SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended
December 31, 1996 Commission File No. 0-15754
CREATIVE TECHNOLOGIES CORP.
(Exact name of small business issuer as specified in its Charter)
NEW YORK 11-2721083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 53rd Street, Brooklyn, New York 11232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (718) 492-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.09 Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B ('229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
Registrants revenues for fiscal year ended December 31, 1996 was $4,986,000.
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $1,348,334 as of March 28, 1997.
The number of shares outstanding of the registrant's Common Stock as of March
28, 1997 is:
Class Outstanding at March 28, 1997
Common Stock, $.09 par value 2,611,394
PART I
ITEM 1. BUSINESS
Creative Technologies Corp. (the "Company") is engaged in the design,
manufacture, and marketing of niche consumer houseware products. The
Company currently sells 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 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 compliment the
products that they are currently selling. The Company has not identified any
other products at this time.
Brabantia Products
The Company and Brabantia, a Netherlands company, entered into a five-year
Distributorship agreement effective January 1, 1996. The agreement provides
that the Company will have the exclusive right to distribute Brabantia
products in the United States and Canada. Brabantia manufactures high
quality houseware products and sells its products in 68 countries throughout
the world. Sales of Brabantia products worldwide in 1996 were in excess of
$100,000,000.
Brabantias major product categories include bread boxes, storage canisters,
step-on cans, ironing boards, mail boxes, kitchen tools and gadgets, step
stools, waste paper baskets, cork screws and items used in food preparation.
Brabantias product lines are of high quality. Brabantia develops and
introduces new products every year and could produce private labels for
special occasions.
The Company believes that Brabantia's product line has been well received by
the retail community and its product line is non-seasonal, non-cyclical, and
appeals to a broader range of customers than the Company's pasta machine and
griller. Furthermore, the inclusion of these products and the line of scales
described below will diversify the Companys product line. Historically,
the return rate for Brabantia products is low. The Brabantia line of
products is being marketed primarily by the, Companys Chief Executive
Officer and the President to department stores, speciality stores, mass
merchandising stores and outlets. The Company also displays its products
at two major houseware shows.
Soehnle-Waagen - Scales
The Company and Soehnle-Waagen GmbH & Co. entered into an exclusive
distribution agreement effective as of October 1, 1996. The agreement
provides that the Company will have the exclusive right to distribute
Soehnle's products, consisting of a full line of bathroom scales in the
United States and Canada. The agreement provides that it would terminate on
December 31, 1997, and that prior to such date the parties would in good
faith enter into a five year extension which would contain minimum purchase
obligations and penalties for early termination. The Company is currently
negotiating with Soehnle the terms of the extension of the Agreement.
The Company believes that Soehnle's product has been well received by the
retail community. The scales are being marketed in the same way as the
Company markets
its Brabantia line.
Pasta Machine
The Company manufactures and sells electric motor-driven pasta machines which
mix, knead, extrude and dry dough. The Company is currently selling four
different models ranging in price at retail from $99.00 to $169.00. The
pasta machines are currently being manufactured and assembled for the Company
in China with a limited number of pasta machines being assembled by the
Company at its Brooklyn facility. The Company fills orders as they are
received and generally maintains an inventory of finished goods to meet
projected orders. The models currently being sold by the Company are
differentiated by the quantities of dies (to create as many as 24 different
types of pastas), construction material, appearance, ability to "dry" the
pasta and by varying the accessory kits.
The Company's pasta machines have been sold throughout the United States and
Canada in various department stores, certain mail order catalogues,
speciality stores and other mass merchandising stores and outlets. The
Companys marketing and sales activities are currently being done primarily by
its Chief Executive Officer and its President. In addition, the Company
demonstrates the pasta machine at two major houseware shows.
During 1994 and 1995, approximately seven new companies entered into the
electric pasta machine market, most producing lower priced machines. The
effect of the new entries on the market was to saturate the market with less
expensive machines, causing price erosion and hurting sales throughout
1995. In addition, throughout 1995, many of these new entries abandoned the
pasta machine market, causing a glut of pasta machines on the market as they
closed out their inventory positions. This, along with poor retail demand,
negatively effected sales in 1996. Because of the poor retail demand for
this product, the Company has temporarily reduced its marketing efforts
domestically.
Grill Express
The Grill Express is designed to grill food very quickly by utilizing heat
and pressure and cooking both sides of the item simultaneously. The Griller
is capable of grilling chicken and steak in one to two minutes and vegetables
and shrimp in under 30 seconds, while retaining the appearance and taste
inherent to traditional grilling. The Grill Express has a removable top
grill element which adjusts to the height of the food and a patented cooking
process which utilizes heat and pressure in a liquid sealed environment,
allowing foods to retain their natural juices and essentially their full
size.
Marketing of this product to retail stores is being accomplished in
substantially the same manner as the Company markets the pasta machine and is
generally selling in the same stores. The Company, however, has temporarily
reduced its domestic marketing efforts for the Grill Express. This product
is being manufactured and completely assembled for the Company in China. The
typical retail price for this product is $99.00 - $149.00. The Company is
unaware of a similar product on the market that will cook food in as short a
time as the Company's griller. During the last quarter of 1996 and the first
quarter of 1997, the Company sold the Grill Express to an overseas entity
which is selling the product in parts of Asia and Europe. The Company is in
the process of negotiating a distribution agreement covering certain overseas
markets.
Product Warranty
The Company provides a limited six-month to one-year warranty on parts and labor
on its electric products. The Company replaces, free of charge, any machines
returned to it which are covered by the warranty. Products which are
defective are either returned for credit or repaired in-house. Products which
have been returned used but undamaged are repackaged and sold through
remarketers, while unopened products are put back into inventory. The
Company has a toll free number with customer service representatives.
Brabantia products sold by the Company contain between a two and ten-year
limited warranty provided by Brabantia. Soehnles products have a three year
warranty provided by Soehnle. Any product returned to the Company as
defective is returned to Brabantia or Soehnle for partial credit.
Lack of Proprietary Rights
The Pasta Machine is covered by a basic utility patent and a design patent. In
July 1993, the Company, by letter to Popeil Pasta Products Inc. ("Popeil"),
charged them with infringement of the Company's pasta machine patent. Popeil
obtained a declaratory judgement that its pasta machine does not infringe
the Companys patent. Popeil commenced an action in Superior Court of the
State of California for malicious prosecution and intentional interference
with economic relationships, against the Company, a director and the
attorneys that represented the Company in connection with this patent suit.
The Company and its directors and attorneys have settled the action with
Popeil on undisclosed terms that had no material adverse affect on the
Companys financial condition.
The Company also received a utility and design patent for the Grill Express.
There can be no assurance that the current patents will provide the Company
with significant protection from infringement or that any other patent will
be granted or that any invention will be developed into commercially viable
products or that other entities will not assert claims against the Company with
respect to any products developed which may be covered by any such patent.
The manufacture and marketing of any products may involve the use of patented
processes or proprietary information, the rights to which are held by
others. The Company may be adversely affected by the costs and delays
resulting from any litigation which may be required to enforce any patents or
licenses or otherwise to protect non-patentable inventions, and there is no
assurance that the Company would be successful in such litigation.
Product Liability
The Company has product liability insurance of up to $1 million per incident.
In July 1994, the Consumer Product Safety Commission (the "CPSC") requested
that the Company provide it with information to allow the CPSC to determine
whether any defect is present in the Company's pasta machine. The request
from the CPSC was precipitated by a consumer claiming that she severed the
tip of her finger while operating the Company's pasta machine. The CPSC has
made a preliminary determination that the Pasta Express represents a
substantial product hazard as that term is defined in the Consumer Product
Safety Act. The Company has disputed this preliminary determination. The CPSC
and the Company have agreed in principle on a Voluntary Corrective Action Plan
whereby the Company, at its own expense, will offer consumers who purchased
and still have the Company's Pasta Machine manufactured prior to August 1992
a newly revised plastic lid which provides a greater degree of sensitivity
for the safety cut off switch. The Plan should be implemented shortly.
The Company has received notice that several other consumers claim to have
suffered finger injuries while using the pasta machine. These claims are
covered by the Company's product liability insurance carrier. The Company
redesigned the lid of the pasta machine in August, 1992. The Company
believes that this modification should minimize the possibility of such injury.
Competition
The Company's products have applications in the consumer field which includes
many major companies and research centers developing, manufacturing and
marketing products that are similar to the Company's products, some of which
companies may dominate their particular market. The Company believes that
its various products have features not available on competitors products. The
Company believes that there were approximately six different companies
producing and marketing electric pasta machines in the U.S. in 1996. Some of
these companies are no longer producing pasta machines.
Competition for the Grill Express comes from grills manufactured by
approximately four other companies and such competitors grills generally sell
at lower price points. The Company believes that such competitive grills
cannot replicate the results produced by the Grill Express in terms of
taste, convenience or cleanup. These companies, however, are major companies
with substantially greater financial resources than the Company.
Brabantias products and Soehnles scales also compete with numerous companies
selling similar products. The Company believes that Brabantias products are of
higher quality than most competitors. The scales that are distributed by the
Company have generally a higher price point than most competitors although
the Company also distributes lower priced scales.
Employees
The Company has an administrative staff, including customer services, of
approximately 23 people and currently employs approximately 7 hourly
workers, who are engaged in shipping and repairing the Company's products in
Brooklyn, New York. The Company entered into an agreement with United
Production Workers Union, Local 17-18 under which agreement the hourly
employees of the Company receive certain health benefits and cost of living
increases. This agreement
terminates March 19, 1999.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse consist of approximately 120,000
square feet located at 170 53rd Street, Brooklyn, New York 11232, and is
leased from Ace Surgical Supply Co., Inc. (Ace) pursuant to a lease
terminating on December 31, 2001. The Company also leases
an office in Hong Kong on a month-to-month basis. Rent expense, inclusive of
real estate taxes and assessments, for 1996 was approximately $624,000. See
"Certain Relationships and Related Transactions." The Company believes that
its executive offices and warehouse space are sufficient for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In November 1995, the Company filed a lawsuit in the Eastern District of New
York against Panint Electric Ltd. and its principal John Kwok, seeking
damages of $1,700,000 for breach of contract and breach of warranty with
respect to Panint's manufacturing of the Grill Express and Pasta Express. In
January 1996, Panint denied the allegations in the complaint and
counterclaimed for $1,400,000 predicated primarily upon allegations that the
Company wrongfully canceled pending purchase orders. This matter has been
settled and did not have a material effect on the Company's financial condition.
Management knows of no other material legal proceeding pending, threatened or
contemplated which the Company is or may be a party to or which any of its
property is subject. See "Lack of Propriety Rights" and "Product Liability".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for the vote of stockholders during the fourth
quarter of the fiscal year covered by this report.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is currently listed for trading on the Bulletin
Board. Prior to December 18, 1996, the Common Stock was traded in the
over-the-counter market on the National Market System of the National
Association of Securities Dealers Automatic Quotation System ("NASDAQ"). The
following table sets forth the range of high and low bid prices of the
Company's Common Stock as quoted by NASDAQ. These quotations represent
prices between dealers in securities, do not include retail mark-ups,
mark-downs or commissions and do not necessarily represent actual
transactions. The bid prices have been retroactively adjusted to reflect
the one-for-three reverse stock split effected in September 1996.
Fiscal Year Ended
December 31, 1995
High Bid Low Bid
Fiscal Year Ended
December 31, 1996
High Bid Low Bid
COMMON STOCK (CRTV)
First Quarter
15
12-9/32
5 -1/16
2-1/4
Second Quarter
13-
7/8
6- 3/4
3 - 3/8
1 -
7/8
Third Quarter
9-
9/16
7-1/2
1 - 3/4
3/4
Fourth Quarter
9-
15/16
3-3/8
1 - 1/2
7/16
The closing bid price of the Common Stock on April 4, 1997 was 5/8.
At March 28, 1997, there were in excess of 1,000 Shareholders. Holders of
Common Stock are entitled to dividends, when, as, and if declared by the
Board of Directors out of funds legally available therefore. The holders of
the Common Stock may not receive dividends until the holders of the Preferred
Stock receive all accrued but unpaid dividends. The Company has not paid
any cash dividends on its Common Stock and, for the immediate future, intends
to retain earnings, if any, to finance the development and expansion of its
business.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
The Company had substantial operating losses for the years ended December 31,
1996 and 1995 of $8,990,000 (before an extraordinary gain of $1,550,000) and
$7,251,000, respectively, and as of December 31, 1996, had a working capital
deficit of $4,846,000. 1996 operating results were adversely affected by
weak retail demand for pasta and grill machines, high returns of the pasta and
grill machines relative to sales, and greater than anticipated start up
expenses and difficulties associated with marketing of the Brabantia product
line. The 1996 operating loss also reflects managements decision to
reduce its marketing efforts to sell to the domestic electrics market, at
least temporarily, and manufacture primarily for export. Because of this
change in corporate direction, assets totaling approximately $4,789,000
associated with its electrics business were written off. These assets included
all excess toolings and molds, parts inventory, and the remaining assets
associated with the Wonder Cooker and Frozen Express. Adequate reserves were
also established to account for future electrics returns and the costs
associated with discontinued manufacturing. As a result of all of these
write offs, for the year ended December 31, 1996 gross profit was negatively
effected by $3,513,000, selling general and administrative expenses increased
$187,000 and restructuring costs amounted to $1,089,000.
Management believes that this decision is consistent with its strategy of
concentrating on distributing non electric European houseware lines. The
Company signed a distribution agreement with Soehnle, a major German
manufacturer of bathroom scales, in October 1996 and believes that this line,
as well as the Brabantia Line, have good sales potential in North America.
Going forward, the Company will continue to seek strategic partnerships with
other manufacturers of high quality, superior designed, and complementary
houseware products.
The Company believes that it will be able to continue as a going concern and
generate sufficient cash flow to meet its obligations as they come due. The
Company has seen its customer base steadily increase on a monthly basis and
management believes that there is positive sales momentum being generated.
The Company receives favorable terms from its suppliers, has and will continue
to negotiate increased bank availability with Century Business Credit
Corporation (Century), and has raised money by selling equity and by
obtaining short term loans. Cost cutting measures to reduce overhead
continue and management will also begin exploring the possibility of selling its
electrics business to a third party in order to generate cash. Management
believes that this course of action represents the quickest and best route to
increase sales, restore profitability and achieve its corporate objective of
becoming an important supplier of housewares to the retail community.
Liquidity and Capital Resources
For the year ended December 31, 1996 (fiscal 1996), cash used in operating
activities was $575,000. Cash of $37,000 was used in investing activities
and cash of $59,000 was used in financing activities. As a result, at
December 31, 1996 cash decreased by $671,000 to $100,000 compared to $771,000
at December 31, 1995. The Company had a negative working capital of
$4,846,000 at December 31, 1996.
Accounts payable and other liabilities increased to $2,810,000 at December
31, 1996 from $1,664,000 at December 31, 1995 due to a build up of inventory
of Brabantia products. At December 31, 1996, the Company had outstanding
approximately $189,000 in commercial Letters of Credit covering the
production and importation of the Grill Express and Pasta Express.
At December 31, 1996, the Company had notes payable due on demand 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 12% per annum. At December
31, 1996, the Company also had $2,800,000 of notes outstanding to various
individuals and shareholders of the Company. These additional loans bear
interest at between 12%-18% per annum and are also due on demand. These
loans, amounting to $3,800,000, were guaranteed by David Guttmann, the CEO
and a principal shareholder of the Company, and Barry
Septimus, the husband of a principal shareholder of the Company.
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 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 December 31, 1996, $78,000 of
preferred stock dividends were accrued.
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 Companys eligible inventory (as defined in the
Agreement), plus (ii) the lesser of $100,000 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.
Results of Operations
The Company had net sales of approximately $4,986,000 in the fiscal year ended
December 31, 1996 compared to net sales of approximately $14,142,000 for the
fiscal year ended December 31, 1995. The decrease in sales was primarily the
result of less unit sales of Pasta Machines and Grill Expresses, a lower
average selling price, and high returns relative to sales. Start up marketing
difficulties associated with distributing Brabantia products were also much
higher than anticipated. A negative gross profit margin was realized for the
fiscal year ended December 31, 1996 because of the high returns relative to
sales, managements decision to write off electrics parts inventory, and
reserves established against sales for future returns.
Selling, general and administrative expenses for fiscal 1996 were $4,091,000, a
decrease of $5,361,000 from fiscal 1995 expense of $9,452,000. This decrease is
attributable primarily to a decrease in advertising expenses associated with
running infomercials. Infomercial media expenses in 1995 were approximately
$4,753,000 but were negligible in 1996.
Interest expense and financing costs in fiscal 1996 were $793,000, a decrease of
$505,000 from the $1,298,000 incurred during fiscal 1995 due to the lower
level of business, lower interest rates negotiated on the notes payable and
the sale of preferred stock used to finance operations.
Ending inventory at December 31, 1996 was $1,609,000 compared to $3,296,000 at
December 31, 1995. The decrease was primarily attributable to the write off
of electrics parts inventory.
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 March 11, 1998 (200,000)
Debt assumed by a stockholder of the Company
in exchange for 111,000 shares of common
stock (333,000)
Gain on debt settlement 1,550,000
Due to the foregoing, the Company had a net loss of approximately $7,440,000
for fiscal 1996 compared to a net loss in fiscal 1995 of approximately
$7,251,000.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Pages F-1 through F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The officers and directors of the Company are as follows:
Name Age Title
Benjamin Sporn 58 Chairman of the Board
David Refson 51 Vice Chairman and
Director
David Guttmann 50 Director and Chief
Executive Officer
Richard Helfman 50 Director and President
David Selengut 41 Secretary
Benjamin Sporn has been a Director of the Company since January 1985 and
Chairman of the Board since March 1990. Since 1995 he has been Vice
President Legal of AMBI Inc. Mr. Sporn was an attorney in private practice
from January 1990 until 1995. From 1964 until December 1989, Mr. Sporn was
an attorney with AT&T and retired as General Attorney for Intellectual Property
matters. Mr. Sporn is Chairman of the Board of Micel Corp.
David Refson has been Vice Chairman and a Director of the Company since January
1985. Mr. Refson is the President and principal stockholder of Newmarket Co.
Limited of Liberia ("Newmarket"), which invests in various entities. Mr.
Refson has been a private investor for more than the past five years and in
his capacity as President of Newmarket, acts as a consultant to a number of
foreign companies.
David Guttmann has been a director and Chief Executive Officer of the Company
since May 1994. From June 1983 until May 1994, Mr. Guttmann was Chief
Executive Officer of Applied Microbiology Inc., and was its chairman until
October 1995. Mr. Guttmann also serves as Chairman of Ace Surgical Supply
Co., Inc., a supplier of disposable surgical materials to the health care
field.
Richard Helfman has been a Director of the Company since April 1990 and
President since March 1990. He devotes all his business time to the affairs
of the Company. From May 1987 to June 1989, Mr. Helfman was a commercial
lending officer at The First New York Bank for Business, and from 1979 until
May 1987, was a commercial lending officer at Extebank.
David Selengut was elected Secretary of the Company in September 1987. Mr.
Selengut has been a partner at the law firm of Singer Zamansky LLP since May
1995. That firm has acted as counsel to the Company with respect to certain
matters. From May 1988 until April 1995, he was an Associate in the law firm
of Neiman Ginsburg & Mairanz P.C., New York, New York.
Each of the Company's Directors has been elected to serve until the next annual
meeting of the stockholders. The Company's executive officers are appointed
annually by the Company's Directors. Each of the Company's Directors and
Officers continues to serve until his successor has been elected and
qualified. Pursuant to a management agreement with Ace, Ace has the
right to appoint two members of the Board of Directors. Ace has never
exercised this right. The Company has an audit committee consisting of
Benjamin Sporn and David Refson.
To the Companys knowledge, there were no delinquent 16(a) filers for
transactions in the Companys securities during the year ended December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid to the Company's Chief Executive Officer and to each of
the other executive officers whose total compensation exceeded $100,000
during each of the preceding three fiscal years are as follows:
1996 SUMMARY COMPENSATION TABLE
Annual Other Annual Long-Term
Compensation Compensation
Awards
Name and Principal Year Salary Compensation Options
Position ($) ($) (#)
David Guttmann, 1996 $50,000 16,666(2)
Chief Executive Officer
1995 $128,218(1)
1994 $88,269(1) -0-
Richard Helfman,
President
1996 $180,000 25,000(3)
1995 $187,692 -0-
1994 $234,576
Benjamin Sporn, 1996 -0- -0- 16,666(2)
Director
(1) Represents compensation since May, 1994. David Guttmann was being
compensated at the rate of $150,000 per annum. Mr. Guttmann voluntarily
reduced his salary to $50,000 per annum during the latter part of 1995.
(2) Represents options previously granted with the exercise price lowered to
$2.05 on April 30, 1996.
(3) Includes 16,666 options previously granted with the exercise price
lowered to $2.05 on April 30, 1996.
OPTION GRANTS IN 1996
Percent of Total
Options Options Granted to Exercise Expiration
Name Granted Employees in Fiscal Year Price Date
(a) (b) 1996 $
David Guttmann, 16,666(1) 13.7% 2.05 May 26, 2004
Chief Executive Officer
Richard Helfman 16,666(1) 13.7% 2.05 May 25, 2004
8,333 6.8% 2.05 April 30, 2001
Benjamin Sporn 16,666(1) 13.7% 2.05 June 10, 2003
(1) Represents options previously granted with the exercise price lowered to
$2.05 per share on April 30, 1996.
AGGREGATED OPTION EXERCISES IN 1996 AND FOR YEAR-END OPTION VALUES
Number of Value of
Unexercised Unexercised
Options in-the-Money
at Fiscal Options
Year-End at Fiscal
(#) Year-End ($)
Shares Value Exercisable/ Exercisable/
Name Acquired on Realized Unexercisable Unexercisable
Exercise (#) $
(a) (b) (c) (d) (e)
David Guttmann -0- -0- 16,666/0`````````-0-
Benjamin Sporn -0- -0-````````````` 16,666/0``````````-0-
Richard Helfman -0- -0- 25,000/0````````` -0-
The Company maintained a Qualified Retirement Plan and Trust for qualified
employees effective as of January 1, 1993. Under the plan, a profit sharing
plan, the Company's contributions are discretionary. The Company terminated
the Plan in 1996.
At a Board of Directors meeting held on April 30, 1996, the Board of Directors
determined that it should issue 46,666 stock options to certain officers and
employees of the Company exercisable at $2.05 per share, the market price on
April 29, 1996, in order to provide an incentive for them to continue providing
services to the Company. For the same reason, the Board of Directors
determined that it should lower the exercise price of 86,666 stock options
previously issued from $3.00 per share to $2.05 per share, the market price
on April 29, 1996, of which 16,666 stock options were previously issued to
each of Benjamin Sporn, David Guttmann and Richard Helfman.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of March 28, 1997, certain information as
to the stock ownership of each person known by the Company to own beneficially
5% or more of the Company's outstanding Common Stock, by each director of
the Company who owns any shares of the Company's Common Stock and by all
officers and directors as a group:
Percentage of
Class
Name of Beneficial Number of Shares of As of
Owner Common Stock Owned (1) March 28, 1997
Ace Surgical Supply Co., Inc. 1,152,000(2) 30.6%
170 53rd Street
Brooklyn, NY
Bonnie Septimus (3) 169,711 6.5%
72 Lord Avenue
Lawrence, NY
David Guttmann (4) 1,596,427 40%
170 53rd Street
Brooklyn, NY
Benjamin Sporn (5) 31,847 1.2%
170 53rd Street
Brooklyn, NY
Richard Helfman (6) 47,777 1.8%
170 53rd Street
Brooklyn, NY
All officers and
directors as a
group (5 persons)(7) 1,686,051 42%
(1) Except as otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the persons named.
(2) Consists of shares issuable upon conversion of the 1996-A Preferred Stock.
(3) A portion of the Common Stock is owned by Mrs. Septimus as nominee for
certain members of her family.
(4) A portion of the Common Stock is currently being held by Mr. Guttmann as
nominee for certain members of his immediate family. Includes 16,666 shares
issuable upon exercise of stock options. Also includes shares of Common
Stock issuable upon conversion of 1996 and 1996-A Preferred Stock owned by
him and Ace Surgical Supply Co., Inc., a corporation in which he is a
principal.
(5) Includes 16,666 shares underlying immediately exercisable installments of
options.
(6) Includes 25,000 shares underlying immediately exercisable options.
(7) Includes the shares described in footnotes (4)(5) and (6) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Barry Septimus and David Guttmann, the shareholders of Ace Surgical Supply
Co., Inc., personally guaranteed certain indebtedness of the Company in the
amount of $3,800,000. In addition, David Guttmann guaranteed the term loan
of $1,000,000 issued to Shawmut and upon the workout with Shawmut in March
1996, David Guttmann agreed to repay the remainder of the term loan in the
amount of $333,333. The Company agreed to issue a total of 111,111 Shares of
Common Stock to his designees in consideration of the assumption of this debt.
In March 1993, the Company borrowed $600,000 from an affiliated entity of David
Refson, Director of the Company. In January, 1995, the Company borrowed an
additional $400,000 from that entity. Interest on these loans is 12% per
annum and are due upon demand. This loan is included in loans guaranteed
by David Guttmann and Barry Septimus.
In June 1991, the Company moved its executive offices and in December 1991 its
assembly line into a building at 170 53rd Street, Brooklyn, New York, which
the Company leases from Ace, an entity owned by Barry Septimus and David
Guttmann. The Company executed a 10-year lease with Ace which provides for
minimum annual rent of $467,000 for the first three years and thereafter
annual rents will be negotiated between the parties based on the then-current
economic conditions including rents for comparable space in the local area
in each year thereafter. The Company is also responsible for its share of
real estate tax assessment. Rent expense for the Brooklyn facility for 1996
was $600,000. Ace used a portion of the amount of this rent expense for the
purchase of 720 1996-A Preferred Stock for $720,000. The Company believes
that the rent is not higher than would be paid to a non-affiliated company.
During 1996, David Guttmann purchased for $1,000 each, 50 shares of 1996
Preferred Stock and 120 shares of 1996-A Preferred Stock. In addition, Ace
Surgical Supply Co., Inc., purchased 720 shares of 1996-A Preferred Stock.
See Managements Discussion and Analysis or Plan of Operation for a
description of the terms of the 1996 and 1996-A Preferred Stock.
In December 1996, the Company obtained a line of credit from Century Business
Credit Corporation (Century) up to a maximum of $300,000 (not more than 40%
of the face amount of the eligible receivables plus 40% of the amount of
eligible inventory). David Guttmann and Ace Surgical Supply Co., Inc.,
Consolidated Disposables, Inc. (Consolidated) and Universal Medical Products,
Inc., companies controlled by David Guttmann, guaranteed the Companys
obligations to Century. The Company in return guaranteed the obligations of
Ace and Consolidated to Century. See Managements Discussion and Analysis
or Plan of Operation for a description of the loan agreement.
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.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
3. (A) Certificate of Incorporation filed with the Department of State of the
State of New York on January 2, 1985 -- Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 33-2100), Exhibit 3.1.
(B) Certificate of Amendment to the Certificate of Incorporation, filed with
the Department of State of the State of New York on November 29, 1985 --
Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 33-2100), Exhibit 3.2.
(C) By-Laws of Registrant -- Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 33-2100), Exhibit 3.3.
10. (F) 1985 Stock Option Plan -- Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 33-2100), Exhibit
10.6.
(I) 1993 Stock Option Plan - Incorporated by reference to the Registration
Statement on Form S-8 filed December 2, 1993.
(J) Management Agreement between the Company and Ace Surgical Supply Co.,
Inc. - Incorporated by reference to the Form 10-Q for quarter ended September
30, 1989.
(K) Lease Agreement between the Company and Ace Surgical Supply Co., Inc. -
Incorporated by reference to the form 10-K for year ended December 31, 1991.
(L) Recognition Agreement between the Company and United Production Workers
Union, Local 17-18 - Incorporated by reference to form 10-K for year ended
December 31, 1991.
(M) Amendment No. 1 to the Management Agreement with Ace Surgical Supply Co.,
Inc. - Incorporated by reference to Post Effective Amendment No. 2 to the
registration statement on Form S-1 (File No. 33-2100).
(N) Termination Agreement of the Infomercial Agreement with Direct Marketing
Enterprises. Incorporated by reference to Form 10-KSB for year ended
December 31, 1993.
(O) Factor Agreement with Rosenthal & Rosenthal . - Incorporated by reference
to Form 10-KSB for year ended December 31, 1994.
(P) Final Agreement with Shawmut - Incorporated by reference to Form 10-K SB for
year ended December 31, 1995.
(Q) Brabantia Agreement - Incorporated by reference to form 10-KSB for year
ended December 31, 1995.
(R) Loan Agreement with Century Business Credit.
(S) Soehnle-Waagen GmbH & Co. Agreement.
11. Computation of Earnings Per Share
27. Financial Data Schedule
Reports on Form 8-K
None
CREATIVE TECHNOLOGIES CORP.
INDEX TO FINANCIAL STATEMENTS
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-KSB
DECEMBER 31, 1996
INCLUDED IN PART II:
REPORT OF INDEPENDENT AUDITORS
BALANCE SHEET AS AT DECEMBER 31, 1996
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1996 AND DECEMBER 31, 1995
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1996 AND DECEMBER 31, 1995
NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Creative Technologies Corp.
Brooklyn, New York
We have audited the accompanying balance sheet of Creative Technologies
Corp. as at December 31, 1996 and the related statements of changes in
stockholders' equity (capital deficiency), operations and cash flows for each
of the years in the two-year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Creative Technologies Corp.
as at December 31, 1996 and the results of its operations and its cash flows
for each of the years in the two-year period then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from
operations and has a working capital deficiency and a capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
New York, New York
February 21, 1997
<TABLE>
CREATIVE TECHNOLOGIES CORP.
BALANCE SHEET
AS AT DECEMBER 31, 1996
A S S E T S
(Note H[2])
<S> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000
Accounts receivable - net of allowance for doubtful
accounts of $100,000 . . . . . . . . . . . . . . . . 631,000
Inventories (Notes A[2] and C) . . . . . . . . . . . . 1,609,000
Prepaid expenses and other current assets. . . . . . . 201,000
Total current assets. . . . . . . . . . . . . . 2,541,000
Fixed assets - at cost (less accumulated depreciation
and amortization of $684,000) (Notes A[1] and D) . . . 781,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . 54,000
T O T A L . . . . . . . . . . . . . . . . . . . $ 3,376,000
</TABLE>
<TABLE>
L I A B I L I T I E S
<S> <C>
Current liabilities:
Loan payable - bank (Note H[2]). . . . . . . . . . . . $ 42,000
Notes payable (Note H[1]). . . . . . . . . . . . . . . 3,800,000
Accounts payable and accrued expenses. . . . . . . . . 2,810,000
Customer claims payable. . . . . . . . . . . . . . . . 435,000
Advances from customers. . . . . . . . . . . . . . . . 300,000
Total current liabilities . . . . . . . . . . . 7,387,000
Note payable bank (Note H[3]) . . . . . . . . . . . . . . 200,000
Total liabilities . . . . . . . . . . . . . . . 7,587,000
Commitments and contingencies (Notes G, H and K)
CAPITAL DEFICIENCY
(Notes A, E and F)
Preferred stock - $.01 par value; 5,000,000 shares
authorized:
10,000 shares of convertible stock designated as
1996 preferred stock; 600 shares issued and
outstanding. . . . . . . . . . . . . . . . . . . . 600,000
10,000 shares of convertible stock designated as
1996-A preferred stock, 1,170 shares issued and
outstanding. . . . . . . . . . . . . . . . . . . . 1,170,000
Common stock - $.09 par value; 20,000,000 shares
authorized; 2,611,000 shares issued and outstanding. . 234,000
Additional paid-in capital. . . . . . . . . . . . . . . . 8,900,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . (15,115,000)
Total capital deficiency. . . . . . . . . . . . (4,211,000)
T O T A L . . . . . . . . . . . . . . . . . . . $ 3,376,000
<FN>
Attention is directed to the foregoing accountants' report an to the
accompanying notes to financial statements.
</TABLE
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<CAPTION>
1996 1996 - A
Preferred Stock Preferred Stock Common Stock
Number Number Number Additional Stock
of of of Par Paid-In Subscription
Shares Value Shares Value Shares Value Capital Receivable Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995 . . 4,967,000 $148,000 $6,141,000 $ (424,000) $ 5,865,000
Exercise of options . . . . . 31,000 1,000 8,000 9,000
Issuance of common stock in
connection with private
placement (Note F) . . . . 2,503,000 75,000 2,428,000 $(50,000) 2,453,000
Net (loss) for the year ended
December 31, 1995. . . . . (7,251,000) (7,251,000)
Balance - December 31, 1995 . 7,501,000 224,000 8,577,000 (50,000) (7,675,000) 1,076,000
Reverse stock split, 3 to 1
(Note A[8]). . . . . . . . (5,001,000)
Issuance of 1996 preferred
stock to related
parties (Note E) . . . . .
600 $600,000 600,000
Issuance of 1996 - A
preferred stock to
related parties (Note E) .
1,170 $1,170,000 1,170,000
Proceeds from stock
subscription receivable. . 50,000 50,000
Common stock issue in
connection with bank
settlement (Note H). . . . 111,000 10,000 323,000 333,000
Net (loss) for the year ended
December 31, 1996. . . . . (7,440,000) (7,440,000)
BALANCE - DECEMBER 31, 1996 .
600 $600,000 1,170 $1,170,000 2,611,000 $234,000 $8,900,000 $ 0 $(15,115,000) $(4,211,000)
<FN>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31,
1996 1995
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . $ 4,986,000 $14,142,000
Cost of sales. . . . . . . . . . . . . . . . 6,563,000 10,885,000
Gross profit . . . . . . . . . . . . . . . . (1,577,000) 3,257,000
Operating expenses:
Selling, general and administrative . . . 4,091,000 9,452,000
Warehousing costs . . . . . . . . . . . . 959,000
Restructuring costs (Note J). . . . . . . 1,089,000
Interest expense and financing costs. . . 793,000 1,298,000
6,932,000 10,750,000
Net (loss) before provision (benefit) for
income taxes and extraordinary item . . . (8,509,000) (7,493,000)
Provision (benefit) for income taxes:
Current . . . . . . . . . . . . . . . . . 36,000 (242,000)
Deferred. . . . . . . . . . . . . . . . . 445,000
481,000 (242,000)
Net (loss) before extraordinary item . . . . (8,990,000) (7,251,000)
Extraordinary item - gain on early
retirement of debt (Note H) . . . . . . . 1,550,000
NET (LOSS) . . . . . . . . . . . . . . . . . $(7,440,000) $(7,251,000)
Per common share:
Net loss before extraordinary item. . . . $(3.50) $(4.00)
Extraordinary item. . . . . . . . . . . . $.60
Net loss. . . . . . . . . . . . . . . . . $(2.90) $(4.00)
<FN>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . $(7,440,000) $(7,251,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Debt forgiveness . . . . . . . . . . . . . . . . . . (1,550,000)
Depreciation and amortization. . . . . . . . . . . . 551,000 600,000
Loss on write-down of fixed assets . . . . . . . . . 1,014,000 194,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,276,000 (1,537,000)
Decrease (increase) in prepaid expenses and other
assets . . . . . . . . . . . . . . . . . . . . . 561,000 (66,000)
Decrease in inventories. . . . . . . . . . . . . . 1,687,000 2,175,000
Decrease in deferred tax asset . . . . . . . . . . 445,000
Increase in customer claims payable. . . . . . . . 435,000
Increase in advances from customers. . . . . . . . 300,000
Increase (decrease) in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . 1,146,000 (1,766,000)
Net cash (used in) operating
activities . . . . . . . . . . . . . . . . . . (575,000) (7,651,000)
Cash flows from investing activities:
Acquisition of fixed assets. . . . . . . . . . . . . . . (37,000) (108,000)
Acquisition of intangibles . . . . . . . . . . . . . . . (53,000)
Net cash (used in) investing activities. . . . . (37,000) (161,000)
Cash flows from financing activities:
Net proceeds from loan payable - bank. . . . . . . . . . 42,000 4,824,000
Repayments of loans payable - bank . . . . . . . . . . . (2,741,000)
Proceeds from notes payable. . . . . . . . . . . . . . . 2,113,000 2,280,000
Repayments of notes payable. . . . . . . . . . . . . . . (1,293,000) (1,400,000)
Proceeds from sale of preferred stock. . . . . . . . . . 1,770,000
Proceeds from exercise of options. . . . . . . . . . . . 9,000
Proceeds from sale of common stock . . . . . . . . . . . 2,453,000
Proceeds from stock subscription receivable. . . . . . . 50,000
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . (59,000) 8,166,000
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . (671,000) 354,000
Cash - January 1. . . . . . . . . . . . . . . . . . . . . . 771,000 417,000
CASH - DECEMBER 31. . . . . . . . . . . . . . . . . . . . . $ 100,000 $ 771,000
Supplemental disclosures of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . $ 838,000 $ 1,265,000
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . 364,000
Noncash financing activities:
Loan assumed by shareholder in exchange for common
stock (Note H[3]). . . . . . . . . . . . . . . . . . 333,000
<FN>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
</TABLE>
(NOTE A) - The Company and its Significant Accounting Policies:
The Company is engaged in importing and marketing small household products,
principally to department and discount stores, catalogue and other retailers.
The Company incurred substantial losses in the years ended December 31, 1996
and December 31, 1995 of $7,440,000 and $7,251,000, respectively, and has a
working capital deficiency of $4,846,000 as of December 31, 1996. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The Company's ability to continue as a going concern is
dependent upon its ability to generate sufficient cash flows to meet its
obligations as they come due. The Company believes that it will be able to
continue as a going concern and generate sufficient cash flow to meet its
obligations as they come due.
Management believes that there is positive sales momentum being generated by
products sold pursuant to the distribution agreement referred to in Note
G[3]. The Company will continue to negotiate increased bank credit
availability (Note H[2]). Cost cutting measures to reduce overhead are
continuing.
[1] Fixed assets:
Fixed assets are being depreciated over their estimated useful lives
ranging from 5 to 7 years. Leasehold improvements are amortized over the
remaining term of the lease or the life of the improvement, whichever is
shorter. The Company values these assets according to their projected
benefits over their useful life.
[2] Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
[3] Revenue recognition:
Revenue is recognized upon shipment of merchandise which has limited
warranties on parts and labor. The Company returns defective product to
vendors for partial credit. Product warranty costs have been insignificant
and are charged to expense as incurred. The Company provides for returns and
allowances based on historical experience.
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
[4] Net loss per common share:
Net loss per common share is based on the loss and, for the year ended
December 31, 1996, increased by the cumulative dividend requirements on
preferred stock of $73,000 divided by the weighted average number of common
shares outstanding.
Shares used in the computation of loss per share are 2,591,000 for the year
ended December 31, 1996 and 1,811,000 for the year ended December 31, 1995.
[5] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[6] Fair value of financial instruments:
The carrying value of cash, accounts receivable, accounts payable and notes
payable approximates their fair value due to the short period to maturity of
these instruments.
[7] Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". SFAS No. 123 encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and, for options granted after December 31, 1995
to present pro forma earnings (loss) and per share information as though it
had adopted SFAS No. 123. Under the provisions of APB No. 25, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's common stock at the date of the grant over the
amount an employee must pay to acquire the stock.
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
[8] Reverse stock split:
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, stock prices and earnings
per share amounts have been restated to give retroactive effect to the reverse
stock split.
(NOTE B) - Concentration of Credit Risk/Factoring Arrangements:
In April of 1995, the Company terminated its relationship with its factor.
During the year ended December 31, 1995, the factor's commissions and
interest charges were $47,000 and $153,000, respectively. See Note H[2] with
respect to a new agreement.
(NOTE C) - Inventories:
Inventories consist of finished goods stated at the lower of cost or market,
using the first-in, first-out method.
(NOTE D) - Fixed Assets:
Fixed assets are comprised of the following:
Molds . . . . . . . . . . . . . . . . . $ 416,000
Equipment . . . . . . . . . . . . . . . 64,000
Furniture and fixtures. . . . . . . . . 224,000
Leasehold improvements. . . . . . . . . 761,000
T o t a l . . . . . . . . . . 1,465,000
Less accumulated depreciation and
amortization . . . . . . . . . . . . (684,000)
B a l a n c e . . . . . . . . $ 781,000
As a result of operations during the year ended December 31, 1996 and
December 31, 1995, the Company reduced the carrying value of certain fixed
assets by approximately $1,014,000 and $194,000, respectively, based on
future cash flow considerations. The Company believes that this reduction
will result in the fixed assets being carried at recoverable values.
(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 $38,000 at
December 31, 1996.
[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,
(NOTE E) - Preferred Stock: (continued)
[2] 1996 - A Preferred Stock: (continued)
(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 $35,000 at
December 31, 1996.
(NOTE F) - Capital Stock:
[1] The Company has a stock option plan (the "1985 Plan") which provides
for issuance of incentive stock options or nonqualified stock options to key
employees, directors, officers and consultants. The aggregate number of
shares of common stock which may be issued under the 1985 Plan is 77,667. No
additional options may be granted under this Plan. Options become
exercisable in annual installments commencing one year from date of grant and
expire, if not exercised, within a maximum of ten years (five years for a ten
percent or greater stockholder). Incentive stock options may not be granted
at less than the fair market value of the underlying shares at date of grant
(110% of fair market value for a ten percent or greater stockholder).
Effective 1993, the Company established a stock option plan (the "1993
Plan") for eligible employees and certain outside consultants. The aggregate
number of shares of common stock to be issued under this Plan is 166,667.
Options are granted at the discretion of the Board of Directors. Options
granted under the 1993 Plan expire at the end of five or ten years from the
date of grant or 89 days after termination of employment, whichever is earlier.
(NOTE F) - Capital Stock: (continued)
[1] (continued)
Stock option activity under the 1985 Plan and the 1993 Plan is summarized as
follows:
<TABLE>
Year Ended December 31,
1996 1995
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year . . . . 108,556 $6.93 89,000 $10.40
Granted. . . . . . . . . . . 186,666 $2.41 93,333 $ 6.33
Exercised. . . . . . . . . . - 0 - (10,444) $ .90
Expired and cancelled. . . . (139,445) $4.25 (63,333) $11.92
Options outstanding at end
of year . . . . . . . . . 155,777 $3.91 108,556 $ 6.93
Options exercisable at end
of year . . . . . . . . . 139,109 $3.77 53,555 $ 7.52
</TABLE>
The following table presents information relating to stock options
outstanding at December 31,
1996.
Options
Options Outstanding
Exercisable
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Life in Exercise
Exercise Price Shares Price Years Shares Price
$2.06 116,666 $ 2.06 5.54 103,332 $ 2.06
$5.46 - $7.50 19,666 $ 5.72 6.72 19,666 $ 5.72
$9.00 - $17.16 19,445 $13.21 2.69 16,111 $12.40
155,777 5.33 139,109
As of December 31, 1996, 16,667 options are available for future grant under
the 1993 Plan. Had the Company, elected to recognize compensation cost based
on the fair value of the options at the date of grant as prescribed by SFAS
No. 123, net (loss) in 1996 and 1995 would have been ($7,665,000) and
($7,546,000) or ($2.99) per share and ($4.17) per share, respectively.
(NOTE F) - Capital Stock: (continued)
[2] During 1995, the Company raised approximately $2,503,000 in connection
with a series of private placements at a price of $0.33 per share of common
stock. 277,000 of these shares were issued as of December 31, 1995. The
issuance of the remaining 557,000 shares was subject to stockholder approval
pursuant to NASD rules which was obtained at a stockholders' meeting in
January of 1996. At this meeting the stockholders approved the issuance of
1,333,000 shares.
[3] Warrants:
At December 31, 1996, shares of common stock were reserved for issuance
upon exercise of warrants as follows:
Number of Exercise Expiration
Shares Reserved Price Date
10,416 (a) $ 9.00 June 21, 1997
1,481 (b) $12.00 May 1, 2000 through August 1, 2000
13,703 (c) $12.00 April 1, 2000
16,667 (d) $ 5.46 August 22, 2000
(a) Issued in 1992 to former guarantors of debt.
(b) Issued in 1995 in connection with the obtaining of financing.
(c) Issued in 1995 in connection with the obtaining of financing.
(d) Issued in 1995 in connection with a series of private placements.
(NOTE G) - Commitments and Contingencies:
[1] The Company is obligated under a lease with a company owned by the
Company's principal stockholders for office and factory space expiring
December 31, 2001. The lease provides that annual rent payable under the
lease shall be based on the then current economic condition, including
availability of comparable rental space in the local area. The Company is
also subject to additional payments for real estate tax and other
assessments. The Company has also entered into a month-to-month lease for an
office in Hong Kong. Rent and other expenses for office and factory space
aggregated $624,000 in each of 1996 and 1995. Substantially all of this rent
was to the related party.
(NOTE G) - Commitments and Contingencies: (continued)
[1] (continued)
Included in accounts payable and accrued expenses at December 31, 1996 is
approximately
$152,000 due to the related company for rent in arrears.
[2] The Company has a contract with an officer/shareholder expiring in
December 1997, which provides for annual negotiation of salary and bonus.
Salary for this individual aggregated approximately $180,000 and $188,000
for 1996 and 1995, respectively.
[3] The Company entered into a distribution agreement with a manufacturer of
household items which requires the Company to make specified minimum
purchases to maintain its exclusive distribution rights.
(NOTE H) - Notes Payable and Related Party Transactions:
[1] At December 31, 1996 the Company had outstanding notes payable
totalling $3,800,000. Of this amount, $2,850,000 bears interest at 12%,
$200,000 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 $2,800,000 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 the related party referred to in Note G,
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.
(NOTE H) - Notes Payable and Related Party Transactions: (continued)
[2] (continued)
As of December 31, 1996 the Company had $42,000 outstanding under this
facility.
[3] In 1995 the Company had a line of credit and a term loan from a bank for
$14,000,000 and $1,000,000, respectively. Interest was being charged on both
of these loans at a rate of 1% 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 December 31, 1995 the Company was in
default of certain terms of the agreement.
In March of 1996, the Company entered into an agreement with the bank to repay
the debt 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 is summarized as follows:
Balance of indebtedness at time of settlement . $ 3,583,000
Paid by the Company . . . . . . . . . . . . . . (1,500,000)
Note payable - noninterest bearing issued by
the Company due March 11, 1998 . . . . . . . (200,000)
Assumed by a stockholder of the Company in
exchange for 111,000 shares of common stock. (333,000)
Reduction of indebtedness due to settlement . . $ 1,550,000
[4] In December 1992, as consideration for waiving its right to share in the
Company's profits under a 1989 management agreement, Ace Surgical Supply Co.,
Inc., whose chairman is a principal stockholder of the Company, was granted
an exclusive worldwide license to manufacture and sell an industrial version
of the Grill Express. Under this agreement, the Company is entitled to a 5%
royalty on the net selling price of such product. As of December 31, 1996 no
monies have been received under the above agreement.
(NOTE I) - Income Taxes:
The major deferred tax asset (liability) items at December 31, 1996 are as
follows:
Net operating loss carryforwards. . . . $ 6,598,000
Provision for doubtful accounts . . . . 44,000
Depreciation of fixed assets. . . . . . 46,000
6,688,000
Valuation allowance . . . . . . . . . . (6,688,000)
$ - 0 -
The difference between the tax provision (benefit) and the amount that would be
computed by applying the statutory Federal income tax rate to income before
taxes is attributable to the following:
December 31,
1996 1995
Income tax (benefit) at 34% . . . . $(2,366,000) $(2,548,000)
State and local income tax
(benefit) - net of federal tax
effect . . . . . . . . . . . . . (505,000) (805,000)
Increase in valuation allowance
on deferred tax assets . . . . . 3,430,000 3,258,000
Other . . . . . . . . . . . . . . . (78,000) (147,000)
$ 481,000 $ (242,000)
The Company's net operating loss carryforwards for income tax reporting
purposes aggregate approximately $14,604,000 with the following expiration
dates: $178,000 in year 2007, $7,017,000 in year 2010 and the remaining
balance of $7,409,000 expires in year 2011. Due to the Company's issuance of
stock during 1995 and 1996, the Company's annual use of the net operating
loss carryforwards may be limited pursuant to Section 382 of the Internal
Revenue Code.
(NOTE J) - Restructuring Costs:
During 1996, the Company ceased manufacturing and reduced the importing of its
electric household appliances. As a result of these actions the Company
incurred restructuring charges of approximately $1,100,000 representing the
write-off of molds used in the manufacturing of its electric household
appliances.
(NOTE K) - 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") 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 has accordingly recorded a reserve for this amount as
of December 31, 1996.
The Company believes that the ultimate resolution of these matters will not
have a material effect on its financial condition.
During 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. 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. During 1996, this matter was settled with no material
effect on the financial position.
(NOTE L) - Other Matters:
The Company purchases a significant portion of its finished goods from a
supplier in the Netherlands.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities and
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.
By: S/RICHARD HELFMAN
Richard Helfman, President
Dated: April 7, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
s/Benjamin Sporn Chairman of the Board
Benjamin Sporn of Directors
April 7, 1997
s/David Refson Vice Chairman of the
David Refson Board and Director
April 7, 1997
s/ David Guttmann Director and Chief
David Guttmann Executive Officer
April 7, 1997
s/Richard Helfman President, Director and
Richard Helfman Chief Financial Officer
April 7, 1997
DISTRIBUTION AGREEMENT
This Distribution Agreement is entered between Creative Technologies Corp.,
170 53rd Street, Brooklyn, New York 11232 (Distributor) and Soehnle-Waagen
GmbH & Co., Fornsbacher Strasse 27-35, D-71540 Murrhardt, Germany
(Manufacturer), effective as of October 1, 1996.
1. Appointment
` a) Manufacturer hereby appoints Distributor as the exclusive distributor
of Manufacturers Products in the U.S.A., its territories and possessions,
and Canada (The Territory) for the Period set forth hereinafter.
2. Products
a) Products included in thie Agreement include all Bathroom Scales for
private use and other items as may be mutually agreed upon, including
any new products of above range developed.....
3. Price, Terms of Sale, Purchase Commitments, Terms of Payment
a) Manufacturer will sell the Products to the Distributor in
accordance with prices, items and conditions set forth in a
mutually agreed upon price list (Price List).
b) Prices set forth in the Price List shall be firm for 12 months unless
changed by mutual agreement.
4. Distributors General Responsibilities
a) Distributor will use its reasonable best efforts to promote, sell and
distribute the Products effectively within the Territory.
b) During the term of this Agreement, Distributor shall not distribute,
manufacture, develop or occupy itself in any other way, directly or
indirectly, with goods of a nature competitive with the Products in or
outside the Territory, without prior written consent from Manufacturer.
5. Manufacturers General Responsibilties
a) Manufacturer will refer to Distributor any purchasing inquiries
within Territory for the Products designated, and Distributor will
refer to Manufacturer recommendations for improvements to the
Products.
b) Manufacturer will make available to Distributor the necessary
operating instructions, manuals, and technical information as is
needed in order for Distributor and its representatives to be fully
familiar with the Products, their operations and benefits.
6. Term & Termination
a) The initial term of this agreement shall terminate December 31, 1997.
Prior to the termination of this agreement, the parties will in good
faith enter into a five year extention to this exclusive Distribution
Agreement which will contain, among other terms, minimum
purchase obligations and penalties for early termination.
b) Should this Agreement be terminated, Manufacturer shall have
the option of repurchasing any existing inventory of the Products
from Distributor at the then prevalent existing prices in the
Price List. Manufacturer will pay for the cost of shipping to any
location requested by Manufacturer. Alternately, Manufacturer, in
its sole discretion, can permit Distributor to continue its sale of its
then-existing inventory of Products during a sell-out period, whose
length shall be determined based upon the amount of Products
sold within the year preceding the termination.
c) After termination of this agreement, Distributor shall
remain empowered to complete all current orders at the time of the
termination. Manufacturer shall assist Distributor in completing
such orders. Furthermore, Distributor shall have the right after
termination of this Agreement with respect to Product which
Manufacturer has not repurchased, to sell the Product, subject to
the otherwise relevant provisions of this Agreement.
7. Trademarks
a) Distributor will use Manufacturers trademarks in advertising and
selling of the Products and only in accordance with approved
method of use of the marks.
b) This Agreement does not give distributor any rights to change
the labeling of any products nor change in the logo, trademark,
tradename, copyright, or contents of any Product purchased
hereunder.
c) The granting of this Agreement and the use of Manufacturers
marks does not create a relationship of agency between
Manufacturer and Distributor and no authority is given to the
Distributor to bind Manufacturer in any manner.
8. Notices
All notices herein provided for, or which may be given by in connection
with this Agreement, shall be in writing. Notices given by Manufacturer
shall be addressed and forwarded by registered mail - return receipt
requested, facsimile with proof of receipt of transmission or personally to:
Richard Helfman
Creative Technologies Corp.
170 53rd Street
Brooklyn, NY 11232
USA
or at such other address as Manufacturer by written notice to Distributor
shall have specified for that purpose. Notices given by Distributor shall
be addressed and forwarded by registered mail - return receipt requested,
facsimile with proof of receipt of transmission or personally to:
Albrecht Munz
Soehnle-Waagen GmnH & Co.
GmbH Fornsbacher Strasse 27-35
D-71540 Murrhardt
Germany
or to such designated party, or at such other address as Distributor by
written notice to Manufacturer shall have specified for that purpose.
10. Miscellaneous
a) Neither party shall be liable to the other for any delay or failure of
performance not caused by the acts of such party, and resulting
from strikes, lock-outs, inability to procure goods, acts of God, or
any other cause beyond the reasonable control of such party.
b) This agreement may not be assigned by either party, except, with
the prior written consent of the party.
c) All claims or controversies arising out of or relating to the
Agreement shall be settled by arbitration. Within thirty (30) days
of a demand for arbitration, each party shall select one arbitrator
and the arbitrators shall select a third arbitrator. The arbitration shall
be in accordance with the rules of the International Chamber of
Commerce and conducted in English. If Manufacturer requests
arbitration, the arbitration shall be held in USA. If Distributor request
arbitration, the arbitration shall be held in Germany. The
arbitration award may be entered in any court of competent
jurisdiction and enforced as any other judgement, decree
or order of such court.
d) This Agreement constitutes the entire agreement between the
parties and may only be changed or amended in a writing signed
by both parties. Statements in orders and shipping documents
may supplement this Agreement, but may not change the terms of
this Agreement.
e) This Agreement shall be governed by the laws of the Federal Republic of
Germany.
CREATIVE TECHNOLOGIES CORP.
By: __________________________
Name: __________________________
Title: __________________________
Date: _________
SOEHNLE-WAAGEN GMBH & CO.
By: __________________________
Name: __________________________
Title: __________________________
LOAN AND SECURITY AGREEMENT
CENTURY BUSINESS CREDIT CORPORATION
with
CREATIVE TECHNOLOGIES CORP.
Dated: December 20, 1996
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement is made as of December 20, 1996 by and
between CENTURY BUSINESS CREDIT CORPORATION ("Lender"), having executive
offices at 119 West 40th Street, New York, New York 10018 and CREATIVE
TECHNOLOGIES CORP. ("Borrower"), having its
principal place of business at 170 53rd Street, Brooklyn, New York 11232.
WHEREAS, the Borrower has requested that Lender make loans and advances
available to Borrower; and
WHEREAS, Lender has agreed to make such loans and advances to Borrower on the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. (a) General Definitions. When used in this Agreement, the following terms
shall have the following meanings:
"Ace" means Ace Surgical Supply Co., Inc., a New York corporation.
"Ace Agreement" means the Loan and Security Agreement dated the date hereof
between Ace and Lender, as amended, modified, supplemented and restated from
time to time.
"Ace Loans" means loans, advances and extensions of credit made by Lender
to Ace under the Ace Agreement.
"Affiliate" of any Person means (a) any Person (other than a Subsidiary)
which, directly or indirectly, is in control of, is controlled by, or is
under common control with such Person, or (b) any Person who is a director or
officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For purposes of this definition,
control of a Person shall mean the power, direct or indirect, (i) to vote ten
percent (10.0%) or more of the securities having ordinary voting power for
the election of directors of such Person, or (ii) to direct or cause the
direction of the management and policies of such Person whether by contract
or otherwise.
"Ancillary Agreements" means all agreements, instruments, and documents
including, without limitation, mortgages, pledges, powers of attorney,
consents, assignments, contracts, notices, security agreements, trust
agreements whether heretofore, concurrently, or hereafter executed by or on
behalf of Borrower or delivered to Lender, relating to this Agreement or to
the transactions contemplated by this Agreement.
"Authority" shall have the meaning set forth in paragraph 12(e)(iii).
"Closing Date" means December 20, 1996 or such other date as may be agreed
upon by the parties hereto.
"Collateral" means and includes:
(A) all Inventory;
(B) all Equipment;
(C) all General Intangibles;
(D) all Receivables;
(E) all books, records, ledgercards, files, correspondence, computer
programs, tapes, disks and related data processing software (owned by
Borrower or in which it has an interest) which at any time evidence or
contain information relating to (A), (B), (C) and (D) above or are otherwise
necessary or helpful in the collection thereof or realization thereupon;
(F) documents of title, policies and certificates of insurance, securities,
chattel paper, other documents or instruments evidencing or pertaining to
(A), (B), (C), (D) and (E) above;
(G) all guaranties, liens on real or personal property, leases, and other
agreements and property which in any way secure or relate to (A), (B), (C),
(D), (E) and (F) above, or are
acquired for the purpose of securing and enforcing any item thereof;
(H) (i) all cash held as cash collateral to the extent not otherwise
constituting Collateral, all other cash or property at any time on deposit
with or held by Lender for the account of Borrower (whether for safekeeping,
custody, pledge, transmission or otherwise), (ii) all present or future
deposit accounts (whether time or demand or interest or non-interest bearing) of
Borrower with Lender or any other Person including those to which any such
cash may at any time and from time to time be credited, (iii) all investments
and reinvestments (however evidenced) of amounts from time to time credited
to such accounts, and (iv) all interest, dividends, distributions and other
proceeds payable on or with respect to (x) such investments and reinvestments
and (y) such accounts; and
(I) all products and proceeds of (A), (B), (C), (D), (E), (F), (G) and (H)
above (including, but not limited to, all claims to items referred to in (A),
(B), (C), (D), (E), (F), (G) and (H) above) and all claims of Borrower
against third parties (x) for (i) loss of, damage to, or destruction of, and
(ii) payments due or to become due under leases, rentals and hires of any or
all of (A), (B), (C), (D), (E), (F), (G) and (H) above and (y) proceeds
payable under, or unearned premiums with respect to policies of insurance in
whatever form.
"Consolidated" means Consolidated Disposables, Inc., a New York corporation.
"Consolidated Agreement" means the Loan and Security Agreement dated the
date hereof between Consolidated and Lender, as amended, modified,
supplemented and restated from time to time.
"Consolidated Loans" means loans, advances and extensions of credit made by
Lender to Consolidated under the Consolidated Agreement.
"Contract Rate" means an interest rate per annum equal to the greater of
(A) nine percent (9%) or (B) the (i) Prime Rate plus (ii) two and three-
quarters percent (2.75%).
"Customer" means and includes the account debtor with respect to any of the
Receivables and/or prospective purchaser of goods, services or both with
respect to any contract or contract right, and/or any party who enters into
or proposes to enter into any contract or other arrangement with the Borrower,
pursuant to which the Borrower is to deliver any personal property or perform
any services.
"Default Rate" means a rate equal to three percent (3.0%) per annum in
excess of the Contract Rate.
"Eligible Inventory" means Inventory which the Lender, in its sole and
absolute discretion, determines: (a) is subject to the security interest of
Lender and is subject to no other liens or encumbrances whatsoever (other
than Permitted Liens); (b) is in good condition and meets all standards
imposed by any governmental agency, or department or division thereof having
regulatory authority over such Inventory, its use or sale including but not
limited to the Federal Fair Labor Standards Act of 1938 as amended, and all
rules, regulations and orders thereunder; (c) is currently either usable or
salable in the normal course of Borrower's business; (d) does not consist of
pasta machines and grills; (e) is not subject to any licensing, patent,
royalty, trademark, trade name or copyright agreement with any third parties;
and (f) not to be ineligible for any other reason.
"Eligible Receivables" means and includes each Receivable which conforms to
the following criteria: (a) shipment of the merchandise or the rendition of
services has been completed; (b) no return, rejection or repossession of the
merchandise has occurred; (c) merchandise or services shall not have been
rejected or disputed by the Customer and there shall not have been asserted
any offset, defense or counterclaim; (d) continues to be in full conformity
with the representations and warranties made by the Borrower to the Lender
with respect thereto; (e) Lender is, and continues to be, satisfied with the
credit standing of the Customer in relation to the amount of credit extended;
(f) there are no facts existing or threatened which are likely to result in
any adverse change in a Customer's financial condition; (g) is documented by
an invoice in a form approved by Lender and shall not be unpaid more than
ninety (90) days from invoice date; (h) less than twenty-five percent (25%)
of the unpaid amount of invoices due from such Customer remain unpaid more
than ninety (90) days from invoice date; (i) is not evidenced by chattel paper
or an instrument of any kind with respect to or in payment of the Receivable
unless such instrument is duly endorsed to and in possession of the Lender or
represents a check in payment of a Receivable; (j) if the Customer is
located outside of the United States, Canada or Puerto Rico, the goods which
gave rise to such Receivable were shipped after receipt by the Borrower from
or on behalf of the Customer of an irrevocable letter of credit, assigned and
delivered to the Lender and confirmed by a financial institution acceptable to
the Lender and is in form and substance acceptable to the Lender, payable in
the full amount of the Receivable in United States dollars at a place of
payment located within the United States; (k) such Receivable is not subject
to any lien, other than Permitted Liens; (l) does not arise out of
transactions with any employee, officer, agent, director, stockholder or
Affiliate of the Borrower; (m) is payable to the Borrower; (n) does not arise
out of a bill and hold sale prior to shipment and, if the Receivable arises
out of a sale to any Person to which the Borrower is indebted, the amount of
such indebtedness, and any anticipated indebtedness, is deducted in
determining the face amount of such Receivable; (o) is net of any returns,
discounts, claims, credits and allowances; (p) if the Receivable arises out of
contracts between the Borrower and the United States, any state, or any
department, agency or instrumentality of any of them, Borrower has so
notified Lender, in writing, prior to the creation of such Receivable, and, if
Lender so requests, there has been compliance with any governmental notice or
approval requirements, including without limitation, compliance with the
Federal Assignment of Claims Act; (q) is a good and valid account
representing an undisputed bona fide indebtedness incurred by the Customer
therein named, for a fixed sum as set forth in the invoice relating thereto
with respect to an unconditional sale and delivery upon the stated terms of
goods sold by the Borrower, or work, labor and/or services rendered by the
Borrower; (r) the total unpaid Receivables from such Customer does not exceed
twenty percent (20%) of all Eligible Receivables with amounts of twenty
percent (20%) or less being deemed Eligible Receivables; (s) does not arise out
of progress billings prior to completion of the order; (t) is covered by
credit insurance acceptable to Lender and only to the extent of such credit
insurance; and (u) is otherwise satisfactory to the Lender as determined in
good faith by the Lender in the reasonable exercise of its discretion.
"Environmental Complaint" shall have the meaning set forth in paragraph 12(e)
(iii).
"Equipment" means and includes all of Borrower's now owned or hereafter
acquired equipment, machinery and goods (excluding Inventory), whether or not
constituting fixtures, including, without limitation: plant and office
equipment, tools, dies, parts, data processing equipment, furniture and trade
fixtures, trucks, trailers, loaders and other vehicles and all replacements
and substitutions therefore and all accessions thereto.
"ERISA" shall have the meaning set forth in paragraph 12(f).
"Event of Default" shall mean the occurrence of any of the events set forth in
paragraph 18.
"Formula Amount" shall have the meaning set forth in paragraph 2(a).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time.
"General Intangibles" means and includes all of Borrower's now owned or
hereafter acquired general intangibles including, without limitation,
trademarks, tradenames, tradestyles, trade secrets, equipment formulation,
manufacturing procedures, quality control procedures, product specifications,
patents, patent applications, copyrights, registrations, contract rights,
choses in action, causes of action, corporate or other business records,
inventions, designs, goodwill, claims under guarantees, licenses, franchises,
tax refunds, tax refund claims, computer programs, computer data bases,
computer program flow diagrams, source codes, object codes and all other
intangible property of every kind and nature.
"Guarantor" means individually, Ace, Consolidated, Universal, David Guttmann
and any other Person who may hereafter guarantee payment or performance of
the whole or any part of the Obligations and "Guarantors" means collectively
all such Persons.
"Guaranty Agreements" means the Guaranty Agreements dated the Closing Date
which are executed by each Guarantor in favor of Lender.
"Hazardous Discharge" shall have the meaning set forth in paragraph 12(e)
(iii).
"Incipient Event of Default" means any act or event which, with the giving of
notice or passage of time or both, would constitute an Event of Default.
"Inventory" means and includes all of Borrower's now owned or hereafter
acquired goods, merchandise and other personal property, wherever located, to
be furnished under any contract of service or held for sale or lease, all
raw materials, work in process, finished goods and materials and supplies of
any kind, nature or description which are or might be used or consumed in
Borrower's business or used in selling or furnishing such goods, merchandise
and other personal property, and all documents of title or other documents
representing them.
"Inventory Availability" means the amount of Revolving Credit Advances
against Eligible Inventory Lender may from time to time during the Term make
available to Borrower up to the lesser of (a) $200,000, or (b) up to forty
percent (40%) of the value of Borrower's Eligible Inventory (calculated on the
basis of the lower of cost or market, on a first-in first-out basis) or (c)
fifty percent (50%) of the amount of Receivables Availability.
"Loans" means the Revolving Credit Advances and all extensions of credit
hereunder.
"Maximum Revolving Amount" means $3,000,000.
"Minimum Average Monthly Loan Amount" means $1,500,000.
"Minimum Default Average Monthly Loan Amount" means $1,250,000.
"Obligations" means and includes all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by Borrower to Lender (or any
corporation that directly or indirectly controls or is controlled by or is
under common control with Lender) of every kind and description (whether or not
evidenced by any note or other instrument and whether or not for the payment of
money or the performance or non-performance of any act), direct or indirect,
absolute or contingent, due or to become due, contractual or tortious,
liquidated or unliquidated, whether existing by operation of law or otherwise
now existing or hereafter arising including, without limitation, any debt,
liability or obligation owing from Borrower to others which Lender may have
obtained by assignment or otherwise and further including, without
limitation, all interest, charges or any other payments Borrower is required
to make by law or otherwise arising under or as a result of this Agreement
and the Ancillary Agreements, together with all reasonable expenses and
reasonable attorneys' fees chargeable to Borrower's account or incurred by
Lender in connection with Borrower's account whether provided for herein or
in any Ancillary Agreement.
"Permitted Liens" means (i) liens of carriers, warehousemen, mechanics and
materialmen incurred in the ordinary course of business securing sums not
overdue; (ii) liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (a)
not overdue or (b) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of
Borrower in conformity with GAAP, (iii) liens in favor of Lender, (iv) liens for
taxes (a) not yet due or (b) being diligently contested in good faith,
provided that adequate reserves with respect thereto are maintained on the
books of Borrower in conformity with GAAP provided, that, the lien shall have
no effect on the priority of liens in favor of Lender or the value of the
assets in which Lender has a lien (v) liens placed upon fixed assets
hereafter acquired to secure a portion of the purchase price thereof,
provided that (x) any such lien shall not encumber any other property of
Borrower any (y) the aggregate amount of indebtedness secured by such liens
incurred as a result of such purchases during any fiscal year shall not
exceed the amount provided in paragraph 12(o) and (vi) liens specified on
Exhibit 1(A) hereto.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political
subdivision thereof.
"Prime Rate" means the prime commercial lending rate of Chase Manhattan
Bank, N.A. as publicly announced in New York, New York to be in effect from
time to time as its "prime" or "base" rate of interest and is neither tied to
any external rate of interest or index nor does it necessarily reflect the
lowest rate of interest actually charged to any particular class or category
of customers. Such rate shall be increased or decreased as the case may be
for each increase or decrease in said rate in an amount equal to such
increase or decrease in said rate; each change to be effective as of the day
of the change in such rate.
"Receivables" means and includes all of Borrower's now owned or hereafter
acquired accounts and contract rights, instruments, insurance proceeds,
documents, chattel paper, letters of credit and Borrower's rights to receive
payment thereunder, any and all rights to the payment or receipt of money or
other forms of consideration of any kind at any time now or hereafter owing
or to be owing to Borrower, all proceeds thereof and all files in which
Borrower has any interest whatsoever containing information identifying or
pertaining to any of Borrower's Receivables, together with all of Borrower's
rights to any merchandise which is represented thereby, and all Borrower's
right, title, security and guaranties with respect to each Receivable,
including, without limitation, all rights of stoppage in transit, replevin and
recla-mation and all rights as an unpaid vendor.
"Receivables Availability" means the amount of Revolving Credit Advances
against Eligible Receivables Lender may from time to time during the Term of
this Agreement make available to Borrower up to the lesser of (a) $100,000,
or (b) up to forty percent (40%) of the net face amount of Borrower's
Eligible Receivables.
"Revolving Credit Advances" shall have the meaning set forth in paragraph
2(a).
"Subsidiary" of any Person means a corporation or other entity whose shares
of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of
the happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity,
are owned, directly or indirectly, by such Person.
"Term" means the Closing Date through the Termination Date subject to
acceleration upon the occurrence of an Event of Default hereunder or other
termination hereunder.
"Termination Date" means December 31, 1998.
"UCC" means the Uniform Commercial Code as adopted in the State of New York
as in effect from time to time.
"Universal" means Universal Medical Products, Inc., a New York corporation.
(b) Accounting Terms. Any accounting terms used in this Agreement which are
not specifically defined shall have the meanings customarily given them in
accordance with GAAP.
(c) Other Terms. All other terms used in this Agreement and defined in the
UCC, shall have the meaning given therein unless otherwise defined herein.
2. Revolving Credit Advances.
(a) Subject to the terms and conditions set forth herein and in the Ancillary
Agreements, Lender may, in its sole discretion, make
revolving credit advances (the "Revolving Credit
Advances") to Borrower from time to time during the term
of this Agreement which, in the aggregate at any time
outstanding, will not exceed the lesser of (x) the Maximum
Revolving Amount minus the aggregate amount of Ace
Loans and Consolidated Loans or (y) an amount equal to
the sum of:
(i) Receivables Availability, plus
(ii) Inventory Availability, minus
(iii) such reserves as Lender may reasonably deem proper and necessary
from time to time.
The sum of 2(a)(i), plus (ii), minus (iii) shall be referred to as the
"Formula Amount".
(b) Notwithstanding anything to the contrary which may be contained herein, in
no event shall the aggregate amount of outstanding Revolving Credit Advances
plus the aggregate amount of Ace Loans and Consolidated Loans at any time
exceed the Maximum Revolving Amount.
(c) Notwithstanding the limitations set forth above, Lender retains the
right to lend Borrower from time to time such amounts in excess of such
limitations as Lender may determine in its sole discretion.
(d) Borrower acknowledges that the exercise of Lender's discretionary
rights hereunder may result during the term of this Agreement in one or more
increases or decreases in the advance percentages used in determining
Receivables Availability and Inventory Availability and Borrower hereby
consents to any such increases or decreases which may limit or restrict
advances requested by Borrower.
(e) If Borrower does not pay any interest, fees, costs or charges to Lender
when due, Borrower shall thereby be deemed to have requested, and Lender is
hereby authorized at its discretion to make and charge to Borrower's account,
a Revolving Credit Advance to Borrower as of such date in an amount equal to
such unpaid interest, fees, costs or charges.
(f) Any sums expended by Lender due to Borrower's failure to perform or
comply with its obligations under this Agreement, including but not limited
to the payment of taxes, insurance premiums or leasehold obligations, shall
be charged to Borrower's account as a Revolving Credit Advance and added
to the Obligations.
(g) Lender will account to Borrower monthly with a statement of all
Revolving Credit Advances and other advances, charges and payments made
pursuant to this Agreement, and such account rendered by Lender shall be
deemed final, binding and conclusive unless Lender is notified by Borrower in
writing to the contrary within thirty (30) days of the date each account was
rendered specifying the item or items to which objection is made.
(h) During the Term hereof, Borrower may borrow, prepay and reborrow
Revolving Credit Advances, all in accordance with the terms and conditions
hereof.
3. Repayment of the Revolving Credit Advances. Borrower shall be required
to (a) make a mandatory prepayment hereunder at any time that the aggregate
outstanding principal balance of the Revolving Credit Advances made by Lender
to Borrower hereunder is in excess of the Formula Amount in an amount equal
to such excess, and (b) repay on the expiration of the Term (i) the then
aggregate outstanding principal balance of Revolving Credit Advances made by
Lender to Borrower hereunder together with accrued and unpaid interest, fees
and charges and (ii) all other amounts owed Lender under this Agreement and
the Ancillary Agreements. Any payments of principal, interest, fees or any
other amounts payable hereunder or under any Ancillary Agreement shall be
made prior to 12:00 noon New York time on the due date thereof in immediately
available funds.
4. Procedure for Revolving Credit Advances. Borrower may by written or
telephonic notice request a borrowing of Revolving Credit Advances prior to
11:00 A.M. New York time on the business day of its request to incur, on that
day, a Revolving Credit Advance. All Revolving Credit Advances shall be
disbursed from whichever office or other place Lender may designate from time
to time and, together with any and all other Obligations of Borrower to
Lender, shall be charged to the Borrower's account on Lender's books. The
proceeds of each Revolving Credit Advance made by the Lender shall be made
available to the Borrower on the day so requested by way of credit to the
Borrower's operating account maintained with such bank as Borrower designated
to Lender. Any and all Obligations due and owing hereunder may be charged to
Borrower's account and shall constitute Revolving Credit Advances.
5. Interest and Fees.
(a) Interest.
(i) Except as modified by paragraphs 5(a)(iii) and 5(b)(iv) below, Borrower
shall pay interest on the unpaid principal balance of the Loans for each day
they are outstanding at the Contract Rate.
(ii) Interest shall be (a) computed on the basis of actual days elapsed
over a 360-day year, (b) calculated by Lender on a daily basis and billed to
Borrower monthly and (c) payable in arrears on the last day of each month,
or, at Lender's option, Lender may charge Borrower's account for said interest.
(iii) Upon the occurrence and during the continuance of an Event of Default,
interest shall be payable at the Default Rate.
(iv) Notwithstanding the foregoing, in no event shall interest exceed the
maximum rate permitted under any applicable law or regulation, and if any
provision of this Agreement or an Ancillary Agreement is in contravention of
any such law or regulation, such provision shall be deemed amended to provide
for interest at said maximum rate and any excess amount shall either be
applied, at Lender's option, to the outstanding Loans in such order as Lender
shall determine or refunded by Lender to Borrower.
(v) Borrower shall pay principal, interest and all other amounts payable
hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including, but not limited to, any deduction for any set-off or
counterclaim.
(b) Fees.
(i) Minimum Loan Fee. In the event the average closing daily unpaid
balances of all Loans hereunder and all Ace Loans and Consolidated Loans
during any calendar month is less than the Minimum Average Monthly Loan
Amount, Borrower shall pay to Lender a minimum loan fee at a rate per annum
equal to the Contract Rate on the amount by which the Minimum Average Monthly
Loan Amount exceeds such average closing daily unpaid balances. Such fee
shall be calculated on the basis of a year of 360 days and actual days
elapsed and such fee shall be charged to Borrower's account on the
first day of each month with respect to the prior month. Notwithstanding the
foregoing, in the event that a fee shall be due to Lender under the
foregoing provision in the Ace Agreement or the Consolidated Agreement, then
the total of such fee and the fee due hereunder shall not exceed the amount
of the fee due hereunder.
(ii) Facility Fee. Borrower shall pay to Lender a facility fee in an amount
equal to $30,000, all of which shall be deemed fully earned on the Closing
Date and shall be payable as follows: $15,000 on the Closing Date and
$15,000 on the first anniversary of the Closing Date. Notwithstanding the
foregoing, in the event that a fee shall be due to Lender under the foregoing
provision in the Ace Agreement or the Consolidated Agreement, then the total
of such fees and the fee due hereunder shall not exceed the amount of the fee
due hereunder.
(iii) Collateral Monitoring Fee. Upon Lender's performance of any
collateral monitoring and/or verification including, without limitation, any
field examination, collateral analysis or other business analysis, the need
for which is to be determined by Lender and which monitoring is undertaken by
Lender or for Lender's benefit, an amount equal to $650 per day, per person,
for each person employed to perform such monitoring together with all costs,
disbursements and expenses incurred by the Lender and the person performing
such collateral monitoring and/or verification shall be charged to Borrower's
account.
(iv) Minimum Default Loan Fee. In the event that following the occurrence
of an Event of Default the average closing daily unpaid balance of all Loans
hereunder, the Ace Loans and the Consolidated Loans during any calendar month
is less than the Minimum Default Average Monthly Loan Amount, Borrower shall
pay to Lender in lieu of interest charges provided for in Section 5(a) and the
fees provided for in Section 5(b)(i), a fee equal to two percent (2.0%) per
month on the unpaid principal balance of the Loans. Such fee shall be
computed on the basis of a year of 360 days and actual days elapsed and such
fee shall be charged to Borrower's account on the first day of each month
with respect to the prior month.
(v) Overadvance Fee. Without affecting Borrower's obligation to
immediately repay any Loans which exceed the amounts permitted by paragraph 2
of this Agreement ("Overadvances"), in the event an Overadvance occurs or is
made by Lender, Borrower shall pay interest on the unpaid balance of the
Loans at the Default Rate for as long as such Overadvance remains outstanding
and shall pay Lender a fee in the amount of $250.00 for each month or part
thereof that an Overadvance exists. Such fee shall be charged to Borrower's
account upon the occurrence of each Overadvance.
(vi) Financial Information Default. Without affecting Lender's other rights
and remedies, in the event Borrower fails to deliver the financial
information required by paragraphs 9 and 11 on the date required by this
Agreement, Borrower shall pay Lender a fee in the amount of $100.00 for each
such failure. Such fee shall be charged to Borrower's account upon the
occurrence of each such failure.
6. Security Interest.
(a) To secure the prompt payment to Lender of the Obligations, Borrower
hereby assigns, pledges and grants to Lender a continuing security interest
in and to the Collateral, whether now owned or existing or hereafter acquired
or arising and wheresoever located, whether or not the same is subject to
Article 9 of the UCC. All of the Borrower's ledger sheets, files, records,
books of account, business papers and documents relating to the Collateral
shall, until delivered to or removed by Lender, be kept by Borrower in trust
for Lender until all Obligations have been paid in full. Each confirmatory
assignment schedule or other form of assignment hereafter executed by
Borrower shall be deemed to include the foregoing grant, whether or not the
same appears therein.
(b) Lender may file one or more financing statements disclosing Lender's
security interest in the Collateral without Borrower's signature appearing
thereon or Lender may sign on Borrower's behalf as provided in paragraph 13
hereof. The parties agree that a carbon, photographic or other reproduction
of this Agreement shall be sufficient as a financing statement. If any
Receivable becomes evidenced by a promissory note or any other instrument for
the payment of money, Borrower will immediately deliver such instrument to
Lender appropriately endorsed.
7. Representations Concerning the Collateral. Borrower represents and
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Revolving Credit Advance and
made as of the time of each and every Revolving Credit Advance hereunder):
(a) all the Collateral (i) is owned by Borrower free and clear of all
claims, liens, security interests and encumbrances (including without
limitation any claims of infringement) except (A) those in Lender's favor and
(B) Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a security interest or requiring notice of or consent to the
granting of a security interest; and
(b) all Receivables (i) represent complete bona fide transactions which
require no further act under any circumstances on Borrower's part to make
such Receivables payable by the Customers, (ii) to the best of Borrower's
knowledge, are not subject to any present, future or contingent offsets or
counterclaims, and (iii) do not represent bill and hold sales, consignment
sales, guaranteed sales, sale or return or other similar understandings or
obligations of any Affiliate or Subsidiary of Borrower.
8. Covenants Concerning the Collateral. During the Term, Borrower
covenants that it shall:
(a) not dispose of any of the Collateral whether by sale, lease or otherwise
except for (i) the sale of Inventory in the ordinary course of business, (ii)
the disposition or transfer in the ordinary course of business during any
fiscal year of obsolete and worn-out Equipment having an aggregate fair market
value of not more than $25,000 and only to the extent that (x) the proceeds
of any such disposition are used to acquire replacement Equipment which is
subject to Lender's first priority security interest or (y) the proceeds of
which are remitted to Lender in reduction of the Obligations and (iii) the
disposition of Equipment located in China provided that at the time of such
disposition no Incipient Event of Default or Event of Default shall have
occurred and the proceeds of such disposition are remitted to Lender in
reduction of the Obligations.
(b) not encumber, mortgage, pledge, assign or grant any security interest
in any Collateral or any of Borrower's other assets to anyone other than
Lender and except for Permitted Liens;
(c) place notations upon Borrower's books of account and any financial
statement prepared by Borrower to disclose Lender's security interest in the
Collateral;
(d) keep and maintain the Equipment in good operating condition, except for
ordinary wear and tear, and shall make all necessary repairs and replacements
thereof so that the value and operating efficiency shall at all times be
maintained and preserved. Borrower shall not permit any such items to become
a fixture to real estate or accessions to other personal property;
(e) not extend the payment terms of any Receivable without prompt notice
thereof to Lender;
(f) perform all other steps requested by Lender to create and maintain in
Lender's favor a valid perfected first security interest in all Collateral
(except for Permitted Liens); and
(g) defend the Collateral against the claims and demands of all parties.
9. Collection and Maintenance of Collateral and Records.
Lender may at any time verify Borrower's Receivables utilizing an audit
control company or any other agent of Lender. Lender or Lender's designee
may notify customers or account debtors, at any time at Lender's sole
discretion, of Lender's security interest in Receivables, collect them
directly and charge the collection costs and expenses to Borrower's account,
but, unless and until Lender does so or gives Borrower other instructions,
Borrower shall collect all Receivables for Lender, receive all payments thereon
for Lender's benefit in trust as Lender's trustee and immediately deliver
them to Lender in their original form with all necessary endorsements or, as
directed by Lender, deposit such payments as directed by Lender pursuant to
paragraphs 22 or 23 hereof. Lender will credit (conditional upon final
collection) all such payments to Borrower's account, in the case of a payment
in the form of federal funds or other immediately available funds three (3)
business days after receipt by Lender of such funds in dollars of the United
States of America in Lender's account and in the case of payments in any
other form five (5) business days after receipt by Lender of good funds in
dollars of the United States of America in Lender's account. Any amount
received by Lender after 12:00 noon New York time on any business day shall be
deemed received on the next business day. Promptly after the creation of any
Receivables, Borrower shall provide Lender with schedules describing all
Receivables created or acquired by Borrower and shall execute and deliver
confirmatory written assignments of such Receivables to Lender, but
Borrower's failure to execute and deliver such schedules or written
confirmatory assignments of such Receivables shall not affect
or limit Lender's security interest or other rights in and to the
Receivables. Borrower shall furnish, at Lender's request, copies of
contracts, invoices or the equivalent, and any original shipping and delivery
receipts for all merchandise sold or services rendered and such other
documents and information as Lender may require. Borrower shall also provide
Lender on a monthly (within ten (10) days after the end of each month) or
more frequent basis, as requested by Lender, a detailed or aged trial balance
of all of Borrower's existing Receivables specifying the names and balances
due for each account debtor and such other information pertaining to the
Receivables as Lender may request. Borrower shall provide Lender on a
monthly (within ten (10) days after the end of each month), or more frequent
basis, as requested by Lender, a summary report of Borrower's current
Inventory, certified as true and accurate by Borrower's President or
Chief Financial Officer, as well as an aged trial balance of Borrower's
existing accounts payable. Borrower shall provide Lender, as requested by
Lender, such other schedules, documents and/or information regarding the
Collateral as Lender may require.
10. Inspections. At all times during normal business hours, Lender shall
have the right to (a) visit and inspect Borrower's properties and the
Collateral, (b) inspect, audit and make extracts from Borrower's relevant
books and records, including, but not limited to, management letters prepared
by independent accountants, and (c) discuss with Borrower's principal
officers, and independent accountants, Borrower's business, assets,
liabilities, financial condition, results of operations and business
prospects. Borrower will deliver to Lender any instrument necessary for
Lender to obtain records from any service bureau maintaining records for
Borrower.
11. Financial Information. Borrower shall provide Lender (a) as soon as
available, but in any event within one hundred five (105) days after the end
of each of Borrower's fiscal years, Borrower's balance sheet as at the end of
such fiscal year and the related statements of income, retained earnings and
changes in cash flow for such fiscal year, setting forth in comparative form
the figures as at the end of and for the previous fiscal year, which shall
have been reported on by independent certified public accountants who shall
be satisfactory to Lender and shall be accompanied by an unqualified audit
report issued by such independent certified public accountants; (b) as soon
as available, but in any event within thirty (30) days after the close of
each month other than the last month of each fiscal quarter and within forty-
five (45) days after the end of each month which is the end of a fiscal
quarter, the balance sheet as at the end of such month and the related
statements of income, retained earnings and changes in cash flow for such
month, which have been internally prepared by Borrower. All financial
statements required under (a) and (b) above shall be prepared in accordance
with GAAP, subject to year-end adjustments in the case of monthly statements.
Together with the financial statements furnished pursuant to (a) above,
Borrower shall deliver a certificate of Borrower's certified public
accountants addressed to Lender stating that (i) they have caused this
Agreement and the Ancillary Agreements to be reviewed and (ii) in making the
examination necessary for the issuance of such financial statements, nothing
has come to their attention to lead them to believe that any Event of Default
or Incipient Event of Default exists and, in particular, they have no
knowledge of any Event of Default or Incipient Event of Default or, if such
is not the case, specifying such Event of Default or Incipient Event of
Default and its nature, when it occurred and whether it is continuing. At
the times the financial statements are furnished pursuant to (a), (b) and (c)
above, a certificate of Borrower's President or Chief Financial Officer
shall be delivered to Lender stating that, based on an examination sufficient
to enable him to make an informed statement, no Event of Default or
Incipient Event of Default exists, or, if such is not the case, specifying
such Event of Default or Incipient Event of Default and its nature, when it
occurred, whether it is continuing and the steps being taken by Borrower with
respect to such event. If any internally prepared financial information,
including that required under this paragraph is unsatisfactory in
any manner to Lender, Lender may request that Borrower's independent
certified public accountants review same.
Borrower shall also provide Lender as soon as available, but in any event
within ten (10) days after the issuance thereof, copies of any regular,
periodic and special report or registration statements which Borrower files
with the Securities and Exchange Commission or any governmental authority which
may be substituted therefor or any national securities exchange.
12. Additional Representations, Warranties and Covenants. Borrower
represents and warrants (each of which such representations and warranties
shall be deemed repeated upon the making of a request for a Revolving Credit
Advance and made as of the time of each Revolving Credit Advance made
hereunder), and covenants that:
(a) Borrower is a corporation duly organized and validly existing under the
laws of the State of New York and duly qualified and in good standing in
every other state or jurisdiction in which the nature of Borrower's business
requires such qualification;
(b) the execution, delivery and performance of this Agreement and the
Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of Borrower's certificate of incor-poration, by-laws or of any
indenture, agreement or undertaking to which Borrower is a party or by which
Borrower is bound and (iii) are within Borrower's corporate powers;
(c) this Agreement and the Ancillary Agreements executed and delivered by
Borrower are Borrower's legal, valid and binding obligations, enforceable in
accordance with their terms;
(d) it keeps and will continue to keep all of its books and records
concerning the Collateral at Borrower's executive offices located at the
address set forth in the introductory paragraph of this Agreement and will
not move such books and records without giving Lender at least thirty (30) days
prior written notice;
(e) (i) the operation of Borrower's business is and will continue to be in
compliance in all material respects with all applicable federal, state and
local laws, including but not limited to all applicable environmental laws
and regulations;
(ii) Borrower will establish and maintain a system to assure and monitor
continued compliance with all applicable environmental laws, which system
shall include periodic reviews of such compliance;
(iii) In the event the Borrower obtains, gives or receives notice of any
release or threat of release of a reportable quantity of any hazardous
substances on its property (any such event being hereinafter referred to as a
"Hazardous Discharge") or receives any notice of violation, request for
information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions on its property, demand
letter or complaint, order, citation, or other written notice with regard to
any Hazardous Discharge or violation of any environmental laws affecting its
property or Borrower's interest therein (any of the foregoing is referred to
herein as an "Environmental Complaint") from any Person or entity, including
any state agency responsible in whole or in part for environmental matters
in the state in which such property is located or the United States
Environmental Protection Agency (any such person or entity hereinafter the
"Authority"), then the Borrower shall, within seven (7) days, give written
notice of same to the Lender detailing facts and circumstances of which the
Borrower is aware giving rise to the Hazardous Discharge or Environmental
Complaint and periodically inform Lender of the status of the matter. Such
information is to be provided to allow the Lender to protect its security
interest in the Collateral and is not intended to create nor shall it create
any obligation upon the Lender with respect thereto;
(iv) Borrower shall respond promptly to any Hazardous Discharge or
Environmental Complaint and take all necessary action in order to safeguard
the health of any Person and to avoid subjecting the Collateral to any lien.
If Borrower shall fail to respond promptly to any Hazardous Discharge or
Environmental Complaint or Borrower shall fail to comply with any of the
requirements of any environmental laws, the Lender may, but without the
obligation to do so, for the sole purpose of protecting the Lender's interest
in Collateral: (A) give such notices or (B) enter onto Borrower's property
(or authorize third parties to enter onto such property) and take such
actions as the Lender (or such third parties as directed by the Lender) deems
reasonably necessary or advisable, to clean up, remove, mitigate or otherwise
deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by the Lender (or such third parties)
in the exercise of any such rights, including any sums paid in connection
with any judicial or administrative investigation or proceedings, fines and
penalties, together with interest thereon from the date expended at the
Default Rate for Revolving Credit Advances shall be paid upon demand by the
Borrower, and until paid shall be added to and become a part of the Obligations
secured by the liens created by the terms of this Agreement or any other
agreement between Lender and Borrower;
(v) Borrower shall defend and indemnify the Lender and hold the Lender
harmless from and against all loss, liability, damage and expense, claims,
costs, fines and penalties, including attorney's fees, suffered or incurred
by the Lender under or on account of any environmental laws, including,
without limitation, the assertion of any lien thereunder, with respect to any
Hazardous Discharge, the presence of any hazardous substances affecting
Borrower's property, whether or not the same originates or emerges from
Borrower's property or any contiguous real estate, including any loss of
value of the Collateral as a result of the foregoing except to the extent
such loss, liability, damage and expense is attributable to any Hazardous
Discharge resulting from actions on the part of the Lender. The Borrower's
obligations under this paragraph 12(e) shall arise upon the discovery of the
presence of any hazardous substances on the Borrower's property, whether or
not any federal, state, or local environmental agency has taken or threatened
any action in connection with the presence of any hazardous substances. The
Borrower's obligation and the indemnifications hereunder shall survive the
termination of this Agreement;
(vi) For purposes of paragraph 12(e) all references to Borrower's property
shall be deemed to include all of Borrower's right, title and interest in and
to all owned and/or leased premises.
(f) based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i)
Borrower has not engaged in any Prohibited Transactions as defined in
paragraph 406 of ERISA and paragraph 4975 of the Internal Revenue Code, as
amended; (ii) Borrower has met all applicable minimum funding requirements
under paragraph 302 of ERISA in respect of its plans; (iii) Borrower has no
knowledge of any event or occurrence which would cause the Pension Benefit
Guaranty Corporation to institute proceedings under Title IV of ERISA to
terminate any employee benefit plan(s); (iv) Borrower has no fiduciary
responsibility for investments with respect to any plan existing for the
benefit of persons other than Borrower's employees; and (v) Borrower has not
withdrawn, completely or partially, from any multi-employer pension plan so
as to incur liability under the Multiemployer Pension Plan Amendments Act of
1980;
(g) it is solvent, able to pay its debts as they mature, has capital
sufficient to carry on its business and all businesses in which it is about
to engage and the fair saleable value of its assets (calculated on a going
concern basis) is in excess of the amount of its liabilities;
(h) there is no pending or threatened litigation, actions or proceeding
which involve the possibility of materially and adversely affecting the
Borrower's business, assets, operations, prospects or condition (financial or
otherwise), or the Collateral or the ability of Borrower to perform this
Agreement;
(i) all balance sheets and income statements which have been delivered to
Lender fairly, accurately and properly state Borrower's financial condition
on a basis consistent with that of previous financial statements and there
has been no material adverse change in Borrower's financial condition as
reflected in such statements since the date thereof and such statements do
not fail to disclose any fact or facts which might materially and adversely
affect Borrower's financial condition;
(j) (x) it possesses all of the licenses, patents, copyrights, trademarks
and tradenames necessary to conduct its business, (y) there has been no
assertion or claim of violation or infringement with respect thereof and (z)
all such licenses, patents, copyrights, trademarks and tradenames are listed on
Exhibit 12(j);
(k) it will pay or discharge when due all taxes, assessments and
governmental charges or levies imposed upon it;
(l) it will promptly inform Lender in writing of: (i) the commencement of all
proceedings and investigations by or before and/or the receipt of any notices
from, any governmental or nongovernmental body and all actions and
proceedings in any court or before any arbitrator against or in any way
concerning any of Borrower's properties, assets or business, which might
singly or in the aggregate, have a materially adverse effect on Borrower;
(ii) any amendment of Borrower's certificate of incorporation or by-laws;
(iii) any change in Borrower's business, assets, liabilities, condition
(financial or otherwise), results of operations or business prospects which
has had or might have a materially adverse effect on Borrower; (iv) any Event
of Default or Incipient Event of Default; (v) any default or any event which
with the passage of time or giving of notice or both would constitute a
default under any agreement for the payment of money to which Borrower is a
party or by which Borrower or any of Borrower's properties may be bound which
would have a material adverse effect on Borrower's business, assets,
operations, prospects or condition (financial or otherwise) or the
Collateral; (vi) any change in the location of Borrower's executive offices;
(vii) any change in the location of Borrower's Inventory or Equipment from
the locations listed on Exhibit 12(l) attached hereto, (viii) any change in
Borrower's corporate name; (ix) any material delay in Borrower's performance
of any of its obligations to any account debtor and of any assertion of any
material claims, offsets or counterclaims by any account debtor and of any
allowances, credits and/or other monies granted by it to any account debtor;
(x) and furnish to Lender all material adverse information
relating to the financial condition of any account debtor; and (xi) any
material return of goods;
(m) it will not (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other
than (x) Borrower's indebtedness to Lender, (y) as set forth
on Exhibit 12(m) attached hereto and made a part hereof and (z) indebtedness
for borrowed money provided that such indebtedness is not secured; (ii)
declare, pay or make any dividend or distribution on any shares of
the common stock of Borrower or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred
stock of Borrower; (iii) directly or indirectly, make any payment or
distribution or prepay any indebtedness (other than to Lender), or
repurchase, redeem, retire or otherwise acquire any indebtedness of Borrower
except that provided no Incipient Event of Default or Event of Default shall
have occurred Borrower (x) may make payments with respect to indebtedness for
borrowed money not to exceed $50,000 in the aggregate in any calendar month
and (y) may refinance the indebtedness shown on Exhibit 12(m) provided that
such indebtedness (A) remains unsecured and (B) Borrower notifies
Lender of such refinancing; (iv) make advances, loans or extensions of credit
to any Person; (v) become either directly or contingently liable upon the
obligations of any Person by assumption, endorsement or guaranty thereof or
otherwise; (vi) enter into any merger, consolidation or other reorganization
with or into any other Person or acquire all or a portion of the assets or
stock of any Person or permit any other Person to consolidate with or merge
with it; (vii) form any Subsidiary or enter into any partnership, joint
venture or similar arrangement; (viii) materially change the nature of the
business in which it is presently engaged; (ix) change its fiscal year or
make any changes in accounting treatment and reporting practices without prior
written notice to Lender except as required by GAAP or in the tax reporting
treatment or except as required by law; (x) enter into any transaction with
any Affiliate, except in ordinary course on arms-length terms; or
(xi) bill Receivables under any name except the present name of the Borrower;
(n) all financial projections of Borrower's performance prepared by
Borrower or at Borrower's direction and delivered to Lender will represent,
at the time of delivery to Lender, Borrower's best estimate of Borrower's
future financial performance and will be based upon assumptions which are
reasonable in light of Borrower's past performance and then current business
conditions;
(o) it will not make capital expenditures in any fiscal year in an amount
in excess of $100,000;
(p) none of the proceeds of the Loans hereunder will be used directly or
indirectly to "purchase" or "carry" "margin stock" or to repay indebtedness
incurred to "purchase" or "carry" "margin stock" within the respective
meanings of each of the quoted terms under Regulation G of the Board of
Governors of the Federal Reserve System as now and from time to time
hereafter in effect; and
(q) it will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. At it's own cost and expense in
amounts and with carriers acceptable to Lender, it shall (i) keep all its
insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered
by extended coverage insurance and such other hazards, and for such amounts,
as is customary in the case of companies engaged in businesses similar to
Borrower's including, without limitation, business interruption insurance;
(ii) maintain a bond in such amounts as is customary in the case of companies
engaged in businesses similar to Borrower's insuring against larceny,
embezzlement or other criminal misappropriation of insured's officers and
employees who may either singly or jointly with others at any time have
access to the assets or funds of Borrower either directly or through
authority to draw upon such funds or to direct generally the disposition of
such assets; (iii) maintain public and product liability insurance against
claims for personal injury, death or property damage suffered by
others; (iv) maintain all such worker's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which Borrower
is engaged in business; (v) maintain together with Ace and assign to Lender
a life insurance policy covering the life of David Guttmann in the face
amount of at least $1,000,000; (vi) maintain a credit insurance policy
satisfactory to Lender insuring the Receivables of Borrower which policy
shall name Lender as the beneficiary thereof; and (vii) furnish Lender with (x)
copies of all policies and evidence of the maintenance of such policies at
least thirty (30) days before any expiration date, (y) endorsements to such
policies naming Lender as "co-insured" or "additional insured"
and appropriate loss payable endorsements in form and substance satisfactory
to Lender, naming Lender as loss payee, and (z) evidence that as to Lender
the insurance coverage shall not be impaired or invalidated by
any act or neglect of Borrower and the insurer will provide Lender with at
least thirty (30) days notice prior to cancellation. Borrower shall instruct
the insurance carriers that in the event of any loss thereunder, the
carriers shall make payment for such loss to lender and not to Borrower and
Lender jointly. If any insurance losses are paid by check, draft or other
instrument payable to Borrower and Lender jointly, Lender may
endorse Borrower's name thereon and do such other things as Lender may deem
advisable to reduce the same to cash. Lender is hereby authorized to adjust
and compromise claims. All loss recoveries received by Lender upon any such
insurance may be applied to the Obligations, in such order as Lender in its
sole discretion shall determine. Any surplus shall be paid by Lender to
Borrower or applied as may be otherwise required by law. Any deficiency
thereon shall be paid by Borrower to Lender, on demand.
13. Power of Attorney. Borrower hereby appoints Lender or any other Person
whom Lender may designate as Borrower's attorney, with power to: (i) endorse
Borrower's name on any checks, notes, acceptances, money orders, drafts or
other forms of payment or security that may come into Lender's possession;
(ii) sign Borrower's name on any invoice or bill of lading relating to any
Receivables, drafts against customers, schedules and assignments of
Receivables, notices of assignment, financing statements and other public
records, verifications of account and notices to or from customers; (iii)
verify the validity, amount or any other matter relating to any Receivable by
mail, telephone, telegraph or otherwise with account debtors; (iv) execute
customs declarations and such other documents as may be required to clear
Inventory through Customs; (v) do all things necessary to carry out this
Agreement, any Ancillary Agreement and all related documents; and (vi) on or
after the occurrence and continuation of an Event of Default, notify the post
office authorities to change the address for delivery of Borrower's mail to
an address designated by Lender, and to receive, open and dispose of all mail
addressed to Borrower. Borrower hereby ratifies and approves all acts of
the attorney. Neither Lender nor the attorney will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law. This
power, being coupled with an interest, is irrevocable so long as any
Receivable which is assigned to Lender or in which Lender has a security
interest remains unpaid and until the Obligations have been fully satisfied.
14. Expenses. Borrower shall pay all of Lender's out-of-pocket costs and
expenses, including, without limitation, reasonable fees and disbursements of
counsel and appraisers, in connection with the preparation, execution and
delivery of this Agreement and the Ancillary Agreements, and in
connection with the prosecution or defense of any action, contest, dispute,
suit or proceeding concerning any matter in any way arising out of, related
to or connected with this Agreement or any Ancillary Agreement. Borrower
shall also pay all of Lender's fees, charges, out-of-pocket costs and
expenses, including without limitation reasonable fees and disbursements of
counsel and appraisers, in connection with (a) the preparation, execution and
delivery of any waiver, any amendment thereto or consent proposed or executed
in connection with the transactions contemplated by this Agreement or the
Ancillary Agreements, (b) Lender's obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not limited
to, the enforcement or defense of Lender's security interests, assignments
of rights and liens hereunder as valid perfected security interests, (c) any
attempt to inspect, verify, protect, collect, sell, liquidate or otherwise
dispose of any Collateral, (d) any appraisals or re-appraisals of any
property (real or personal) pledged to Lender by Borrower as Collateral for,
or any other Person as security for, Borrower's Obligations hereunder and (e)
any consultations in connection with any of the foregoing. Borrower shall
also pay Lender's customary bank charges for all bank services performed or
caused to be performed by Lender for Borrower at Borrower's request or in
connection with Borrower's loan account with Lender. All such costs and
expenses together with all filing, recording and search fees, taxes and
interest payable by Borrower to Lender shall be payable on demand and shall
be secured by the Collateral. If any tax by any governmental authority is or
may be imposed on or as a result of any transaction between Borrower and
Lender which Lender is or may be required to withhold or pay, Borrower agrees
to indemnify and hold Lender harmless in respect of such taxes, and Borrower
will repay to Lender the amount of any such taxes which shall be charged to
Borrower's account; and until Borrower shall furnish Lender with indemnity
therefor (or supply Lender with evidence satisfactory to it that due
provision for the payment thereof has been made), Lender may hold without
interest any balance standing to Borrower's credit and Lender shall
retain its security interests in any and all Collateral.
15. Assignment By Lender. Lender may assign any or all of the Obligations
together with any or all of the security therefor and any transferee shall
succeed to all of Lender's rights with respect thereto. Upon such transfer,
Lender shall be released from all responsibility for the Collateral to the
extent same is assigned to any transferee. Lender may from time to time sell
or otherwise grant participations in any of the Obligations and the holder
of any such participation shall, subject to the terms of any agreement
between Lender and such holder, be entitled to the same benefits as Lender
with respect to any security for the Obligations in which such holder is a
participant. Borrower agrees that each such holder may exercise
any and all rights of banker's lien, set-off and counterclaim with respect to
its participation in the Obligations as fully as though Borrower were
directly indebted to such holder in the amount of such participation.
16. Waivers. Borrower waives presentment and protest of any instrument and
notice thereof, notice of default and all other notices to which Borrower
might otherwise be entitled.
17. Term of Agreement. This Agreement shall continue in full force and
effect until the expiration of the Term; provided, however, Lender may
terminate at any time upon sixty (60) days notice. The Termination Date
shall be automatically extended for successive periods of two (2) years each
unless Borrower shall have provided Lender with a written notice of
termination, at least sixty (60) days prior to the expiration of the
Termination Date or any renewal of the Termination Date. Upon any extension
of the Termination Date or any renewal of the Termination Date, Borrower
shall pay Lender an extension fee in an amount equal to the product of (x)
the Maximum Revolving Amount times (y) one percent (1.0%).
Notwithstanding the foregoing, Lender shall release its security interests at
any time after thirty (30) days notice upon payment to it of all Obligations
if Borrower shall have (i) provided Lender with an executed release of any
and all claims which Borrower may have or thereafter shall have under this
Agreement and (ii) paid to Lender an early payment fee in an amount equal to
the product of (x) fifty percent (50%) of the average monthly interest
(including any minimum loan fees payable hereunder) payable by Borrower to
Lender from the Closing Date until the date of payment of the fee hereunder
multiplied by (y) the difference between (i) the number of full months from
the Closing Date until the Termination Date and (ii) the number
of full months which have elapsed from the Closing Date until the date of
payment of the fee hereunder; such fee being intended to compensate Lender
for its costs and expenses incurred in initially approving this
Agreement or extending same. Such early payment fee shall also be due and
payable by Borrower to Lender upon termination of this Agreement by Lender
after the occurrence of an Event of Default.
18. Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(a) failure to make payment of any of the Obligations when required hereunder;
(b) failure to pay any taxes when due unless such taxes are being contested
in good faith by appropriate proceedings and with respect to which adequate
reserves have been provided on Borrower's books;
(c) failure to perform under and/or committing any breach of this Agreement
or any Ancillary Agreement or any other agreement between Borrower and Lender;
(d) occurrence of a default under any agreement to which Borrower is a
party with third parties which has a material adverse affect upon Borrower's
business, assets, operations, prospects or condition (financial or otherwise)
including all leases for any premises where Inventory or Equipment is located;
(e) any representation, warranty or statement made by Borrower hereunder,
in any Ancillary Agreement, any certificate, statement or document delivered
pursuant to the terms hereof, or in connection with the transactions
contemplated by this Agreement should at any time be false or misleading
in any material respect;
(f) if any Guarantor attempts to terminate, challenges the validity of, or
its liability under any Guaranty Agreement or if any Guarantor shall die and
Borrower shall fail to provide Lender with a replacement Guarantor acceptable
to Lender within thirty (30) days of such occurrence;
(g) should any Guarantor default in its obligations under any Guaranty
Agreement or if any proceeding shall be brought to challenge the validity,
binding effect of any Guaranty Agreement, or should any Guarantor breach any
representation, warranty or covenant contained in any Guaranty
Agreement or should any Guaranty Agreement cease to be a valid, binding and
enforceable obligation;
(h) an attachment or levy is made upon any of Borrower's assets having an
aggregate value in excess of $10,000,or a judgment is rendered against
Borrower or any of Borrower's property involving a liability of more than
$10,000, which shall not have been vacated, discharged, stayed or bonded
pending appeal within thirty (30) days from the entry thereof;
(i) any change in Borrower's condition or affairs (financial or otherwise)
which in Lender's opinion impairs the Collateral or the ability of Borrower
to perform its Obligations;
(j) any lien created hereunder or under any Ancillary Agreement for any
reason ceases to be or is not a valid and perfected lien having a first
priority interest;
(k) if Borrower shall (i) apply for, consent to or suffer to exist the
appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of creditors, (iii)
commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent,
(v) file a petition seeking to take advantage of any other law providing for
the relief of debtors, (vi) acquiesce to, or fail to have dismissed, within
thirty (30) days, any petition filed against it in any involuntary
case under such bankruptcy laws, or (vii) take any action for the purpose of
effecting any of the foregoing;
(l) Borrower shall admit in writing its inability, or be generally unable to
pay its debts as they become due or cease operations of its present business;
(m) any Affiliate or any Subsidiary or any Guarantor shall (i) apply for,
consent to or suffer to exist the appointment of, or the taking possession
by, a receiver, custodian, trustee or liquidator of itself or of all or a
substantial part of its property, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business, (iii) make a general assignment for the benefit of
creditors, (iv) commence a voluntary case under the federal bankruptcy laws
(as now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent,
(vi) file a petition seeking to take advantage of any other law providing for
the relief of debtors, (vii) acquiesce to, or fail to have dismissed, within
thirty (30) days, any petition filed against it in any involuntary case
under such bankruptcy laws or (viii) take any action for the purpose of
effecting any of the foregoing;
(n) Borrower directly or indirectly sells, assigns, transfers, conveys, or
suffers or permits to occur any sale, assignment, transfer or conveyance of
any assets of Borrower or any interest therein, except as permitted herein;
(o) Borrower fails to operate in the ordinary course of business;
(p) Lender shall in good faith deem itself insecure or unsafe or shall fear
diminution in value, removal or waste of the Collateral;
(q) a default by Borrower in the payment, when due, of any principal of or
interest on any indebtedness for money borrowed;
(r) (i) David Guttmann shall fail to own or control the percentage of
common stock of Borrower held by David Guttmann on the Closing Date; (ii) 50%
or more of the common stock of Borrower is owned or controlled by any Person
other than David Guttmann or (iii) any one or more of David
Guttmann or Richard Helfman shall no longer be a part of senior management of
Borrower;
(s) the indictment or threatened indictment of Borrower, any officer of
Borrower or any Guarantor under any criminal statute, or commencement of
criminal or civil proceeding against Borrower, any officer of Borrower or any
Guarantor pursuant to which statute or proceeding penalties or remedies
sought or available include forfeiture of any of the property of Borrower or
any Guarantor; or
(t) the occurrence of a default or event of default under the Ace Agreement
or the Consolidated Agreement.
19. Remedies. Upon the occurrence of an Event of Default pursuant to
paragraph 18(k) herein, all Obligations shall be immediately due and payable
and this Agreement shall be deemed terminated; upon the occurrence and
continuation of any other of the Events of Default, Lender shall have
the right to demand repayment in full of all Obligations, whether or not
otherwise due. Until all Obligations have been fully satisfied, Lender shall
retain its security interest in all Collateral. Lender shall have, in
addition to all other rights provided herein, the rights and remedies of a
secured party under the UCC, and under other applicable law, all other legal
and equitable rights to which Lender may be entitled, including
without limitation, the right to take immediate possession of the Collateral,
to require Borrower to assemble the Collateral, at Borrower's expense, and
to make it available to Lender at a place designated by Lender
which is reasonably convenient to both parties and to enter any of the
premises of Borrower or wherever the Collateral shall be located, with or
without force or process of law, and to keep and store the same on said
premises until sold (and if said premises be the property of Borrower,
Borrower agrees not to charge Lender for storage thereof), and the right to
apply for the appointment of a receiver for Borrower's property.
Further, Lender may, at any time or times after default by Borrower, sell and
deliver all Collateral held by or for Lender at public or private sale for
cash, upon credit or otherwise, at such prices and upon such terms as
Lender, in Lender's sole discretion, deems advisable or Lender may otherwise
recover upon the Collateral in any commercially reasonable manner as Lender,
in its sole discretion, deems advisable. The requirement of
reasonable notice shall be met if such notice is mailed postage prepaid to
Borrower at Borrower's address as shown in Lender's records, at least ten
(10) days before the time of the event of which notice is being given.
Lender may be the purchaser at any sale, if it is public. In connection with
the exercise of the foregoing remedies, Lender is granted permission to use
all of Borrower's trademarks, tradenames, tradestyles, patents,
patent applications, licenses, franchises and other proprietary rights which
are used in connection with (a) Inventory for the purpose of disposing of
such Inventory and (b) Equipment for the purpose of completing
the manufacture of unfinished goods. The proceeds of sale shall be applied
first to all costs and expenses of sale, including attorneys' fees, and
second to the payment (in whatever order Lender elects) of all
Obligations. Lender will return any excess to Borrower and Borrower shall
remain liable to Lender for any deficiency. In addition to all other sums
due to Lender, Borrower shall pay Lender, for costs and expenses
incurred by Lender for internal collection efforts to obtain or enforce
payment of Receivables, an amount equal to fifteen percent (15%) of the net
face amount of any Receivables collected.
20. Waiver; Cumulative Remedies. Failure by Lender to exercise any right,
remedy or option under this Agreement or any supplement hereto or any other
agreement between Borrower and Lender or delay by Lender in exercising the
same, will not operate as a waiver; no waiver by Lender will be
effective unless it is in writing and then only to the extent specifically
stated. Lender's rights and remedies under this Agreement will be cumulative
and not exclusive of any other right or remedy which Lender may have.
21. Application of Payments. Borrower irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Lender from or on Borrower's behalf and Borrower hereby
irrevocably agrees that Lender shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times
hereafter against Borrower's Obligations hereunder in such manner as Lender
may deem advisable notwithstanding any entry by Lender upon any of Lender's
books and records.
22. Depository Accounts. Any payment received by Borrower on account of any
Collateral shall be held by Borrower in trust for Lender and Borrower shall
promptly deliver same in kind to Lender or deposit all such payments into a
cash collateral account at such bank as Lender may designate for
application to payment of the Obligations. Borrower shall also execute such
further documents as Lender may deem necessary to establish such an account
and all funds deposited in such account shall immediately be deemed Lender's
property.
23. Lock Box Accounts. Borrower shall, at Lender's request, instruct all
of its customers and account debtors to make such payments on account of
Receivables to an account under Lender's dominion and control at such bank as
Lender may designate. Borrower shall also execute such further documents as
Lender may deem necessary to establish such an account and all funds
deposited in such account shall immediately be deemed Lender's property.
24. Revival. Borrower further agrees that to the extent Borrower makes a
payment or payments to Lender, which payment or payments or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable
cause, then, to the extent of such payment or repayment, the obligation or
part thereof intended to be satisfied shall be revived and continued in full
force and effect as if said payment had not been made.
25. Notices. Any notice or request hereunder may be given to Borrower or
Lender at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this paragraph.
Any notice or request hereunder shall be given by registered or certified
mail, return receipt requested, or by hand delivery, overnight mail or by
telecopy (confirmed by mail). Notices and requests shall be, in the case of
those by hand delivery, deemed to have been given when delivered to any
officer of the party to whom it is addressed, in the case of those by mail or
overnight mail, deemed to have been given when deposited in the mail or with
the overnight mail carrier, and, in the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to the Lender: Century Business Credit Corporation
119 West 40th Street
New York, New York 10018
Attention: Allen H. Vogel
Telephone: (212) 703-3500
Telecopier: (212) 703-3639
with a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118
Attention: Miriam L. Cohen, Esq.
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
If to the Borrower: Creative Technologies Corp.
170 53rd Street
Brooklyn, New York 11232
Attention: David Guttmann
Telephone: (718) 492-8400
Telecopier: (718) 492-3878
With a copy to: Singer Zamansky LLP
40 Exchange Place, 20th Floor
New York, New York 10005
Attention: David Selengut, Esq.
Telephone: (212) 809-8550
Telecopier: (212) 344-0394
26. Governing Law and Waiver of Jury Trial. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK. LENDER SHALL HAVE THE RIGHTS AND REMEDIES OF A
SECURED PARTY UNDER APPLICABLE LAW INCLUDING, BUT NOT LIMITED TO, THE
UNIFORM COMMERCIAL CODE OF NEW YORK. BORROWER AGREES THAT ALL ACTIONS
AND PROCEEDINGS RELATING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR ANY
ANCILLARY AGREEMENT OR ANY OTHER OBLIGATIONS SHALL BE LITIGATED IN THE
FEDERAL DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK OR, AT LENDER'S
OPTION, IN ANY OTHER COURTS LOCATED IN NEW YORK STATE OR ELSEWHERE AS
LENDER MAY SELECT AND THAT SUCH COURTS ARE CONVENIENT FORUMS AND
BORROWER SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS. BORROWER
WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS
UPON BORROWER MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
REQUESTED, DIRECTED TO BORROWER AT BORROWER'S ADDRESS APPEARING ON
LENDER'S RECORDS, AND SERVICE SO MADE SHALL BE DEEMED COMPLETED TWO (2)
DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. BOTH PARTIES HERETO WAIVE
THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BETWEEN BORROWER
AND LENDER AND BORROWER WAIVES THE RIGHT TO ASSERT IN ANY ACTION OR
PROCEEDING INSTITUTED BY LENDER WITH REGARD TO THIS AGREEMENT OR ANY OF THE
OBLIGATIONS ANY OFFSETS OR COUNTERCLAIMS WHICH IT MAY HAVE.
27. Limitation of Liability. Borrower acknowledges and understands that in
order to assure repayment of the Obligations hereunder Lender may be
required to exercise any and all of Lender's rights and remedies hereunder
and agrees that neither Lender nor any of Lender's agents shall be liable for
acts taken or omissions made in connection herewith or therewith except for
actual bad faith.
28. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding between Borrower and Lender and any
promises, representations, warranties or guarantees not herein contained
shall have no force and effect unless in writing, signed by the Borrower's
and Lender's respective officers. Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or
by any course of dealing, or in any manner other than by an agreement in
writing, signed by the party to be charged.
29. Severability. Wherever possible each provision of this Agreement or
the Ancillary Agreements shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions thereof.
30. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
31. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
taken together shall constitute one and the same
instrument.
32. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any
amendments, schedules or exhibits thereto.
33. Publicity. Borrower hereby authorizes Lender to make appropriate
announcements of the financial arrangement entered into by and between
Borrower and Lender, including, without limitation, announcements which are
commonly known as tombstones, in such publications and to such selected
parties as Lender shall in its sole and absolute discretion deem appropriate.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year first above written.
ATTEST: CREATIVE TECHNOLOGIES CORP.
By:_________________________
Secretary By:_________________________
Title:______________________
[CORPORATE SEAL]
CENTURY BUSINESS CREDIT
CORPORATION
By:_________________________
Title:______________________
Table of Contents
1. (a) General Definitions 1
(b) Accounting Terms 8
(c) Other Terms 8
2. Revolving Credit Advances 8
3. Repayment of the Revolving Credit Advances 9
4. Procedure for Revolving Credit Advances 9
5. Interest and Fees 10
(a) Interest 10
(b) Fees 10
(i) Minimum Loan Fee 10
(ii) Facility Fee 11
(iii) Collateral Monitoring Fee 11
(iv) Minimum Default Loan Fee 11
(vi) Financial Information Default 12
6. Security Interest 12
7. Representations Concerning the Collateral 12
8. Covenants Concerning the Collateral 13
10. Inspections 14
11. Financial Information 15
12. Additional Representations, Warranties and Covenants 16
13. Power of Attorney 21
14. Expenses 21
15. Assignment By Lender 22
16. Waivers 23
17. Term of Agreement 23
18. Events of Default 23
19. Remedies 25
20. Waiver; Cumulative Remedies 26
21. Application of Payments 27
22. Depository Accounts 27
23. Lock Box Accounts 27
24. Revival 27
25. Notices 27
26. Governing Law and Waiver of Jury Trial 28
27. Limitation of Liability 28
28. Entire Understanding 29
29. Severability 29
30. Captions 29
31. Counterparts 29
32. Construction 29
33. Publicity 29
EXHIBITS
Exhibit 1(A) - Permitted Liens
Exhibit 12(j) - Licenses, Patents, Trademarks and Copyrights
Exhibit 12(l) - Inventory Locations
Exhibit 12(m) - Permitted Indebtedness
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> $100,000
<SECURITIES> 0
<RECEIVABLES> 731,000
<ALLOWANCES> 100,000
<INVENTORY> 1,609,000
<CURRENT-ASSETS> 2,541,000
<PP&E> 1,465,000
<DEPRECIATION> 684,000
<TOTAL-ASSETS> 3,376,000
<CURRENT-LIABILITIES> 7,387,000
<BONDS> 0
<COMMON> 234,000
1,770,000
0
<OTHER-SE> (6,215,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,376,000
<SALES> 4,986,000
<TOTAL-REVENUES> 4,986,000
<CGS> 6,563,000
<TOTAL-COSTS> 6,563,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 793,000
<INCOME-PRETAX> (8,509,000)
<INCOME-TAX> 481,000
<INCOME-CONTINUING> (8,990,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,550,000
<CHANGES> 0
<NET-INCOME> (7,440,000)
<EPS-PRIMARY> (2.90)
<EPS-DILUTED> (2.90)
</TABLE>
