<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1999
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
Incorporation of organization) Number)
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 4,127,444
- ---------------------------- ----------------------------
(Title of each class) (Outstanding at June 30, 1999)
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Balance Sheet as at June 30, 1999 3
Statement of Operations
For the three and Six Months ended
June 30, 1999 and June 30, 1998 4
Statement of Stockholders' Deficiency
For the Six Months ended June 30, 1999 5
Statement of Cash Flows
For the Six Months ended
June 30, 1999 and June 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit 27 21
Financial Data Schedule
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash $ 1,000
Accounts receivable-net 3,046,000
Inventories 1,034,000
Prepaid expenses and other current assets 286,000
-------
Total current assets 4,367,000
Fixed assets - less accumulated depreciation
and amortization of $12,000 92,000
Other assets 832,000
-------
Total assets $5,291,000
==========
Liabilities and Stockholders' Deficiency
Current liabilities:
Loans payable - financial institution $2,180,000
Notes payable - related parties 3,408,000
Accounts & other payables and accrued expenses 4,043,000
Due to related party 745,000
-------
Total current liabilities 10,376,000
Notes payable-related parties 529,000
Subordinated note payable - affiliate 400,000
-------
Total liabilities 11,305,000
----------
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) 330,000
-------
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 4,127,000 shares 371,000
Additional paid-in capital 8,461,000
Accumulated deficit (16,946,000)
------------
Stockholders' deficiency ( 6,344,000)
------------
Total liabilities and stockholders' deficiency $5,291,000
============
See notes to condense consolidated financial statements.
</TABLE>
<PAGE>
CREATIVE TECHNOLOGIES CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $3,382,000 $3,169,000 $7,505,000 $6,562,000
Cost of sales 2,151,000 2,269,000 4,826,000 4,407,000
---------- --------- --------- ---------
Gross profit 1,231,000 900,000 2,679,000 2,155,000
--------- ------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 713,000 640,000 1,630,000 1,355,000
Warehousing expense 278,000 222,000 566,000 520,000
Interest expense and financing costs 226,000 223,000 443,000 458,000
------- ------- ------- -------
1,217,000 1,085,000 2,639,000 2,333,000
--------- --------- --------- ---------
Income (loss) before extraordinary item 14,000 (185,000) 40,000 (178,000)
Extraordinary item-Gain on debt forgiveness 0 420,000 0 420,000
- ------- - -------
Net income 14,000 235,000 40,000 242,000
Less undeclared dividends on
preferred stock (158,000) (158,000) (316,000) (316,000)
---------- ---------- ---------- ----------
Net income(loss) applicable to common shares $(144,000) $77,000 $(276,000) $ (74,000)
========= ======= ========= =========
Per common share - basic and diluted
Loss before extraordinary item $(.04) $(.08) $(.07) $(.12)
Extraordinary item - .10 - .10
------ ---- ------ ---------
Net income (loss) $ (.04) $.02 $(.07) $(.02)
------ ---- ------ ---------
Weighted average number of shares 4,117,000 4,127,000 4,114,000 4,127,000
========= ========= ========= =========
See notes to condense consolidated financial statements.
</TABLE>
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30,1999
(Unaudited)
<TABLE>
<CAPTION>
1996 1996-A
Preferred Stock Preferred Stock Common Stock
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 600 $600,000 1,170 $1,170,000 4,127,000 $371,000
Increase in carrying value of
1997-A preferred stock issued
in connection with acquisition
1997-A preferred stock dividend
accrued
Net income for the period
Balance at June 30, 1999 600 $600,000 1,170 $1,170,000 4,127,000 $371,000
=== ======== ===== ========== ========= ========
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Balance at January 1, 1999 $8,692,000 $(17,188,000) $(6,355,000)
Increase in carrying value of
1997-A preferred stock issued
in connection with acquisition (21,000) (21,000)
1997-A preferred stock dividend
accrued (210,000)
(210,000)
Net income for the period 242,000
242,000
Balance at June 30, 1999 $8,461,000 $(16,946,000) $(6,344,000)
========== ============= ==============
</TABLE>
See notes to condense consolidated financial statements.
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $40,000 $242,000
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 43,000 31,000
Amortization of goodwill 15,000 17,000
Gain on debt forgiveness - (420,000)
Noncash professional fees 54,000 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 480,000 (170,000)
Decrease in inventories 394,000 315,000
Increase in prepaid expenses and other current assets and other assets (87,000) (108,000)
Decrease in accounts payable and accrued expenses (920,000) (228,000)
--------- ---------
Net cash (used in) provided by operating activities 19,000 (321,000)
------ --------
Cash flows from investing activities:
Acquisition of fixed assets (3,000) (70,000)
------- --------
Cash flows from financing activities:
Net repayments of loans payable - financial institution (157,000) (103,000)
Proceeds from notes payable - related parties 300,000 200,000
Repayment of notes payable - related parties (174,000) (218,000)
Proceeds from related party - 685,000
Repayments to related party - (173,000)
--------- ---------
Net cash provided by (used in) financing activities (31,000) 391,000
--------- ---------
Net decrease in cash (15,000) -
Cash at beginning of period 16,000 1,000
--------- ---------
Cash at end of period $ 1,000 $ 1,000
======= =======
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $311,000 $ 212,000
======== =========
Supplemental schedule of non cash financing activities:
Payments of $685,000 of principal and $352,000 of interest to noteholders
by guarantors on behalf of the Company $ 0 $1,037,000
======== ==========
Note issued to guarantors $ 0 $1,037,000
======== ==========
Debt forgiveness on restructure of debt including interest of $233,000 $ 0 $420,000
======== ======== ========
Fixed assets transferred to a related party in satisfaction of certain
obligations $ 0 $135,000
======== ========
Issuance of common stock for services $ 54,000 $ 0
======== ========
</TABLE>
<PAGE>
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 six-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998.
Creative Technologies Corp. ("CTC") and Subsidiaries (collectively the
"Company") are engaged in importing and marketing small household products
(principally to specialty 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"). 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. 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. 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.
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - B NOTES PAYABLE AND RELATED PARTY TRANSACTIONS
During May 1999, certain related party noteholders demanded payment of a portion
of their notes from the Company. As the Company was unable to meet these
demands, payments of principal and interest totaling $1,037,000 were made by the
guarantors of these notes. The Company delivered a promissory note to the
guarantors in said amount with principal and interest at the rate of 12% per
year due upon demand. The Company pledged all of the shares of Ace and IHW to
the guarantors, subject to the prior security interest of the financial
institution and the other noteholders.
In addition, certain of these related party noteholders aggregating $1,180.000
agreed to restructure the terms of their notes and as a result, interest accrued
in the amount of $233,000 was waived and principal in the amount of $187,000 was
forgiven. Principal and interest in the amount of $402,000 and $6,000
respectively, was paid and repayment of the remaining $591,000 of debt will be
made over 48 months with interest at the rate of 12% per annum.
At June 30, 1999, the Company had outstanding related party notes totaling
$3,937,000 payable as follows:
Twelve Months Ending
--------------------
June 30 Amount
------- ------
2000 $3,408,000
2001 114,000
2002 179,000
2003 236,000
-----------
3,937,000
Current portion 3,408,000
---------
$529,000
========
Of the $3,937,000, $3,196,000 bears interest at 12% and $741,000 bears interest
at 18%. These notes are payable to various individuals who are stockholders,
entities whose principals are stockholders of the Company, and the Company's
retirement plan. Certain of these related party noteholders have been granted a
security interest in the assets of CTC subordinated to the rights of the
financial institution described below. Notes payable aggregating $2,814,000 are
personally guaranteed by certain stockholders of the Company.
At June 30, 1999, the Company owed $2,180,000 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 as defined, which expires June 2001. The
loan is collateralized by substantially all 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% effective July 1, 1999) plus 2.5%
plus other fees and all of the lender's 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, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to maintain certain
ownership percentages throughout the term of the agreement.
At June 30, 1999 the Company owed a related party $496,000 for the prior rental
of its office and warehousing space. During April 1999, the related party sold
the building occupied by the Company and the Company moved into substantially
less office and warehousing space at the same location. In addition, the company
also owed this entity an additional $249,000 for advances received from them.
Interest on these obligations are payable at the rate of 12% per annum.
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 1999 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.
Pursuant to an October 27, 1997 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 two related parties, a principal stockholder and the spouse
of a principal stockholder of the Company. During the six-month periods ended
June 30, 1999 and 1998, $60,000 was paid to each of these individuals.
Note - C PREFERRED STOCK
During October 1997, in connection with the acquisition of Ace, the board of
directors designated 4,000 shares of redeemable 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.
At June 30, 1999 $286,000 of dividends was in arrears longer than one year and
as a result, holders of the 1997- A Preferred Stock are entitled to 3,500,000
votes along with holders of 4,127,000 shares of common stock.
At the effective date of the Ace merger, 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 $706,000 at June
30, 1999.
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;
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(iii) redemption of their preferred shares on June 1, 2000 at $1,000 per share
payable in cash or shares of common stock at the option of the Company, as
amended;
(iv) liquidation preferences of $1,000 per preferred share; and
(iv) 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, 2000 as amended.
Management intends to satisfy the cumulative unpaid 1996 Preferred Stock
dividends, which aggregated approximately $222,000 at June 30, 1999 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;
(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, as amended.
Management intends to satisfy the cumulative unpaid 1996-A Preferred Stock
dividends, which aggregated approximately $394,000 at June 30, 1999 through the
issuance of securities, and, therefore, such amounts have not been accrued.
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - D COMMITMENTS AND CONTINGENCIES
During April 1999, the building which the Company leased from a related
party was sold and its lease was terminated by the mutual consent of both
parties.
As an inducement to the Company for canceling its lease, the related
party agreed to assume fixed assets aggregating $135,000 in satisfaction of
certain obligations aggregating $135,000 and to reimburse the Company for any
costs associated with its relocation which amounted to approximately $63,000 at
June 30, 1999 and an additional amount to be negotiated.
The Company is currently leasing substantially less office and
warehousing space from the related party on a month to month basis at a cost of
$13,200 per month inclusive of real estate taxes.
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. All but one
of the claims is covered by the Company's product liability insurance carrier.
The Company denies any wrongdoing with respect to this claim and is currently in
settlement discussions. Should a satisfactory settlement not be reached, the
Company is prepared to defend itself with respect to this claim. The ultimate
outcome of this claim is not expected to have a material effect on the Company's
financial position, results of operations or cash flows. 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. Such
voluntary corrective action plan was completed prior to the second quarter of
1999.
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company in the normal course of business. While the amounts
claimed or expected to be claimed may be substantial, the ultimate liability
cannot be determined because of the inherent uncertainties surrounding the
litigation and the considerable uncertainties that exist. Based on facts
currently available, management believes that the disposition of matters that
are pending or asserted will not have a materially adverse effect on the
financial position or results of operations of the Company.
Note - F BUSINESS SEGMENTS
In accordance with SFAS No. 131, the Company's business segments are organized
around its product lines, small household products and medical, janitorial and
dietary products. The following table is a summary of these segments for the
six-month periods ended June 30, 1998 and 1999.
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Month Period Ended June 30, 1998
<TABLE>
<CAPTION>
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $1,457,000 $1,925,000 $- $- $3,382,000
Intersegment sales 4,000 - - (4,000) -
- ------------------------------------------------------------------------------------------------------------------
Total sales $1,461,000 $1,925,000 $- $(4,000) $3,382,000
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) $42,000 $259,000 $(61,000) $- $240,000
Interest expense (148,000) (78,000) - - (226,000)
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax $(106,000) $181,000 $(61,000) $- $14,000
- ------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $16,000 $5,000 $- $- $21,000
- ------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $9,000 $- $- $9,000
- -----------------------------------------------------------------------------------------------------------------
Identifiable assets $2,557,000 $2,972,000 $484,000 $(996,000) $5,017,000
at June 30, 1998
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Month Period Ended June 30, 1998
<TABLE>
<CAPTION>
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $3,389,000 $4,116,000 $- $- $7,505,000
Intersegment sales 9,000 - - (9,000) -
- ------------------------------------------------------------------------------------------------------------------------
Total sales $3,398,000 $4,116,000 $- $(9,000) $7,505,000
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $116,000 $556,000 $(189,000) $- $483,000
Interest expense (297,000) (146,000) - - (443,000)
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax $(181,000) $410,000 $(189,000) $- $40,000
- ------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $33,000 $10,000 $- $- $43,000
- ------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $15,000 $- $- $15,000
- ------------------------------------------------------------------------------------------------------------------------
Capital expenditures $3,000 $- $- $- $3,000
- ------------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,557,000 $2,972,000 $484,000 $(996,000) $5,017,000
at June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Month Period Ended June 30, 1999
<TABLE>
<CAPTION>
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $1,586,000 $1,583,000 $- $- $3,169,000
Intersegment sales - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total sales $1,586.000 $1,583,000 $- $- $3,169,000
- -------------------------------------------------------------------------------------------------------------------------
Operating income
(loss) $33,000 $108,000 $(103,000) $- $38,000
Interest expense (168,000) (55,000) - - (223,000)
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax & extraordinary
item $(135,000) $53,000 $(103,000) $- $(185,000)
- -------------------------------------------------------------------------------------------------------------------------
Extraordinary item $420,000 $- $- $- $420,000
- -------------------------------------------------------------------------------------------------------------------------
Income (loss )before
provision for income
tax $285,000 $53,000 $(103,000) $- $235,000
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $9,000 $3,000 $- $- $12,000
- -------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $8,000 $- $- $8,000
- -------------------------------------------------------------------------------------------------------------------------
Capital expenditures $70,000 $- $- $- $70,000
- -------------------------------------------------------------------------------------------------------------------------
Identifiable assets
at June 30, 1999 $2,192,000 $2,538,000 $484,000 $(733,000) $4,481,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Month Period Ended June 30, 1999
<TABLE>
<CAPTION>
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $3,230,000 $3,332,000 $- $- $6,562,000
Intersegment sales 1,000 - - (1,000)
- -----------------------------------------------------------------------------------------------------------------------------
Total sales $ 3,231,000 $ 3,332,000 $- $ (1,000) $6,562,000
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $185,000 $ 289,000 $(194,000) $- $ 280,000
Interest expense (340,000) (118,000) - - - (458,000)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax & extraordinary
item $ (155,000) $ 171,000 $(194,000) $- $ (178,000)
- -----------------------------------------------------------------------------------------------------------------------------
Extraordinary item $ 420,000 $- $- $- $ 420,000
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss )before
provision for income
tax $ 265,000 $ 171,000 $(194,000) $- $ 242,000
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $ 23,000 $ 8,000 $- $- $ 31,000
- -----------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $ 17,000 $- $- $ 17,000
- -----------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 70,000 $- $- $- $ 70,000
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets
at June 30, 1999 $ 2,192,000 $ 2,538,000 $ 484,000 $(733,000) $ 4,481,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Creative Technologies Corp. ("CTC") through its wholly owned subsidiary, IHW
Inc. ("IHW") which was incorporated in 1997, is exclusive distributor of
Brabantia International ("Brabantia"), Soehnly-Waagen Gmbh & Co. (Soehnle"),
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. 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 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 six-month period ended June 30, 1999, cash used in operating activities
was $321,000, $70,000 was used in investing activities and cash of $391,000 was
provided by financing activities. As a result, at June 30, 1999, cash was
$1,000, the same as it was at December 31, 1998. The Company had a negative
working capital of $6,009,000 at June 30, 1999.
Accounts payable and other liabilities decreased to $4,043,000 at June 30, 1999
from $4,647,000 at December 31, 1998 primarily due to the Company's reduction of
inventory.
During the three-month period ended June 30, 1999 the Company was also able to
reduce debt to financial institution by $103,000 to $2,180,000. Notes payable to
related parties increased by $147,000 to $3,937,000.
During May 1999, certain related party noteholders demanded payment of a portion
of their notes from the Company. As the Company was unable to meet these
demands, the guarantors of these notes made payments of principal and interest
totaling $1,037,000. The Company delivered a promissory note to the guarantors
in said amount with principal and interest at the rate of 12% per year due upon
demand. The Company pledged all of the shares of Ace and IHW to the guarantors,
subject to the prior security interest of the financial institution and the
other noteholders.
In addition, certain of these related party noteholders aggregating $1,180,000
agreed to restructure the terms of their notes and as a result, interest accrued
in the amount of $233,000 was waived and principal in the amount of $187,000 was
forgiven. Principal and interest in the amount of $402,000 and $6,000
respectively, was paid and repayment of the remaining $591,000 of debt will be
made over 48 months with interest at the rate of 12% per annum.
At June 30, 1999, the Company had outstanding related party notes totaling
$3,937,000 payable as follows:
Twelve Months Ending
--------------------
June 30 Amount
------- ------
2000 $3,408,000
2001 114,000
2002 179,000
2003 236,000
---------
3,937,000
Current portion 3,408,000
---------
$529,000
========
<PAGE>
Of the $3,937,000, $3,196,000 bears interest at 12% and $741,000 bears interest
at 18%. These notes are payable to various individuals who are stockholders,
entities whose principals are stockholders of the Company, and the Company's
retirement plan. Certain of these related party noteholders have been granted a
security interest in the assets of CTC subordinated to the rights of the
financial institution described below. Notes payable aggregating $2,814,000 are
personally guaranteed by certain stockholders of the Company.
At June 30, 1999, the Company owed $2,180,000 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 as defined, which expires June 2001. The
loan is collateralized by substantially all 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% effective July 1, 1999) plus 2.5%
plus other fees and all of the lender's 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, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to maintain certain
ownership percentages throughout the term of the agreement.
At June 30, 1999 the Company owed a related party $496,000 for the prior rental
of its office and warehousing space. During April 1999, the related party sold
the building occupied by the Company and the Company moved into substantially
less office and warehousing space at the same location. In addition, the company
also owed this entity an additional $249,000 for advances received from them.
Interest on these obligations are payable at the rate of 12% per annum.
At June 30, 1999 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.
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.
<PAGE>
Results of Operations
The Company had net sales of $3,169,000 and $3,382,000, respectively, for the
three-month periods ended June 30, 1999 and June 30, 1998 and $6,562,000 and
$7,505,000, respectively for the six-month periods ended June 30, 1999 and June
30, 1998. The decrease in sales is primarily attributable to Ace losing several
accounts to competitors with national contracts.
Gross profit margins for the second quarter ended June 30, 1999 and June 30,
1998 were 28% and 36%, respectively and for the six month periods ended June 30,
1999 and June 30, 1998 were 33% and 36%, respectively. The decrease in gross
profit margin is attributable to the lower gross profit margins of Ace sales,
changing product mixes, and closing out slow moving and obsolete inventory.
Selling, general and administrative expenses were $640,000 and $713,000 or 20%
and 21% of net sales, respectively, in the three-month periods ended June 30,
1999 and June 30, 1998, and $1,355,000 and $1,630,000 or 21% and 22% of net
sales respectively in the six month periods ended June 30, 1999 and June 30,
1998.
Interest expense decreased to $223,000 from $226,000 for the three-month period
ended June 30, 1999, compared to the comparable three-month period ended June
30, 1998 and increased to $458,000 from $443,000 for the six month period ended
June 30, 1999 compared to the comparable 6-month period ended June 30, 1998. The
increase of $15,000 was primarily due to debt owed by the Company.
Inventory was $1,034,000 at June 30, 1999 compared to $1,715,000 at June 30,
1998. The decrease in inventory is attributable to lower sales, management's
ability to better forecast IHW sales based on historic experience, and relying
more on just in time deliveries from Brabantia. Accounts receivable was
$3,046,000 at June 30, 1999, compared to $2,793,000 at June 30, 1998 and
reflects 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 income of $235,000 after an
extraordinary gain of $420,000 compared to a net income of $14,000 respectively,
for the three month periods ended June 30, 1999 and June 30, 1998 and a net
income of $242,000 after an extraordinary gain of $420,000 compared to a net
income of $40,000 respectively, for the six month periods ended June 30, 1999
and June 30, 1998.
<PAGE>
PART II OTHER INFORMATION
Item 6. A) Exhibits
Exhibit 27. Financial Data Schedule
B) Reports on form 8-K
The registrant did not file reports on Form 8-K during the six
months ended June 30, 1999
<PAGE>
Creative Technologies Corp.
---------------------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE TECHNOLOGIES CORP.
---------------------------
Registrant
Dated: August 13, 1999 By: /s/ Richard Helfman
--------------------------
Richard Helfman, President
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 3,391,000
<ALLOWANCES> 345,000
<INVENTORY> 1,034,000
<CURRENT-ASSETS> 4,367,000
<PP&E> 104,000
<DEPRECIATION> 12,000
<TOTAL-ASSETS> 5,291,000
<CURRENT-LIABILITIES> 10,376,000
<BONDS> 0
371,000
330,000
<COMMON> 1,770,000
<OTHER-SE> (8,485,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,291,000
<SALES> 6,562,000
<TOTAL-REVENUES> 6,562,000
<CGS> 4,407,000
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<INCOME-PRETAX> (178,000)
<INCOME-TAX> 0
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<EXTRAORDINARY> 420,000
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</TABLE>
