FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1996
Commission File Number: 0-15754
CREATIVE TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2721083
(State or other jurisdiction of(IRS Employer Identification
Number)
incorporation of organization)
170 53rd Street, Brooklyn, New York
11232
(Address of principal executive offices) (Zip Code)
(718) 492-8400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of the latest
practicable date.
Common Stock, Par Value $.03
7,834,183
(Title of each class) (Outstanding at March 31, 1996)
<PAGE>
CREATIVE TECHNOLOGIES CORP.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
(Unaudited)
Balance Sheet as at March 31, 1996 3
Statements of Operations
for the Three Months ended
March 31, 1996 and March 31, 1995 4
Statement of Stockholders' Equity
for the Three Months ended March 31, 1996 5
Statements of Cash Flows
for the Three Months ended
March 31, 1996 and March 31, 1995 6
Notes to Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 27
Financial Data Schedule 15
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED BALANCE SHEET
AS AT MARCH 31, 1996
(Unaudited)
<CAPTION>
Assets
<S> <C>
Current assets:
Cash and equivalents $ 373,000
Accounts receivable-net 1,545,000
Inventories 2,922,000
Prepaid expenses and other assets 723,000
Total Current Assets 5,563,000
Fixed assets - at cost (less accumulated depreciation
and amortization of $1,555,000) 2,133,000
Intangible and other assets 163,000
Deferred tax benefit 45,000
Total $ 7,904,000
</TABLE>
<TABLE>
<CAPTION>
Liabilities
<S> <C>
Current liabilities:
Notes payable $ 4,605,000
Accounts payable and accrued expenses. 1,489,000
Total Current Liabilities 6,094,000
Note Payable - Fleet Capital Corporation 200,000
Total Liabilities 6,294,000
Stockholders' Equity
Common stock - $.03 par value; authorized
20,000,000 shares; issued and outstanding
7,834,000 shares 235,000
Additional paid - in capital 8,901,000
Deficit (7,526,000)
Total Stockholders' Equity 1,610,000
Total $ 7,904,000
<FN>
See notes to condensed financial statements.
</TABLE>
3
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Net Sales $1,620,000 $3,930,000
Cost of Sales 941,000 2,088,000
Gross Profit 679,000 1,842,000
Operating Expenses:
Selling, general and
administrative expenses 918,000 1,282,000
Warehousing expense 343,000 -0-
Advertising expense 180,000 969,000
Interest expense 240,000 266,000
1,681,000 2,517,000
Loss before provision for income taxes and
extraordinary item (1,002,000) (675,000)
Provision for income taxes -0- -0-
Loss before extraordinary item (1,002,000) (675,000)
Extraordinary item
Gain-debt settlement net of tax 1,150,000 -0-
Net income (loss) attributable to
common shareholders $ 148,000$ (675,000)
Loss before extraordinary
item per common share $ (.13) $ (.14)
Extraordinary item per common share $ .15
Fully diluted extraordinary
item per common share $ .15
Primary earnings (loss) per common share $ .02 $ (.14)
Fully diluted earnings per common share $ .02
<FN>
See notes to condensed financial statements.
</TABLE>
4
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(Unaudited)
<CAPTION>
Common Stock Additional
Number of Par Paid-in
Shares Value CapitalDeficit
<S> <C> <C> <C> <C>
Balance December 31, 1995 7,501,000 $225,000 $8,577,000 $(7,674,000)
Stock issued for assumption
of debt in connection with
loan settlement 333,000 10,000 324,000
Net profit ________ ________ ________ 148,000
Balance March 31, 1996 7,834,000 $235,000 $8,901,000 $(7,526,000)
<FN>
See notes to condensed financial statements.
</TABLE>
5
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Net cash provided by (used in)
operating activities $742,000 $(701,000)
Cash flows from investing activities:
Acquisition of fixed assets (74,000) (313,000)
Acquisition of intangibles -0- (21,000)
Net cash (used in)
investing activities (74,000) (334,000)
Cash flows from financing activities:
Net repayment of credit facility (2,658,000) -0-
Proceeds from notes payable 1,625,000 1,230,000
Repayment of notes payable (83,000) (500,000)
Exercise of options -0- 10,000
Proceeds from sale of common stock 50,000 -0-
Net cash (used in) provided by
financing activities (1,066,000) 740,000
Net decrease in cash (398,000) (295,000)
Cash at beginning of period 771,000 417,000
Cash at end of period $ 373,000 $ 122,000
Supplemental disclosures of cash flow information
Interest paid $274,000 $ 226,000
Taxes paid -0- -0-
<FN>
See notes to condensed financial statements.
</TABLE>
6
<PAGE>
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further
information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB
for the year ended December 31, 1995
Note B- Cash
Included in cash at March 31, 1996 is a $348,000 United States
Agency note maturing May 13, 1996 held by a bank as collateral
for its issuance of a $350,000 revolving letter of credit to
enable the Company to purchase merchandise. The letter of credit
expires May 8, 1996.
Note C - Inventories
Inventories, which are stated at the lower of cost (first-in,
first-out) or market are summarized as follows:
March 31, 1996
Finished Goods $1,410,000
Work in Process and Parts 1,512,000
Total $2,922,000
Note D- Note Payable - Fleet Capital Corp.
In April of 1995 the Company obtained a line of credit and a term
loan from Fleet Capital Corporation ("Fleet") for $14,000,000 and
$1,000,000, respectively. Interest was being charged on both of
these loans at a rate of 1 1/4% above prime and was collateralized
by substantially all of the assets of the Company and the term
loan was personally guaranteed by a stockholder. At September
30, 1995 and thereafter the Company was in default of certain
terms of the agreement.
Effective November 1, 1995 the Company and Fleet entered into a
Post Default Agreement which among other things allowed Fleet to
continue to extend financing to the Company under the credit
facility at reduced advance rates against collateral up to
$5,500,000.
7
<PAGE>
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In March of 1996, the Company entered into an agreement with the
bank to pay off its indebtedness and release both the Company and
the bank from any future obligations. The Company borrowed
additional funds to pay off the indebtedness. The resulting
settlement which occurred March 8, 1996, is summarized as
follows:
Paid by the Company $1,500,000
Note payable - non-interest bearing issued by
the company due not later than March 8, 1998 200,000
Assumed by a stockholder of the Company in
exchange for 333,000 shares of common stock 333,000
Reduction of indebtedness due to settlement 1,550,000
Loan balance subject to settlement $3,583,000
The gain to the Company due to this settlement amounted to
$1,150,000 net of income tax effect.
Note E - Income Taxes
The Company's net operating loss carryforwards for income tax
reporting purposes aggregated approximately $7,672,000 as of
December 31, 1995.
Note F - Product Liability and Litigation
The Company has received notice that several consumers claim to
have suffered finger injuries while using one of the Company's
appliance products. The claims are covered by the Company's
product liability insurance carrier. The Company redesigned the
appliance in August 1992, and believes that the modification made
should minimize the possibility of such injury. The Consumer
Product Safety Commission (the "CPSC") has made a preliminary
determination that the Company's appliance product represents a
"substantial product hazard" as that term is defined in the
Consumer Product Safety Act. The Company has disputed this
preliminary determination and is currently involved in
negotiations with the CPSC to try to resolve this matter.
In November 1995, the Company filed a lawsuit against a vendor
seeking damages of $1,700,000 for breach of contract and breach
of warranty with respect to the vendor's manufacturing of certain
products. In January 1996, the vendor denied the allegations in
the complaint and counterclaimed for $1,400,000 predicated
primarily upon allegations that the Company wrongfully cancelled
pending purchase orders. The Company believes that due to vendor
breaches, the Company was within its rights to cancel the orders.
The Company believes that the ultimate resolution of these
matters will not have a material effect on its financial
condition.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Company is engaged in the design, manufacture, marketing and
distribution of niche consumer products. The Company currently
sells electric motor-driven pasta machines and a food griller.
Since January 1, 1996 the Company is also the exclusive
distributor of Brabantia International ("Brabantia") products in
the United States. These products include high quality bread
boxes, step-on pails, and waste paper baskets, ironing boards, 2
and 3 step stools and a complete line of kitchen tools and other
household items. Brabantia, headquartered in the Netherlands, is
a leading manufacturer of top of the line houseware products in
Europe. Its products are sold in 68 countries throughout the
world.
For the three month period ending March 31, 1996, net cash
provided by operating activities was $742,000, net cash of
$74,000 was used in investing activities and net cash of
$1,066,000 was used in financing activities. As a result, for
the three month period ending March 31, 1996 cash decreased by
$398,000 to $373,000. The accounts receivable decreased to
$1,545,000 at March 31, 1996 from $2,907,000 at December 31,
1995, reflecting high collections and relatively low sales volume
during the first three month period. The accounts payable and
other liabilities decreased to $1,489,000 at March 31, 1996 from
$1,662,000 at December 31,1995.
Until April 1995, the Company sold substantially all of its trade
receivables at various levels of recourse to Rosenthal &
Rosenthal (the"factor"). On April 19, 1995, the Company ceased
the factoring arrangement with Rosenthal & Rosenthal and instead
obtained a one year credit facility from Fleet Capital
Corporation ("Fleet") in the total amount of $15,000,000,
consisting of a one year term loan of $1,000,000 and a revolving
credit facility for the remainder. The term loan was payable in
twelve equal installments and was personally guaranteed by David
Guttmann, the Chief Executive Officer. Loans on the revolving
credit facility were available in amounts equal to 70% of the
Eligible Accounts Receivables plus the lesser of $7,500,000 or
the sum of the Eligible Inventory. The Company paid a closing
fee of $100,000 to Fleet and $120,000 to a finder. In February
1996, the Company and Fleet agreed to discontinue the banking
relationship. During March 1996 the Company repaid Fleet
$1,500,000 and executed a non-interest bearing unsecured two year
note to Fleet in the amount of $200,000. In addition, David
Guttmann assumed the payment of the remainder of the term loan in
the total amount of $333,333. In order to repay Fleet the
workout amount, the Company obtained short term loans of
$1,000,000 from several individuals. The loans contain interest
at 2% per month plus expenses. The Company derived a pre-tax
profit on the workout of $1,550,000. The Company is seeking to
obtain a new line of credit in order to repay the short term
loans and for working capital. The Company issued 333,000 shares
during March 1996 to the designees to David Guttmann in
consideration for their assumption of the term note in the amount
of $333,333. The Company also borrowed during the three month
period ending March 31, 1996, $625,000 on a short-term basis,
with interest at 18% per annum.
9
<PAGE>
During April 1996 the Company borrowed $675,000 net of repayments
from David Guttmann and related entities repayable within three
months, with interest at 18% per annum. These funds were used to
repay $500,000 to certain individuals who had loaned the Company
this amount for the Fleet workout and for working capital
purposes.
At March 31, 1996, the Company had notes payable due September
30, 1996 in the amount of $1,000,000 payable to an entity whose
principal is a director of the Company. The loan bears interest
at a rate of 18% per annum. At March 31, 1996, the Company also
had $2,605,000 of notes outstanding to various individuals and
shareholders of the Company. These additional loans bear
interest at 18% per annum and are due on September 30, 1996.
These loans, amounting to $3,605,000 are guaranteed by David
Guttmann, the CEO and a principal stockholder of the Company, and
Barry Septimus, the husband of a principal stockholder of the
Company.
In the third quarter of 1995, the Company raised $830,000 through
the sale of 830,000 shares in a private placement. The Board of
Directors authorized the raising of an additional $4,000,000 in a
private placement subject to obtaining the approval of the
shareholders in accordance with the NASDAQ listing requirements.
At a Shareholders' meeting held on January 26, 1996 the private
placement was approved and 1,623,000 shares of common stock were
issued at $1.00 per share, effective December 31, 1995.
The Company expects to fund future operations by obtaining bank
lines of credit, if available, borrowing money privately and cash
flows from operations. The Company is also continuing the
private placement described above.
At March 31, 1996, the Company had outstanding approximately
$350,000 in commercial letters of credit covering the production
and importation of the Grill Express.
In order to reduce future losses, the Company has reduced
expenses by cutting its administrative staff, closing its
assembly plant in Brooklyn, New York and moving the manufacture
of the pasta machine to China, cutting back or eliminating the
use of outside consulting services and otherwise reducing
overhead. In addition, certain key employees have taken
voluntary pay cuts. The Company has also identified and is
currently using a more reliable factory for manufacturing the
Grill Express. This factory will also be producing the Pasta
Machine. The reliability of shipments from this factory has
allowed the Company to reduce its inventory of these products to
an approximate one month supply.
10
<PAGE>
Results of Operations
The Company had net sales of $1,620,000 and $3,903,000
respectively for the three month periods ended March 31, 1996 and
March 31, 1995. The decrease in sales for the three month
comparative period is attributable to continued softness in
demand for the Grill Express and Pasta Machine offset by sales
applicable to the introduction of the Brabantia product line.
Gross profit margins for the first quarters ended March 31, 1996
and March 31, 1995 were 41.9% and 46.9% respectively. The
decrease in gross profit margins is attributable to margins being
lower on the imported Brabantia product line where the Company
acts as a distributor as opposed to higher gross profit margins
on its own manufactured products. These lower gross profit
margins were offset by certain expenses previously considered
part of cost of sales when the Company was assembling and
manufacturing products in its Brooklyn facility and are now being
classified as Warehousing Expense. The benefit of high gross
profit margins is offset by media purchases (advertising expense)
associated with infomercial sales which are part of operating
expenses. Profit margins on sales after cost of sales and media
purchases for the first quarters ended March 31, 1996 and March
31, 1995 were 30.1% and 22.2% respectively representing
management's decision to reduce expenditures for the airings of
the infomercial during the first quarter of 1996. It is
management's intention to increase its expenditures for
infomercial airings above current levels during the second half
of the Company's firscal year.
Selling, general and administrative expenses were $918,000 and
$1,282,000 or 56.7% and 32.6% respectively in the three month
periods ended March 31, 1996 and March 31, 1995, and relfects the
effect of management's cost cutting program.
The Company is no longer assembling and manufacturing its
products in its Brooklyn facility. As a result, certain expenses
previously shown as cost of sales are now classified as
Warehousing Expense. During the three month period ending March
31, 1996 these expenses amounted to $343,000.
Advertising expenses were $180,000 and $969,000 respectively for
the three month periods ending March 31, 1996 and March 31, 1995.
The decrease of $789,000 for the comparative quarters is due to
management's decision to reduce expenditures for the airings of
the infomercial during the first quarter of 1996.
Interest expense decreased to $240,000 for the three month period
ended March 31, 1996 as compared to $266,000 for the three month
period ended March 31, 1995. The decrease of $26,000 was
primarily due to the Fleet debt settlement and lower interest
rates on debt owed Fleet during the current quarter verses
interest rates on debt owed a factor in the comparative quarter
of the prior year.
The settlement of the Fleet debt during the three month period
ending March 31, 1996 resulted in a gain to the Company of
$1,550,000 reduced by applicable income taxes of $400,000 or a
net gain after income taxes of $1,150,000 as follows:
11
<PAGE>
Loan balance subject to settlement $3,583,000
Paid by the Company (1,500,000)
Note payable issued by the Company
non-interest bearing, due not later
than March 8, 1996 (200,000)
Debt assumed by a stockholder of the Company in
exchange for 333,000 shares of common stock. (333,000)
Gain on debt settlement before income tax 1,550,000
Income Tax 400,000
Net gain on debt settlement $1,150,000
Due to the foregoing, the Company reported for the three month
periods ended March 31, 1996 and March 31, 1995, loss before
extraordinary gain of $1,002,000 and $675,000 respectively and
net income of $148,000 for the three months ended March 31, 1996
compared to a net loss of $675,000 in the comparable period of
the prior year.
12
<PAGE>
PART II - OTHER INFORMATION
Item 6. a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
The Registrant did not file reports on Form
8-K during the three months ended March 31, 1996.
13
<PAGE>
CREATIVE TECHNOLOGIES CORP.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CREATIVE TECHNOLOGIES CORP.
Registrant
Dated : May 13, 1996 By: S/Richard Helfman
Richard Helfman, President
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Mar-31-1996
<CASH> $ 373,000
<SECURITIES> 0
<RECEIVABLES> 2,005,000
<ALLOWANCES> 460,000
<INVENTORY> 2,922,000
<CURRENT-ASSETS> 5,563,000
<PP&E> 3,688,000
<DEPRECIATION> 1,555,000
<TOTAL-ASSETS> 7,904,000
<CURRENT-LIABILITIES> 6,094,000
<BONDS> 0
<COMMON> 235,000
0
0
<OTHER-SE> 1,375,000
<TOTAL-LIABILITY-AND-EQUITY> 7,904,000
<SALES> 1,620,000
<TOTAL-REVENUES> 1,620,000
<CGS> 941,000
<TOTAL-COSTS> 941,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240,000
<INCOME-PRETAX> (1,002,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,002,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,150,000
<CHANGES> 0
<NET-INCOME> 148,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
