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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, 1998 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 (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Registrant's revenues for fiscal year ended December 31, 1998 was $15,263,000.
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $444,982 as of April 5, 1999.
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The number of shares outstanding of the registrant's Common Stock as of April 5,
1999 is:
Class Outstanding at April 5, 1999
----- ----------------------------
Common Stock, $.09 par value 4,127,444
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PART I
ITEM 1. BUSINESS
Creative Technologies Corp. ("CTC") is a holding company owning the
stock of two operating subsidiaries, IHW, Inc. ("IHW") and Ace Surgical Supplies
Co., Inc. ("Ace"), collectively (the "Company"). Ace, in business since 1974,
was acquired by CTC in October 1997. It distributes medical, janitorial and
dietary products in the tri-state area, generally to hospitals, nursing homes
and medical care facilities. IHW, which was incorporated in 1997, is the
exclusive importer and distributor for various European manufacturers of
moderate to high-end housewares. The companies whose products are currently
being distributed by IHW are Brabantia, Soehnle, Ergotrade, MAWA
Metallwarenfabrik, Foppa Pedretti S.p.A., and Bredemeijer. IHW is continually
looking to distribute other complementary lines that meet its various criteria.
Brabantia Products
The Company and Brabantia, a Netherlands company, entered into a
five-year distributorship Agreement effective January 1, 1996. The agreement
provides that IHW 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 over 68 countries throughout the world.
Brabantia's major product categories include food storage, waste
storage and laundry products. 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 36% 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, specialty
stores, catalogs, hardware stores, mass merchandising stores and discounters.
The Company also displays its products at the Chicago Houseware Show, the
Gourmet 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 IHW 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 is
renewable on an annual basis with no minimum sales or purchase requirements and
can be cancelled by either party without penalty. Sales of Soehnle products
represented approximately 10% of the total sales of the Company in 1998. The
scales are being marketed in the same way as the Company markets its Brabantia
line.
Other Products
IHW is the United States distributor of Ergotrade, MAWA, Foppa
Pedretti, and Bredemeijer products. Ergotrade, located in Slovenia, manufactures
high quality wooden carts and pantry items which are distributed under the
registered Euroform trademark. The Distributorship Agreement with Ergotrade
expires June 30, 1999 and negotiations are currently underway to extend it.
MAWA, a German company, is the largest European manufacturer of metal clothes
hangers. Foppa Pedretti, an Italian company, manufactures a full line of
high-end wooden space saving efficient home furnishings. Bredemeijer, a Dutch
company, produces a line of high-end teapots and tea cosy's. Ergotrade sales
were not material in 1998. The marketing efforts for the other three product
lines began in early 1999 and sales are not expected to be material during 1999.
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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 various sources, two of whom supply more than 10% of Ace's
total purchases. Ace generally has more than one supplier for all of its
products and usually 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 fiscal
1998 were approximately 51% 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 the manufacturer for partial credit. No warranty is
available for the other IHW lines or Ace products.
Trademarks
The Company generally provides in its distributorship agreements that
the Company shall be entitled to distribute such products utilizing the
trademarks of the companies that manufacture the product.
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 that it
was producing and selling prior to June 30, 1997. 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. As of
December 31, 1998 such voluntary corrective action plan was substantially
completed and the Company had a $50,000 reserve which it believes is adequate to
cover any additional cost to be incurred in completing the plan.
The Company has received notice that several other consumers claim to
have suffered finger injuries while using the pasta machine. All but one of
these claims are covered by the Company's product liability insurance carrier.
The Company denies any wrongdoing and is currently in settlement discussions.
Should a satisfactory settlement not be reached, the Company is prepared to
defend the claim. The ultimate outcome is not expected to have a material effect
on the Company's financial position, results of operations or cash flows. 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.
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Competition
The product lines which IHW distributes all compete with numerous
companies selling similar products. The Company believes that its products are
of higher quality than most competitors and have certain unique features and
benefits.
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 manufacturers 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 has 33 employees. These include 19 people in
administration, customer services and sales, 3 officers, and 11 people engaged
in shipping and warehousing. The Company and Ace have entered into an agreement
with United Production Workers Union, Local 17-18 under which agreement 7
employees receive certain health benefits and cost of living increases. This
agreement terminates March 19, 2002.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse currently 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 stockholders
pursuant to a lease terminating May 31, 2011. Rent expense, inclusive of real
estate taxes and assessments, for 1998 was approximately $750,000. 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
Various lawsuits and claims have been instituted against the Company in
the normal course of business. While the amounts claimed might be substantial,
the ultimate liability can not be determined because of the inherent
uncertainties surrounding the actions 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 the results of operations of the
Company.
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.
The following table sets forth the range of high and low bid prices of the
Company's Common Stock for the fiscal quarters of 1997 and 1998. 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.
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<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
December 31, 1997 December 31, 1998
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C>
COMMON STOCK (CRTV)
First Quarter 13/16 1/4 15/32 13/32
Second Quarter 11/16 3/8 13/32 11/32
Third Quarter 1/2 3/8 3/8 5/16
Fourth Quarter 15/32 3/8 5/16 9/32
</TABLE>
The closing bid price of the Common Stock on April 5, 1999 was $.16.
At April 5, 1999, 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 an operating profit for the year ended December 31,
1998 of $93,000 (before an extraordinary gain of $188,000) after a substantial
operating loss of $2,354,000 in 1997. As of December 31, 1998 the Company had a
working capital deficit of $6,669,000. The 1998 results were positively affected
by the inclusion of Ace's operating results for the entire year, an increase in
IHW's sales, (exclusive of the Company's discontinued electric's business),
continued efforts by management to cut and contain costs, a strong dollar, and a
changing and more profitable product mix. The results of operations continued to
be negatively affected by the heavy interest burden of the notes payable which
represented monies borrowed to support the now discontinued electrics business.
Management continues to believe that its decision to exit the small
electric business and concentrate on distributing moderate to high-end
non-electric European housewares is correct and will result in the Company
increasing its profitability. Last year IHW experienced a solid growth in
Brabantia sales and has started to distribute the products of other European
companies in the United States. While management does not expect material sales
this year from the new products, it believes long term these new lines can make
meaningful contributions to both sales and profits. The Company continues to
seek strategic partnerships with other manufacturers of high quality, unique and
complementary houseware products.
The positive sales and profit contribution of Ace, acquired in October,
1997, strengthened the Company's overall operating results. Ace is a company
which has shown a steady and profitable operating pattern for over 20 years. The
acquisition of Ace also resulted in operational synergies by fully integrating
the warehouse and shipping functions and certain administrative aspects such as
order entry and invoicing.
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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 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 lines which the Company is introducing 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, reduce overhead, and operate more efficiently.
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.
Liquidity and Capital Resources
For the year ended December 31, 1998 ("fiscal 1998"), cash used in
operating activities was $214,000. Cash of $11,000, was used in investing
activities and cash of $210,000 was provided by financing activities. As a
result, at December 31, 1998, cash decreased by $15,000 to $1,000 compared to
$16,000 at December 31, 1997. The Company had a negative working capital of
$6,669,000 at December 31, 1998.
Accounts payable and other liabilities decreased to $4,647,000 at
December 31, 1998 from $5,863,000 at December 31, 1997. This decrease is
partially offset by a reduction in inventory as both IHW and Ace are relying
more on Just In Time ("JIT") inventory shipments from their suppliers and by the
operating profits which were used to reduce payables.
At December 31, 1998, the Company had notes payable due on demand in
the amount of $1,000,000 payable to an entity whose principal was formerly a
director of the Company. The loan bears interest at a rate of 12% per annum. At
December 31, 1998, the Company also had $2,790,000 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, $3,693,000 were guaranteed by certain stockholders of the
Company.
During the year ended December 31, 1998 the Company issued 130,000
shares of common stock (valued at $56,000) as payment for services performed on
behalf of the Company.
At December 31, 1998, the Company had a credit line with Century
Business Credit Corporation (Century) in the total amount of $3,000,000, which
expires June 2001. Of this amount, $1,200,000 was available to IHW and
$1,800,000 was available to Ace. The loans under this line are on a revolving
credit basis based on asset availability. The Company pays an interest rate
equal to the greater of 9% or the prime rate plus 2.5%. 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. A stockholder has given his limited personal
guarantee for this loan.
Results of Operations
The Company had net sales of approximately $15,263,000 in the fiscal
year ended December 31, 1998
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compared to net sales of approximately $10,862,000 for the fiscal year ended
December 31, 1997. The increase in sales was primarily the result of greater
sales of Brabantia and the inclusion of Ace's sales for the entire year.
Selling, general and administrative expenses for Fiscal 1998 were
$3,080,000, an increase of $291,000 from fiscal 1997 expense of $2,789,000. This
increase is attributable primarily to expenses associated with Ace which is
included in the statement of operations for all of 1998.
Interest expense and financing costs in Fiscal 1998 were $887,000, an
increase of $31,000 from the $856,000 incurred during Fiscal 1997. This increase
is the result of higher borrowing costs to finance higher sales that were offset
partially by lower interest rates being paid on a portion of the notes payable.
Ending inventory at December 31, 1998 was $1,349,000 compared to
$2,109,000 as of December 31, 1997. This decrease in inventory is primarily the
result of both IHW and Ace being able to better project their customer's future
inventory needs and order from their suppliers more on a JIT basis.
Due to the forgoing, the Company had income of approximately $93,000
(before and extraordinary gain of $188,000) for fiscal 1998 compared to a loss
of approximately $2,354,000 in fiscal 1997.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Pages F-1 through F-19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 52 Chairman of the Board
Richard Helfman 52 Director and President
of the Company and IHW
David Selengut 43 Secretary
Lala Bessler 51 Director and President of Ace
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
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of Applied Microbiology Inc., and was its chairman until October 1995.
Richard Helfman has been a Director of the Company since April 1990 and
President since March 1990. He has also been President of IHW since July, 1997.
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 has been Secretary of the Company since September 1987.
Mr. Selengut has been an attorney with Ellenoff Grossman & Schole LLP since May
1998, was a partner at the law firm of Bernstein and Wasserman LLP from June
1997 to April 1998 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.
Lala Bessler has been a Director of the Company since December 1998 and
President of Ace Surgical Supply Co., Inc. since 1986.
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,
1998.
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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 $100,000
during each of the preceding three fiscal years are as follows:
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
Other Annual Awards
Name and Principal Year Salary Compensation Options
Position ($) ($) (#)
David Guttmann, 1998 $106,333
Chief Executive Officer
1997 $122,596 16,666(1)
1996 $50,000
Richard Helfman, 1998 126,485 250,000
President
1997 $147,115 25,000(1)
1996 $180,000
Lala Bessler 1998 $116,406 125,000
(1) Represents options previously granted with the exercise price lowered to
$.44 on August 21, 1997.
OPTION GRANTS IN 1998
Percent of Total
Options Options Granted to Exercise Expiration
Name Granted Employees in Fiscal Price Date
(a) (b) Year 1998 $
David Guttmann,
Chief Executive
Officer None
Richard Helfman 250,000 43% $.28 November 30, 2003
Lala Bessler 125,000 21.5% $.28 November 30, 2003
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AGGREGATED OPTION EXERCISES IN 1998 AND FOR YEAR-END OPTION VALUES
Number of Value of
Unexercised Unexercised
Options in-the-Money
at Fiscal Options
Year-End at Fiscal
(#) Year-End ($)
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- 275,000/0 -0-
Lala Bessler -0- -0- 125,000/0 -0-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, 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, and by all officers and directors
as a group:
Percentage of
Name of Beneficial Number of Shares of Class as of
Owner Common Stock Owned (1) December 31, 1998
----- ---------------------- -----------------
Bonnie Septimus (2) 1,390,664 28.6%
72 Lord Avenue
Lawrence, NY
David Guttmann (3) 1,526,738 30.2%
170 53rd Street
Brooklyn, NY
Richard Helfman (4) 297,777 6.8%
170 53rd Street
Brooklyn, NY
Lala Bessler (5) 135,046 3.2%
170 53rd Street
Brooklyn, NY
All officers and
directors as a
group (4 persons)(6) 1,969,561 36.0%
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(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 275,000 shares underlying immediately exercisable options.
(5) Includes 125,000 shares underlying immediately exercisable options and
2,190 shares owned by her husband as to which she disclaims beneficial
interest of.
(6) Includes the shares described in footnotes (3), (4) and (5) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Barry Septimus and David Guttmann, personally guaranteed certain
indebtedness of the Company in the amount of $2,693,000 as of December 31, 1998.
In March 1993, the Company borrowed $600,000 from an affiliated entity
of a former 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. These loans are 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 1998 was
$750,000. 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
aggregating 3,000,000 from Century Business Credit Corporation ("Century").
Currently Ace and IHW can borrow 1,800,000 and 1,200,000 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.
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
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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 Ergotrade D.O.O. Incorporated by
reference to Form 10-KSB for year ended December 31, 1997.
(V) Amendment No. 3 to Loan and Security Agreement with Century Business
Credit Corporation. Incorporated by reference to Form 10-KSB for year
ended December 31, 1997.
(W) 1998 Stock Option Plan incorporated by reference to Appendix A to the
Proxy Statement for the 1998 Shareholders' meeting.
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REPORTS ON FORM 8-K
- -------------------
None.
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SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CREATIVE TECHNOLOGIES CORP.
By:
--------------------------
Richard Helfman, President
Dated: April , 1999
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.
Chairman of the Board
- ------------------------ of Directors
David Guttmann April , 1999
President, Director and
- ------------------------ Chief Financial Officer
Richard Helfman April , 1999
Director
- ------------------------ April , 1999
Lala Bessler
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CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet F-2
Statement of Operations F-3
Statement of Changes in Stockholders' Deficiency F-4
Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-19
<PAGE>
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, 1998 and the related
consolidated statements of operations, changes in stockholders' deficiency, and
cash flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative
Technologies Corp. and Subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for each of the two years in the period
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 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 LLP
New York, New York
March 17, 1999
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------
ASSETS (Note 9)
<S> <C>
Current Assets:
Cash (Note 1) $ 1,000
Accounts receivable - net of allowance for doubtful accounts of $285,000
(Notes 1, 2 and 9) 2,875,000
Inventories (Notes 1 and 9) 1,349,000
Prepaid expenses and other current assets 194,000
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,419,000
Fixed Assets - less accumulated depreciation and amortization of $332,000
(Notes 1, 3 and 9) 188,000
Other Assets (Notes 1 and 4) 834,000
=================================================================================================
TOTAL ASSETS $ 5,441,000
=================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Loans payable - financial institution (Notes 1 and 9) $ 2,283,000
Notes payable - related parties (Notes 1, 9 and 13) 3,790,000
Accounts payable and accrued expenses (Notes 1 and 6) 4,647,000
Due to related party (Note 8) 368,000
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,088,000
Subordinated Note Payable - affiliate (Note 9) 400,000
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,488,000
- -------------------------------------------------------------------------------------------------
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) 308,000
- -------------------------------------------------------------------------------------------------
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 4,127,000 shares 371,000
Additional paid-in capital 8,692,000
Accumulated deficit (17,188,000)
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIENCY (6,355,000)
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 5,441,000
=================================================================================================
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-2
</TABLE>
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Notes 1 and 2) $10,862,000 $15,263,000
Cost of sales 7,999,000 10,030,000
- -------------------------------------------------------------------------------------------------
Gross profit 2,863,000 5,233,000
- -------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,789,000 3,080,000
Warehousing costs 985,000 1,173,000
Restructuring costs (Notes 3 and 11) 587,000 -
Interest expense and financing costs (Note 9) 856,000 887,000
- -------------------------------------------------------------------------------------------------
5,217,000 5,140,000
- -------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (2,354,000) 93,000
- -------------------------------------------------------------------------------------------------
Extraordinary item - gain on settlement of debt (Note 9) - 188,000
- -------------------------------------------------------------------------------------------------
Net income (loss) (2,354,000) 281,000
Less undeclared dividends on preferred stock (288,000) (632,000)
- -------------------------------------------------------------------------------------------------
Net loss applicable to common shares $(2,642,000) $ (351,000)
=================================================================================================
Per common share - basic and diluted (Note 1):
Loss before extraordinary item $ (.90) $ (.13)
Extraordinary item - .04
=================================================================================================
Net loss $ (.90) $ (.09)
=================================================================================================
Weighted average number of shares 2,929,000 4,117,000
=================================================================================================
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 AND 1998
- -----------------------------------------------------------------------------------------------------------------------------------
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, 1997 600 $600,000 1,170 $1,170,000 2,611,000 $234,000
Issuance of common stock in lieu of
interest (Note 9) - - - - 386,000 35,000
Issuance of common stock in connection with
acquisition (Note 4) - - - - 1,000,000 90,000
Increase in carrying value of 1997-A preferred
stock issued in connection with acquisition - - - - - -
1997-A preferred stock dividend accrued - - - - - -
Net loss for the year ended December 31, 1997 - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 600 600,000 1,170 1,170,000 3,997,000 359,000
Issuance of common stock for services - - - - 130,000 12,000
Increase in carrying value of 1997-A preferred
stock issued in connection with acquisition - - - - - -
1997-A preferred stock dividend accrued - - - - - -
Net income for the year ended December 31, 1998 - - - - - -
===================================================================================================================================
Balance at December 31, 1998 600 $600,000 1,170 $1,170,000 4,127,000 $371,000
===================================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1998
- -------------------------------------------------------------------------------------------------
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $8,900,000 $(15,115,000) $(4,211,000)
Issuance of common stock in lieu of
interest (Note 9) 158,000 - 193,000
Issuance of common stock in connection with
acquisition (Note 4) 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 9,103,000 (17,469,000) (6,237,000)
Issuance of common stock for services 44,000 - 56,000
Increase in carrying value of 1997-A preferred
stock issued in connection with acquisition (35,000) - (35,000)
1997-A preferred stock dividend accrued (420,000) - (420,000)
Net income for the year ended December 31, 1998 - 281,000 281,000
=================================================================================================
Balance at December 31, 1998 $8,692,000 $(17,188,000) $(6,355,000)
=================================================================================================
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,354,000) $ 281,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 87,000 86,000
Restructuring charge 587,000 -
Amortization of goodwill 8,000 32,000
Noncash interest expense (Note 9) 193,000 -
Shares issued for services (Note 7) - 56,000
Debt forgiveness - (188,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (81,000) 397,000
Decrease in inventories 64,000 761,000
Increase (decrease) in prepaid expenses and other
current assets 62,000 (3,000)
Increase (decrease) in accounts payable and accrued expenses 1,148,000 (1,636,000)
- --------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (286,000) (214,000)
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of fixed assets (14,000) (11,000)
Cash acquired in noncash acquisition (Note 4) 2,000 -
- --------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (12,000) (11,000)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds (repayments) from loans payable - financial
institution 312,000 (65,000)
Repayment of loans payable - bank - (12,000)
Proceeds from notes payable - related parties 261,000 310,000
Repayment of notes payable - related parties (359,000) (391,000)
Amounts due to related party (Note 8) - 368,000
- --------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 214,000 210,000
- --------------------------------------------------------------------------------------------------
Net decrease in cash (84,000) (15,000)
Cash at beginning of year 100,000 16,000
==================================================================================================
Cash at end of year $ 16,000 $ 1,000
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 416,000 $ 594,000
==================================================================================================
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 -
==================================================================================================
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-5
</TABLE>
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT Creative Technologies Corp. ("CTC") and Subsidiaries
ACCOUNTING (collectively the "Company") are engaged in importing and
POLICIES: 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 a loss in the year ended December 31,
1997 of $2,354,000, earned income of $93,000 (before an
extraordinary gain of $188,000) in the year ended December
31, 1998, and has a working capital deficiency of $6,669,000
as of December 31, 1998. 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. In addition,
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, to present both basic and
diluted net loss 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.
F-6
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Net loss per common share is based on the net loss increased
by the cumulative dividend requirements on preferred stock of
$288,000 for the year ended December 31, 1997 and $632,000
for the year ended December 31, 1998 divided by the
weighted-average number of common shares outstanding.
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, loans 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.
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, which was
to take effect for years beginning after December 15, 1997.
Accordingly, the Company adopted SFAS Nos. 131 and 132 in
fiscal 1998. Adoption of SFAS Nos. 131 and 132 has no impact
on the Company's consolidated financial position, results of
operations or cash flows.
The Company does not believe that any recently issued, but
not yet effective, accounting standards will have a material
effect on the Company's consolidated financial position,
results of operations or cash flows.
F-7
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. CONCENTRATION Two customers comprised approximately 24% of the Company's
OF CREDIT accounts receivable at December 31, 1998, and one of these
RISK: customers comprised approximately 10% of sales for the year
then ended. Such sales have been reported in the small
household products business segment.
3. FIXED ASSETS: Fixed assets are comprised of the following:
Estimated
Useful Life
-------------------------------------------------------------
Equipment $ 57,000 5 to 7 years
Furniture and fixtures 224,000 5 to 7 years
Leasehold improvements 239,000 10 to 20 years
-------------------------------------------------------------
520,000
Less accumulated depreciation and
amortization (332,000)
-------------------------------------------------------------
$ 188,000
=============================================================
As a result of operations during the year ended December 31,
1997, the Company reduced the carrying value of certain fixed
assets by approximately $539,000 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 $587,000 for the year ended December 31,
1997.
4. ACQUISITION OF On October 27, 1997, CTC executed a merger agreement among a
ACE SURGICAL subsidiary of the Company, Ace, David Guttmann and Barry
SUPPLY CO., Septimus, the stockholders (the "Stockholders") of Ace and
INC.: 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:
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
=============================================================
F-8
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 redeemable
preferred stock, valued at approximately $265,000 (see Note
5). Subsequent to the merger, the subsidiary Ace merged into
and changed its name to Ace Surgical Supply Co., Inc.
The results of operations of Ace have been included in the
1997 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
1997-A Preferred Stock issued and amortization of goodwill.
5. PREFERRED During October 1997, in connection with the acquisition of
STOCK: Ace, the board of directors designated 4,000 shares of
redeemable preferred stock as "1997-A Preferred Stock" having
a stated value 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.
F-9
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
$496,000 at December 31, 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, as amended;
(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, as
amended.
Management intends to satisfy the cumulative unpaid 1996
Preferred Stock dividends which aggregated $182,000 at
December 31, 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, as amended;
(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.
F-10
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Management intends to satisfy the cumulative unpaid 1996-A
Preferred Stock dividends which aggregated $315,000 at
December 31, 1998 through the issuance of securities and,
therefore, such amounts have not been accrued.
6. ACCOUNTS The following are included in accounts payable and accrued
PAYABLE expenses at December 31, 1998:
AND ACCRUED
EXPENSES: Accounts payable $2,990,000
Interest 533,000
Dividends on 1997-A preferred stock 496,000
Other accrued expenses 628,000
-------------------------------------------------------------
$4,647,000
=============================================================
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 could have been issued under the 1985 Plan
was 77,667. No additional options can be granted under this
Plan and all options granted under this Plan have expired.
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.
During July 1998, the shareholders approved the establishment
of a stock option plan (the "1998 Plan") which provides for
issuance of incentive stock options or nonqualified stock
options to eligible employees, officers, nonemployee
directors and certain outside consultants. The aggregate
number of shares of common stock to be issued under this plan
is 750,000. Options are granted at the discretion of the
board of directors. Options granted under the 1998 Plan
expire at the end of 5 or 10 years from the date of grant or
3 months or 1 year after termination of service to the
Company or employment, whichever is earlier. Incentive stock
options may not be granted at less than fair market value of
the underlying shares at date of grant (110% of fair market
value for a 10% or greater stockholder).
F-11
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock option activity under the 1985 Plan, the 1993 Plan and the 1998
plan is summarized as follows:
Year ended December 31, 1997 1998
- ------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------
Options outstanding at
beginning of year 155,777 $3.91 149,994 $ 2.10
Granted 116,663 $ .44 580,000 $ .28
Expired and canceled (122,446) $2.82 (5,000) $12.75
- ------------------------------------------------------------------------
Options outstanding at end
of year 149,994 $2.10 724,994 $ .57
========================================================================
Options exercisable at end
of year 143,326 $2.18 721,660 $ .57
========================================================================
Weighted-average fair value of
options granted during the
year 116,663 $ .32 580,000 $ .28
========================================================================
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, 1998:
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
- ------------------------------------------------------------------------
$ .28 580,000 $ .28 4.92 580,000 $ .28
$ .44 116,663 $ .44 3.60 113,329 $ .44
$ 2.06 16,666 $ 2.06 4.44 16,666 $ 2.06
$ 7.50 1,667 $ 7.50 1.49 1,667 $ 7.50
$11.63-$17.16 9,998 $15.32 2.42 9,998 $15.32
- ------------------------------------------------------------------------
724,994 4.65 721,660
========================================================================
F-12
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1998, 16,667 and 170,000 options are
available for future grant under the 1993 and 1998 Plans,
respectively. 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
1997 and net income in 1998 would have been $(2,389,000) and
$177,000 or $(.91) per share and ($.11) 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,
1998:
Expected life of options 5
=============================================================
Risk-free interest rate 4.45%
=============================================================
Expected volatility of Creative Technologies, Inc. 73%
=============================================================
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, 1998, 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 (a) $12.00 April 1, 2000
16,667 (b) $ 5.46 August 22, 2000
-------------------------------------------------------------
(a) Issued in 1995 in connection with a financing.
(b) Issued in 1995 in connection with a series of private
placements.
During the year ended December 31, 1998, the Company issued
130,000 shares of common stock (valued at $56,000) as
consideration for services performed on behalf of the Company
and are reflected in the financial statements as part of
selling, general and administrative expenses in the
consolidated statement of operations.
F-13
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. COMMENTS The Company is obligated under a noncancelable operating
AND lease with a related party for office and warehousing space
CONTINGENCIES: 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
$652,000 and $750,000 in 1997 and 1998, respectively. Prior
to the acquisition of Ace in October 1997, substantially all
rent was paid to them. Substantially all of the rent was paid
to another related party for the remainder of 1997 and 1998.
At December 31, 1998, included in due to related parties,
rent aggregated approximately $368,000.
Minimum future obligations under the lease are as follows:
Year ending December 31,
1999 $ 750,000
2000 750,000
2001 750,000
2002 750,000
2003 750,000
Thereafter 5,563,000
-------------------------------------------------------------
$9,313,000
=============================================================
Ace has guaranteed a $2,400,000 bond issued on the office and
warehouse facility leased by the Company.
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 At December 31, 1998, the Company had outstanding related
AND RELATED party notes payable totaling $3,790,000. Of this amount,
PARTY $3,040,000 bears interest at 12% and $750,000 bears interest
TRANSACTIONS: at 18%. These notes are all due on demand and include
$1,000,000 due to an entity whose principal was a director of
the Company. The remaining $2,790,000 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). Certain of these related party note
holders have been granted a security interest in the assets
of CTC subordinated to the rights of the financial
institution described below. Notes payable aggregating
$3,693,000 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.
At December 31, 1998, the Company owed $2,283,000 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
F-14
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 (7.75% at December 31,
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, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to
maintain certain ownership percentages at December 31, 1998.
At December 31, 1998, the Company was not in compliance with
certain provisions of the agreement which have been waived by
the financial institution.
At December 31, 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.
During March 1996 the Company and a bank entered into an
agreement for the repayment of debt owed by the Company to
the bank. As part of this agreement the Company issued to the
bank a non-interest bearing note in the amount of $200,000
payable March 11, 1998. During November 1998, the bank agreed
to accept approximately $12,000 in full payment of this note.
No provision for income taxes is reflected on this
transaction due to net operating loss carryforwards available
to the Company from prior years.
The gain on settlement of debt is shown as an extraordinary
item in the financial statements.
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 two related parties, a
principal stockholder and the spouse of a principal
stockholder of the Company. During 1997 and 1998, $30,000 and
$120,000, respectively, was paid to each of these
individuals.
10. INCOME TAXES: The major deferred tax asset (liability) items at
December 31, 1998 are as follows:
Net operating loss carryforwards $ 7,636,000
Provision for doubtful accounts (4,000)
Depreciation of fixed assets (35,000)
Amortization of goodwill 14,000
-------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 7,611,000
Valuation allowance (7,611,000)
-------------------------------------------------------------
NET DEFERRED TAX ASSETS $ - 0 -
=============================================================
F-15
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 provision for taxes
and extraordinary item is attributable to the following:
December 31, 1997 1998
-------------------------------------------------------------
Income tax (benefit) provision at 34% $(807,000) $32,000
State and local income tax (benefit)
provision - net of federal tax effect (190,000) 7,000
Increase (decrease) in valuation
allowance on deferred tax assets 1,019,000 (97,000)
Other (22,000) 58,000
-------------------------------------------------------------
$ - 0 - $ - 0 -
=============================================================
The Company's net operating loss carryforwards for income tax
reporting purposes aggregate approximately $17,251,000 with
the following expiration dates: $6,973,000 in year 2010,
$7,129,000 in year 2011, and the remaining balance of
$3,149,000 in year 2012.
11. RESTRUCTURING During 1997, the Company reassessed the carrying values of
COSTS: 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.
12. PRODUCT The Company has received notice that several consumers claim
LIABILITY to have suffered finger injuries while using one of the
AND Company's appliance products. All but one of the claims are
LITIGATION: 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 operation 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. As of December
31, 1998, such voluntary corrective action plan is
substantially completed and the Company has a $50,000 reserve
which it believes is adequate to cover any additional costs
to be incurred in completing the plan.
F-16
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
13. RETIREMENT A subsidiary of the Company maintains a 401(k) self-directed
PLAN: retirement plan covering its eligible employees, as defined.
There were no contributions made during the year ended
December 31, 1998. An officer serves as trustee of the plan.
At December 31, 1998, 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 small
household finished goods from suppliers in the Netherlands
and Germany and its medical, janitorial and dietary finished
goods from suppliers in the United States.
15. BUSINESS In accordance with SFAS No. 131, the Company's business
SEGMENTS: segments are organized around its product lines, small
household products and medical, janitorial and dietary
products. The 1997 information has not been restated since
there has been no change in the Company's reportable
segments. The following table is a summary of these segments
for the years ended December 31, 1997 and 1998. The 1997
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, 1998.
F-17
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31, 1997
- ---------------------------------------------------------------------------------------------
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------
Profit (loss) before
extraordinary items
and provision for
income tax $(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
=============================================================================================
(continued)
F-18
</TABLE>
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31, 1998
- ---------------------------------------------------------------------------------------------
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to
unaffiliated
customers $ 7,454,000 $7,809,000 - - $15,263,000
Intersegment sales 11,000 - - $ (11,000) -
- ---------------------------------------------------------------------------------------------
Total sales $ 7,465,000 $7,809,000 - $ (11,000) $15,263,000
=============================================================================================
Operating profit
(loss) $ 464,000 $ 947,000 $(431,000) - $ 980,000
Interest expense (610,000) (277,000) - - (887,000)
- ---------------------------------------------------------------------------------------------
Profit (loss) before
extraordinary item
and provision for
income taxes $ (146,000) $ 670,000 $(431,000) - $ 93,000
=============================================================================================
Extraordinary item -
gain on settlement
of debt $ 188,000 - - - $ 188,000
=============================================================================================
Depreciation and
amortization of
fixed assets $ 66,000 $ 20,000 - - $ 86,000
=============================================================================================
Amortization of
Intangibles $ - $ - $ 32,000 $ - $ 32,000
=============================================================================================
Capital expenditures $ 4,000 $ 7,000 - - $ 11,000
=============================================================================================
Identifiable assets
at December 31,
1998 $ 2,315,000 $3,512,000 $482,000 $(868,000) $ 5,441,000
=============================================================================================
F-19
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 3,160,000
<ALLOWANCES> 285,000
<INVENTORY> 1,349,000
<CURRENT-ASSETS> 4,419,000
<PP&E> 520,000
<DEPRECIATION> 332,000
<TOTAL-ASSETS> 5,441,000
<CURRENT-LIABILITIES> 11,088,000
<BONDS> 0
308,000
1,770,000
<COMMON> 371,000
<OTHER-SE> (8,496,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,441,000
<SALES> 15,263,000
<TOTAL-REVENUES> 15,263,000
<CGS> 10,030,000
<TOTAL-COSTS> 10,030,000
<OTHER-EXPENSES> 4,253,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 887,000
<INCOME-PRETAX> 93,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 93,000
<DISCONTINUED> 0
<EXTRAORDINARY> 188,000
<CHANGES> 0
<NET-INCOME> 281,000
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
