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, 1997
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 $.09 2,611,394
(Title of each class) (Outstanding at)
CREATIVE TECHNOLOGIES CORP.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
(Unaudited)
Balance Sheet as at March 31, 1997 3
Statements of Operations
for the Three Months ended
March 31, 1997 and March 31, 1996 4
Statement of Stockholders' (Deficit)
for the Three Months ended March 31, 1997 5
Statements of Cash Flows
for the Three Months ended
March 31, 1997 and March 31, 1996 6
Notes to Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II - OTHER INFORMATION
Item 2. Change In Securities 14
Item 4. Submission of Matters to a Vote of Securities Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27
Financial Data Schedule 16
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED BALANCE SHEET
AS AT MARCH 31, 1997
(Unaudited)
<CAPTION>
Assets
<S> <C>
Current assets:
Cash $ 7,000
Accounts receivable-net 1,190,000
Inventories 1,549,000
Prepaid expenses and other assets 110,000
Total Current Assets 2,856,000
Fixed assets - at cost (less accumulated depreciation
and amortization of $735,000) 732,000
Intangible and other assets 46,000
Total $ 3,634,000
Liabilities
Current liabilities:
Note payable - Century Business Credit Corp. $ 62,000
Notes payable 3,927,000
Accounts payable and accrued expenses 3,105,000
Customer claims payable 435,000
Advances from customers 339,000
Note payable - Fleet Capital Corporation 200,000
Total Current Liabilities 8,068,000
Stockholders' (Deficit)
Preferred stock - $.01 par value; 5,000,000 shares authorized
Preferred stock- 1996- (12% cumulative)
10,000 shares designated; issued and outstanding 600 shares
at redemption value of $1,000 per share 600,000
Preferred stock- 1996-A- (12% cumulative)
10,000 shares designated; issued and outstanding 1,170 shares
at redemption value of $1,000 per share 1,170,000
Common stock - $.09 par value; authorized
20,000,000 shares; issued and outstanding
2,611,000 shares 235,000
Additional paid - in capital 8,900,000
Deficit (15,339,000)
Total Stockholders' (Deficit) (4,434,000)
Total $3,634,000
See notes to condensed financial statements
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Net Sales $2,792,000 $1,620,000
Cost of Sales 1,921,000 941,000
Gross Profit 871,000 679,000
Operating Expenses:
Selling, general and administrative expenses 688,000 1,098,000
Warehousing expense 267,000 343,000
Interest expense 140,000 240,000
1,095,000 1,681,000
Loss before provision for income taxes and
extraordinary item (224,000) (1,002,000)
Provision for income taxes
Deferred 0 400,000
Loss before extraordinary item (224,000) (1,402,000)
Extraordinary item
Gain-debt settlement net of tax 0 1,550,000
Net (loss) income attributable to
common shareholders $(224,000) $148,000
Loss before extraordinary item per
common share $ (.15) $ (.54)
Extraordinary item per common share $ .59
Fully diluted extraordinary item per
common share $ .59
Primary (loss) earnings per common share $ (.15) $ .05
Fully diluted earnings per common share $ .05
See notes to condensed financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31,1997
(Unaudited)
<CAPTION>
Preferred Stock Common Stock
Additional
Number of Number of Par Paid-in
Shares Value Shares Value Capital Deficit
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 1,770 $1,770,000 2,611,000 $235,000 $8,900,000 $(15,115,000)
Net loss (224,000)
Balance March 31, 1997 1,770 $1,770,000 2,611,000 $235,000 $8,900,000 $(15,339,000)
See notes to condensed financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Net cash (used in) provided by operating activities $(238,000) $742,000
Cash flows from investing activities:
Acquisition of fixed assets (2,000) (74,000)
Cash flows from financing activities:
Net proceeds from credit facility 20,000 0
Net repayment of credit facility 0 (2,658,000)
Proceeds from notes payable 195,000 1,625,000
Repayment of notes payable (68,000) (83,000)
Proceeds from sale of common stock 0 50,000
Net cash provided by (used in) financing activities 147,000 (1,066,000)
Net (decrease) in cash (93,000) (398,000)
Cash at beginning end of period 100,000 771,000
Cash at end of period $ 7,000 $ 373,000
Supplemental disclosures of cash flow information
Interest paid $133,000 $ 274,000
Taxes paid 0 0
See notes to condensed financial statements.
</TABLE>
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, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. 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, 1996.
Note B - Inventories
Inventories consist of finished goods stated at the lower of cost or market
using the first - in, first out method.
Note C - Notes Payable and Related Party Transaction
1. At March 31, 1997 the Company had outstanding notes payable totaling
$3,927,000. Of this amount, $2,992,000 bears interest at 12% $185,000
bears interest at 15% and $750,000 bears interest at 18%. These notes are all
due on demand and include $1,000,000 due to an entity whose principal is a
director of the Company. The remaining $2,927,000 is payable to various
individuals who are stockholders or entities whose principals are
stockholders of the Company. These notes payable are personally guaranteed
by certain stockholders of the Company.
2. In December 1996 the Company and Companies owned by the Company's
principal stockholders entered into a two-year loan and security agreement
with a lender whereby the Company and the related party are required to
maintain an outstanding combined loan balance of not less than $1,500,000,
but no more than $3,000,000. The loan is collateralized by substantially all
of the assets of the Company and is guaranteed by the Company, the related
party and an officer of the Company. Under the agreement, the Company and
the related party receive revolving credit advances based on accounts
receivable and inventory available and are required to pay interest at a rate
of prime plus 2.75% plus all of the lenders out-of-pocket costs and
expenses. The agreement, among other matters, restricts the Company with
respect to (i) incurring any lien or encumbrance on its property or assets,
(ii) entering into new indebtedness (iii) incurring capital expenditures
in any fiscal year in an amount in excess of $100,000 and requires an officer
of the Company to maintain certain ownership percentages.
At March 31, 1997, the Company had $62,000 outstanding under this facility.
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note D - Note Payable - Fleet Capital Corporation
In March of 1996, the Company entered into an agreement with its former 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 in March 1996, is
summarized as follows:
Loan balance subject to settlement $3,583,000
Paid by the Company (1,500,000)
Note payable - non-interest bearing issued by
the company due not later than March 11, 1998 (200,000)
Debt assumed by a stockholder of the Company
during March 1996 in exchange for 111,000
shares of common stock (333,000)
Gain on debt settlement $1,550,000
NOTE E - Preferred Stock:
[1] 1996 Preferred Stock:
In June 1996 the Board of Directors designated 10,000 shares of preferred
stock as "1996 Preferred Stock" valued at $1,000 per share. The holders of
1996 Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum payable
quarterly in cash or common stock at the option of the Company,
(ii) convert each share of preferred stock into approximately 333 shares of
common stock subject to adjustment, as defined,
(iii) redemption of their preferred shares on June 1, 1998 at $1,000 per
share payable in cash or shares of common stock at the option of the Company,
(iv) liquidation preferences of $1,000 per preferred share and
(v) no voting rights.
The Company, at its option, has the right to redeem all or any portion of the
1996 Preferred Stock at $1,100 per share plus accrued and unpaid dividends
prior to June 1, 1998.
Cumulative unpaid 1996 preferred stock dividends aggregated $60,000 at March
31, 1997.
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
[2] 1996 - A Preferred Stock:
On September 30, 1996 the Board of Directors designated 10,000 shares of
preferred stock as "1996 - A Preferred Stock" valued at $1,000 per share.
The holders of 1996 - A Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum payable
quarterly in cash or common stock at the option of the Company,
(ii) convert each share of preferred stock into approximately 1,600 shares
of common stock subject to adjustment, as defined,
(iii) redemption of their preferred shares on October 1, 1998 at $1,000 per
share payable in cash or shares of common stock at the option of the Company,
(iv) liquidation preferences of $1,000 per preferred share and
(v) no voting rights.
The Company, at its option, has the right to redeem all or any portion of the
1996 - A Preferred Stock at $1,100 per share plus accrued and unpaid
dividends prior to October 1, 1998.
Cumulative unpaid 1996-A preferred stock dividends aggregated $98,000 at
March 31, 1997.
Note F - Common Stock
On September 4, 1996 the Board of Directors approved a three for one reverse
stock split effective September 5, 1996. All references in these financial
statements to numbers of common shares, and earnings per share amounts
have been restated to give retroactive effect to the reverse stock split.
Note G - Income Taxes
The Company's net operating loss carryforwards for income tax reporting
purposes aggregated approximately $14,604,000 as of December 31, 1996.
$178,000 in year 2007, $7,017,000 in year 2010 and the remaining balance
of $7,409,000 expires in year 2011.
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note H - 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 proposed and the CPSC accepted a voluntary corrective action plan
to be implemented during 1997, whereby the Company would replace certain
parts of the appliances manufactured prior to August 1992.
Management has estimated that the costs of implementing this plan will be
approximately $50,000 and the Company accordingly established a reserve for
this amount as of March 31, 1997.
The Company believes that the ultimate resolution of these matters will not
have a material effect on its financial condition.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Creative Technologies Corp. (the "Company") is the distributor of certain
non-electric houseware products for two European manufacturers and has been
selling electric motor-driven pasta machines under the name "Pasta Express"
and "Takka Pasta and Dough Machine" and a food griller under the name "Grill
Express". The Company has announced its intention to stop selling pasta
machines and grills domestically. The Company is the exclusive distributor
of Brabantia International (Brabantia) products in North America. Brabantia,
headquartered in the Netherlands, is a leading manufacturer of top of the
line non-electric houseware products in Europe. Its products are sold in 68
countries throughout the world. In addition, since October 1, 1996, the
Company has been the exclusive distributor in the United States and Canada of
bathroom scales, manufactured by Soehnle-Waagen GmbH & Co., headquartered in
Murrhardt, Germany. The Company would consider becoming a distributor of
other products that it believes would complement the products that they are
currently selling. The Company has not identified any other products at this
time.
For the three month period ended March 31, 1997, cash used in operating
activities was $238,000, $2,000 was used in investing activities and cash of
$147,000 was provided by financing activities. As a result, at March 31, 1997
cash decreased by $93,000 to $7,000 compared to $100,000 at December 31,
1996. The Company had a negative working capital of $5,212,000 at March 31,
1997.
Accounts payable and other liabilities increased to $3,105,000 at March 31,
1997 from 2,810,000 at December 31, 1996 primarily due to the first quarters
loss and a slow up in collections. Advances from customers increased to
$339,00 at March 31, 1997 from $300,000 at December 31, 1996.
At March 31, 1997 the Company had outstanding notes payable totaling
$3,927,000. Of this amount, $2,992,000 bears interest at 12%, $185,000 bears
interest at 15% and $750,000 bears interest at 18%. These notes are all due
on demand and include $1,000,000 due to an entity whose principal is a
director of the Company. The remaining $2,927,000 is payable to various
individuals who are stockholders or entities whose principals are
stockholders of the Company. These notes payable are personally guaranteed
by certain stockholders of the Company.
During the first quarter of 1997 the Company borrowed $195,000 from a
relative and an entity controlled by the principal shareholders of the
Company and repaid $68,000 to various individuals and entities described
above. In addition the Company increased its borrowings under its credit
facility by $20,000.
The Company amended its Certificate of Incorporation to designate a new class
of 10,000 shares of 1996 preferred stock $.01 par value and a new class of
10,000 shares of 1996-A preferred stock $.01 par value, from 5,000,000
shares of preferred stock previously authorized. During June 1996, the
Company issued 600 shares of the 1996 preferred stock for $600,000 of debt
owed to David Guttmann and related entities. During September 1996, the
Company issued 720 shares of the 1996-A preferred stock for $720,000 of debt
owed to a company owned by David Guttmann and Barry Septimus, the husband of
a principal stockholder of the Company and sold 450 shares of the 1996-A
preferred stock for $450,000 to various Common stockholders of the Company
including David Guttmann and Barry Septimus. Each share of 1996 and 1996-A
preferred stock is subject to mandatory redemption two years from the date of
issuance at $1,000 per share plus unpaid dividends payable in cash, common
stock or any combination thereof at the option of the Company. At any time
prior to redemption, the preferred stockholders can at their option convert
their 1996 preferred stock into 333 shares of common stock and their 1996-A
preferred stock into approximately 1,600 shares of common stock for each
share of preferred stock held. The 1996 and 1996-A preferred stock are each
entitled to a cumulative dividend of $120 per share per annum and shall be
payable in quarterly installments on the first day of January, April, July
and October commencing January 1, 1997. At March 31, 1997 $158,000 of
preferred stock dividends were in arrears.
On December 20, 1996, the Company obtained a two year credit facility from
Century Business Credit Corporation (Century) in the total amount of up to
$300,000. Loans on the revolving credit facility are available up to (i) the
lesser of $200,000 or 40% of the Company's eligible inventory (as defined in
the Agreement), plus (ii) the lesser of $200,000 or 40% of the eligible
accounts receivables (as defined in the Agreement).
The Company pays interest at the greater of 9% or the prime rate plus 2.75%.
The Company also pays a minimum loan fee in the event that the closing daily
unpaid balance is less than a certain amount. The Company paid a facility
fee to obtain the line of credit and pays certain administrative fees.
Century obtained a security interest in all the assets of the Company.
David Guttmann and Ace Surgical Supply Co., Inc., Consolidated Disposables,
Inc. and Universal Medical Products, Inc., entities that David Guttmann is a
principal of, guaranteed the obligations of the Company to Century and in
return, the Company guaranteed the obligations of Ace and Consolidated under
a loan from Century to these entities.
The Board of Directors of the Company is considering having a newly created
subsidiary of the Company merge with and into Ace Surgical Supply Co., Inc.,
pursuant to which Ace would become a wholly owned subsidiary of the Company.
The merger must be approved by a majority of the non-interested directors
of the Company and the Shareholders of Ace. The terms of the merger have not
been finalized to date and has not been approved by either the Shareholders
of Ace or the Board of Directors of the Company.
Results of Operations
The Company had net sales of $2,792,000 and $1,620,000 respectively for
the three month periods ended March 31, 1997 and March 31, 1996. The
increase in sales for the comparative three month periods is attributable to
increased sales of Brabantia, initial sales of Soehnle, export grill express
business, and lower returns as a percentage of sales.
Gross profit margins for the first quarter ended March 31, 1997 and March 31,
1996 were 31.2% and 41.9% 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. The gross profit on
electric export sales is also much lower than domestic retail sales.
Selling, general and administrative expenses were $688,000 and $1,098,000 or
24.6% and 67.8% respectively in the three month periods ended March 31, 1997
and March 31, 1996, and reflects the effect of management's cost cutting
program. Advertising expenses included above were $7,000 and $180,000 in the
respective first quarters if 1997 and 1996.
Interest expense decreased to $140,000 for the three month period ended March
31, 1997 as compared to $240,000 for the three month period ended March 31,
1996. The decrease of $100,000 was primarily due to the Fleet debt
settlement, lower interest rates negotiated on the notes payable and the sale
of preferred stock used to finance operations.
The settlement of the Fleet debt during the three month period ended March
31, 1996 resulted in an extraordinary gain to the Company of $1,550,000.
Due to the foregoing, the Company reported losses before extraordinary item
of $224,000 and $1,402,000 respectively for the three month periods ended
March 31, 1997 and March 31, 1996, and net loss of $224,000 for the three
months ended March 31, 1997 compared to net income of $148,000 in the
comparable period of the prior year.
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, 1997.
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, 1997 By: S/Richard Helfman
Richard Helfman, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> $7,000
<SECURITIES> 0
<RECEIVABLES> 1,461,000
<ALLOWANCES> 271,000
<INVENTORY> 1,549,000
<CURRENT-ASSETS> 2,856,000
<PP&E> 1,467,000
<DEPRECIATION> 735,000
<TOTAL-ASSETS> 3,634,000
<CURRENT-LIABILITIES> 8,068,000
<BONDS> 0
<COMMON> 235,000
1,770,000
0
<OTHER-SE> (6,439,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,295,000
<SALES> 2,792,000
<TOTAL-REVENUES> 2,792,000
<CGS> 1,921,000
<TOTAL-COSTS> 1,921,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,000
<INCOME-PRETAX> (224,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (224,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224,000)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
