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, 1997 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 thischapter) 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]
Registrant's revenues for fiscal year ended December 31, 1997 was $10,862,000.
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $1,309,979 as of March 16, 1998.
The number of shares outstanding of the registrant's Common Stock as of March
16, 1998 is:
Class Outstanding at March 16, 1998
Common Stock, $.09 par value 4,117,444
PART I
ITEM 1. BUSINESS
Creative Technologies Corp. (the "Company") through its wholly owned
subsidiary, IHW Inc. ("IHW") which was incorporated in 1997, is the exclusive
distributor of Brabantia International ("Brabantia") and Soehnle-Waagen GmbH
& Co. ("Soehnle") 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. Soehnle-Waagen GmbH & Co., headquartered in Murrhardt,
Germany, manufactures a full line of bathroom scales. IHW is currently
importing and distributing a line of high quality wooden carts and pantry
products from Slovenia. These products are distributed under the registered
Euroform trademark. IHW is looking for other products that it believes would
compliment the products that they are currently selling.
In October 1997, the Company acquired Ace Surgical Supply Co., Inc.,
("ACE"), a company which distributes medical, janitorial and dietary products
in the tri-state area, generally to hospitals, nursing homes and medical
care facilities.
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.
Brabantia's major product categories include food storage, waste
storage, laundry products, mailboxes, kitchen tools and gadgets. Brabantia's
product lines are targeted to the middle to high end of the market.
Brabantia develops and introduces new products every year.
Sales of Brabantia products represented approximately 43% of total sales
of the Company. Historically, the return rate for Brabantia products is low.
The Brabantia line of products is being marketed primarily by the Company's
Chief Executive Officer and the President to department stores, speciality
stores, catalogs, mass merchandising stores and outlets.
The Company also displays its products at the Chicago Houseware show and
other smaller regional 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 has the exclusive right to distribute
Soehnle's products, consisting of a full line of bathroom scales in the
United States and Canada. The agreement as amended on December 8, 1997,
terminates on December 31, 2001. The agreement provides for a five year
extension and contains minimum purchase obligations and penalties for early
termination. Sales of Soehnle products represented approximately 14 % of
the total sales of the Company in 1997. The scales are being marketed in the
same way as the Company markets its Brabantia line.
Electrics
Prior to June 30, 1997 the Company was manufacturing and selling
electric motor driven pasta machines and electric grillers for sale
throughout the United States. Due to the poor retail demand and high returns
on electrics, relative to sales, the Company determined to discontinue the
marketing efforts domestically. The Company may sell these products to
non US markets. Sales of electrics in 1997 represented approximately 22% of
total sales. In 1998 it will represent significantly less.
Ace Surgical Supply Co., Inc.
Ace, a wholly-owned subsidiary purchased by the Company in October
1997, has distributed medical, janitorial and dietary supplies generally to
Hospitals, nursing homes and medical care facilities since 1974.
The products can be generally categorized as disposables and include
branded and non-branded lines of wound dressing, incontinence products,
dietary supplies, house keeping supplies and cleaning chemicals.
These products are purchased by Ace from a variety of sources, none of whom,
other than Kendal Healthcare Products, represents a supplier of more than 10%
of products to Ace. Ace has more than one supplier for all of its products.
Ace generally keeps a 30 day supply of products in its inventory.
Generally, Ace's customers have been customers of Ace for many years.
Management believes that Ace allows its customers the convenience of
purchasing many of its product needs from one source at a price that would
not be higher than if such customers purchased the products from other
distributors. Ace's sales for the fourth quarter of 1997 included in the
Companies total sales for fiscal 1997 were approximately 21% of total sales.
Marketing of Ace's products are performed by two salesmen New
customers are called upon by the salesmen. Deliveries are performed by
leased trucks and drivers.
Product Warranty
Brabantia products sold by the Company contain between a two and ten-
year limited warranty provided by Brabantia. Soehnle's 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.
No warranty is available for the Ace and Euroform products.
Patents and Trademarks
The Pasta Machine and Grill Express that were manufactured and sold
by the Company, are each covered by a basic utility patent. There can be no
assurance that the current patents will provide the Company with significant
protection from infringement 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 Company may be adversely affected by the
costs and delays resulting from any litigation which may be required to
enforce any patents and there is no assurance that the Company would be
successful in such litigation. The Company has been granted a trademark for
Grill Express.
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
recall is ongoing and it is too early to determine the exact cost. The
Company has reserved $50,000 for this purpose.
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 and has seen
a decrease in the number of reported incidence of such injuries.
The Company believes that this modification should minimize the possibility of
such injury.
Competition
Brabantia's products and Soehnle's scales compete with numerous
companies selling similar products. The Company believes that Brabantia's
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.
Ace competes with many companies that distribute the same products
that are distributed by Ace, many of which have substantially greater
financial resources than the Company. In addition, many of the
manufacturers of such supplies have manufactures representatives that
distribute their products. Ace believes that it competes by providing better
service, consolidation of orders and more liberal financing terms.
Employees
The Company and Ace collectively had 58 employees at the beginning of
1997. Due to a cost cutting program, discontinuing electrics sales and
operating efficiencies created by the acquisition of Ace, the Company and
Ace ended the year with a total of 33 employees. This included 21 in
administration, customer services and sales and 12 engaged in shipping and
warehousing 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 six 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 and ACE's executive offices and warehouse consist of
approximately 160,000 square feet located at 170 53rd Street, Brooklyn, New
York 11232, and is leased from a company owned by the Company's principal
stockholder pursuant to a lease terminating on May 31, 2011. The lease
provides that annual rent shall be $750,000 inclusive of real estate taxes.
The Company also leased an office in Hong Kong on a month- to-month basis
through April 30, 1997. Rent expense, inclusive of real estate taxes and
assessments, for 1997 was approximately $652,000. 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
Management knows of no 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.
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 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 for the fiscal quarters of 1996 and 1997. 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 Fiscal Year Ended
December 31, 1996 December 31, 1997
High Bid Low Bid High Bid Low Bid
COMMON STOCK (CRTV)
First Quarter 13/16 1/4 5 -1/16 2-1/4
Second Quarter 11/16 3/8 3 - 3/8 1 - 7/8
Third Quarter 1/2 3/8 1 - 3/4 3/4
Fourth Quarter 15/32 3/8 1 - 1/2 7/16
____________________________
The closing bid price of the Common Stock on March 16, 1998 was $.46.
At March 16, 1998, there were in excess of 750 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
The Company had substantial operating losses for the years ended December
31, 1997 and 1996 of $2,354,000 and $8,990,000 (before an extraordinary gain
of $1,550,000), respectively, and as of December 31, 1997, had a working
capital deficit of $6,695,000. The 1997 operating results were adversely
affected by a $587,000 restructuring charge pertaining to additional write
off of the Company's remaining assets associated with its electrics business.
The results of operations were also negatively affected by the continuing
interest burden of the notes payable which represented monies borrowed to
support the now defunct electrics business, and the fact that sales of the
non-electric products did not reach the levels necessary to support the basic
infrastructure and overhead needed to successfully manage and operate this
type of business.
Management believes that its decision to exit the small electrics business and
concentrate on distributing moderate-high end non-electric European
housewares is correct and hopefully will result in the Company regaining
profitability in the near future. Last year the Company experienced a solid
growth in Brabantia sales and successfully introduced the Soehnle line
of bathroom scales. The Company recently entered into an exclusive
distributorship agreement with ErgoTrade Company, a manufacturer of
wooden kitchen carts and related wooden pantry products, covering the United
States and Canada, which the Company is marketing under its own Euroform
name. The Distributorship Agreement terminates on June 30, 1999 and provides
that prior to such date, the parties will, in good faith, enter into a five
year extension which will contain, among other terms, minimum purchase
obligations and penalties for early termination.
The Company is also in discussions with other European companies to
distribute their products in the United States. The Company continues to
seek strategic partnerships with other manufacturers of high quality, unique,
and complementary houseware products.
As of October 1997 the Company successfully concluded the purchase of Ace
Surgical Supply Co., Inc. Ace is a company that has been in business for over
20 years and has shown a steady pattern of sales and profitable
operations. The acquisition of Ace will result in operational synergies by
fully integrating the warehouse and shipping functions as well as the
administrative aspects of the business, including order entry and invoicing.
The monthly sales and profit contribution which Ace is expected to
contribute should also strengthen the company's
overall sales and profits. See Certain Transactions for a description of the
Ace acquisition.
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. IHW
has seen its sales platform for Brabantia and Soehnle steadily
increase on a monthly basis, both in terms of the number of retail accounts
and the number of items that these customers are carrying. There has
been a positive reaction to the new wood products line which the Company
introduced in January 1998 and the Company expects to add additional
complementary lines in the future. The Company receives favorable terms from
its suppliers, enjoys a satisfactory banking relationship with Century
Business Credit Corporation, and is continuing to look for ways to cut costs
and reduce overhead. Management believes that continuing to concentrate and
expand the distribution of non-electric housewares, coupled with the
acquisition of Ace is the best and quickest route to show increased sales and
profitability.
The Company is currently assessing the potential impact of the present
computer technology issue generally referred to as the "Year 2000
Problem." The Year 2000 Problem, which is common to most corporations,
relates to the inability of information systems, primarily computer
software programs, to properly recognize and process data sensitive
information related to the year 2000 and beyond. The Company is currently
evaluating the expected costs to be incurred in connection with the Year 2000
Problem, and expects that such costs will not be material.
Liquidity and Capital Resources
For the year ended December 31, 1997 ("fiscal 1997"), cash used in operating
activities was $286,000. Cash of $14,000, offset by $2,000 acquired through
the non-cash Ace merger, was used in investing activities and cash of
$214,000 was provided by financing activities. As a result, at December 31,
1997, cash decreased by $86,000 (offset by $2,000 acquired through the
non-cash Ace merger), to $16,000 compared to $100,000 at December 31, 1996.
The Company had a negative working capital of $6,695,000 at December 31, 1997.
Accounts payable and other liabilities increased to $5,863,000 at December 31,
1997 from $2,810,000 at December 31, 1996. This increase is the result of
higher levels of Brabantia and Soehnle inventory being needed to
support increased sales and the accounts payable associated with Ace which
were not reflected in the previous year.
At December 31, 1997, 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, 1997, the Company also had $2,871,000 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. Of these related party loans, $3,702,000 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.
Additionally, the Company issued an aggregate of 386,050 shares of common
stock to various lenders in lieu of interest, in connection within their
extending the loans and reducing the interest rates on certain loans.
On December 20, 1996, the Company obtained a two year credit facility from
Century Business Credit Corporation (Century) in the total amount of
$3,000,000. Of this amount, $300,000 was available to IHW. The loans
under this line are on a revolving credit basis based on asset availability.
The Company paid an interest rate 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. The Company enjoys a satisfactory banking relationship with Century
and in March 1998 renewed the loan facility through December 19, 1999 at an
interest rate of the greater of 9% or the prime rate plus 2.5% and with a
higher and more flexible advance rate. The cross corporate guarantees and
David Guttmann's limited personal guarantee continue in effect.
Results of Operations
The Company had net sales of approximately $10,862,000 in the fiscal year
ended December 31, 1997 compared to net sales of approximately $4,986,000 for
the fiscal year ended December 31, 1996. The increase in sales
was primarily the result of greater sales of Brabantia and Soehnle and sales
of Ace in the fourth quarter of 1997.
Selling, general and administrative expenses for Fiscal 1997 were
$2,789,000, a decrease of $1,302,000 from fiscal 1996 expense of $4,091,000.
This decrease is attributable primarily to a complete elimination of all
infomercial expenses, the decline in commission expense caused by Creative
terminating its relationship with most of its independent sales
representatives, a decrease in depreciation because of the fixed assets and
tooling written off in Fiscal 1996, and a decrease in the legal expenses as a
result of exiting the small electrics business.
Interest expense and financing costs in Fiscal 1997 were $856,000, an increase
of $63,000 from the $793,000 incurred during Fiscal 1996. This increase is the
result of the need to finance increased inventories necessary for
the expansion of the Brabantia and Soehnle lines and debt owed by Ace.
Ending inventory at December 31, 1997 was $2,109,000 compared to $1,609,000
as of December 31, 1996. The increase was primarily
attributable to the increased level of Brabantia and Soehnle inventory and the
increase of inventory from Ace. The inventory and receivable needs and
turnover of Ace and IHW are very different. Ace sells to end users, buys
domestically, has a much better estimate of monthly sales and requires a much
shorter lead time when ordering products. As a result, the inventory needed
by ACE to sustain the business is much lower than IHW, which is importing
product from abroad and servicing a retail customer base whose inventory
needs are dependent on sell through.
IHW must maintain a higher level of inventory in order to promptly fulfill
all purchase orders for inventory replenishment. Conversely, Ace's
receivables are collected over a longer period because Ace extends more
liberal payment terms to their customers as an inducement to do business.
IHW, on the other hand, has receivables that turnover and are collected at a
much faster rate.
Due to the forgoing, the Company had a net loss of approximately $2,354,000
for fiscal 1997 compared to a net loss of approximately $7,440,000 (after an
extraordinary gain of $1,550,000) in fiscal 1996.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Pages F-1 through F-18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Reference is made to a Form 8-K filed by the Company in January 1998 to
report a change of auditors.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The officers and directors of the Company are as follows:
Name Age Title
David Guttmann 51 Chairman of the Board
David Refson 52 Vice Chairman and
Director
Richard Helfman 51 Director and President
David Selengut 42 Secretary
David Guttmann has been a director and Chief Executive Officer of the Company
since May 1994 and Chairman of the Board since May 1997. 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 wholly owned
subsidiary of the Company.
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.
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 Bernstein and Wasserman LLP
since June 1997 and was a Partner at the law firm of Singer Zamansky LLP
from May 1995 until April 1997. Those firms have 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.
To the Company's knowledge, there were no delinquent 16(a) filers for
transactions in the Company's securities during the year ended December 31,
1997.
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 $100,000
during each of the preceding three fiscal years are as follows:
1997 SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
Other Annual Awards
Name and Principal Year Salary Compensation Options
Position ($) ($) (#)
David Guttmann,
Chief Executive Officer 1997 $122,596 16,666(1)
1996 $50,000
1995 $128,218
Richard Helfman,
President 1997 $147,115 25,000(1)
1996 $180,000
1995 $187,692
(1) Represents options previously granted with the exercise price lowered to
$.44 on August 21, 1997.
OPTION GRANTS IN 1997
Percent of Total
Options Options Granted to
Name Granted Employees in Fiscal Exercise Expiration
Year Price Date
(a) (b) 1997 $
David Guttmann,
Chief Executive Officer 16,666(1) 14% .44 May 26, 2004
Richard Helfman 16,666(1) 14% .44 May 25, 2004
8,333(1) 7% .44 April 30, 2001
(1) Represents options previously granted with the exercise price lowered to
$.44 per share on August 21, 1997.
AGGREGATED OPTION EXERCISES IN 1997 AND FOR YEAR-END OPTION VALUES
Number of Value of
Unexercised Unexercised
Options in-the-Money
at Fiscal Options
Year-End at Fiscal
(#) Year-End ($)
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise(#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
David Guttmann -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 August 21, 1997, the Board of
Directors determined that it should lower the exercise price of 116,663 stock
options previously issued to officers and employees of the Company from
$2.05 per share to $.44 per share, the market price on August 21, 1997.
These persons agreed to a reduction in their salary to help the Company
out of its cash flow problem.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 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) December 31, 1997
Bonnie Septimus (2) 1,390,664 37.2%
72 Lord Avenue
Lawrence, NY
David Guttmann (3) 1,526,738 39%
170 53rd Street
Brooklyn, NY
Richard Helfman (4) 47,777 1.6%
170 53rd Street
Brooklyn, NY
All officers and
directors as a
group (4 persons)(5) 1,574,515 40%
(1) Except as otherwise indicated, all shares are beneficially owned and sole
voting and investment power is held by the persons named.
(2) A portion of the Common Stock is owned by Mrs. Septimus as nominee for
certain members of her family and shares owned by her husband, as to which
she disclaims beneficial interest of. Also includes shares of Common Stock
issuable upon conversion of 1996-A Preferred Stock.
(3) 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.
(4) Includes 25,000 shares underlying immediately exercisable options.
(5) Includes the shares described in footnotes (3) and (4) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Barry Septimus and David Guttmann, personally guaranteed certain
indebtedness of the Company in the amount of $1,702,000. In addition, in
March 1996, David Guttmann agreed to repay the remainder of the term loan
owed to a prior lender 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 also guaranteed
by David Guttmann and Barry Septimus.
The Company and Ace's executive offices at 170 53rd Street, Brooklyn, New
York, are leased from an entity owned by Barry Septimus and David Guttmann.
The lease expires May 31, 2011 and provides for annual rent of
$750,000, including real estate taxes. Rent expense for the Brooklyn
facility for 1997 was $638,000. The Company believes that the rent is not
higher than would be paid to a non-affiliated company.
In December 1996, the Company and Ace obtained lines of credit from
Century Business Credit Corporation ("Century") which is currently up to a
maximum of $500,000 and 2,500,000 respectively. David Guttmann guaranteed up
to $1,000,000 of the Company's and its subsidiaries' obligations to Century.
See "Management's Discussion and Analysis or Plan of Operation" for a
description.
On October 27, l997, the Company executed and closed a transaction pursuant
to an Agreement and Plan of Merger (the "Agreement")
between the Company, CTC Acquisition Corporation ("Subsidiary"), Ace Surgical
Supply Co., Inc. ("Ace") and David Guttmann and Barry Septimus, the
stockholders (the "Stockholders" ) of Ace. Subsidiary was a New York
corporation wholly-owned by the Company. Ace was a privately held New York
corporation, which distributes medical, janitorial and dietary products in
the tri-state area from its warehouse in Brooklyn, New York.
At the closing, Ace merged into Subsidiary in a merger carried out pursuant to
the laws of the State of New York (the "Merger"). In connection with the
Merger, the Stockholders of Ace transferred l00% ownership of Ace and two
affiliated companies to the Company and stockholders of Ace received an
aggregate of 1,000,000 shares of Common Stock of the Company and 3,500 1997
Series A 12% Preferred Stock (the "1997 Preferred Stock").
The rights, preferences and conditions of the 1997 Preferred Stock are as
follows:
(a) the 1997 Preferred Stock shall have a stated value of One Thousand
Dollars ($1,000) per share;
(b) the holders of the 1997 Preferred Stock are entitled to a cumulative
dividend at the rate of One Hundred Twenty Dollars ($120.00) per
share per annum, when, as and if declared by the Board of Directors of the
Company;
(c) the holders of the 1997 Preferred Stock are entitled to receive One
Thousand Dollars ($1,000) per share and accrued and accumulated dividends
thereon at the rate aforesaid, if any, and no more on liquidation of the
Company before any payment is made to the holders of Common Stock;
(d) the holders of the 1997 Preferred Stock are not entitled to any vote at
any meeting of the shareholders of the Company unless the dividends are in
arrears longer than one year at which time the holders of the 1997 Preferred
Stock are entitled to 1,000 votes per share and
will vote along with the holders of Common Stock as one Class;
(e) the shares of the 1997 Preferred Stock are not convertible;
(f) the shares shall be redeemed for cash at a redemption price of $1,000
per share, plus accrued, but unpaid dividends, out of funds legally
available therefore, on October 27, 2017.
(h) the holders of the Preferred Shares share pro-rata with the holders of
the 1996 and 1996-A Preferred Stock in the event of a liquidation or a
dissolution of the Company.
The consideration paid by the Company was determined by negotiations between
the Stockholders of Ace and a committee made up of certain members of the
Board of Directors of the Company. The amount of Shares of 1997 Preferred
Stock received by the Stockholders of Ace was calculated by multiplying
1,000,000 (number of shares of Common Stock issued to them) by the average
of the Bid prices of the Common Stock of the Company for thirty days
prior to the closing and subtracting such product from 4,000,000 and dividing
the sum by 1,000 (the stated value of each of the 1997 Preferred Stock).
The Company has received an opinion from Chartered Capital Advisers, Inc.,
independent investment advisers, that the amount of Common Stock and
Preferred Stock issued as consideration in the Merger is fair to the
Company and its stockholders from a financial point of view.
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. Incorporated by reference
to Form 10-KSB for year ended December 31, 1996.
(S) Soehnle-Waagen GmbH & Co. Agreement. Incorporated by reference to Form
10-KSB for year ended December 31, 1996.
(T) Agreement and Plan of Merger dated October 27, 1997. Incorporated by
reference to the Form 8- K filed October 27, 1997.
(U) Distributorship Agreement with Ergo Trade D.O.O.
(V) Amendment No. 3 to Loan and Security Agreement with Century Business
Credit Corporation.
REPORTS ON FORM 8-K
None.
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report F-1 - F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Stockholders' Deficiency F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-18
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Creative Technologies Corp.
We have audited the accompanying consolidated balance sheet of Creative
Technologies Corp. and Subsidiaries as of December 31, 1997 and the
related statements of operations, changes in stockholders' deficiency, and
cash flows for the year 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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Creative Technologies
Corp. and Subsidiaries as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has sustained
recurring losses from operations and has a working capital deficiency and a
stockholders' 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 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
April 2, 1998, except for the third paragraph in Note 9, as to which the date
is April 9, 1998
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Creative Technologies Corp.
Brooklyn, New York
We have audited the statements of operations, cash flows and changes in
stockholders' deficiency of Creative Technologies Corp. for the year
ended December 31, 1996. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the results of operations of Creative Technologies
Corp. and its cash flows 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 1 to the
financial statements, the Company has sustained recurring losses from
operations and has a working capital deficiency and a capital deficiency at
December 31, 1996 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 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
February 21, 1997
F-2
<TABLE>
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS (Note 9)
<S> <C>
Current Assets:
Cash $ 16,000
Accounts receivable - net of allowance for doubtful accounts of $314,000 (Notes 2 and 9) 3,272,000
Inventories (Notes 1 and 9) 2,109,000
Prepaid expenses and other current assets (Note 8) 190,000
Total current assets 5,587,000
Fixed Assets - less accumulated depreciation and amortization of $361,000
(Notes 1, 3, 9 and 11) 264,000
Other Assets (Notes 1 and 4) 867,000
Total Assets $ 6,718,000
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Loans payable - financial institution (Note 9). $ 2,348,000
Note payable - bank (Note 9) 200,000
Notes payable - related parties (Notes 9 and 13) 3,871,000
Accounts payable and accrued expenses (Note 6) 5,863,000
Total current liabilities 12,282,000
Subordinated Note Payable - affiliate (Note 9) 400,000
Total liabilities 12,682,000
Commitments and Contingencies (Notes 8, 9 and 12)
Redeemable Preferred Stock - $.01 par value; authorized 5,000,000 shares;
4,000 shares of nonconvertible stock designated as 1997-A preferred stock -
$1,000 stated value; issued and outstanding 3,500 shares (redemption and
liquidation value $3,500,000) (Note 5) 273,000
Stockholders' Deficiency:
Preferred stock - $.01 par value; authorized 5,000,000 shares:
10,000 shares of convertible stock designated as 1996 preferred stock -
$1,000 stated value; issued and outstanding 600 shares (liquidation
value $600,000) (Note 5) 600,000
10,000 shares of convertible stock designated as 1996-A preferred stock -
$1,000 stated value; issued and outstanding 1,170 shares (liquidation value
$1,170,000) (Note 5) 1,170,000
Common stock - $.09 par value; authorized 20,000,000 shares, issued and
outstanding 3,997,000 shares 359,000
Additional paid-in capital 9,103,000
Accumulated deficit (17,469,000)
Stockholders' deficiency (6,237,000)
Total Liabilities and Stockholders' Deficiency $ 6,718,000
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-3
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<S> <C> <C>
Year ended December 31, 1996 1997
Net sales (Note 1) $ 4,986,000 $10,862,000
Cost of sales 6,563,000 7,999,000
Gross profit (loss) (1,577,000) 2,863,000
Operating expenses:
Selling, general and administrative 4,091,000 2,789,000
Warehousing costs 959,000 985,000
Restructuring costs (Notes 3 and 11) 1,089,000 587,000
Interest expense and financing costs (Note 9) 793,000 856,000
6,932,000 5,217,000
Net loss before provision for income
taxes and extraordinary item (8,509,000) (2,354,000)
Provision for income taxes (Notes 1 and 10):
Current 36,000 -
Deferred 445,000 -
481,000 -
Net loss before extraordinary item (8,990,000) (2,354,000)
Extraordinary item - gain on early
retirement of debt (Note 9) 1,550,000 -
Net loss (7,440,000) (2,354,000)
Less undeclared dividends on preferred stock (73,000) (288,000)
Net loss applicable to common shares $(7,513,000) $(2,642,000)
Per common share - basic and diluted (Note 1):
Loss before extraordinary item $ (3.50) $ (.90)
Extraordinary item $ .60 -
Net loss $ (2.90) $ (.90)
Weighted average number of shares 2,591,000 2,929,000
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-4
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Years ended December 31, 1996 and 1997
1996 1996-A
Preferred Stock Preferred Stock Common Stock Additional Stock
Number Number Number Paid-in Subscription Accumulated
of Shares Amount of Shares Amount of Shares Amount Capital Receivable Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 7,501,000 $224,000 $8,577,000 $(50,000) $(7,675,000) $ 1,076,000
Reverse stock split, 3-to-1 - - (5,001,000) - -
- - -
Issuance of 1996 preferred stock to related parties
600 $600,000 - - - - - - - 600,000
Issuance of 1996-A preferred stock to related
parties - - 1,170 $1,170,000 - - - - - 1,170,000
Proceeds from stock subscription receivable - - - - 50,000 - 50,000
Common stock issued in connection with bank
settlement (Note 9) - - - 111,000 10,000 323,000 - - 333,000
Net loss for the year ended December 31, 1996 - - - - - (7,440,000) (7,440,000)
Balance at December 31, 1996
600 600,000 1,170 1,170,000 2,611,000 234,000 8,900,000 - (15,115,00 (4,211,000)
Issuance of common stock in lieu
of interest (Note 9) - - - 386,000 35,000 158,000 - 193,000
Issuance of common stock in connection with
acquisition (Note 4) - - - 1,000,000 90,000 129,000 - - 219,000
Increase in carrying value of 1997-A preferred
stock issued in connection with acquisition - - - (8,000) - (8,000)
1997-A preferred stock dividend accrued - - - - (76,000) (76,000)
Net loss for the year ended December 31, 1997 - - - - - (2,354,000) (2,354,000)
Balance at December 31, 1997
600 $600,000 1,170 $1,170,000 3,997,000 $359,000 $9,103,000 $ - 0 - $(17,469,000) $(6,237,000)
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-5
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,440,000) $(2,354,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 551,000 87,000
Restructuring charge 1,014,000 587,000
Amortization of goodwill - 8,000
Noncash interest expense (Note 9) - 193,000
Debt forgiveness (1,550,000) -
Changes in operating assets and liabilities:
Decrease (increase)
in accounts receivable 2,276,000 (81,000)
Decrease in inventories 1,687,000 64,000
Decrease in prepaid expenses
and other current assets 561,000 62,000
Decrease in deferred tax asset 445,000 -
Increase in accounts
payable and accrued expenses 1,146,000 1,148,000
Increase in customer claims payable 435,000 -
Increase in advances from customers 300,000 -
Net cash used in operating activities (575,000) (286,000)
Cash flows from investing activities:
Acquisition of fixed assets (37,000) (14,000)
Cash acquired in noncash
acquisition (Note 4) - 2,000
Net cash used in investing activities (37,000) (12,000)
Cash flows from financing activities:
Net proceeds from loans
payable - financial institution 42,000 312,000
Repayment of loans payable - bank (2,741,000) -
Proceeds from notes payable 2,113,000 261,000
Repayment of notes payable (1,293,000) (359,000)
Proceeds from sale of preferred stock 1,770,000 -
Proceeds from stock
subscription receivable 50,000 -
Net cash provided by
(used in) financing activities (59,000) 214,000
Net decrease in cash (671,000) (84,000)
Cash at beginning of year 771,000 100,000
Cash at end of year $ 100,000 $ 16,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 838,000 $ 416,000
Taxes - -
Supplemental schedule of noncash investing activity:
Goodwill arising in
acquisition (Note 4) - $ 869,000
Supplemental schedule of noncash financing activities:
Issuance of common stock in connection
with acquisition (Note 4) - $ 219,000
Issuance of preferred stock in connection
with acquisition (Note 4) - $ 265,000
Issuance of common stock
in lieu of interest (Note 9) - $ 193,000
Loan assumed by stockholder
in exchange for common stock $ 333,000 -
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-6
</TABLE>
1. SIGNIFICANT ACCOUNTING POLICIES:
Creative Technologies Corp. ("CTC") and Subsidiaries (collectively the
"Company") are engaged in importing and marketing small household products
(principally to department and discount stores, catalogues and other retailers)
and medical, janitorial and dietary products to hospitals and other healthcare
facilities.
The Company incurred substantial losses in the years ended December 31, 1996
and 1997 of $8,990,000 (before an extraordinary gain of $1,550,000) and
$2,354,000, respectively, and has a working capital deficiency of $6,695,000 as
of December 31, 1997. These conditions raise 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 which management believes that
it will be able to do. Management believes that there is positive sales
momentum being generated by products sold pursuant to the distribution
agreements referred to in Note 8. The Company will continue to negotiate
increased bank credit availability referred to in Note 9. Cost-cutting
measures to reduce overhead are continuing.
The consolidated financial statements include the accounts of CTC and its
wholly owned subsidiaries, IHW, Inc. and Ace Surgical Supply Co., Inc. ("Ace")
which was acquired as of October 27, 1997 (see Note 4). All material
intercompany balances and transactions have been eliminated in consolidation.
Depreciation and amortization of fixed assets is provided for by the
straight-line method over the estimated useful lives of the related assets.
Inventories, consisting primarily of finished goods, are stated at the lower
of cost (first-in, first-out method) or market.
Revenue is recognized upon date of shipment of merchandise. The Company
receives partial credit from vendors for defective products. Product warranty
costs have been insignificant and are charged to expense as incurred. The
Company provides for returns and allowances based on historical experience.
The Company employs the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, under which method recorded deferred income
taxes reflect the tax consequences on future years of temporary differences
(differences between the tax basis of assets and liabilities and their
financial amounts at year-end). The Company provides a valuation allowance
that reduces deferred tax assets to their estimated net realizable value
based on an evaluation of the likelihood of the realization of those tax
benefits.
The Company adopted SFAS No. 128, Earnings per Share, during the year
ended December 31, 1997, and has retroactively revised the presentation of net
loss per share in historical financial statements to present both basic and
diluted net loss per share as required by SFAS No. 128. Basic net loss per
common share is based on the weighted-average number of shares outstanding
during the period while diluted net loss per common share considers the
dilutive effect of stock options and warrants reflected under the treasury
stock method. The Company's net loss per share presented in the accompanying
consolidated financial statements, calculated under SFAS No. 128, is the
same as net loss per share calculated under the provisions of Accounting
Principles Board ("APB") Opinion No. 15. Both basic net loss per share and
diluted net loss per share are the same since the Company's outstanding stock
options and warrants have not been included in the calculation because their
effect would have been antidilutive.
F-7
Net loss per common share is based on the net loss increased by the cumulative
dividend requirements on preferred stock of $73,000 for the year ended
December 31, 1996 and $288,000 for the year ended December 31, 1997 divided
by the weighted-average number of common shares outstanding.
The number of shares used in the computation of loss per share is 2,591,000 for
the year ended December 31, 1996 and 2,929,000 for the year ended December
31, 1997.
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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.
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.
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
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 APB Opinion No. 25, Accounting for
Stock Issued to Employees, 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 Opinion 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.
On September 4, 1996, the board of directors approved a 1-for-3 reverse stock
split effective September 5, 1996. All references in these consolidated
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.
Goodwill arising from business acquisitions accounted for under the purchase
method is amortized over 25 years using the straight-line method.
The Company has adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
that long-lived assets and certain identifiable intangibles held and valued
by a company be reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company periodically assesses the realizability of its
long-lived assets pursuant to the provisions of SFAS No. 121.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Company is required to adopt SFAS Nos. 131 and 132
in fiscal 1998. Adoption of SFAS Nos. 131 and 132 is expected to have no
impact on the Company's consolidated financial position, results of operation
or cash flows.
F-8
2. CONCENTRATION OF CREDIT RISK:
Two customers comprise approximately 25% of the Company's accounts
receivable at December 31, 1997, including certain accounts receivable
acquired in the Ace merger (see Note 4).
3. FIXED ASSETS:
Fixed assets are comprised of the following:
Estimated
Useful Life
Equipment $ 65,000 5 to 7 years
Furniture and fixtures 300,000 5 to 7 years
Leasehold improvements 260,000 10 to 20 years
625,000
Less accumulated depreciation
and amortization (361,000)
$ 264,000
As a result of operations during the years ended December 31, 1996 and 1997,
the Company reduced the carrying value of certain fixed assets by
approximately $1,014,000 and $539,000, respectively, based on future cash
flow considerations arising from the acquisition described in Note 4 and
discontinuation of its electrical household appliances business. The Company
believes that this reduction will result in the fixed assets being carried
at the lower of cost or net realizable value. In addition, during the year
ended December 31, 1997, the Company also wrote off the remaining carrying
value of certain intangible assets in the amount of $48,000, relating to the
electrical household appliances business. These amounts are included in
restructuring costs which amounted to $1,089,000 and $587,000, respectively,
for the years ended December 31, 1996 and 1997.
4. ACQUISITION OF ACE SURGICAL SUPPLY CO., INC.:
On October 27, 1997, CTC executed a merger agreement among a subsidiary of
the Company, Ace, David Guttmann and Barry Septimus, the stockholders (the
"Stockholders") of Ace and the principal stockholders of the Company for an
estimated purchase price of approximately $484,000. At the closing, Ace
merged into a subsidiary of the Company in a merger treated as a purchase for
accounting purposes, with the purchase price allocated based on the fair
F-9
value of the assets acquired and liabilities assumed. The excess of the
fair value of the net assets acquired over the estimated purchase price,
aggregating approximately $869,000 has been calculated as follows:
Purchase price $ 484,000
Assets acquired 3,821,000
Liabilities assumed 4,206,000
Net liabilities acquired (385,000)
Excess of cost over fair value of net assets acquired
(goodwill) $ 869,000
On the effective date of the merger, the outstanding shares of common stock of
Ace were transferred to a subsidiary of the Company. The stockholders of Ace
received an aggregate of 1,000,000 shares of the Company's common stock
valued at approximately $219,000 and an aggregate of 3,500 shares of the
Company's 1997 Series A 12% cumulative preferred stock, valued at
approximately $265,000 (see Note 5). Subsequent to the merger, the subsidiary
Ace merged into changed its name to Ace Surgical Supply Co., Inc.
The results of operations of Ace have been included in the consolidated
statement of operations from the date of acquisition.
Unaudited pro forma results of operations which reflect the combined
operations of the Company and Ace as if the merger had occurred on January
1, 1997 and 1996 are as follows:
Year ended December 31, 1996 1997
Net sales $17,103,000 $18,602,000
Loss before extraordinary item (9,024,000) (2,755,900)
Net loss (7,474,000) (2,755,900)
Net loss per common share (2.22) (.90)
The above amounts reflect adjustments for dividends on the preferred stock
issued and amortization of goodwill.
5. PREFERRED STOCK:
During October 1997, in connection with the acquisition of Ace, the board of
directors designated 4,000 shares of preferred stock as "1997-A Preferred
Stock" having a stated valued of $1,000 per share. The holders of 1997-A
Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum, when, as
and if declared by the board of directors of the Company;
F-10
(ii) redemption of their preferred stock on the later of 20 years from date
of issuance or October 1, 2017 at a redemption price of $1,000 per share
plus accrued but unpaid dividends; and
(iii) liquidation preference of $1,000 per share plus accrued but unpaid
dividends.
The holders of 1997-A Preferred Stock are not entitled to:
(i) convert the 1997-A Preferred Stock into common stock; or
(ii) vote at any meeting of the stockholders of the Company unless the
dividends are in arrears longer than one year at which time the holders of
the 1997-A Preferred Stock shall be entitled to 1,000 votes per share and
shall vote along with the holders of common stock as one class.
The estimated fair value of the 1997-A Preferred Stock amounted to
approximately $265,000 pursuant to a valuation by an independent financial
advisory firm.
Cumulative unpaid 1997-A Preferred Stock dividends aggregated $76,000 at
December 31, 1997.
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.
Management intends to satisfy the cumulative unpaid 1996 Preferred Stock
dividends which aggregated $110,000 at December 31, 1997 through the
issuance of securities and, therefore, such amounts have not been accrued.
F-11
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.
Management intends to satisfy the cumulative unpaid 1996-A Preferred Stock
dividends which aggregated $175,000 at December 31, 1997 through the
issuance of securities and, therefore, such amounts have not been accrued.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The following are included in accounts payable and accrued expenses at
December 31, 1997:
EXPENSES: Accounts payable $4,373,000
Professional fees 517,000
Other accrued expenses 973,000
$5,863,000
7. CAPITAL STOCK:
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 1 year from date of grant and expire, if not
exercised, within a maximum of 10 years (5 years for a 10% 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 10% 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 5 or 10 years from the date of grant
or 89 days after termination of employment, whichever is earlier.
F-12
Stock option activity under the 1985 Plan and the 1993 Plan is summarized as
follows:
Year ended December 31, 1996 1997
Weighted- Weighted-
Average Average-
Exercise Exercise-
Shares Price Shares Price-
Options outstanding at
beginning of year 108,556 $6.93 155,777 $3.91
Granted 186,666 $2.41 116,663 $ .44
Exercised - 0 - - - 0 - -
Expired and canceled (139,445) $4.25 (122,446) $2.82
Options outstanding at end
of year 155,777 $3.91 149,994 $2.10
Options exercisable at end
of year 139,109 $3.77 143,326 $2.18
Weighted-average fair value of
options granted during the year - - 116,663 $ .32
In August 1997, the Company lowered the exercise price of 116,663 stock
options previously issued to certain officers and employees of the Company
from $2.05 per share to $.44 per share, the fair market value at the date of
such determination. For financial reporting purposes, this has been treated as
a new option grant and the cancelation of existing options. In addition, such
officers and employees agreed to a reduction in salary.
The following table presents information relating to stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Price Shares Price Life in Years Shares Price
$ .44 116,663 $ .44 4.60 109,995 $ .44
$ 2.06 16,666 $ 2.06 5.44 16,666 $ 2.06
$ 7.50 1,667 $ 7.50 2.49 1,667 $ 7.50
$11.63 - $17.16 14,998 $14.46 2.43 14,998 $14.46
149,994 4.45 143,326
F-13
As of December 31, 1997, 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 1997 would have been $(7,665,000) and
$(2,389,000) or $(2.99) per share and $(.82) per share, respectively.
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for the year ended December 31, 1997:
Expected life of options 5
Risk-free interest rate 6.19%
Expected volatility of Creative Technologies, Inc. 93%
Expected dividend yield on Creative Technologies, Inc. -
In accordance with SFAS No. 123, the weighted-average fair value of stock
options granted is required to be based on a theoretical statistical model
using the preceding Black-Scholes assumptions. In actuality, because the
Company's incentive stock options do not trade on a secondary exchange,
employees can receive no value or derive any benefit from holding stock
options under these plans without an increase in the market price of the
Company. Such an increase in stock price would benefit all stockholders
commensurately.
At December 31, 1997, shares of common stock were reserved for issuance
upon exercise of warrants as follows:
Number of Exercise
Shares Reserved Price Expiration Date
1,481 (a) $12.00 May 1, 2000 through August 1, 2000
13,703 (b) $12.00 April 1, 2000
16,667 (c) $ 5.46 August 22, 2000
(a) Issued in 1995 in connection with a financing.
(b) Issued in 1995 in connection with a financing.
(c) Issued in 1995 in connection with a series of private placements.
F-14
8. COMMITMENTS AND CONTINGENCIES:
The Company is obligated under a noncancelable operating lease with a related
party for office and warehousing space expiring May 31, 2011. This lease
provides for annual rent payments of $750,000 inclusive of real estate taxes.
The Company also had a month-to-month lease for an office in Hong Kong
through April 30, 1997. Rent and other expenses charged to operations for
office and warehouse space aggregated $624,000 and $652,000 in 1996 and
1997, respectively. Substantially all of this rent was paid to Ace prior to
Ace's acquisition and to another related party for the remainder of 1997.
Included in prepaid expenses and other current assets at December 31, 1997 is
approximately $11,000 due from the related party for prepaid rent.
Minimum future obligations under the lease are as follows:
Year ending December 31,
1998 $ 750,000
1999 750,000
2000 750,000
2001 750,000
2002 750,000
Thereafter 6,313,000
$10,063,000
Ace has guaranteed a $2,400,000 bond issued on the office and warehouse
facility leased by the Company.
The Company had a contract with an officer/shareholder which expired in
December 1997. It provided for annual negotiation of salary and bonus.
Salary for this individual aggregated approximately $180,000 and $147,000 for
1996 and 1997, respectively.
The Company has distribution agreements with manufacturers of household
products which require the Company to make specified minimum purchases
aggregating $3,375,000 per year through December 31, 2000 to maintain its
exclusive distribution rights.
9. NOTES PAYABLE AND RELATED PARTY TRANSACTIONS:
At December 31, 1997, the Company had outstanding related party notes
payable totaling $3,871,000. Of this amount, $3,121,000 bears interest at
rates ranging from 12% to 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 $2,871,000 is payable
to various individuals who are stockholders, entities whose principals are
stockholders of the Company, and the Company's retirement plan (see Note 13).
Notes payable aggregating $2,702,000 are personally guaranteed by certain
stockholders of the Company. During the year ended December 31, 1997, the
Company issued 386,000 shares of common stock (valued at $193,000) in lieu of
interest and to induce certain of the related party noteholders to agree to
lower the interest rates attributable to such notes from 18% to 12% per annum.
F-15
At December 31, 1997, the Company owed $2,348,000 pursuant to a loan and
security agreement entered into with a financial institution whereby the
Company is required to maintain an outstanding combined loan balance of not
less than $1,500,000, but no more than $3,000,000, which expires December
1999, as defined. The loan is collateralized by substantially all of the
assets of the Company and is partially guaranteed by an officer of the
Company. Under the agreement, the Company receives revolving credit advances
based on accounts receivable and inventory available, as defined, and is
required to pay interest at a rate equal to the greater of 9% or the prime
rate (8.5% at December 31, 1997) plus 2.5% plus other fees and 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, declaring or paying dividends on common or preferred
stock and requires an officer of the Company to maintain certain ownership
percentages at December 31, 1997.
The Company was not in compliance with certain provisions of the agreement
which have been waived by the financial institution.
At December 31, 1997, the Company had an outstanding note payable
(aggregating $400,000) to an affiliate subordinated to the obligations due the
financial institution discussed above. Interest is payable on the note at
the rate of 12% per annum.
At December 31, 1995, the Company was in default of certain terms of a loan
agreement with a bank. In March 1996, the Company entered into an agreement
with this 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 has not been repaid as of April 2, 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
Pursuant to the merger agreement between the Company and Ace, the Company
agreed to continue an obligation to pay $10,000 per month each in consulting
fees to Rochelle Guttmann (the wife of David Guttmann) and Bonnie Septimus,
a stockholder of the Company. During 1997, $30,000 was paid to each of these
individuals.
F-16
10. INCOME TAXES:
The major deferred tax asset (liability) items at December 31, 1997 are as
follows:
Net operating loss carryforwards $ 7,599,000
Provision for doubtful accounts 138,000
Depreciation of fixed assets (30,000)
Total deferred tax assets 7,707,000
Valuation allowance (7,707,000)
Net deferred tax assets $ - 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 1997
Income tax benefit at 34% $(2,366,000) $ (807,000)
State and local income tax benefit - net of
federal tax effect (505,000) (190,000)
Increase in valuation allowance on deferred
tax assets 3,430,000 1,019,000
Other (78,000) (22,000)
$ 481,000 $ -
The Company's net operating loss carryforwards for income tax reporting
purposes aggregate approximately $17,162,000 with the following expiration
dates: $178,000 in year 2007, $7,017,000 in year 2010, $7,129,000 in year
2011, and the remaining balance of $2,838,000 in year 2012. The Company
believes that its issuance of stock during 1995, 1996 and 1997 may limit its
ability to use any of its net operating loss carryforwards pursuant to Section
382 of the Internal Revenue Code.
11. RESTRUCTURING COSTS:
During 1997, the Company reassessed the carrying values of certain assets and
made several decisions to streamline its operations and therefore incurred
restructuring charges of $587,000 representing the write-off of the remaining
fixed and intangible assets applicable to the Company's former electric
household appliances business as well as the write-off of certain fixed assets
made obsolete by the Ace acquisition.
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.
12. 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.
F-17
The Company proposed and the CPSC accepted a voluntary corrective action
plan which began implementation during 1997, whereby the Company would
replace certain parts of the appliances manufactured prior to August 1992. At
December 31, 1997 the Company has a $50,000 reserve which it believes is
adequate to cover any additional costs to be incurred in completing the plan.
The Company believes that the ultimate resolution of these matters will not
have a material effect on its financial condition.
13. RETIREMENT PLAN:
The Company maintains the former Ace 401(k) retirement plan covering eligible
employees, as defined. There were no contributions made during the year ended
December 31, 1997. An officer serves as trustee of the plan. At December 31,
1997, the Company has outstanding loans from the plan aggregating
approximately $209,000 due on demand with interest payable monthly at 12%.
14. OTHER MATTERS:
The Company purchases substantially all of its finished goods from suppliers
in the Netherlands and Germany.
15. BUSINESS SEGMENTS:
The Company's business segments are small household products and medical,
janitorial and dietary products. The following table is a summary of these
segments for the year ended December 31, 1997. For the year ended December
31, 1996, the Company had only its small household products segment and,
accordingly, industry segment information is not presented for that period.
Information related to the medical, janitorial and dietary products business
segment relates only to the period from October 27, 1997 (date of acquisition)
to December 31, 1997.
Year ended December 31, 1997
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
Sales to
unaffiliated
customers $ 8,563,000 $2,299,000 $ - - $10,862,000
Intersegment
sales 3,000 - - $(3,000) -
Total sales $ 8,566,000 $2,299,000 $ - $(3,000) $10,862,000
Operating profit
(loss) $(1,327,000) $ 29,000 $(200,000) - $(1,498,000)
Interest expense (775,000) (81,000) - - (856,000)
Loss before provision
for income taxes $(2,102,000) $(52,000) $(200,000) - $(2,354,000)
Depreciation and
amortization of
fixed assets $ 83,000 $ 4,000 $ - $ - $ 87,000
Amortization of
intangibles $ - $ - $ 8,000 $ - $ 8,000
Capital
expenditures $ 12,000 $ 2,000 $ - $ - $ 14,000
Identifiable assets
at December 31,
1997 $ 3,061,000 $2,797,000 $ 475,000 $385,000 $ 6,718,000
F-18
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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.
By: S/RICHARD HELFMAN
Richard Helfman, President
Dated: April 15, 1998
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/David Guttmann Chairman of the Board
David Guttmann of Directors
April 15, 1998
s/David Refson Vice Chairman of the
David Refson Board and Director
April 15, 1998
s/Richard Helfman President, Director and
Richard Helfman Chief Financial Officer
April 15, 1998
DISTRIBUTION AGREEMENT
This Distribution Agreement is entered between IHW, Inc., 170 53rd Street,
Brooklyn, New York 11232 (Distributor) and Ergo Trade D.O.O., Cankarjeva
3/11, 1000 Ljubljana, Slovenia effective as of January 1, 1998.
1. Appointment
a) Manufacturer hereby appoints Distributor as the exclusive distributor of
Manufacturer's 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 this Agreement include all serving trolleys and
other wooden articles for use in homes or other venues and other items
as may be mutually agreed upon, including any new products of above
range developed during the agreement.
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
or special price quotations (Price List).
b) Prices set forth in the Price List shall be firm for 12 months unless
changed by mutual agreement.
4. Distributor's General Responsibilities
a) Distributor will use its reasonable best efforts to promote, sell and
distribute the Products effectively within the Territory.
5. Manufacturer's General Responsibilities
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 June 30, 1999. Prior
to the termination of this agreement, the parties will in good faith enter
into a five year extension 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 may use Manufacturer's trademarks in advertising and
selling of the Products.
b) The granting of this Agreement and the use of Manufacturer's
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
IHW, Inc.
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 to:
Mrs. Stanka Verbic
Ergo Trade D.O.O.
Cankarjeva 3/11
1000 Ljubljana
Slovenia
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
requests arbitration, the arbitration shall be held in Slovenia. The
arbitration award may be entered in any court of competent jurisdiction and
enforced as any other judgment, 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 State of New York.
IHW, INC.
By: S/Richard Helfman
Name: Richard Helfman
Title: President
Date: 1/22/98
ERGO TRADE D.O.O.
By: S/Stanka Verbic
Name: Stanka Verbic
Title: President
Date: 2/23/98
AMENDMENT NO. 2
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 ("Amendment") is entered into as of March __, 1998,
by and between IHW, Inc. ("Borrower"), having its principal place of business
at 170 53rd Street, Brooklyn, New York 11232 and Century Business Credit
Corporation ("Lender") having its principal place of business at 119 West
40th Street, New York, New York 10018.
BACKGROUND
Borrower and Lender are parties to a Loan and Security Agreement dated as of
July 10, 1997 (as same has been and may be further amended, supplemented or
otherwise modified from time to time, the "Loan Agreement") pursuant to which
Lender provides Borrower with certain financial accommodations.
Borrower has requested that Lender amend the Contract Rate and Lender is
willing to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of Borrower by Lender, and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the following defined terms in
Paragraph 1(a) of the Loan Agreement are hereby amended in their entirety
to provide as follows:
"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 one-half
percent (2.50%).
"Termination Date" means December 19, 1999.
3. Conditions of Effectiveness. This Amendment shall become effective upon
Lender's receipt, in form and substance satisfactory to Lender, of this
Amendment duly executed on behalf of Borrower and consented and agreed to by
each Guarantor.
4. Representations and Warranties. Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all
such covenants, representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment.
(c) No Event of Default or Incipient Event of Default has occurred and is
continuing or would exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset with respect to the Loan
Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended herein, the Loan Agreement, and
all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of Lender, nor
constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State
of New York.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all
of which taken together shall be deemed to constitute one and the same
agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
IHW, INC.
By: _______________________________
Title:
CENTURY BUSINESS CREDIT CORPORATION
By: _______________________________
Title:
CONSENTED AND AGREED TO:
ACE SURGICAL SUPPLY CO., INC.
By: _______________________________
Title:
______________________________
DAVID GUTTMANN
AMENDMENT NO. 3
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 ("Amendment") is entered into as of March __, 1998,
by and between Ace Surgical Supply Co., Inc. ("Borrower"), having its
principal place of business at 170 53rd Street, Brooklyn, New York 11232 and
Century Business Credit Corporation ("Lender") having its principal place of
business at 119 West 40th Street, New York, New York 10018.
BACKGROUND
Borrower and Lender are parties to a Loan and Security Agreement dated as of
December 20, 1996 (as same has been and may be further amended, supplemented
or otherwise modified from time to time, the "Loan Agreement") pursuant to
which Lender provides Borrower with certain financial accommodations.
Borrower has requested that Lender amend the Contract Rate and increase the
advance rate against Eligible Receivables and Lender is willing to do so on
the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of Borrower by Lender, and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined herein shall have
the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the following defined terms in
Paragraph 1(a) of the Loan Agreement are hereby amended in their entirety to
provide as follows:
"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 one half
percent (2.50%).
"Receivables Availability" means the amount of Revolving Credit Advances
against Eligible Receivables which Lender may, from time to time during the
Term of this Agreement, make available to Borrower up to eighty percent (80%).
"Termination Date" means December 19, 1999.
3. Conditions of Effectiveness. This Amendment shall become effective
upon Lender's receipt, in form and substance satisfactory to Lender, of this
Amendment duly executed on behalf of Borrower and consented and agreed to
by each Guarantor.
4. Representations and Warranties. Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all
such covenants, representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment.
(c) No Event of Default or Incipient Event of Default has occurred and
is continuing or would exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset with respect to
the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as
amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and
all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of Lender, nor
constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State
of New York.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all
of which taken together shall be deemed to constitute one and the same
agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
ACE SURGICAL SUPPLY CO., INC.
By: _______________________________
Title:
CENTURY BUSINESS CREDIT CORPORATION
By: _______________________________
Title:
CONSENTED AND AGREED TO:
IHW, INC.
By: _______________________________
Title:
______________________________
DAVID GUTTMANN
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> $ 16,000
<SECURITIES> 0
<RECEIVABLES> 3,586,000
<ALLOWANCES> 314,000
<INVENTORY> 2,109,000
<CURRENT-ASSETS> 5,587,000
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<COMMON> 359,000
273,000
1,770,000
<OTHER-SE> (8,366,000)
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<CGS> 7,999,000
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<OTHER-EXPENSES> 4,361,000
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