FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1998
Commission File Number: 0-15754
CREATIVE TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2721083
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
170 53rd Street, Brooklyn, New York 11232
(Address of principal executive offices) (Zip Code)
(718) 492-8400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, Par Value $.09 4,117,444
(Title of each class) (Outstanding at September 30, 1998)
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Balance Sheet as at September 30, 1998 3
Statement of Operations
for the Three and Nine Months ended
September 30, 1998 and September 30, 1997 4
Statement of Stockholders' Deficiency
for the Nine Months ended September 30, 1998 5
Statement of Cash Flows
for the Nine Months ended
September 30, 1998 and September 30, 1997 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote of Securities Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 27
Financial Data Schedule 17
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
<CAPTION>
Assets
Current assets:
<S> <C>
Cash $ 3,000
Accounts receivable-net 3,065,000
Inventories 1,784,000
Prepaid expenses and other current assets 309,000
Total current assets 5,161,000
Fixed assets - less accumulated depreciation
and amortization of $310,000 203,000
Other assets 843,000
Total assets $6,207,000
Liabilities and Stockholders' Deficiency
Current liabilities:
Loans payable - financial institution $ 2,240,000
Note payable - bank 200,000
Notes payable - related parties 3,847,000
Accounts payable and accrued expenses 5,653,000
Total current liabilities 11,940,000
Subordinated note payable - affiliate 400,000
Total liabilities 12,340,000
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) 299,000
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) 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) 1,170,000
Common Stock - $.09 par value; authorized 20,000,000 shares, issued and
outstanding 4,117,000 shares 370,000
Additional paid-in capital 8,805,000
Accumulated deficit (17,377,000)
Stockholders' deficiency (6,432,000)
Total liabilities and stockholders' deficiency $6,207,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net Sales $2,001,000 $3,739,000 $6,422,000 $11,244,000
Cost of sales 1,470,000 2,434,000 4,355,000 7,260,000
Gross profit 531,000 1,305,000 2,067,000 3,984,000
Operating expenses:
Selling, general and
administrative expenses 541,000 739,000 1,728,000 2,369,000
Warehousing expense 220,000 297,000 729,000 863,000
Restructuring costs 442,000 0 442,000 0
Interest expense and
financing costs 331,000 217,000 611,000 660,000
1,534,000 1,253,000 3,510,000 3,892,000
Income (loss) before provision
for income taxes (1,003,000) 52,000 (1,443,000) 92,000
Income tax benefit
Current _______0 _______0 (22,000) _______0
Net income (loss) (1,003,000) 52,000 (1,421,000) 92,000
Less undeclared dividends on
Preferred stock (54,000) (158,000) (160,000) (474,000)
Net loss applicable
to common shares $(1,057,000) $(106,000) $(1,581,000) $(382,000)
Per common share - basic and diluted
Net loss $ (.39) $ (.03) $ (.59) $ (.09)
Weighted average number
of shares 2,710,000 4,117,000 2,669,000 4,115,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1998
(Unaudited)
<CAPTION>
1996 1996-A
Preferred Stock Preferred Stock Common Stock Additional
Number Number Number Paid-in Accumulated
of Shares Amount Of Shares Amount of Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998
600 $600,000 1,170 $1,170,000 3,997,000 $359,000 $9,103,000 $(17,469,000) $(6,237,000)
Issuance of Common Stock for
services 120,000 11,000 43,000 54,000
Increase in carrying value of
1997-A preferred stock issued
in connection with acquisition (26,000) (26,000)
1997-A preferred stock
dividend accrued (315,000) (315,000)
Net income for the period 92,000 92,000
Balance at September 30, 1998
600 $600,000 1,170 $1,170,000 4,117,000 $370,000 $8,805,000 $(17,377,000) $(6,432,000)
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1998
Cash flows from operating activities:
<S> C> <C>
Net income (loss) $(1,421,000) $92,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 211,000 65,000
Restructuring charge 442,000 -
Amortization of goodwill - 24,000
Noncash professional fees - 54,000
Noncash interest expense 193,000 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (638,000) 207,000
Decrease (increase) in inventories (71,000) 325,000
(Increase) decrease in prepaid expenses
and other current assets 57,000 (118,000)
(Decrease) increase in accounts payable
and accrued expenses 643,000 (526,000)
Net cash provided by (used in) operating activities (584,000) 123,000
Cash flows from investing activities:
Acquisition of fixed assets (12,000) (4,000)
Cash flows from financing activities:
Net (repayments of) proceeds from loans payable -
financial institution 441,000 (108,000)
Proceeds from notes payable 560,000 310,000
Repayment of notes payable (471,000) (334,000)
Net cash provided by (used in) financing activities 530,000 (132,000)
Net decrease in cash (66,000) (13,000)
Cash at beginning of period 100,000 16,000
Cash at end of period $ 34,000 $ 3,000
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $273,000 $450,000
Taxes 0 0
Supplemental schedule of noncash financing activities:
Issuance of common stock for services 0 $54,000
Issuance of common stock in lieu of interest 193,000 0
See notes to condensed consolidated financial statements.
</TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - A Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the rules and regulations of the
Securities and Exchange Commission. Accordingly they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on
Form 10-KSB for the year ended December 31, 1997.
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 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 on October 27, 1997 (see Note B). All material
intercompany balances and transactions have been eliminated in consolidation.
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 Earnings per Share, 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.
Note - B 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
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:
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 D). Subsequent to the merger, the
subsidiary merged into and changed its name to Ace Surgical Supply Co., Inc.
Note - C Notes Payable and Related Party Transactions:
At September 30, 1998 the Company had outstanding related party notes payable
totaling $3,847,000. Of this amount, $3,097,000 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 $2,847,000 is payable to various
individuals who are stockholders, entities whose principals are
stockholders of the Company, and the Company's retirement plan. Notes
payable aggregating $3,693,000 are personally guaranteed by certain
stockholders of the Company. In addition, holders of notes totaling
approximately $2,943,000 have a security interest in substantially all the
assets of the Company second to the financial institution indicated below.
During the year ended December 31, 1997, the Company issued 386,000 shares of
common stock (valued at $193,000) 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.
At September 30, 1998, the Company owed $2,240,000 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 June 2001,
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
(8.25% at September 30, 1998) 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 September 30, 1998, the Company had a $200,000 unsecured
noninterest-bearing note payable to a bank due March 11, 1998. The note has
not been repaid to date.
At September 30, 1998, 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.
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the nine months ended
September 30, 1998, $90,000 was paid to each of these individuals.
Note - D 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;
(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 at the date of
acquisition of Ace amounted to approximately $265,000 pursuant to a valuation
by an independent financial advisory firm.
Cumulative unpaid 1997-A Preferred Stock dividends aggregated $391,000 at
September 30, 1998.
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, 1999 at $1,000 per
share payable in cash or shares of common stock at the option of the Company
valued at the lowest monthly average closing bid market price for any month
between the months of May 1998 and May 1999. This is an extension of the
original redemption date of June 1, 1998;
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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, 1999. This is an extension of the original redemption date
of June 1, 1998.
Management intends to satisfy the cumulative unpaid 1996 Preferred Stock
dividends, which aggregated $164,000 at September 30, 1998 through the
issuance of securities, and, therefore, such amounts have not been accrued.
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, 1999 at $1,000 per
share payable in cash or shares of common stock at the option of the Company
valued at the lowest monthly average closing bid market price for any month
between the months of September 1998 and September 1999. This is an
extension of the original redemption date of October 1, 1998.
(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, 1999. This is an extension of the original redemption
date of October 1, 1998.
Management intends to satisfy the cumulative unpaid 1996-A Preferred Stock
dividends, which aggregated $280,000 at September 30, 1998 through the
issuance of securities, and, therefore, such amounts have not been accrued.
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - E 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. Most
of these claims are covered by the Company's product liability insurance
carrier. The Company redesigned the appliance in August 1992, and believes
that the modification made should minimize the possibility of such injury.
The Consumer Product Safety Commission (the "CPSC") made a preliminary
determination that the Company's appliance product represents a "substantial
product hazard" as that term is defined in the Consumer Product Safety Act.
The Company proposed and the CPSC accepted a voluntary corrective action
plan, which began implementation during 1997, whereby the Company would
replace certain parts of the appliances manufactured prior to August
1992. At September 30, 1998 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.
These appliances are no longer sold by the Company in the United States
("US").
Two parties recently commenced actions against the Company for prior service.
The Company feels it has adequate defenses to these actions, although the
ultimate outcome can not be determined at this time.
Note F - Stock Option Plan
At the annual meeting of the shareholders of the Company held July 28, 1998,
shareholders approved the Company's 1998 Stock Option Plan (the "Plan"). The
Plan provides for the grant of options to purchase an aggregate of 750,000
shares of common stock (subject to adjustment). These options may be either
incentive stock options ("ISOs") for eligible employees including officers or
non-qualified stock options for consultants and non-employee directors.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the common stock on the date of the option grant, provided
that the exercise price of such option granted to an employee owning more
than 10% of the combined voting power of all classes of stock of the Company
and its subsidiaries may not be less than 110% of the fair market value of
the common stock on the date of the option grant. The term of each option
and the manner of exercise are determined by a committee appointed by the
board of directors, but in no case can the options be exercised in excess of
10 years (5 years for a holder of more than 10% of the combined voting power
of all classes of stock of the Company and its subsidiaries and non-employee
directors) beyond the grant date, as defined. The Plan contains no present
criteria determining the identity or amount of options to be granted
to any person or groups of persons. At September 30, 1998 no options were
granted under the Plan.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Creative Technologies Corp. (the "Company") through its wholly owned
subsidiary, IHW Inc. ("IHW") which was incorporated in 1997, is the exclusive
distributor of Brabantia International ("Brabantia"), Soehnle-Waagen GmbH
& Co. ("Soehnle"), and Ergo Trade Co. ("Ergo") products in the US and Canada.
Brabantia, headquartered in the Netherlands, is a leading European
manufacturer of top of the line metal houseware products. Soehnle
headquartered in Murrhardt, Germany, manufactures a full line of bathroom
scales. Ergo, located in Slovenia, manufactures a line of high quality
wooden carts and pantry products that 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. Ace has been in business since 1974. Their product line can
generally be 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 domestic suppliers.
For the nine month period ended September 30, 1998, cash provided by
operating activities was $123,000, $4,000 was used in investing activities
and cash of $132,000 was used in financing activities. As a result, at
September 30, 1998 cash decreased by $13,000 from $16,000 at December 31,
1997. The Company had a negative working capital of $6,779,000 at September
30, 1998.
Accounts payable and other liabilities decreased to $5,653,000 at September
30, 1998 from $5,863,000 at December 31, 1997 primarily due to the Company's
profitable operations and a reduction of inventory.
During the nine month period ended September 30, 1998 the Company was also
able to reduce debt to financial institution by $108,000 to $2,240,000.
Notes payable to related parties decreased by $24,000 to $3,847,000.
At September 30, 1998 the Company had outstanding notes payable to related
parties totaling $3,847,000. Of this amount, $3,097,000 bears interest at
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 $2,847,000 is payable to various individuals
who are stockholders or entities whose principals are stockholders of
the Company and the Company's retirement plan. Notes payable aggregating
$3,693,000 are personally guaranteed by certain stockholders of the Company.
In addition, holders of notes totaling approximately $2,943,000 have a
security interest in substantially all the assets of the Company second to
the financial institution indicated below.
At September 30, 1998, the Company owed $2,240,000 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 June 2001,
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 (8.25% at
September 30, 1998) 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.
Liquidity and Capital Resources (continued)
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and has
developed an implementation plan to resolve the issue. The Company
presently believes that, with modifications to existing software, conversions
to new software and the replacement of certain hardware, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. The Company is presently
testing certain software that has already been modified. The Company does
not anticipate that the total cost of implementing its year 2000 plan will
have a material effect on its financial condition.
Results of Operations
The condensed consolidated financial statements at September 30, 1998 and
for the three and nine month periods then ended contained in this Form 10QSB
reflect the acquisition of Ace which took place in October, 1997. The
Company had net sales of $3,739,000 and $2,001,000, respectively, for the
three month periods ended September 30, 1998 and September 30, 1997 and
$11,244,000 and $6,422,000, respectively for the nine month periods ended
September 30, 1998 and September 30, 1997. The increase in sales is
primarily attributable to the inclusion of Ace sales in the third quarter and
nine month periods ended September 30, 1998 but not in the comparable
periods of 1997 and increased sales of Brabantia. These factors offset the
elimination of sales of small electric products, which occurred during the
three and nine month periods ended September 30, 1997.
Gross profit margins for the third quarter ended September 30, 1998 and
September 30, 1997 were 35% and 27%, respectively and for the nine month
periods ended September 30, 1998 and September 30, 1997 were 35% and
32%, respectively. The increase in gross profit margin is attributable to
the Company's changing product mixes and the elimination of small electrics
sales.
Selling, general and administrative expenses were $739,000 and $541,000 or
20% and 27% of net sales, respectively, in the three month periods ended
September 30, 1998 and September 30, 1997, and $2,369,000 and $1,728,000 or
21% and 27% of net sales respectively in the nine month periods ended
September 30, 1998 and September 30, 1997. The increase in such expenses was
due to the inclusion of Ace partially offset by management's continuing cost
cutting programs and better efficiencies from consolidating Ace and IHW. The
reduction in such expenses as a percentage of sales was due to increased
sales in the September 30, 1998 periods compared to the September 30, 1997
periods.
During 1997 the Company announced its intention to stop selling its electric
goods domestically and sharply reduced the export of these products. As a
result of these decisions the Company incurred restructuring charges of
approximately $442,000 representing the write-off of molds and facilities
used in the manufacturing of its electric household appliances.
Interest expense was $217,000 and $660,000 for the three and nine month
periods ended September 30, 1998, respectively, as compared to $331,000 and
$611,000 for the three and nine month periods ended September 30, 1997. The
decrease of $114,000 in the third quarter of 1998 was primarily due to
interest on notes payable to certain note holders being recorded in the third
quarter of 1997. During July 1997 these note holders agreed not to
call their loans in exchange for the difference in interest they would have
received at the old rate vs. the new rate being converted into common stock
of the Company at the current market price of the Company's stock. This
resulted in the issuance of 386,000 shares of the Company's common stock.
The increase of $49,000 in the nine month periods was primarily due to debt
owed by Ace.
Inventory was $1,784,000 at September 30, 1998 compared to $1,680,000 at
September 30, 1997. The increase in inventory associated with the Ace
acquisition was offset by management's ability to better forecast IHW sales
based on historic experience and its relying more on just in time deliveries
from Brabantia. All inventory associated with small electrics has been
written off. Accounts receivable were $3,065,000 at September 30, 1998
and reflects receivables from Ace, higher sales and the fact that Ace extends
more liberal terms to their customers as an inducement to do business.
Due to the foregoing, the Company reported a net profit of $52,000 compared
to a net loss of $1,003,000 respectively, for the three month periods ended
September 30, 1998 and September 30, 1997 and a net profit of $92,000
compared to a net loss of $1,421,000 respectively, for the nine month periods
ended September 30, 1998 and September 30, 1997.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a vote of Securities Holders.
The Company held its annual shareholders' meeting on July 28, 1998.
Richard Helfman, David Guttmann and David Refson were re-elected directors.
In addition, the shareholders approved the Company's 1998 Employee Stock
Option Plan. 2,466,178 shares voted for the plan, 31,710 shares voted
against and 8,363 shares abstained.
Item 6. a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
The Registrant did not file reports on Form
8-K during the nine months ended September 30, 1998.
CREATIVE TECHNOLOGIES CORP.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE TECHNOLOGIES CORP.
Registrant
Dated: November 13, 1998 By: S/Richard Helfman
Richard Helfman, President
and Chief Financial Officer
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