FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1997
Commission File Number: 0-15754
CREATIVE TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2721083
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
170 53rd Street, Brooklyn, New York 11232
(Address of principal executive offices) (Zip Code)
(718) 492-8400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, Par Value $.09
2,611,394
(Title of each class)
(Outstanding at June 30, 1997)
CREATIVE TECHNOLOGIES CORP.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
(Unaudited)
Balance Sheet as at June 30, 1997 3
Statements of Operations
for the Three Months and Six Months ended
June 30, 1997 and June 30, 1996 4
Statement of Stockholders' (Deficit)
for the Six Months ended June 30, 1997 5
Statements of Cash Flows
for the Six Months ended
June 30, 1997 and June 30, 1996 6
Notes to Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27
Financial Data Schedule 16
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED BALANCE SHEET
AS AT JUNE 30, 1997
(Unaudited)
<CAPTION>
Assets
<S> <C>
Current assets:
Cash $ 11,000
Accounts receivable-net
844,000
Inventories 1,316,000
Prepaid expenses and other assets
137,000
Total Current Assets
2,308,000
Fixed assets - at cost (less accumulated depreciation
and amortization of $785,000)
682,000
Intangible and other assets
38,000
Total $ 3,028,000
Liabilities
Current liabilities:
Note payable - Century Business Credit Corp. $ 204,000
Notes payable 3,761,000
Accounts payable and accrued expenses 3,003,000
Customer claims payable
395,000
Advances from customers
93,000
Note payable - Fleet Capital Corporation 200,000
Total Current Liabilities 7,656,000
Stockholders' (Deficit)
Preferred stock - $.01 par value; 5,000,000 shares authorized
Preferred stock- 1996- (12% cumulative)
10,000 shares designated; issued and outstanding 600 shares
at redemption value of $1,000 per share 600,000
Preferred stock- 1996-A- (12% cumulative)
10,000 shares designated; issued and outstanding 1,170 shares
at redemption value of $1,000 per share 1,170,000
Common stock - $.09 par value; authorized
20,000,000 shares; issued and outstanding
2,611,000 shares 235,000
Additional paid - in capital
8,900,000
Deficit (15,533,000)
Total Stockholders' (Deficit) (4,628,000)
Total $3,028,000
See notes to condensed financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C>
<C>
Net Sales $1,629,000 $1,151,000 $4,421,000 $2,771,000
Cost of Sales 964,000 510,000 2,885,000 1,451,000
Gross Profit 665,000 641,000 1,536,000 1,320,000
Operating Expenses:
Selling, general and administrative expenses 499,000 810,000
1,187,000
1,908,000
Warehousing expense 242,000 292,000 509,000 635,000
Interest expense 140,000 190,000 280,000 430,000
881,000 1,292,000 1,976,000 2,973,000
Loss before provision for income taxes and
extraordinary item (216,000) (651,000) (440,000) (1,653,000)
(Benefit) provision for income taxes
Current (22,000) 0 (22,000) 0
Deferred _______0 0 0 400,000
Loss before extraordinary item (194,000) (651,000) (418,000)
(2,053,000)
Extraordinary item
Gain-debt settlement 0 0
________0 1,550,000
Net Loss
$(194,000) $(651,000) $(418,000) $(503,000)
Loss attributable to
common shareholders $(247,000) $(657,000) $(524,000)
$(509,000)
Loss before extraordinary item per common share $ (.09) $
(.25) $ (.20) $ (.79)
Extraordinary item per common share
$ 0 $ .59
Fully diluted extraordinary item per common share
$
0 $ .59
Primary loss per common share $ (.09)
$ (.25) $ (.20) $ (.20)
See notes to condensed financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30,1997
(Unaudited)
<CAPTION>
Preferred Stock Common Stock
Additional
Number of Number of Par Paid-in
Shares Value Shares Value Capital Deficit
<S> <C> <C> <C> <C> <C>
1996 Preferred Stock 600 $600,000
1996 - A Preferred Stock 1,170 1,170,000
Balance December 31, 1996 1,770 $1,770,000
2,611,000
$235,000 $8,900,000 $(15,115,000)
Net loss (418,000)
Balance June 30, 1997 1,770 $1,770,000 2,611,000
$235,000 $8,900,000 $(15,533,000)
See notes to condensed financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C>
<C>
Net cash (used in) provided by operating activities $(210,000)
$559,000
Cash flows from investing activities:
Acquisition of fixed assets (2,000) (91,000)
Cash flows from financing activities:
Net proceeds from credit facility 162,000 0
Net repayment of credit facility 0 (2,658,000)
Proceeds from notes payable 395,000 1,800,000
Repayment of notes payable (434,000)
(958,000)
Proceeds from sale of common stock 0
50,000
Proceeds from sale of preferred stock 0 600,000
Net cash provided by (used in) financing activities 123,000
(1,166,000)
Net (decrease) in cash (89,000) (698,000)
Cash at beginning end of period 100,000 771,000
Cash at end of period $ 11,000 $ 73,000
Supplemental disclosures of cash flow information
Interest paid $212,000 $ 475,000
Taxes paid 0
0
See notes to condensed financial statements.
</TABLE>
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01
of Regulation S-X. Accordingly they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six
month periods ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1996.
Note B - Inventories
Inventories consist of finished goods stated at the lower of cost or market
using the first - in, first out method.
Note C - Notes Payable and Related Party Transaction
1. At June 30, 1997 the Company had outstanding notes payable totaling
$3,761,000. Of this amount, $2,836,000 bears interest at 12%, $750,000 bears
interest at 18% and $175,000 is currently non interest bearing. 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 $2,761,000 is payable to various
individuals who are stockholders or entities whose principals are
stockholders of the Company. These notes payable are personally guaranteed
by certain stockholders of the Company.
2. In December 1996 the Company and Companies owned by the Company's
principal stockholders entered into a two-year loan and security agreement
with a lender whereby the Company and the related party are required to
maintain an outstanding combined loan balance of not less than $1,500,000,
but no more than $3,000,000. The loan is collateralized by substantially all
of the assets of the Company and is guaranteed by the Company, the related
party and an officer of the Company. Under the agreement, the Company and
the related party receive revolving credit advances based on accounts
receivable and inventory available and are required to pay interest at a rate
of prime plus 2.75% plus all of the lenders out-of-pocket costs and
expenses. The agreement, among other matters, restricts the Company with
respect to (i) incurring any lien or encumbrance on its property or assets,
(ii) entering into new indebtedness (iii) incurring
capital expenditures in any fiscal year in an amount in excess of $100,000
and requires an officer of the Company to maintain certain ownership
percentages.
At June 30, 1997, the Company had $204,000 outstanding under this facility.
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note D - Note Payable - Fleet Capital Corporation
In March of 1996, the Company entered into an agreement with its former bank
to pay off its indebtedness and release both the Company and the bank from
any future obligations. The Company borrowed additional funds to pay off the
indebtedness. The resulting settlement, which occurred in March 1996, is
summarized as follows:
Loan balance subject to settlement $3,583,000
Paid by the Company (1,500,000)
Note payable - non-interest bearing issued by
the company due not later than March 11, 1998 (200,000)
Debt assumed by a stockholder of the Company
during March 1996 in exchange for 111,000
shares of common stock (333,000)
Gain on debt settlement $1,550,000
NOTE E - Preferred Stock:
[1] 1996 Preferred Stock:
In June 1996 the Board of Directors designated 10,000 shares of preferred
stock as "1996 Preferred Stock" valued at $1,000 per share. The holders of
1996 Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum
payable quarterly in cash or common stock at the option of the
Company,
(ii) convert each share of preferred stock into approximately 333
shares of common stock subject to adjustment, as defined,
(iii) redemption of their preferred shares on June 1, 1998 at $1,000
per share payable in cash or shares of common stock at the
option of the Company,
(iv) liquidation preferences of $1,000 per preferred share and
(v) no voting rights.
The Company, at its option, has the right to redeem all or any portion of the
1996 Preferred Stock at $1,100 per share plus accrued and unpaid dividends
prior to June 1, 1998.
Cumulative unpaid 1996 preferred stock dividends aggregated $78,000 at June
30, 1997.
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
[2] 1996 - A Preferred Stock:
On September 30, 1996 the Board of Directors designated 10,000
shares
of preferred stock as "1996 - A Preferred Stock" valued at $1,000 per share.
The holders of 1996 - A Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum
payable quarterly in cash or common stock at the option of the
Company,
(ii) convert each share of preferred stock into approximately 1,600
shares of common stock subject to adjustment, as defined,
(iii) redemption of their preferred shares on October 1, 1998
at
$1,000 per share payable in cash or shares of common stock
at
the option of the Company,
(iv) liquidation preferences of $1,000 per preferred share and
(v) no voting rights.
The Company, at its option, has the right to redeem all or any portion of the
1996 - A Preferred Stock at $1,100 per share plus accrued and unpaid
dividends prior to October 1, 1998.
Cumulative unpaid 1996-A preferred stock dividends aggregated $113,000 at
June 30, 1997.
Note F - Common Stock
On September 4, 1996 the Board of Directors approved a three for one reverse
stock split effective September 5, 1996. All references in these financial
statements to numbers of common shares, and earnings per share amounts have
been restated to give retroactive effect to the reverse stock split.
Note G - Income Taxes
The Company's net operating loss carryforwards for income tax reporting
purposes aggregated approximately $14,604,000 as of December 31, 1996.
$178,000 expires in year 2007, $7,017,000 expires in year 2010 and the
remaining balance of $7,409,000 expires in year 2011.
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note H - Product Liability and Litigation
The Company has received notice that several consumers claim to have suffered
finger injuries while using one of the Company's appliance products. The
claims are covered by the Company's product liability insurance carrier. The
Company redesigned the appliance in August 1992, and believes that the
modification made should minimize the possibility of such injury. The
Consumer Product Safety Commission (the "CPSC") has made a preliminary
determination that the Company's appliance product represents a "substantial
product hazard" as that term is defined in the Consumer Product Safety Act.
The Company proposed and the CPSC accepted a voluntary corrective action plan
to be implemented during 1997, whereby the Company would replace certain
parts of the appliances manufactured prior to August 1992. Management has
estimated that the costs of implementing this plan will be approximately
$50,000 and the Company accordingly continues to maintain a reserve for this
amount as of June 30, 1997.
The Company believes that the ultimate resolution of these matters will not
have a material effect on its financial condition.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Creative Technologies Corp. (the "Company"), through its wholly
owned subsidiary IHW, Inc., is the distributor of certain non-electric
houseware products for two European manufacturers. In addition, Creative
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 has announced its intention to stop selling pasta
machines and grills domestically. IHW, Inc. 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, IHW, Inc. is the exclusive
distributor in the United States and Canada of bathroom scales, manufactured
by Soehnle-Waagen GmbH & Co., headquartered in Murrhardt, Germany. The
Company would consider becoming a distributor of other products that it
believes would complement the products that they are currently selling. The
Company has not identified any other products at this time.
For the six month period ended June 30, 1997, cash used in operating
activities was $210,000, $2,000 was used in investing activities and cash of
$123,000 was provided by financing activities. As a result, at June 30, 1997
cash decreased by $89,000 to $11,000 compared to $100,000 at December 31,
1996. The Company had a negative working capital of $5,348,000 at June 30,
1997.
Accounts payable and other liabilities increased to $3,003,000 at June 30,
1997 from 2,810,000 at December 31, 1996 primarily due to the first quarters
loss and a slow up in collections. Advances from customers decreased to
$93,00 at June 30, 1997 from $300,000 at December 31, 1996.
At June 30, 1997 the Company had outstanding notes payable totaling
$3,761,000. Of this amount, $2,836,000 bears interest at 12%, $750,000 bears
interest at 18% and $175,000 is currently non interest bearing. 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 $2,610,000 is payable
to various individuals who are stockholders or entities whose principals are
stockholders of the Company. These notes payable are personally guaranteed
by certain stockholders of the Company.
During the first six months of 1997 the Company borrowed $395,000 from a
relative and an entity controlled by the principal shareholders of the
Company and repaid $434,000 to various individuals and entities described
above. In addition the Company increased its borrowings under its credit
facility by $162,000.
The Company amended its Certificate of Incorporation to designate a new class
of 10,000 shares of 1996 preferred stock $.01 par value and a new class of
10,000 shares of 1996-A preferred stock $.01 par value, from 5,000,000 shares
of preferred stock previously authorized. During June 1996, the Company
issued 600 shares of the 1996 preferred stock for $600,000 of debt owed to
David Guttmann and related entities. During September 1996, the Company
issued 720 shares of the 1996-A preferred stock for $720,000 of debt owed to
a company owned by David Guttmann and Barry Septimus, the husband of a
principal stockholder of the Company and sold 450 shares of the 1996-A
preferred stock for $450,000 to various Common stockholders of the Company
including David Guttmann and Barry Septimus. Each share of 1996 and 1996-A
preferred stock is subject to mandatory redemption two years from the date of
issuance at $1,000 per share plus unpaid dividends payable in cash, common
stock or any combination thereof at the option of the Company. At any time
prior to redemption, the preferred stockholders can at their option convert
their 1996 preferred stock into 333 shares of common stock and their 1996-A
preferred stock into approximately 1,600 shares of common stock for each
share of preferred stock held. The 1996 and 1996-A preferred stock are each
entitled to a cumulative dividend of $120 per share per annum and
shall be payable in quarterly installments on the first day of January,
April, July and October commencing January 1, 1997. At June 30, 1997
$191,000 of preferred stock dividends were in arrears.
On December 20, 1996, the Company obtained a two year credit facility from
Century Business Credit Corporation (Century) in the total amount of up to
$300,000. Loans on the revolving credit facility are available up to (i) the
lesser of $200,000 or 40% of the Company's eligible inventory (as defined in
the Agreement), plus (ii) the lesser of $200,000 or 40% of the eligible
accounts receivables (as defined in the Agreement).
The Company pays interest at the greater of 9% or the prime rate plus 2.75%.
The Company also pays a minimum loan fee in the event that the closing daily
unpaid balance is less than a certain amount. The Company paid a facility
fee to obtain the line of credit and pays certain administrative fees.
Century obtained a security interest in all the assets of the Company.
David Guttmann and Ace Surgical Supply Co., Inc., Consolidated Disposables,
Inc. and Universal Medical Products, Inc., entities that David Guttmann is a
principal of, guaranteed the obligations of the Company to Century and in
return, the Company guaranteed the obligations of Ace and Consolidated under
a loan from Century to these entities.
The Board of Directors of the Company is considering having a newly created
subsidiary of the Company merge with and into Ace Surgical Supply Co., Inc.,
pursuant to which Ace would become a wholly owned subsidiary of the Company.
The merger must be approved by a majority of the non-interested directors of
the Company and the Shareholders of Ace. The terms of the merger have not
been finalized to date and has not been approved by either the Shareholders
of Ace or the Board of Directors of the Company.
Results of Operations
The Company had net sales of $1,629,000 and $4,421,000 respectively for
the three and six month periods ended June 30, 1997. The increase in sales
for the comparative three and six month periods is attributable to increased
sales of Brabantia, initial sales of Soehnle, export grill express business,
and lower returns as a percentage of sales.
Gross profit margins for the three month periods ending June 30, 1997 and
1996 were 40.8% and 55.7% and for the six month periods ending June 30, 1997
and 1996 were 34.7% and 47.6%. The decrease in gross profit margins is
attributable to margins being lower on the imported Brabantia and Soehnle
product lines where the Company acts as a distributor as opposed to higher
gross profit margins on its own manufactured products. The gross profit on
electric export sales is also much lower than domestic retail sales.
Selling, general and administrative expenses were $499,000 and $810,000 or
30.6% and 70.4% respectively for the three month periods ended June 30, 1997
and 1996 and were $1,187,000 and $1,908,000 or 26.8% and 68.9% for the six
month periods ending June 30, 1997 and 1996. The decrease in both the
amounts incurred and as a percentage of sales reflects the effect of
management's continuing cost cutting program. Advertising expenses included
above were -0- and $45,000 for the three month periods ending June 30, 1997
and 1996 and were $7,000 and $225,000 for the six month periods ended June
30, 1997 and 1996.
Interest expense for the three month periods ending June 30, 1997 and 1996
were $140,000 and $190,000 respectively and for the six month periods ending
June 30, 1997 and 1996 were $280,000 and $430,000. The decrease in both the
three and six month periods was primarily due to the Fleet debt settlement,
lower interest rates negotiated on the notes payable and the sale of
preferred stock used to finance operations.
The settlement of the Fleet debt during March 1996 resulted in an
extraordinary gain to the Company of $1,550,000 as reflected in the six month
period ending June 30, 1996.
Due to the foregoing, the Company reported loss before extraordinary item of
$194,000 and $651,000 for the three month periods ended June 30, 1997 and
1996 respectively and $418,000 and $2,053,000 for the six month periods
ending June 30, 1997 and 1996. For the three month periods ending June 30,
1997 and 1996 net loss was $194,000 and $651,000 and for the six month
periods ending June 30, 1997 and 1996 was $418,000 and $503,000.
PART II OTHER INFORMATION
Item 6. a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
The Registrant did not file reports on Form
8-K during the six months ended June 30, 1997.
CREATIVE TECHNOLOGIES CORP.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE TECHNOLOGIES CORP.
Registrant
Dated : August 1, 1997 By: S/Richard Helfman
Richard Helfman, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<CASH> $11,000
<SECURITIES> 0
<RECEIVABLES> 997,000
<ALLOWANCES> 153,000
<INVENTORY> 1,316,000
<CURRENT-ASSETS> 2,308,000
<PP&E> 1,467,000
<DEPRECIATION> 785,000
<TOTAL-ASSETS> 3,028,000
<CURRENT-LIABILITIES> 7,656,000
<BONDS> 0
<COMMON> 235,000
1,770,000
0
<OTHER-SE> (6,633,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,028,000
<SALES> 4,421,000
<TOTAL-REVENUES> 4,421,000
<CGS> 2,885,000
<TOTAL-COSTS> 2,885,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,000
<INCOME-PRETAX> (440,000)
<INCOME-TAX> (22,000)
<INCOME-CONTINUING> (418,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (418,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
