
permitted under this Agreement, there has been:
(a) any material change in the condition (financial or otherwise) of the
properties, assets, liabilities or business of the Company, except changes
in the ordinary course of business which, individually and in the aggregate,
have not been materially adverse.
(b) any undisclosed redemption, purchase or other acquisition of any
shares of the capital stock of Company, or any issuance of any shares of
capital stock or the granting, issuance or exercise of any rights, warrants,
options or commitments by the Company relating to their authorized or issued
capital stock.
3.12 COMPLIANCE WITH LAW. The Company has in all material respects
complied with and it is now in all material respects in compliance with, all
Federal and State laws applicable to the Company, including that the Company is
current in its SEC filings. The Consideration will be issued in full compliance
with all state and federal securities laws.
IV. COVENANTS AND AGREEMENTS OF THE PARTIES EFFECTIVE PRIOR TO CLOSING
4.01 CORPORATE EXAMINATIONS AND INVESTIGATIONS. Prior to the Closing,
Shareholders shall be entitled, through their employees and representatives, to
make such investigations and examinations of the books, records and financial
condition of the Company as Shareholders may request to verify the Company's
representations. Company shall furnish Shareholders and their representatives
during such period with all such information as Shareholders or their
representatives may reasonably request and cause the Company's officers,
employees, consultants, agents, accountants and attorneys to cooperate fully
with Shareholder or its representatives in connection with such review and
examination and to make full disclosure of all information and documents
requested by Shareholders and/or their representatives. Company shall have the
right to request additional information on PNC. Company acknowledges that US
GAAP audits will not be available on PNC until after the Closing. Shareholders
agree to supply Company with copies of available financial and business
information as requested. Each party's investigations and examinations shall be
conducted at reasonable times and under reasonable circumstances, with copies of
requested documents to be provided to the other party upon request.
4.02 COOPERATION; CONSENTS. Prior to the Closing Date, each party shall
cooperate with the other parties to the end that the parties shall (i) in a
timely manner make all necessary filings with, and conduct negotiations with,
all authorities and other persons the consent or approval of which, or a license
or permit from which is required for the consummation of the transactions
contemplated by this
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Agreement and (ii) provide to each other party such information as the other
party may reasonably request in order to enable it to prepare such filings and
to conduct such negotiations.
4.03 CONDUCT OF BUSINESS. From the date hereof through the Closing, the
Company and PNC shall (i) conduct its business in the ordinary course and in
such a manner so that the representations and warranties contained herein shall
continue to be true and correct as of the Closing as if made at and as of the
Closing. Without the prior written consent of Shareholders, except as expressly
set forth herein, the Company shall not undertake or fail to undertake any
action if such action or failure would render any of said warranties and
representations untrue as of the Closing.
4.04 NOTICE OF DEFAULT. From the date hereof through the Closing, each
party hereto shall give to the other parties prompt written notice of the
occurrence or existence of any event, condition or circumstance occurring which
would constitute a violation or breach of this Agreement by such party or which
would render inaccurate in any material respect any of such party's
representations or warranties contained herein.
V. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants of the Company, Shareholders
and PNC contained herein shall survive the closing for a period of two years.
VI. CONDITIONS PRECEDENT TO CLOSING
6.01 CONDITIONS PRECEDENT TO OBLIGATION OF SHAREHOLDERS. The obligations
of Shareholders under this Agreement shall be subject to each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES OF COMPANY TO BE TRUE. The
representations and warranties of Company herein contained shall be true in
all material respects at the Closing with the same effect as though made at
such time. The Company shall have performed in all material respects all
obligations and complied in all material respects, to its actual knowledge,
with all covenants and conditions required by this Agreement to be performed
or complied with by it at or prior to the Closing.
(b) NO LEGAL PROCEEDINGS. No injunction or restraining order shall be
in effect prohibiting this Agreement, and no action or proceeding shall have
been instituted and, at what would otherwise have been the Closing, remain
pending before the court to restrain or prohibit the transactions
contemplated by this Agreement.
(c) STATUTORY REQUIREMENTS. All statutory requirements for the valid
consummation by the Company of the transactions contemplated by this
Agreement shall have been fulfilled. All authorizations, consents and
approvals of all governments and other persons required to be obtained in
order to permit consummation by the Company of the transactions contemplated
by this Agreement shall have been obtained.
(d) DIRECTOR RESIGNATION. Prior to the Closing, all bust one of the
directors of the Company shall have submitted their resignations to Company
to be held in escrow and to become effective at the Closing.
(e) NO MATERIAL ADVERSE CHANGE. Following the execution of this
Agreement, there shall not have occurred any material adverse change in the
financial condition, business, or operations of, nor shall nay event have
occurred which, with the lapse of time or the giving of notice, may cause or
create any material adverse change in the financial condition, business, or
operations, of Company.
(f) BOARD OF DIRECTORS' APPROVAL. This Agreement shall have received
Shareholders Board of Director's approval prior to Closing.
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6.02 CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY. The obligation of the
Company under this Agreement shall be subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS AND PNC TO BE
TRUE. The representations and warranties of Shareholders herein contained
shall be true in all material respects as of the Closing, and shall have the
same effect as though made at the Closing; Shareholders shall have performed
in all material respects all obligations and complied in all material
respects, with all covenants and conditions required by this Agreement to be
performed or complied with by them prior to the Closing.
(b) NO LEGAL PROCEEDINGS. No injunction or restraining order shall be
in effect, and no action or proceeding shall have been instituted and, at
what would otherwise have been the Closing, remain pending before the court
to restrain or prohibit the transactions contemplated by this Agreement.
(c) STATUTORY REQUIREMENTS. All statutory requirements for the valid
consummation by Shareholders of the transactions contemplated by this
Agreement shall have been fulfilled. All authorizations, consents and
approvals of all governments and other persons required to be obtained in
order to permit consummation by Shareholders of the transactions
contemplated by this Agreement shall have been obtained, including, but not
limited to, requirements imposed by the government of Hong Kong.
(d) NO MATERIAL ADVERSE CHANGE. Following the execution of this
Agreement, there shall not have occurred any material adverse change in the
financial condition, business, or operations of, nor shall any event have
occurred which, with the lapse of time or the giving of notice, may cause or
create any material adverse change in the financial condition, business, or
operations, of PNC.
(e) BOARD OF DIRECTOR'S APPROVAL. This Agreement shall have received
Company Board of Director's approval prior to Closing.
VII. MISCELLANEOUS
7.01 EXPENSES OF SALE. Except as otherwise provided herein, each party
shall bear its own direct and indirect expenses incurred in connection with the
negotiation and preparation of this Agreement and the consummation and
performance of the transactions contemplated herein. Without limitation, such
expenses shall include the fees and expenses of all attorneys, brokers,
investment bankers, accountants, agents, advisors, and finders and other
professionals incurred in connection herewith, acting on behalf of such party.
7.02 PARTIES IN INTEREST. Except otherwise expressly provided herein, all
the terms and provisions of this Agreement shall binding upon, shall inure to
the benefit of and shall be enforceable by the respective heirs, beneficiaries,
personal and legal representatives, successors, designees and assigns of the
parties hereto.
7.03 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including any
Schedules, Exhibits and other documents and writings referred to herein or
delivered pursuant hereto, which form a part hereof, contains the entire
understanding of the parties with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings other
than those expressly set forth herein or therein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to its
subject matter. This Agreement may be amended only by a written instrument duly
executed by the parties or their respective successors or assigns.
7.04 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original but all of which together shall
constitute on e and the same instrument.
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<PAGE>
7.05 TERMINATION. In the event that one party's due diligence determines a
material breach or inaccuracy in the other's representation(s) or other terms of
this Agreement, the party may terminate its obligations under this Agreement by
providing written notice of the breach. If the breach is not cured within 10
calendar days, the agreement is terminated, with no further obligations of the
parties.
7.06 GOVERNING LAW. This Agreement shall be subject to New York law and
jurisdiction, except insofar as the laws of the jurisdictions of domicile of the
parties shall control in any conflict of laws dispute.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto as of the date first above written.
<TABLE>
<S> <C> <C> <C>
PacificNet.com LLC Creative Master International, Inc.
By: /s/ TONY TONG By: /s/ CARL TONG
--------------------------------------- ---------------------------------------
Name: Tony Tong Name: Carl Tong
Title: CEO Title: CEO
/s/ TONY TONG /s/ WAN SANG HUI*
- ------------------------------------------- -------------------------------------------
Tong I, Tony Wan Sang Hui
/s/ LEE LI* /s/ JAMES MULLIN*
- ------------------------------------------- -------------------------------------------
Lee Li James Mullin
/s/ JOHN FARRELL* /s/ PAUL POUNG HWA CHOW*
- ------------------------------------------- -------------------------------------------
John Farrell Paul Poung-Hwa Chow
/s/ FUNG OI IP ALFONSO* /s/ OEI HONG LEONG*
- ------------------------------------------- -------------------------------------------
Fung Oi Ip Alfonso Oei Hong Leong
Fortune E-Commerce Limited B2B Limited
By: * By: *
--------------------------------------- ---------------------------------------
Name: Name:
Title: Title:
*By Tony Tong, attorney-in-fact.
</TABLE>
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<PAGE>
APPENDIX B
SUPPLEMENT TO SHARE EXCHANGE AGREEMENT
SUPPLEMENT TO SHARE EXCHANGE AGREEMENT, dated as of April 29, 2000 (this
"Supplement"), among Creative Master International, Inc., a Delaware corporation
(the "Company"), PacificNet.com LLC, a Minnesota limited liability company
("PNC"), and the members of PNC and other persons and entities listed on the
signature pages hereto (collectively, the "Members").
RECITALS:
WHEREAS, the Company, PNC and certain of the Members have entered into that
certain Share Exchange Agreement dated as of February 17, 2000 (the "Exchange
Agreement"); and
WHEREAS, each of the Members owns or has the right to acquire membership
interests in PNC as set forth in Schedule 3.1(b) to this Supplement; and
WHEREAS, the parties desire to supplement the Exchange Agreement as set
forth in this Supplement to address certain matters not provided for in the
Exchange Agreement and to clarify certain of the terms and conditions thereof.
NOW, THEREFORE, in consideration of the premises, and in reliance on the
representations, warranties and covenants contained in the Exchange Agreement
and herein, the parties hereby agree as follows:
ARTICLE I
THE EXCHANGE
Section 1.1. EXCHANGE; EXCHANGE PROCEDURES. Sections 1.01, 1.02 and 1.04
of the Exchange Agreement are hereby deleted in their entirety and the following
new Sections 1.01 and 1.02 substituted therefor:
1.01 THE EXCHANGE.
(a) At the closing (the "Closing") of the transactions contemplated by
the Exchange Agreement, as amended and supplemented by this Supplement, all
membership interests ("MI's") issued and outstanding immediately prior to
the Closing shall be surrendered and assigned to the Company by the Members
in exchange for the Company's sale and issuance to the Members, pro rata in
accordance with their relative ownership of MI's, of an aggregate of
21,500,000 shares (the "Exchange Shares") of validly issued, fully paid and
nonassessable shares of common stock, $.0001 par value per share, of the
Company ("Common Stock").
(b) If as a result of the foregoing any of the Members would receive a
fractional share of the Common Stock, such fractional share shall be rounded
up to the nearest whole share of the Common Stock.
(c) Prior to the Closing, the Company shall not effect any change in its
capital. For purposes of this Supplement, a "change" in the capital of the
Company shall include any issuance of capital stock, options, warrants or
other right to purchase shares of capital stock in the Company (other than
pursuant to the exercise of the currently outstanding stock options and
warrants enumerated in Section 2.1(b) below) or any stock dividend, stock
split, combination, recapitalization, reorganization or similar event.
(d) All references in this Supplement to the Exchange means the exchange
of MI's by the Members for the Exchange Shares contemplated by the Exchange
Agreement and this Supplement.
1.02 EXCHANGE PROCEDURES. At the Closing, the Company shall deliver to
the Members certificates representing the Exchange Shares to which they are
entitled as provided in Section 1.01(a), against the Members' delivery to
the Company of all of the issued and outstanding
<PAGE>
MI's, free and clear of all liens, claims and encumbrances, by means of a
fully executed Assignment of Membership Interest pursuant to which Members
assign all of their right, title and interest in and to the MI's to the
Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Section 2.1. CAPITAL STRUCTURE. Section 3.02 of the Exchange Agreement is
hereby deleted in its entirety and the following new Section 3.02 substituted
therefor:
3.02 CAPITAL STRUCTURE OF THE COMPANY.
(a) AUTHORIZED AND OUTSTANDING CAPITAL STOCK. As of the date hereof,
the authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, of which 4,999,322 shares are issued and outstanding. All
outstanding shares of Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable and free of preemptive rights.
Except as provided in Section 3.02(b) below, the Company has no outstanding
securities convertible into or exchangeable for Common Stock, no contracts,
rights, options, warrants or other agreements or commitments to purchase or
otherwise issue any shares of Common Stock or securities convertible into or
exchangeable therefor, or any shares reserved for issuance under any stock
option, employee benefit or other plans or otherwise. No security of the
Company is entitled to any preemptive or similar rights to purchase
securities from the Company.
(b) CAPITAL STOCK OF COMPANY AT CLOSING. On the date of Closing, and
just prior to completion of the Exchange, (i) the authorized capital stock
of the Company will consist of 125,000,000 shares of Common Stock and
5,000,000 shares of "blank check" preferred stock, (ii) the Company will
have 4,999,322 shares of Common Stock issued and outstanding (plus any
shares issued subsequent to the date hereof upon the exercise of any of the
options or warrants described in clause (iii) that follows), and
(iii) 462,607 shares (less any shares subject to options or warrants that
are exercised or terminated subsequent to the date hereof) reserved for
issuance pursuant to (A) options for the purchase of an aggregate of 337,607
shares of Common Stock at an exercise price of $5.00 per share and
(B) warrants for the purchase of 125,000 shares of Common Stock at an
exercise price of $8.25 per share.
Section 2.2. AUTHORITY. Section 3.03 of the Exchange Agreement is hereby
deleted in its entirety and the following new Section 3.03 substituted therefor:
3.03 AUTHORITY. The Company's Board of Directors has, on or prior to
the date of this Supplement, subject to receipt of the fairness opinion
referred to in Section 6.3(e), (a) declared that as of such date that the
Exchange was advisable and in the best interests of the Company and its
stockholders, (b) approved the Exchange Agreement and this Supplement and
resolved to recommend the approval of the Exchange Agreement and this
Supplement and the transactions contemplated thereby and hereby by the
Company's stockholders, and (c) directed that the Exchange Agreement and
this Supplement and the transactions contemplated thereby and hereby be
submitted to the Company's stockholders for approval. The Company has all
requisite corporate power and authority to enter into the Exchange Agreement
and this Supplement and to consummate the transactions contemplated hereby.
The execution and delivery of the Exchange Agreement and this Supplement by
the Company and the consummation by the Company of the transactions
contemplated thereby and hereby have been duly authorized by all necessary
action on the part of the Board of Directors of the Company, and (assuming
the valid authorization, execution and delivery of the Exchange Agreement
and this Supplement by PNC and the Members) the Exchange Agreement and this
Supplement constitute valid and binding obligations of the Company
enforceable against it in accordance with their respective terms. When
issued in
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<PAGE>
accordance with the terms of the Exchange Agreement and this Supplement, the
Exchange Shares will be duly authorized, validly issued, fully paid and
nonassessable.
Section 2.3. SEC REPORTS. Section 3.04 of the Exchange Agreement is hereby
deleted in its entirety and the following new Section 3.04 substituted therefor:
3.04 SEC REPORTS. The Company has filed all forms, reports and
documents required to be filed by it with the Securities and Exchange
Commission (the "SEC") since December 31, 1998 and has heretofore made
available to PNC and the Members, in the form filed with the SEC (excluding
any exhibits thereto), (i) its Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999, and (ii) all other forms, reports,
registration statements and other documents filed by the Company with the
SEC since December 31, 1997 (the forms, reports, registration statements and
other documents referred to in clauses (i) and (ii) above being referred to
herein, collectively, as the "Company SEC Reports"). The Company SEC Reports
and any other forms, reports and other documents filed by the Company with
the SEC after the date of this Supplement (i) were or will be prepared in
accordance with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as the case may be, and the rules and regulations
thereunder and (ii) did not at the time they were filed, or will not at the
time they are filed, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order
to make the statements made therein, in the light of the circumstances under
which they were or are made, not misleading.
Section 2.4. ADDITIONAL REPRESENTATIONS AND WARRANTIES. In addition to the
representations and warranties under Article III of the Exchange Agreement, the
Company hereby represents and warrants to PNC and the Members as follows:
(a) CONSENTS AND APPROVALS. No filing or registration with, or
authorization, consent or approval of, any domestic (federal and state),
foreign or supranational court, commission, governmental body, regulatory
agency, authority or tribunal (a "Governmental Entity") is required by or
with respect to the Company or any subsidiary of the Company in connection
with the execution and delivery of the Exchange Agreement and this
Supplement by the Company or is necessary for the consummation of the
transactions contemplated by the Exchange Agreement and this Supplement,
except for (i) the filing with the SEC of (A) the proxy statement for the
meeting of the Company's stockholders to be held for the purpose of
obtaining the approvals required for the transactions contemplated hereby
(the "Proxy Statement"); and (B) such reports and information under the
Exchange Act, as may be required in connection with the Exchange Agreement
and this Supplement and the transactions contemplated thereby and hereby,
(ii) such as may be required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (iii) applicable
requirements, if any, of Blue Sky Laws, National Association of Securities
Dealers and Nasdaq Stock Market, and (iv) such other consents, orders,
authorizations, registrations, declarations and filings the failure of which
to be obtained or made would not, individually or in the aggregate, have a
material adverse effect on the Company, or prevent or materially delay the
consummation of the Exchange.
(b) BROKERS. Neither the Company, any of the Company subsidiaries nor
any of their respective directors, officers or employees has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or similar payments in connection with the
transactions contemplated by the Exchange Agreement or this Supplement.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PNC AND THE MEMBERS
Section 3.1. JOINT REPRESENTATIONS AND WARRANTIES OF PNC AND THE
MEMBERS. In addition to the representations and warranties under Article II of
the Exchange Agreement, PNC and each of the Members hereby represent and warrant
to the Company as follows:
(a) PNC is a limited liability company duly organized, validly existing
and in good standing under the laws of the State of Minnesota and has the
requisite company power and authority to own, lease or operate its
properties and to carry on its business as now being conducted. PNC owns no
shares of capital stock or other equity interest or investment in any
corporation, limited liability company, joint venture or other entity other
than PacificNet.com Limited, a Hong Kong company, and Grand Scheme
Profits, Ltd, a British Virgin Islands company (the "PNC subsidiaries"). PNC
owns, of record and beneficially, all of the outstanding shares of capital
stock of the PNC subsidiaries as described on Schedule 3.1(a), in each case,
free and clear of all liens, claims and encumbrances.
(b) The authorized and outstanding MI's are as set forth in
Schedule 3.1(b). Except as described in Schedule 3.1(b), PNC has no
outstanding securities convertible into or exchangeable for MI's, no
contracts, rights, options, warrants or other agreements or commitments to
purchase or otherwise issue any MI's or securities convertible into or
exchangeable therefor, or any MI's reserved for issuance under any option,
employee benefit or other plans or otherwise.
(c) PNC has all requisite company power and authority to enter into the
Exchange Agreement and this Supplement and to perform its obligations
thereunder and hereunder. The execution and delivery of the Exchange
Agreement and this Supplement by PNC and the performance of its obligations
thereunder and hereunder have been duly authorized by all necessary company
action on the part of PNC. The Exchange Agreement and this Supplement have
been duly executed and delivered by PNC and the Members and (assuming the
valid authorization, execution and delivery of the Exchange Agreement and
this Supplement by the Company) constitute the valid and binding obligations
of PNC and the Members enforceable against PNC and the Members in accordance
with their respective terms except to the extent that (a) enforcement may be
limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium or similar laws now or hereafter in effect relating to or
limiting creditors' remedies and (b) the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain
equitable defenses and to the discretion of the court or other tribunal
before which any proceeding therefor may be brought.
(d) No filing or registration with, or authorization, consent or
approval of, any Governmental Entity is required by or with respect to PNC,
the PNC subsidiaries or any of the Members in connection with the execution
and delivery of the Exchange Agreement and this Supplement by PNC or any of
the Members or is necessary for the consummation of the transactions
contemplated by the Exchange Agreement and this Supplement, except for
(A) such as may be required under the HSR Act, and (B) such consents,
orders, authorizations, registrations, declarations and filings the failure
of which to be obtained or made would not, individually or in the aggregate,
have a material adverse effect on PNC, the PNC subsidiaries, or prevent or
materially delay the consummation of the Exchange.
Section 3.2. SEVERAL REPRESENTATIONS AND WARRANTIES OF THE MEMBERS. Each
of the Members, for himself, herself or itself, but not on behalf of any other
Member, further represents and warrants to the Company, to the best of such
Member's knowledge, as follows:
(a) No claim is pending or threatened to the effect that the present or
past operations of PNC or the PNC subsidiaries infringes upon or conflicts
with the rights of others with respect to
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<PAGE>
any intellectual property (including, without limitation, licenses, patents,
patent rights, patent applications, trademarks, trademark applications,
trade names, copyrights, drawings, trade secrets, know-how and computer
software) necessary to permit PNC and the PNC subsidiaries to conduct their
businesses as now operated (the "PNC Intellectual Property") and no claim is
pending or threatened to the effect that any of the PNC Intellectual
Property is invalid or unenforceable. PNC and the PNC subsidiaries own, or
have the right to use, all PNC Intellectual Property material to the conduct
of PNC's business as presently conducted. No contract, agreement or
understanding between PNC or the PNC subsidiaries and any other party exists
which would, following the transactions contemplated hereby, impede or
prevent the continued use by the Company, PNC and the PNC subsidiaries of
the entire right, title and interest of PNC and the PNC subsidiaries in and
to the PNC Intellectual Property.
(b) Attached as Schedule 3.2(b) are the audited consolidated financial
statements of PNC as of and for the period ended December 31, 1999. The
parties agree that all references in Section 2.10 of the Exchange Agreement
to the "financial statements of PNC" shall mean the audited financial
statements of PNC attached as Schedule 3.2(b) and that the fourth sentence
in Section 4.01 of the Exchange Agreement is hereby deleted.
(c) Except as described in Schedule 3.2(c), neither PNC nor any of the
PNC subsidiaries is a party to (i) any lease, installment purchase agreement
or other contract with respect to any real property used or proposed to be
used in its operations, except, in each case, items reflected in
Schedule 3.2(c), (ii) any contract or agreement for the purchase of any
personal property, commodity, material, fixed asset or equipment in excess
of $100,000; (iii) any mortgage, lease, contract or agreement creating an
obligation of $100,000 or more; (iv) any contract or agreement involving
payments in excess of $100,000 which by its terms does not terminate or is
not terminable without penalty to it within one year after the date hereof;
(v) any loan agreement, indenture, promissory note, conditional sales
agreement or other similar type of arrangement; or (vi) any material license
agreement. Each of the foregoing mortgages, leases, contracts, agreements
and other arrangements to which PNC or any of the PNC subsidiaries is a
party are valid and enforceable in accordance with their terms, except as
such enforceability may be limited by (i) bankruptcy laws and other similar
laws affecting creditors' rights generally and (ii) general principles of
equity, whether asserted in a proceeding in equity or at law; PNC and the
PNC subsidiaries and all other parties to each of the foregoing have
performed all material obligations required to be performed to date
thereunder; neither PNC nor any of the PNC subsidiaries, nor any such other
party is in default or in arrears under the terms of any of the foregoing;
and no condition exists or event has occurred which, with the giving of
notice or lapse of time or both, would constitute a default under any of
them.
(d) Neither PNC, the Members, any of the PNC subsidiaries nor any of
their respective governors, directors, officers, managers or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or similar payments in connection
with the transactions contemplated by the Exchange Agreement or this
Supplement.
ARTICLE IV
ADDITIONAL REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE MEMBERS
In addition to the representations and warranties under Article II of the
Exchange Agreement and Article III of this Supplement, each Member, for himself,
herself or itself, but not on behalf of any other Member, hereby represents and
warrants to, and covenants with, the Company as follows:
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<PAGE>
Section 4.1. TITLE. Such Member is the beneficial and record owner of the
number of MI's listed opposite his/her/its name in Schedule 3.1(b) to this
Supplement and owns such MI's free and clear of all liens, claims, encumbrances
and restrictions, which MI's constitutes the Member's entire ownership interest
in PNC. Except as expressly contemplated in Schedule 3.1(b), such Member shall
not sell, transfer, assign or convey any of such MI's, or any interest therein.
Section 4.2. UNREGISTERED SECURITIES; INVESTMENT INTENT. Such Member
acknowledges and agrees that the Exchange Shares have not been, and will not be,
registered under the Securities Act or relevant foreign or state securities laws
pursuant to exemptions from registration under the Securities Act and such laws,
and that the Company's reliance upon such exemptions is predicated in part on
such Member's representations to the Company as contained herein. Such Member
understands and agrees that the Exchange Shares must be held indefinitely unless
they are subsequently registered for resale under the Securities Act or unless
transferred in reliance upon an available exemption from such registration
requirements. Such Member further acknowledges and agrees that there is no
understanding or agreement to register the Exchange Shares. The Exchange Shares
are being purchased for the account of such Member for investment only and
without the intention of reselling, transferring or redistributing the same.
Such Member has no agreement for the transfer or disposition of any of the
Exchange Shares.
Section 4.3. RESTRICTIONS ON TRANSFER. Such Member acknowledges that the
Company will place an appropriate restrictive legend on the certificate(s)
representing the Exchange Shares to be received by such Member in the Exchange
reflecting that such shares will constitute "restricted securities" within the
meaning of the Securities Act.
Section 4.4. WAIVERS. Such Member hereby agrees, concurrent with and
conditioned upon the consummation of the transactions contemplated by the
Exchange Agreement and this Supplement, to waive (i) any provision of law and
any and all contract rights which grant or granted to such Member a preemptive
right to purchase any MI's or other interest in PNC; (ii) any rights of first
refusal and similar rights to purchase any MI of any other Member; and
(iii) any and all provisions of the Articles of Organization or Member Control
Agreement of PNC and any other contract or agreement, the operation of which
would impair or impede or prevent the Exchange as contemplated by the Exchange
Agreement and this Supplement.
ARTICLE V
ADDITIONAL PROVISIONS
Section 5.1. CERTAIN REFERENCES. References to "Shares," "Shareholders"
and "corporate" in the Exchange Agreement, and in particular, Article II
thereof, when referring to PNC or the Members, were erroneous and unintended,
and should be read as referring to MI's, the Members of PNC and actions by a
limited liability company, as the case may be.
Section 5.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties of the Company, PNC and the Members contained
herein shall survive the Closing for a period of two years.
Section 5.3. COMPANY STOCKHOLDER MEETING. The Company shall call its
Annual Meeting of stockholders as promptly as practicable for the purpose of
having the stockholders of the Company vote with respect to: (a) approving the
transactions contemplated hereby, including, but not limited to, the issuance of
the Exchange Shares; (b) changing the name of the Company to a name to be
specified by PNC prior to the initial filing of the Proxy Statement;
(c) approving an increase in the number of authorized shares of Common Stock to
125,000,000 shares and authorizing the issuance of up to 5,000,000 shares of
"blank check" preferred stock, $.0001 par value per share, of the Company;
(d) approving an appropriate amendment to the Company's 1998 Stock Option Plan
to increase the number of shares available for issuance thereunder from 650,000
to 5,000,000; and (e) approving such
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<PAGE>
other matters as the Company's Board of Directors shall determine. The Company
shall, as soon as is practicable after the execution of this Supplement, prepare
and file with the SEC the Proxy Statement for the purpose of soliciting proxies
for the matters brought before the Annual Meeting. Subject to its prior receipt
of the fairness opinion contemplated in Section 6.3(e), the Company will,
through the Company's Board of Directors, recommend to its stockholders approval
of such matters and shall not withdraw such recommendation; provided, however,
that the Company's Board of Directors or any committee thereof shall not be
required to make, or if already made shall be entitled to withdraw, such
recommendation if and only if the Company's Board of Directors or any committee
thereof concludes in good faith on the basis of the advice of counsel that the
making of, or the failure to withdraw, such recommendation might violate the
fiduciary obligations of the Company's Board of Directors or any committee
thereof under applicable law; provided further, however, that in no case shall
any change in the trading price of Common Stock be used as the sole basis for
any such conclusion. No withdrawal of the recommendation by the Company's Board
of Directors or any committee thereof that is permitted by this Section 5.3,
shall affect the Company's obligation to call the Annual Meeting as provided in
this Section 5.3; provided, however, that PNC and the Members acknowledge and
agree that the Company will not be obligated to call its Annual Meeting for the
purposes referenced above, file the Proxy Statement or recommend to its
stockholders the transactions contemplated by the Exchange Agreement and this
Supplement unless and until it shall have received the opinion of its fairness
advisor as contemplated in Section 6.3(e).
Section 5.4. EXERCISE OF FIDUCIARY DUTIES. Nothing in the Exchange
Agreement or this Supplement shall prohibit or restrict the Company and its
Board of Directors from taking such actions as the Board of Directors of the
Company determines in good faith, after consultation with counsel, are necessary
in order to comply with its fiduciary duties to the Company or the Company's
stockholders under applicable law, including, without limitation,
(i) responding to, or negotiating or entering into agreements with respect to,
alternative proposals that the Board of Directors determines have a reasonable
likelihood of resulting in a more favorable transaction for the Company and its
stockholders than the Exchange and (ii) making any disclosures to the Company's
stockholders regarding such alternative proposals, or otherwise, which, if not
made, could be inconsistent with the fiduciary duties of the Board of Directors
to the Company or its stockholders or its obligations under applicable law.
Section 5.5. PREPARATION OF THE PROXY STATEMENT.
(a) The Company shall use its reasonable best efforts to prepare and
file with the SEC a Proxy Statement and related proxy which meets the
requirements of Regulation 14A of the Exchange Act. The Proxy Statement
shall solicit proxies in respect to the matters described in Section 5.3
above.
(b) Each of the Company and PNC, as to itself and its subsidiaries, and
each of the Members agree to cooperate in the preparation of the Company's
Proxy Statement and that none of the information supplied or to be supplied
by it for inclusion or incorporation by reference in the Proxy Statement and
any amendment or supplement thereto will, at the date of mailing to the
Company stockholders, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 5.6. FEES AND EXPENSES OF PNC. All expenses incurred by or on
behalf of PNC and the Members in connection with the Exchange and related
transactions shall be expenses of PNC and PNC shall pay the same.
Section 5.7. PUBLIC ANNOUNCEMENTS. PNC and the Company each shall consult
with the other prior to issuing any press releases or otherwise making public
announcements with respect to the Exchange and the other transactions
contemplated by the Exchange Agreement and this Supplement
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<PAGE>
and prior to making any filings with any third party and/or any Governmental
Entity with respect thereto, except as may be required by law or by obligations
pursuant to any listing agreement with or rules of Nasdaq.
Section 5.8. STATE TAKEOVER LAWS. If any "fair price," "business
combination" or "control share acquisition" statute or other similar statute or
regulation shall become applicable to the transactions contemplated hereby, the
Company and PNC and their Board of Directors and Board of Governors,
respectively, shall use their commercially reasonable efforts to grant such
approvals and take such actions as are necessary so that the transactions
contemplated hereby by the Exchange Agreement and this Supplement may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to minimize the effects of any such statute or regulation on the
transactions contemplated hereby
Section 5.9. INSURANCE. After the Closing, the Company shall maintain in
effect, without modification, until the normal expiration of the policy term
ending December 23, 2001, its current policy (policy number NDA 0151652) of
directors and officers liability insurance with Reliance Insurance Company of
Illinois (Reliance National Risk Specialists, Inc.). Neither the Company nor PNC
or any of the Members will take any action which would have the effect of
limiting the coverage available under such policy to the directors or officers
or former directors or former officers of the Company or rendering such coverage
unavailable to such persons, each of whom is an intended beneficiary of this
Section 5.9.
Section 5.10. TRANSFER TAXES. All transfer, documentary, sales, use,
registration, value-added and other similar taxes and related fees (including
any penalties, interest an additions to tax) (collectively, "Transfer Taxes")
incurred by any party hereto in connection with this Supplement and the
transactions contemplated hereby shall be paid by the Company. The Company and
the Members shall cooperate in timely making all filings, returns, reports and
forms as may be required to comply with the provisions of such Transfer Tax
laws.
Section 5.11. COMPANY STOCK OPTIONS. Notwithstanding any provision of the
Exchange Agreement and this Supplement to the contrary, PNC and the Members
understand and agree that the Board of Directors of the Company has resolved to
accelerate the vesting of all of the stock options currently outstanding under
the Company's 1998 Stock Option Plan, such that all such options shall
immediately vest and become exercisable three business days following the
Closing.
Section 5.12. CERTAIN TRANSACTIONS. Prior to the Closing, PNC shall not
sell or issue any MI's or other ownership interest in PNC or any option, warrant
or other right to purchase or acquire any MI's or other ownership interest in
PNC, or any securities convertible into or exchangeable for MI's, unless
(a) PNC provides at least three days prior written notice to the Company and
(b) the recipient of such MI's or other ownership interest, or option, warrant,
or other right, enters into an appropriate amendment or supplement to the
Exchange Agreement and this Supplement by which it (i) agrees to be a party to
the Exchange Agreement and this Supplement, (ii) makes the same representations
and warranties to the Company as are made by the Members under the Exchange
Agreement and this Supplement, (iii) agrees to sell and assign to the Company at
the Closing in exchange for its pro rata share of the Exchange Shares as
provided in Section 1.01(a) of the Exchange Agreement, as amended by this
Supplement, any and all MI's it may own or have the right to acquire. The notice
required by this Section shall not apply to the issuance of any MI's pursuant to
any currently outstanding option or other commitment described in
Schedule 3.1(b) attached hereto. Not later than three days prior to the Closing,
PNC and the Members shall update Schedule 3.1(b) as of the Closing and deliver
the updated Schedule 3.1(b) to the Company, which updated Schedule shall be true
and complete as of the date of the Closing.
Section 5.13. NO DIVIDENDS, DISTRIBUTIONS OR SPECIAL PAYMENTS. Prior to
the Closing, neither the Company nor PNC will (a) declare or pay any dividends
or make other distributions with respect to its
B-8
<PAGE>
Common Stock or MI's or (b) pay or become obligated to pay in the future any
bonuses, consulting fees or other compensation outside the recurring, ordinary
course of business to or for the benefit of any shareholder, Member, director,
governor, management person or other, unless such compensation is pursuant to an
agreement disclosed in the Proxy Statement.
Section 5.14. QUARTERLY FINANCIAL INFORMATION. Prior to the Closing, the
Company and PNC shall deliver to the other copies of quarterly unaudited
consolidated financial statements as of and for the three months ended
March 31, 2000 and such other financial information as the other reasonably
requests. Such unaudited quarterly financial statements will be prepared from
the respective books of the Company and PNC, will be in compliance with U. S.
generally accepted accounting principles consistently applied and will contain
and reflect all adjustments and disclosures necessary for a fair presentation of
financial condition and results of operation.
ARTICLE VI
CONDITIONS PRECEDENT TO CLOSING
Section 6.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
EXCHANGE. The respective obligations of each party to effect the Exchange shall
be subject to the fulfillment at or prior to the Closing of the conditions
contained in Article IV of the Exchange Agreement and the following additional
conditions, each of which may be waived only with the consent in writing of each
party not obligated to satisfy the condition:
(a) The Exchange Agreement and this Supplement and the Exchange shall
have been duly approved by the requisite vote of stockholders of the Company
in accordance with applicable law and the Certificate of Incorporation and
Bylaws of the Company.
(b) The Exchange Shares shall have been authorized for listing on the
Nasdaq National Market upon official notice of issuance.
(c) The waiting period applicable to the consummation of the Exchange
under the HSR Act shall have expired or been terminated. All authorizations,
consents, orders, declarations or approvals of, or filings with, any
Governmental Entity, which the failure to obtain, make or occur would have
the effect of making the Exchange or any of the transactions contemplated
hereby illegal or would have a material adverse effect on either of the
Company or PNC (assuming the Exchange had taken place), shall have been
obtained or shall have been made.
(d) There shall not be instituted or pending any suit, action or
proceeding by a Governmental Entity or any other person as a result of this
Supplement or the Exchange Agreement or any of the transactions contemplated
herein or therein which would have a material adverse effect on either the
Company or PNC (assuming for purposes of this paragraph (d) that the
Exchange shall have occurred) or which seeks to prevent or restrict the
consummation of the Exchange or seeks monetary damages in connection
therewith.
(e) No court or other Governmental Entity having jurisdiction over PNC
or the Company, or any of their respective subsidiaries, shall have enacted,
issued, promulgated, enforced or entered any law, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of
making this Supplement, the Exchange Agreement, the Exchange or any of the
transactions contemplated hereby or thereby illegal.
(f) Sections 2.11 and 3.11 of the Exchange Agreement are deleted in
their entirety and the following new Sections 2.11 and 3.11 substituted
therefor:
2.11 [3.11] NO ADVERSE CHANGE. There shall have been no material adverse
change in the assets, as a whole, or the business, prospects, financial
condition or results of operations of PNC and the PNC Subsidiaries taken as a
whole since December 31, 1999.
B-9
<PAGE>
Section 6.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE MEMBERS TO EFFECT
THE EXCHANGE. In addition to the conditions contained in Section 6.01 of the
Exchange Agreement, the obligation of the Members to effect the Exchange shall
be subject to the fulfillment at or prior to the Closing of the following
additional conditions, each of which may be waived by the Members in writing:
(a) The Company shall have performed in all material respects each of
its agreements contained in the Exchange Agreement and this Supplement
required to be performed on or prior to the date of Closing, each of the
representations and warranties of the Company contained in the Exchange
Agreement and this Supplement shall be true and correct in all material
respects on and as of the date of Closing as if made on and as of such date
in each case except as contemplated or permitted by the Exchange Agreement
or this Supplement, and the Members shall have received a certificate signed
on behalf of the Company by its Chief Executive Officer and its Chief
Financial Officer to such effect.
(b) The Company's Certificate of Incorporation shall be amended to adopt
the changes to the Company's capital structure contemplated in Section 5.3
of this Supplement.
(c) Troy & Gould shall have delivered to the Members its opinion, in
form and content satisfactory to PNC, to the effects set forth in Exhibit 1
to this Supplement.
Section 6.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY TO EFFECT
THE EXCHANGE. The obligations of the Company to effect the Exchange shall be
subject to the fulfillment at or prior to the date of Closing of the conditions
contained in Section 6.02 of the Exchange Agreement and the following additional
conditions, each of which may be waived by the Company in writing:
(a) PNC and the Members shall have performed in all material respects
each of their agreements contained in the Exchange Agreement and this
Supplement required to be performed by them on or prior to the date of
Closing, each of the representations and warranties of PNC and the Members
contained in the Exchange Agreement and this Supplement shall be true and
correct in all material respects on and as of the date of Closing as if made
on and as of such date in each case except as contemplated or permitted by
the Exchange Agreement or this Supplement, and the Company shall have
received a certificate signed on behalf of PNC by its President and Chief
Executive Officer and its Vice President of Finance and Operations to such
effect.
(b) Any and all securities convertible into or exchangeable for MI's,
and any and all other contracts, rights, options, warrants and other rights
to purchase or otherwise acquire any MI's or securities convertible into or
exchangeable therefor (including, without limitation, those set forth on
Schedule 3.1(b)) shall have been exercised in full or shall have been
terminated without any liability on the part of PNC.
(c) All necessary third-party consents, waivers, approvals and
authorizations set forth hereto shall have been obtained.
(d) Briggs and Morgan, P.A. shall have delivered to the Company its
opinion, in form and content satisfactory to the Company, to the effects set
forth in Exhibit 2 to this Supplement, and the Company shall have received
such opinions of counsel to the Members as it may reasonably request with
respect to the due authorization, execution and delivery of the Exchange
Agreement and this Supplement and the enforceability thereof and hereof
against the Members.
(e) The Board of Directors of the Company shall have received, as of the
date of the Proxy Statement referred to in Section 5.3 of this Supplement
and as of the Closing, the advice and written opinion, in form and content
satisfactory to it, of Roth Capital Partners, its fairness adviser, to the
effect that the Exchange is fair to the stockholders of the Company from a
financial point of view.
(f) All outstanding indebtedness of the Members to PNC shall have been
repaid in full.
B-10
<PAGE>
ARTICLE VII
TERMINATION
Section 7.1. TERMINATION. The Exchange Agreement and this Supplement may
be terminated at any time prior to the Closing, whether before or after any
approval of the matters presented in connection with the Exchange by the
stockholders of the Company:
(a) by mutual written consent of the Company, PNC and all the Members;
and
(b) by the Company on the one hand, or PNC or the Members holding, in
aggregate, a majority of the MI's on the other hand, if the Exchange has not
been effected on or prior to the close of business on September 30, 2000
(the "Termination Date"); provided, however, that the right to terminate
this Supplement pursuant to this Section 7.1(b) shall not be available to
any party whose failure to fulfill any of its obligations contained in the
Exchange Agreement and this Supplement has been the cause of, or resulted
in, the failure of the Exchange to have occurred on or prior to the
aforesaid date.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1. ENTIRE AGREEMENT. The Exchange Agreement is hereby
incorporated herein by this reference. In the event of any conflict or
inconsistency between the terms of the Exchange Agreement and this Supplement,
the terms of this Supplement shall control. Except as expressly set forth in
this Supplement, the Exchange Agreement shall remain in full force and effect.
Section 8.2. COUNSEL TO PNC. Briggs and Morgan, P.A. has served as counsel
to PNC in connection with this Supplement. Briggs and Morgan, P.A. does not
represent or advise, or undertake to represent or advise, any Member of PNC in
connection with the Exchange Agreement or this Supplement or the transactions
contemplated thereby or hereby.
Section 8.3. CONTROLLING LAW. Section 7.06 of the Exchange Agreement is
deleted. The parties hereby agree that the Exchange Agreement and this
Supplement and all questions relating to their validity, interpretation,
performance and enforcement, shall be governed by and construed in accordance
with the laws of the State of Delaware, notwithstanding any Delaware or other
conflict-of-law provisions to the contrary. Any legal action or other legal
proceeding relating to this Supplement or the enforcement of any provision of
the Exchange Agreement and this Supplement may be brought or otherwise commenced
in any state or federal court located either in California or Minnesota. Each
party to the Exchange Agreement and this Supplement (i) expressly and
irrevocably consents and submits to the nonexclusive jurisdiction of each state
and federal court located in either California or Minnesota (and each appellate
court located in either such state in connection with any such legal
proceeding); (ii) agrees that each state and federal court located in either
such state shall be deemed to be a convenient forum; and (iii) agrees not to
assert (by way of motion, as a defense or otherwise) in any such legal
proceeding commenced in any state or federal court located in either such state,
any claim that such party is not subject personally to the jurisdiction of such
court, that such legal proceeding has been brought in an inconvenient forum,
that the venue of such proceeding is improper or that this Supplement or the
subject matter of the Exchange Agreement and this Supplement may not be enforced
in or by such court.
B-11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or have caused this
Supplement to be executed by their respective duly authorized officers all as of
the date first written above.
<TABLE>
<S> <C> <C> <C>
PNC: COMPANY:
PACIFICNET.COM LLC CREATIVE MASTER INTERNATIONAL, INC.
By: /s/ TONY TONG By: /s/ CARL KA WING TONG
--------------------------------------- ---------------------------------------
Tony Tong Carl Ka Wing Tong,
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MEMBERS:
/s/ TONY TONG /s/ WAN SAN HUI*
- ------------------------------------------- -------------------------------------------
Tony Tong Wan San Hui
/s/ LEE LI* /s/ JAMES MULLIN*
- ------------------------------------------- -------------------------------------------
Lee Li James Mullin
/s/ JOHN FARRELL* /s/ PAUL POUNG-HWA CHOW*
- ------------------------------------------- -------------------------------------------
John Farrell Paul Poung-Hwa Chow
Pure Technology International Limited /s/ STEVE LAU*
-------------------------------------------
Steve Lau
By: *
---------------------------------------
Name: ---------------------------------
Title:
----------------------------------
/s/ OEI HONG LEONG*
-------------------------------------------
Oei Hong Leong
Fortune E-Commerce Limited B2B Limited
By: * By: *
--------------------------------------- ---------------------------------------
Name: --------------------------------- Name: ---------------------------------
Title: Title:
---------------------------------- ----------------------------------
</TABLE>
B-12
<PAGE>
<TABLE>
<S> <C> <C> <C>
Sino Mart Management Ltd. Eastern Road Group Limited
By: * By: *
--------------------------------------- ---------------------------------------
Name: --------------------------------- Name: ---------------------------------
Title: Title:
---------------------------------- ----------------------------------
Green Plant, Inc. Asia Pulp & Paper
By: * By: *
--------------------------------------- ---------------------------------------
Name: --------------------------------- Name: ---------------------------------
Title: Title:
---------------------------------- ----------------------------------
Alpha One Limited /s/ SIMON CHU*
-------------------------------------------
Simon Chu
By: *
---------------------------------------
Name: ---------------------------------
Title:
----------------------------------
/s/ CATHERINE MA*
-------------------------------------------
Catherine Ma
*By Tony I. Tong, Attorney-in-Fact.
</TABLE>
B-13
<PAGE>
SCHEDULE 3.1(A)
PNC JOINT VENTURE OWNERSHIP
PNC China Holding I, has been renamed "PacificNet.com China Limited" ("PNC
China") and is a joint venture funded/owned 51% by PNC and 49% by APP China
Group, Ltd., a company established under the laws of Bermuda ("APP China"). PNC
China was formed to provide electronic commerce and website development services
and information technology services initially to APP China and thereafter to
third parties located in the People's Republic of China ("PRC").
PNC II Joint Venture ("PNC II") is a joint venture yet to be formed which
the parties anticipate will be funded/owned 20% by PNC and 80% by APP China. PNC
II will be formed to act as a holding company for another foreign company which
will own two wholly-owned subsidiaries in Shanghai China, "PNC China B2B" and
"PNC China Logistics". PNC China B2B will initially develop and operate an
electronic commerce website for use by APP China, its suppliers and customers,
and subsequently offer these services to third parties in the PRC. PNC China
Logistics would provide back-end electronic commerce services to APP China
initially and third parties in PRC subsequently.
B-14
<PAGE>
SCHEDULE 3.1(B)
A. OUTSTANDING MEMBERSHIP INTERESTS IN PNC:
<TABLE>
<CAPTION>
MEMBERSHIP INTERESTS
-------------------------
NAME AND ADDRESS OF MEMBER NUMBER PERCENTAGE
- -------------------------- --------- ----------
<S> <C> <C>
Tony I. Tong ............................................... 800,000 8.62%
3201 Bryant Avenue South
Minneapolis, MN 55408
Sino Mart Management Ltd. .................................. 800,000 8.62%
Akara Building
24 De Castro Street
Wickhams Cay I
Road Town, Tortola, British Virgin Islands
Wang Sang Hui, Richard ..................................... 300,000 3.23%
3201 Bryant Avenue South
Minneapolis, MN 55408
Li Lee, Sally .............................................. 100,000 1.08%
3201 Bryant Avenue South
Minneapolis, MN 55408
Green Plant, Inc. .......................................... 1,000,000 10.77%
c/o Caribbean Corporate Services Limited
Third Floor, Omar Hodge Building
Wickams Cay I
P.O. Box 362
Road Town, Tortola, British Virgin Islands
Alpha One Limited .......................................... 500,000 5.38%
22nd Floor
Lane Crawford House
70 Queen's Road Central
Hong Kong
Pure Technology International Ltd. ......................... 300,000 3.23%
P.O. Box 957
Offshore Incorporation Centre
Road Town, Tortola, British Virgin Islands
Fortune E-Commerce Ltd. .................................... 1,050,000 11.31%
Room 1502-7
15/F Tower A, Regent Centre
63 Wo Yi Hop Road
Kwai Chung, N.T., Hong Kong
B2B Ltd. ................................................... 3,000,000 32.31%
52/F Bank of China Tower
1 Garden Road
Hong Kong
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
MEMBERSHIP INTERESTS
-------------------------
NAME AND ADDRESS OF MEMBER NUMBER PERCENTAGE
- -------------------------- --------- ----------
<S> <C> <C>
Oei Hong Leong ............................................. 1,000,000 10.77%
c/o 52/F Bank of China Tower
1 Garden Road
Hong Kong
Eastern Road Group Limited ................................. 285,714 3.08%
509 Bank of America Tower
12 Harcourt Road
Hong Kong
James Mullin ............................................... 50,000 0.54%
249 Benton Avenue
Wayzata, MN 55391
John Farrell ............................................... 100,000 1.08%
South Ninth Street
Minneapolis, MN 55402
--------- ------
9,285,714 100.0%
</TABLE>
B. OPTIONS, RIGHTS AND OTHER COMMITMENTS TO ISSUE MEMBERSHIP INTERESTS IN PNC:
<TABLE>
<CAPTION>
NUMBER OF VESTING
NAME OF RIGHTS HOLDER TYPE MIS EXERCISE PRICE SCHEDULE
- --------------------- -------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Tony I. Tong.................................... options 150,000 $2.50 fully vested
Richard Hui..................................... options 150,000 $2.50 fully vested
Sally Lee....................................... options 50,000 $2.50 fully vested
Paul Chow....................................... options 100,000 $2.50 fully vested
B2B Ltd......................................... options 1,000,000 $2.50 fully vested
Oei Hong Leong.................................. options 150,000 $2.50 fully vested
APP China Group Limited......................... options 1,000,000 (1) fully vested
Simon Chu....................................... options 100,000 $2.50 fully vested
Li Ling Xiu..................................... options 100,000 $2.50 fully vested
Steve Lau....................................... options 100,000 $2.50 fully vested
Catherine Ma.................................... options 100,000 $2.50 fully vested
</TABLE>
- ------------------------
(1) APP China Group Limited has the right to exercise its options at an exercise
price equal to $5.00 per unit payable in cash and stock of APP. Total cash
to be paid is $2.5 million.
B-16
<PAGE>
SCHEDULE 3.2(B)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
OF PACIFICNET.COM, LLC
B-17
<PAGE>
SCHEDULE 3.2(C)
SCHEDULE OF CONTRACTS OR AGREEMENTS IN EXCESS OF $100,000
<TABLE>
<CAPTION>
DESCRIPTION REMAINING COMMITMENT
- ------------------------------------------------------------ --------------------
<S> <C>
PNC subsidiary is party to a noncancelable office lease for
Hong Kong office space through 2001....................... $183,000
PNC has a funding commitment for APP China Joint Venture
pursuant to that certain Subscription Agreement dated as
of 3/31/00 between APP China Group Limited and PNC.
Funding required subsequent to 4/30/00.................... $510,000
PNC has a funding commitment for North America Trade Center
in a quarterly amount of $100,000 beginning 7/1/00........ $400,000
</TABLE>
B-18
<PAGE>
EXHIBIT 1
[FORM OF TROY & GOULD OPINION]
Based upon the foregoing, but subject to the qualifications and limitations
which follow, we are of the opinion that:
(a) The Company is validly existing and in good standing under the laws of
the State of Delaware and has the requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as presently
conducted.
(b) The Company has the requisite corporate power and authority to execute
and deliver the [Acquisition Documents] and to carry out the transactions
contemplated thereby, and the execution, delivery and performance of the
[Acquisition Documents] by the Company have been duly authorized by all
requisite corporate action of the Company.
(c) Each of the [Acquisition Documents] to which the Company is a party has
been duly executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
(d) The capitalization of the Company is as described in the Proxy
Statement and, to such counsel's knowledge, there are no outstanding options,
warrants or other rights to subscribe for or purchase any shares of capital
stock of the Company other than as described in the Proxy Statement.
(e) All of the outstanding shares of common stock of the Company have been
duly authorized and are validly issued, fully-paid and non-assessable.
(f) The sale, assignment, and transfer to the Members of the Exchange
Shares pursuant to the [Acquisition Documents] does not (i) conflict with or
violate the Certificate of Incorporation or By-laws of the Company or any
agreement known to such counsel to which the Company is a party or by which it
or its assets or the Exchange Shares are bound or affected, or (ii) give rise to
any preemptive or similar right on the part of any person or entity.
* * *
The foregoing opinions will be subject to usual and customary
qualifications.
B-19
<PAGE>
EXHIBIT 2
[FORM OF BRIGGS AND MORGAN OPINION]
Based upon the foregoing, but subject to the qualifications and limitations
which follow, we are of the opinion that:
(a) PNC and PacificNet.com, Ltd. is validly existing under the laws of its
jurisdiction of organization and has the requisite company power and authority
to own, lease and operate its properties and to carry on its business as
presently conducted.
(b) *PNC has the requisite corporate power and authority to execute and
deliver the [Acquisition Documents] and to carry out the transactions
contemplated thereby, and the execution, delivery and performance of the
[Acquisition Documents] by PNC have been duly authorized by all requisite
company action of PNC.
(c) *Each of the [Acquisition Documents] to which PNC is a party has been
duly executed and delivered by PNC and constitutes the legal, valid and binding
obligation of PNC, enforceable against PNC in accordance with its terms.
(d) The [MI's] constitute all of the outstanding membership interests in
PNC and, to such counsel's knowledge, there are no outstanding options, warrants
or other rights to subscribe for or purchase any membership interest in PNC
other than the [PNC Employee Options].
(e) The [MI's] have been duly authorized and are validly issued, fully-paid
and non-assessable.
(f) Except for such conflicts, violations and rights as have been validly
waived, the sale, assignment, and transfer to the Company of the [MI's] pursuant
to the [Acquisition Documents] does not (i) conflict with or violate the
Articles of Organization or Member Control Agreement or other charter document
of PNC or any agreement known to such counsel to which PNC is a party or by
which it or its assets or MI's are bound or affected, or (ii) give rise to any
preemptive or similar right on the part of any person or entity.
* * *
The foregoing opinions will be subject to usual and customary
qualifications.
- ------------------------
* Briggs and Morgan need not express the opinions under these paragraphs with
respect to the Exchange Agreement or the Supplement to Exchange Agreement.
B-20
<PAGE>
APPENDIX C
[Letterhead of Roth Capital Partners]
April 26, 2000
Board of Directors
Creative Master International, Inc.
18 Bedford Road
Casey Ind. Building, 8(th) Floor
Taikoktsui, Kowloon, Hong Kong
Gentlemen:
You have requested that we render our opinion as to the fairness, from a
financial point of view, to the shareholders of Creative Master
International, Inc., a Delaware Corporation (the "Company"), of a proposed
purchase (the "Transaction") by the Company of PacificNet.com LLC, a Minnesota
Limited Liability Corporation ("Seller"). The Transaction will be effected
pursuant to the terms and conditions of the Share Exchange Agreement, dated
February 10, 2000, and Supplement to the Share Exchange Agreement, dated
April 17, 2000, (collectively the "Agreement") between the Company and the
Seller.
The Transaction will be structured as a stock exchange for 21,500,000 shares
of the Company, all as more fully set forth in the Agreement. In our review we
have assumed, at your direction, that the definitive documents to be prepared,
used and signed by the parties to formally effect the Transaction will not, when
executed, contain any terms or conditions that differ materially from the terms
and conditions contained in the Agreement.
In connection with our opinion, among other things, and at the direction of
the Company, we have (i) held several discussions with the management of the
Company and certain members of the management of the Seller however, took no
steps to independently verify the substance of such discussions, (ii) reviewed
an executed copy of the Agreement; (iii) reviewed certain public information
made available to us relating to the Company and Seller, although took no steps
to independently verify the substance of such public information; (iv) reviewed
internal budgets and projections, marketing materials and press releases
provided to us by the Company and the Seller; (v) reviewed certain publicly
available information of companies which we believe to be comparable to the
Company and the Seller, however, took no steps to independently verify the
substance of such information; (vi) reviewed the historical stock prices for
companies which we have determined to be comparable to the Company and the
Seller; and (vii) reviewed available research reports for companies which we
have determined to be comparable to the Company and the Seller.
We have not been requested to, and did not, solicit third party indications
of interest in acquiring all or any part of the Company, investing in the
Company or participating in a reverse merger such as the Transaction. We have
considered management's representations concerning their solicitation of such
indications of interest prior to reaching an agreement with the Seller. We have
also considered management's opinion that any formal undertaking to solicit
additional offers subsequent to reaching this agreement with the Seller was
highly unlikely to produce a bona fide, more attractive offer from a financial
point of view and could have the effect of alienating the Seller. However, we
have not been asked to consider, and our opinion does not address, the relative
merits of the Transaction as compared to any alternative business strategy that
might exist for the Company. Furthermore, we have not negotiated the
Transaction, provided any legal advice or advised you with respect to
alternatives to the Transaction. Although we have performed a valuation of the
Company and the Seller using a number of commonly accepted methodologies, we
have not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company nor the Seller. Rather, we
utilized all provided information based on a belief that such was true and
correct.
<PAGE>
Board of Directors
Creative Master International, Inc.
April 26, 2000
Page 2
In rendering this opinion, we have been directed to rely, without
independent verification, on the accuracy of all of the financial and other
information that was publicly available or furnished to us by the Company and
the Seller. Independent of the foregoing, and at the direction of the Company
and the Seller, we have assumed that the projections were reasonably prepared,
based upon assumptions reflecting the best currently available estimates and
good faith judgments of management as to the future performance of these
companies and that neither the management of the Company, nor the management of
the Seller, has any information or beliefs that would make the projections
misleading. We have further relied upon the assurances of management of the
Company and the Seller that they are not aware of any facts that would make any
of the foregoing information inaccurate or misleading. We have not made or
obtained or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any properties or facilities of the Company and the
Seller, nor have we been furnished with any such evaluations or appraisals.
Our opinion is based upon analysis of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist
and as evaluated by us as of the date hereof.
As you are aware, we are acting as financial advisor to the Company in
connection with the Transaction and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the
transaction. Additionally, we have previously rendered, and presently render,
certain investment banking and financial advisory services to the Company for
which we received and will receive customary compensation. In addition, in the
ordinary course of business, we may hold or actively trade the securities of the
Company for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities. In addition,
the Company has agreed to indemnify us against certain liabilities arising out
of our engagement.
This opinion is intended for the benefit and use of the members of Board of
Directors of the Company in considering the Transaction and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
any matter relating to the Transaction. This opinion may not be used by the
Company for any other purpose or published, reproduced, disseminated, quoted or
referred to by the Company at any time, in any manner or for any purpose,
without our prior written consent, except that this opinion may be reproduced in
full in, and references to the opinion and to us (in each case in such form as
we shall approve) may be included in, the solicitation/recommendation statement
the Company distributes to holders of Company's Common Stock in connection with
the Transaction and any proxy/information statement filed with the Securities
and Exchange Commission in connection with the Transaction.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Transaction is fair to the shareholders of the Company from
a financial point of view.
Very truly yours,
/s/ Roth Capital Partners, Inc.
ROTH CAPITAL PARTNERS, INC.
C-2
<PAGE>
APPENDIX D
PACIFICNET.COM LLC AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... D-3
CONSOLIDATED BALANCE SHEET.................................. D-4
CONSOLIDATED STATEMENT OF OPERATIONS........................ D-5
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY AND COMPREHENSIVE
LOSS...................................................... D-6
CONSOLIDATED STATEMENT OF CASH FLOWS........................ D-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. D-8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Governors of
PacificNet.com LLC:
We have audited the accompanying consolidated balance sheet of PacificNet.com
LLC (a Minnesota Limited Liability Company) and Subsidiary as of December 31,
1999, and the related consolidated statements of operations, members' equity and
comprehensive loss and cash flows for the period from inception (July 8, 1999)
through December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PacificNet.com LLC and
Subsidiary as of December 31, 1999, and the results of operations and cash flows
for the period from inception (July 8, 1999) through December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 24, 2000
D-3
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS:
CURRENT ASSETS--
Cash...................................................... $4,061,301
Trade Receivables, net.................................... 34,331
Other Current Assets...................................... 59,978
----------
Total Current Assets........................................ 4,155,610
Property and Equipment, net of accumulated depreciation of
$4,969.................................................... 109,046
----------
TOTAL ASSETS................................................ $4,264,656
----------
LIABILITIES AND MEMBERS' EQUITY:
CURRENT LIABILITIES--
Trade Payables............................................ $ 86,405
Accrued Expenses.......................................... 138,710
Due to Members............................................ 17,075
----------
Total Current Liabilities................................... 242,190
----------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 4, 5, 7)
MEMBERS' EQUITY--
Membership Interests...................................... 4,450,000
Due from Members.......................................... (45,406)
Cumulative Other Comprehensive Income..................... 1,416
Accumulated Deficit....................................... (383,544)
----------
Total Members' Equity....................................... 4,022,466
----------
TOTAL LIABILITIES AND MEMBERS' EQUITY....................... $4,264,656
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS CONSOLIDATED BALANCE SHEET.
D-4
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 8, 1999) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
REVENUES.................................................... $ 48,805
---------
OPERATING EXPENSES--
Cost of Services.......................................... 14,221
Technology Development.................................... 17,221
Sales and Marketing....................................... 92,545
General and Administrative................................ 335,998
---------
Total Operating Expenses................................ 459,985
---------
OPERATING LOSS.............................................. (411,180)
Interest Income............................................. 27,636
---------
NET LOSS.................................................... $(383,544)
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
D-5
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY AND COMPREHENSIVE LOSS
FOR THE PERIOD FROM INCEPTION (JULY 8, 1999) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
MEMBERS CUMULATIVE
----------------------- OTHER
MEMBERSHIP DUE FROM COMPREHENSIVE ACCUMULATED
INTERESTS AMOUNT MEMBERS INCOME DEFICIT TOTAL
---------- ---------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance........... -- $ -- $ -- $ -- $ -- $ --
Issuance of Interests to
Founders.................. 3,834,000 100 -- -- -- 100
Sales of Membership
Interests at $.287 per
unit...................... 1,566,000 449,900 -- -- -- 449,900
Sales of Membership
Interests at $1.111 per
unit...................... 3,600,000 4,000,000 -- -- -- 4,000,000
Repurchase of Membership
Interests................. (123,120) (45,406) -- -- -- (45,406)
Sales of Membership Interest
at $.369 per unit for
Member receivable......... 123,120 45,406 (45,406) -- -- --
Comprehensive Loss:
Net Loss for the period
from Inception (July 8,
1999) through December
31, 1999................ -- -- -- -- (384,544) (384,544)
Change in Cumulative
Effect of Foreign
Currency Translation.... -- -- -- 1,416 -- 1,416
----------
Comprehensive Loss........ -- -- -- -- -- (382,128)
--------- ---------- -------- ------ --------- ----------
9,000,000 $4,450,000 $(45,406) $1,416 $(383,544) $4,022,466
========= ========== ======== ====== ========= ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
D-6
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 8, 1999) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net Loss.................................................. $ (383,544)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation............................................ 4,969
Changes in current assets and liabilities:
Receivables and other current assets.................. (94,309)
Accounts Payable...................................... 86,405
Accrued Expenses...................................... 138,710
Due to Members........................................ 17,075
----------
Net cash used in operating activities............... (230,694)
----------
INVESTING ACTIVITIES:
Purchases of Property and Equipment....................... (114,015)
----------
FINANCING ACTIVITIES:
Proceeds from Sale of Membership Interests................ 4,450,000
Due from Members for Sale of Membership Interests......... (45,406)
----------
Net cash provided by financing activities........... 4,404,594
----------
EFFECT OF CUMULATIVE TRANSLATION ADJUSTMENTS................ 1,416
----------
Increase in cash.......................................... 4,061,301
CASH, AT INCEPTION (JULY 8, 1999)........................... --
----------
CASH, END OF PERIOD......................................... $4,061,301
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
D-7
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
ORGANIZATION--PacificNet.com LLC and Subsidiary (the "Company") is a
Minnesota Limited Liability Corporation, founded on July 8, 1999 and organized
under the Minnesota Limited Liability Company Act contained in Minnesota
Statutes Chapter 322B.
PRINCIPAL ACTIVITIES--The Company's mission is to develop, market and
support full-service trans-Pacific, business-to-business, e-commerce solutions.
The Company's corporate headquarters and North American operations are located
in Minneapolis, Minnesota, USA. The Company's Asian operations are headquartered
in Hong Kong. The Company has sales and development offices in Minneapolis;
Vancouver, Canada; Hong Kong; and Beijing and Guang Zhou, China. The Company's
strategy is to offer comprehensive front-end and back-end e-commerce services to
small and medium enterprises ("SMEs") to enable SMEs to take advantage of the
benefits of e-commerce based opportunities. Front-end services consist of web
site design, hosting, product database development and management, shopping cart
application, call center and live customer service support. Back-end services
consist of order processing, payment transaction and fulfillment.
OPERATING RISKS--The Company has operations in Hong Kong and the People's
Republic of China ("PRC"). Accordingly, the Company's business, financial
condition and results of operations may be influenced by the political, economic
and legal environments in Hong Kong and the PRC, and by the general state of the
Hong Kong and PRC economies.
On July 1, 1997, 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, the Hong
Kong SAR will have full economic autonomy and its own legislative, legal and
judicial systems for fifty years. The Company does not believe that the transfer
of sovereignty over Hong Kong will have an adverse impact on the Company's
financial and operating environment. There can be no assurance, however, that
changes in political or other conditions will not result in such an adverse
impact.
The Company's operations in the PRC are subject to significant risks not
typically associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company's results may be
adversely affected by changes in the political and social conditions in the PRC
and by changes in government policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The Company's business is characterized by rapid technological change, new
product and service development and evolving industry standards. Inherent in the
Company's business are various risks and uncertainties, including limited
operating history, uncertain profitability, history of losses and risks
associated with the Internet, e-commerce and the ability to raise additional
capital.
2. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying financial statements include
the accounts of the Company and its wholly-owned foreign subsidiary,
PacificNet.com Limited. Significant intercompany transactions and balances have
been eliminated.
ESTIMATES AND ASSUMPTIONS--Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and disclosure of contingent assets
and liabilities. Actual results may differ from these estimates.
D-8
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION--Revenue is recognized as services are provided. During
1999, substantially all of the Company's revenues were generated outside of the
United States.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost and
depreciated using the straight-line method over the shorter of the estimated
life of the asset or the lease term, ranging from one to fifteen years.
FOREIGN CURRENCY TRANSLATION--The translation of the financial statements of
PacificNet.com Limited into United States dollars is performed for balance sheet
accounts using the closing exchange rate in effect at the balance sheet date and
for revenue and expense accounts using an average exchange rate during each
reporting period. The resulting foreign currency translation gain or loss is
included in Members' Equity as Other Comprehensive Income.
FAIR VALUE OF FINANCIAL INSTRUMENTS--All financial instruments of the
Company and its subsidiary are carried at cost, which approximates fair value.
3. INCOME TAXES
The Company has elected to be taxed as a Minnesota Limited Liability Company
("LLC") and the taxable income or loss of the Company is included in the income
tax returns of its Members. Taxable income or loss is allocated to the Members
in proportion to their percentage interests or capital contributions, as defined
in the Member Control Agreement (See Note 5). Deferred income tax obligations
arising from cumulative temporary differences between financial and income tax
reporting bases of accounting are the responsibility of the Company's Members,
unless the LLC election is terminated, at which time deferred income taxes
applicable to such temporary differences would be recorded by the Company
through a charge to operations. The Company is required by the Member Control
Agreement (See Note 5) to make tax distributions to its Members in proportion to
their respective share of the Company's taxable income. For the period from
inception (July 8, 1999) through December 31, 1999, the Company had a taxable
loss in the United States of $125,042, which was allocated to the Members.
The Company's wholly owned subsidiary, PacificNet.com Limited, is subject to
Hong Kong profits tax. For the period ended December 31, 1999, Pacificnet.com
Limited had a taxable loss of $183,502. No tax benefits have been recorded
related to the taxable loss of PacificNet.com Limited.
4. OPERATING LEASES
The Company has operating lease agreements for office premises, which extend
through 2001. Minimum rental payments due under the agreements classified as
operating leases with noncancelable terms are approximately $120,000 in 2000 and
$63,000 in 2001.
5. MEMBERSHIP INTEREST TRANSACTIONS
MEMBER CONTROL AGREEMENT--Authority to manage the affairs of the Company is
outlined in a Member Control Agreement dated November 11, 1999 by and among each
of the Members and the Company. In addition, the Member Control Agreement
contains covenants between each Member related to the transfer of membership
interests, including transfer restrictions, permitted transferees, rights of
first refusal and other transfers, as defined. As of December 31, 1999,
9,000,000 Membership Interests representing ownership of the Company were
outstanding. All Membership Interest amounts
D-9
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. MEMBERSHIP INTEREST TRANSACTIONS (CONTINUED)
and per unit amounts have been retroactively restated to reflect a 5:1 unit
split transaction and a 9:10 reverse unit split authorized by the Members.
B2B LIMITED--The Company has granted an option to purchase up to 1,000,000
Membership Interests at an exercise price of $2.50 per Membership Interest
($2,500,000) to B2B Limited, a wholly owned subsidiary of China Strategic
Holdings ("CSH"). The option may be exercised in whole or in part on or after a
qualified initial public offering. CSH and its chairman (who also is the
chairman of the Company) collectively own 4,000,000, or approximately 44%, of
the Membership Interests outstanding at December 31, 1999. In connection with
the proposed acquisition of the Company by Creative Master International, Inc.
(Creative Master) (See Note 7), the option must be exercised and the Membership
Interests purchased prior to closing.
APP CHINA GROUP LIMITED--In March 2000, APP China Group Limited ("APP
China"), a wholly-owned subsidiary of Asia Pulp and Paper (NYSE: PAP), entered
into an agreement with the Company to subscribe to 1,000,000 Membership
Interests of the Company for a total purchase price consisting of $2,500,000
cash and 334,225 unregistered shares of common stock of APP China. The proposed
transaction is subject to customary closing conditions and may be terminated by
the Company or APP China if the closing does not occur by April 30, 2000. In
connection with the proposed acquisition of the Company by Creative Master (See
Note 7), APP China must exercise it's subscription right and purchase Membership
Interests prior to closing. The brother and sister of the chairman of the
Company are officers of the controlling shareholder of APP China.
In addition, the Company and APP China have agreed to create a strategic
joint venture for providing e-commerce services in the PRC. Under the terms of
the proposed joint venture agreement, the Company will make an initial
investment comprised of $510,000 and certain e-commerce technologies and
expertise in exchange for an initial ownership interest of 51% in the joint
venture. APP China will make an initial investment comprised of $490,000 and
will contract with the joint venture to provide APP China with services to
support APP China's existing information technology infrastructure.
EASTERN ROAD GROUP LIMITED--For the period from November 1999 through
March 2000, Eastern Road Group Limited ("ERGL") provided the Company with
$300,000 of strategic consulting, advisory and investment banking services. The
principals of ERGL provide similar services for CSH. In March 2000, the Company
sold 285,714 Membership Interests to ERGL for $285,714 or $1.00 per Membership
Interest.
BOARD OF GOVERNORS--In March 2000, the Company granted options to subscribe
for a total of 1,000,000 Membership Interests to existing members of its Board
of Governors at an exercise price of $2.50 per Membership Interest. These
options are fully vested. In connection with the proposed acquisition of the
Company by Creative Master (See Note 7), these options must be exercised and the
Membership Interests purchased prior to closing.
6. RELATED PARTY TRANSACTIONS
TALENTSOFT LLC--During 1999, TalentSoft LLC ("TalentSoft") provided building
space, accounting and general marketing services to the Company on a monthly
contract basis. The Company's chief executive officer is the brother of the
chief executive of TalentSoft and owns approximately 15% of the outstanding
membership interests of TalentSoft. For the period from inception (July 8, 1999)
through December 31, 1999, the Company paid TalentSoft $87,525 for these
services which is included in
D-10
<PAGE>
PACIFICNET.COM LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. RELATED PARTY TRANSACTIONS (CONTINUED)
general and administrative expenses in the accompanying consolidated statement
of operations. In January 2000, the contracted services from TalentSoft were
discontinued.
During 1999, the Company paid TalentSoft $1,000 for the rights to the
"PacificNet.com" domain name.
AMOUNTS DUE FROM/DUE TO MEMBERS--During 1999, the Company advanced funds
aggregating $45,406 to certain Members of the Company. These funds were used by
those Members to purchase 123,120 Membership Interests from a founder of the
Company. The amount advanced is reflected in amounts due from Members as a
reduction of Members' equity in the accompanying consolidated balance sheet. In
addition, during 1999, certain Members advanced funds aggregating $17,705 on
behalf of the Company. These amounts are payable to the Members within one year
and are reflected as a current liability in the accompanying consolidated
balance sheet.
7. EVENTS SUBSEQUENT TO DECEMBER 31, 1999
SHARE EXCHANGE AGREEMENT WITH CREATIVE MASTER INTERNATIONAL, INC.
On February 17, 2000, the Company and its Members entered into a Share
Exchange Agreement to be acquired by Creative Master. In consideration, Creative
Master expects to issue 21,000,000 shares of its common stock in exchange for
all the Membership Interests of the Company, which would represent approximately
80% of the total number of Creative Master shares expected to be outstanding
immediately following the acquisition.
The Company and Creative Master are currently preparing a supplement to the
Share Exchange Agreement to document the parties' understanding of certain
details of the proposed acquisition. The consummation of the proposed
transaction is subject to the execution of the supplement, receipt of a fairness
opinion from Creative Master's financial advisor, approval of Creative Master's
shareholders and other customary conditions.
If the transaction is consummated, it is anticipated that the primary
business focus of the combined company will be business-to-business electronic
commerce. The Company will seek to dispose of Creative Master's current business
following completion of the acquisition.
Creative Master, whose common stock trades on NASDAQ National Market under
the symbol CMST, is a leading manufacturer of collectible-quality, die-cast
replicas of cars, trucks, buses, marine products and other items distributed
throughout the U.S. and Europe. For the year ended December 31, 1999, Creative
Master reported net sales and net income of $40,668,000 and $2,681,000,
respectively.
NORTH AMERICAN CHINA TRADE CENTRE CORPORATION
In January 2000, the Company entered into a letter of intent to acquire all
of the outstanding common stock of the North America China Trade Centre Corp.
("NACTC") and all rights belonging to NACTC. The Company has agreed to assume
$400,000 of existing NACTC indebtedness and pay monthly management fees
aggregating $1.1 million beginning in August 2000 through May 2001 to Canadian
Metropolitan Properties Corp. NATC is based in Vancouver, Canada, and provides
trans-Pacific trade promotion services to Chinese companies. The consummation of
this transaction is subject to approval by the Company's board of governors and
it is anticipated that the transaction will close in the second quarter of 2000.
D-11
<PAGE>
APPENDIX E
PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION
TO CHANGE NAME TO "PACIFICNET.COM, INC."
RESOLVED, that the text of the first article of the Restated Certificate of
Incorporation of Creative Master International, Inc. (the "Corporation") as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
FIRST: The name of the Corporation is
PACIFICNET.COM, INC.
<PAGE>
APPENDIX F
PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK
RESOLVED, that the text of the first paragraph of the fourth article of the
Restated Certificate of Incorporation of Creative Master International, Inc.
(the "Corporation") as heretofore amended or supplemented is hereby restated and
further amended to read in its entirety as follows:
FOURTH: (1) The total number of shares of stock which the Corporation is
authorized to issue is One Hundred and Thirty Million (130,000,000) shares
designated "Common Stock" and "Preferred Stock." The number of shares of Common
Stock authorized to be issued is One Hundred and Twenty-Five Million
(125,000,000) with a par value of $.0001 per share. The number of shares of
Preferred Stock authorized to be issued is Five Million (5,000,000) with a par
value of $.0001 per share. The holders of the Common Stock or Preferred Stock
shall have no preemptive rights to subscribe for or purchase any shares of any
class of stock of the Corporation, whether now or hereafter authorized.
<PAGE>
PROXY
CREATIVE MASTER INTERNATIONAL, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF CREATIVE MASTER INTERNATIONAL, INC.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Stockholders and Proxy Statement, each dated May , 2000, and hereby revokes
all prior proxies and appoints Carl Ka Wing Tong and Leo Sheck Pui Kwok (the
"Proxies"), and each of them, with full power of substitution, as the proxy of
the undersigned to represent the undersigned and to vote all shares of Common
Stock of Creative Master International, Inc. which the undersigned would be
entitled to vote if personally present at the Annual Meeting of Stockholders, to
be held on June , 2000, at 10:00 A.M., local time at , and at
any adjournments thereof.
1. PNC ACQUISITION. Approval of the issuance of shares of our Common Stock in
the PNC Acquisition.
/ / FOR / / AGAINST / / ABSTAIN
2. ELECTION OF FOUR DIRECTORS. Election of four directors, each to hold office
until his or her successor shall have been elected or qualified. Nominees: Carl
Ka Wing Tong, Leo Sheck Pui Kwok, Steve Gordon, and Clayton K. Trier.
Instruction: To withhold authority to vote for any nominee(s), write the name(s)
of such nominee(s) on the following line:______________________________________.
/ / FOR the nominees listed above except as indicated above / / WITHHOLD
AUTHORITY to vote for all nominees
3. AMENDMENT TO CERTIFICATE OF INCORPORATION TO CHANGE NAME. Conditioned upon
approval of Proposal No. 1, approval of an amendment to our Certificate of
Incorporation to change our name to "PacificNet.com, Inc."
/ / FOR / / AGAINST / / ABSTAIN
4. AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED SHARES OF
COMMON STOCK. Approval of an amendment to our Certificate of Incorporation to
increase the number of shares of Common Stock we are authorized to issue from
25,000,000 shares to 125,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
(CONTINUED ON REVERSE SIDE)
<PAGE>
5. AMENDMENT TO STOCK OPTION PLAN. Approval of an amendment to our 1998 Stock
Option Plan to increase the number of shares of Common Stock we can issue upon
the exercise of options granted under the plan from 650,000 to 5,000,000.
/ / FOR / / AGAINST / / ABSTAIN
6. INDEPENDENT PUBLIC ACCOUNTANTS. Ratification of the appointment of Arthur
Andersen & Co. as our independent public accountants for the fiscal year ending
December 31, 2000.
/ / FOR / / AGAINST / / ABSTAIN
Shares for which proxy cards are properly executed and returned will be
voted at the Annual Meeting in accordance with the directions noted thereon, or
in the absence of directions to the contrary, will be voted "FOR" the election
of the four director nominees and each of the other proposals set forth above.
Should any other matter requiring a vote of the stockholders arise, the
persons named in this Proxy or their substitutes shall vote in accordance with
their best judgment in the interest of CMI.
Please sign below exactly as your
name appears on the Proxy Card. If
shares are registered in more than
one name, the signatures of all
such persons are required. A
corporation should sign in its full
corporate name by a duly authorized
officer, stating his/her title.
Trustees, guardians, executors, and
administrators should sign in their
official capacity, giving their
full title as such. If a
partnership, please sign in the
partnership name by authorized
person(s).
___________________________________
Signature(s)
Date: _____________________________
PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
