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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, 1999 Commission File No. 0-15754
CREATIVE TECHNOLOGIES CORP.
---------------------------
(Exact name of small business issuer as specified in its Charter)
NEW YORK 11-2721083
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(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, 1999 were $14,929,000.
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $543,861 as of March 15, 2000.
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The number of shares outstanding of the registrant's Common Stock as of March
15, 2000 is:
Class Outstanding at March 15, 2000
----- -----------------------------
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 IHW, Inc. ("IHW") an operating company who in turn owns the
stock of Ace Surgical Supplies Co., Inc. ("Ace") an operating company,
collectively (the "Company"). Ace, in business since 1974, was acquired by CTC
in October 1997 and transferred to IHW in November 1999. It distributes
janitorial, dietary and medical products in the tri-state area, generally to
hospitals, nursing homes and assisted living facilities. Ace is currently
expanding its customer base to include various other facilities including
educational, hospitality, institutional and entertainment. 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 International BV,
Soehnle-Waagen GmbH + Co., MAWA Metallwarenfabrik Wagner GmbH and Foppa Pedretti
S.p.A. 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 that provides
for IHW to have the exclusive right to distribute Brabantia products in the
United States. This 5-year agreement renews automatically provided that all
terms and conditions are being met. To date this has been the case and the
company enjoys an excellent working relationship with Brabantia. 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.
In 1999 sales of Brabantia products represented approximately
44% 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 specialty stores,
catalogs, hardware stores, mass merchandising stores and discounters. The
Company 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 8% of the total sales of the Company
in 1999. 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 MAWA, and Foppa
Pedretti products. 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. The
marketing efforts for these product lines began in early 1999 and sales in 1999
were not material & are not expected to be material during 2000.
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Ace Surgical Supply Co., Inc.
Ace, a wholly owned subsidiary purchased by the Company in
October 1997, has distributed janitorial, dietary and medical supplies generally
to Hospitals, nursing homes and assisted living 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
1999 were approximately 46% 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, 1999 such voluntary corrective action plan was completed and the
unused balance of a reserve to cover any additional cost to be incurred in
completing the plan is no longer required.
Over the past years, the Company has received notice that
several other consumers claimed to have suffered finger injuries while using the
pasta machine. To date all the claims have been settled with no material effect
on the Company's financial condition. 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. The Company no longer markets or sells
this product.
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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 29 employees. These include 15 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 5
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 28,800 square feet located at 170 53rd Street,
Brooklyn, New York 11232 and is leased on a month to month basis from a company
owned by the Company's principal stockholders who sold such building in April
1999 and terminated the Company's lease by the mutual consent of the parties.
Rent expense, inclusive of real estate taxes and assessments, for 1999 was
approximately $371,000. See "Certain Relationships and Related Transactions."
Outside public warehouse space is utilized as needed. 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. Based on facts currently available,
management believes that the disposition of matters that are pending or asserted
will not have a material 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 1999 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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Fiscal Year Ended Fiscal Year Ended
December 31, 1998 December 31, 1999
High Bid Low Bid High Bid Low Bid
----------------- -----------------
COMMON STOCK (CRTV)
- -------------------
First Quarter $0.46875 $0.40625 $0.3750 $0.1250
Second Quarter $0.40625 $0.34375 $0.1875 $0.1000
Third Quarter $0.3750 $0.3125 $0.1250 $0.1000
Fourth Quarter $0.3125 $0.2813 $0.3825 $0.09375
- ----------------------------
The closing bid price of the Common Stock on March 15, 2000 was $0.30.
At March 15, 2000, 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,
1999 of $56,000 compared to an operating profit of $93,000 (before an
extraordinary gain of $188,000) for the year ended December 31, 1998. As of
December 31, 1999 the Company had a working capital deficit of $6,038,000. The
1999 results were positively affected by greater sales by IHW, a strong dollar,
and a downsizing in the amount of warehouse and administrative space being
leased. The results of operation were negatively affected by a decrease in Ace's
sales and the continued heavy interest burden of the notes payable which
represented monies borrowed to support the now discontinued electrics business
and loans payable from a financial institution.
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 continued to distribute the products of other European
companies in the United States. While management does not expect material sales
this year from these other lines, it believes long term these new products 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.
Ace experienced a decline in sales as a result of management's
decision to give up certain low profit accounts and product lines to concentrate
on implementing a long-term strategy to develop and offer higher margin and less
competitive services and products.
The Company believes that it will be able to continue as a going concern and
generate sufficient cash flow to meet its
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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. The Company
believes that 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 (Century), and is continuing to look for ways to cut costs, reduce
overhead, and operate more efficiently.
Liquidity and Capital Resources
For the year ended December 31, 1999 ("fiscal 1999"), cash used in
operating activities was $161,000. Cash of $96,000, was used in investing
activities and cash of $319,000 was provided by financing activities. As a
result, at December 31, 1999, cash increased by $62,000 to $63,000 compared to
$1,000 at December 31, 1998. The Company had a negative working capital of
$6,038,000 at December 31, 1999.
Accounts payable and other liabilities increased to $4,980,000 at
December 31, 1999 from $4,647,000 at December 31, 1998. This is attributable
primarily to IHW taking advantage of an opportune buying situation and
purchasing additional quantities of basic products.
At December 31, 1999, the Company had $3,915,000 of notes outstanding
to various individuals and shareholders of the Company. These loans bear
interest at between 12%-18% per annum and of this amount $3,439,000 is due on
demand and the remaining $476,000 is due in monthly installments through July
2003. Of these related party loans, $2,771,000 was guaranteed by certain
stockholders of the Company.
At December 31, 1999, the Company had a credit line with Century in
the total amount of $3,000,000, which expires June 2001 and had a balance of
$2,266,000 at December 31, 1999. 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. The Company is in technical default of certain
non-monetary provisions of its loan and security agreement. The Company is
negotiating to obtain a waiver from Century. See Note 8 of the notes to the
financial statements for a more detailed description of this transaction.
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 of $685,000 and interest of $397,000
totaling $1,082,000 were made by the guarantors of these notes, $1,037,000
during the second quarter of 1999 and $45,000 during the fourth quarter of 1999.
The Company delivered promissory notes 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. The waived interest and principal forgiven
totaling $420,000 has been recorded as a capital contribution. Principal and
interest in the amount of $402,000 and $6,000 respectively, was paid as part of
the $1,082,000 of payments made by the guarantors as described above and
repayment of the remaining $591,000 of debt is being made in varying monthly
installments over 48 months with interest at the rate of 12% per annum. During
the year ended December31, 1999 principle payments related to these term loans
aggregated $33,000. In addition the Company repaid $52,000 of loans from other
related party noteholders. Also the Company borrowed an additional $200,000 from
a related party which was repaid during the year.
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Results of Operations
The Company had net sales of approximately $14,929,000 in the fiscal
year ended December 31, 1999 compared to net sales of approximately $15,263,000
for the fiscal year ended December 31, 1998. The decrease in sales was primarily
the result of lower sales in Ace, which resulted from management's decision to
give up certain low profit accounts and product lines.
Selling, general and administrative expenses for Fiscal 1999 were
$2,991,000, a decrease of $89,000 from fiscal 1998 expense of $3,080,000.
Warehousing costs also were lowered to $921,000 for fiscal 1999 from $1,173,000
in fiscal 1998. The decreases are attributable primarily to lower expenses
associated with the Company's move into smaller office and warehouse space.
Interest expense and financing costs in Fiscal 1999 were $928,000, an
increase of $41,000 from the $887,000 incurred during Fiscal 1998. This increase
is the result of the transactions and restructuring of the related party notes
payable.
Ending inventory at December 31, 1999 was $1,772,000 compared to
$1,349,000 as of December 31, 1998. This increase in inventory is primarily the
result of IHW making large purchases late in the year to take advantage of an
opportune buying situation.
The Company had an extraordinary gain from the forgiveness of debt in
the amount of $188,000 for the year ended December 31, 1998.
Due to the forgoing, the Company had net income of approximately
$56,000 for fiscal 1999 compared to net income of $93,000 (before an extra
ordinary gain of approximately $188,000) in fiscal 1998.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Pages F-1 through F-18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The officers and directors of the Company are as follows:
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Name Age Title
---- --- -----
David Guttmann 53 Chairman of the Board
Richard Helfman 53 Director and President of
the Company and IHW
David Selengut 44 Secretary
Lala Bessler 52 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 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 & Cyruli 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,
1999.
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, 1999 $143,160
Chief Executive Officer
1998 $106,333
1997 $122,596 16,666(1)
Richard Helfman, 1999 $180,000
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President
1998 $126,485 250,000
1997 $147,115 25,000(1)
Lala Bessler 1999 $117,625
1998 $116,406 125,000
(1) Represents options previously granted with the exercise price lowered
to $.44 on August 21, 1997.
OPTION GRANTS IN 1999
None
AGGREGATED OPTION EXERCISES IN 1999 AND FOR YEAR-END OPTION VALUES
Number of Value of
Unexercised Unexercised
Options in-the-Money
at Fiscal Options
Year-End at Fiscal
(#) Year-End ($)
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, 1999, 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. This table includes the shares of 1997 Preferred Stock which have
the right to cast 1000 votes per share of 1997 Preferred Stock.
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Percentage of
Name of Beneficial Number of Shares of Class as of
Owner Common Stock Owned (1) December 31, 1998
- ------------------ ---------------------- -----------------
Bonnie Septimus (2) 2,715,164 49.8%
72 Lord Avenue
Lawrence, NY
David Guttmann (3) 2,883,738 52.6%
170 53rd Street
Brooklyn, NY
Richard Helfman (4) 297,777 6.7%
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) 3,316,561 56.4%
(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 and
1,324.5 shares of 1997 Preferred Stock, which represents the right to
1,324,500 votes.
(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 and of 1,357 shares of 1997 Preferred Stock, which represents the
right to 1,357,000 votes.
(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 $2,771,000 as of December 31, 1999.
Payments by these individuals during 1999 amounted to $1,082,000 under their
guarantee.
The Company's executive offices and warehouse at 170 53rd Street,
Brooklyn, NY are leased on a month to month basis at a cost of $13,200 per month
inclusive of real estate taxes from a Company owned by the Company's principal
stockholders. During April 1999 the lessor sold the building previously leased
by the Company and terminated the lease by the mutual consent of the parties. As
an inducement for the Company canceling its lease the lessor 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 $87,000 at December 31,
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1999. Rent and expenses inclusive of real estate taxes for the Brooklyn facility
for 1999 was $355,000.
In December 1996, the Company obtained a line of credit from Century
Business Credit Corporation ("Century"). 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 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.
(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.
(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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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 year
ended December 31, 1999.
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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 13, 2000
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
David Guttmann of Directors
April 13, 2000
- -------------------------- President, Director and
Richard Helfman Chief Financial Officer
April 13, 2000
- -------------------------- Director
Lala Bessler April 13, 2000
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CREATIVE TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
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-17
<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, 1999 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, 1999 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 10, 2000
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
ASSETS (Note 8)
Current Assets:
Cash (Note 1) 63,000
Accounts receivable - net of allowance for doubtful accounts and rebates of $386,000
(Notes 1, 2 and 8) 3,170,000
Inventories (Notes 1 and 8) 1,772,000
Prepaid expenses and other current assets (Note 8) 278,000
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,283,000
Fixed Assets - less accumulated depreciation of $23,000 (Notes 1, 3 and 8) 107,000
Other Assets (Note 1) 816,000
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,206,000
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Loans payable - financial institution (Notes 1 and 8) $ 2,266,000
Notes payable - related parties (Notes 1, 8 and 11) 3,439,000
Accounts payable and accrued expenses (Notes 1 and 5) 4,980,000
Due to related party (Note 8) 636,000
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,321,000
Notes Payable - related parties (Notes 1 and 8) 476,000
Subordinated Note Payable - affiliate (Note 8) 400,000
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,197,000
- -------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 7, 8 and 10)
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 4) 351,000
- -------------------------------------------------------------------------------------------------------
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 4) 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 4) 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 8,649,000
Accumulated deficit (17,132,000)
- -------------------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIENCY (6,342,000)
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 6,206,000
=======================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be read
in conjunction with the consolidated financial statements
F-2
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Notes 1 and 2) $15,263,000 $14,929,000
Cost of sales 10,030,000 10,033,000
- --------------------------------------------------------------------------------------------------
Gross profit 5,233,000 4,896,000
- --------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 3,080,000 2,991,000
Warehousing costs 1,173,000 921,000
Interest expense and financing costs (Note 8) 887,000 928,000
- --------------------------------------------------------------------------------------------------
5,140,000 4,840,000
- --------------------------------------------------------------------------------------------------
Income before extraordinary item 93,000 56,000
- --------------------------------------------------------------------------------------------------
Extraordinary item - gain on debt forgiveness (Note 8) 188,000 -
- --------------------------------------------------------------------------------------------------
Net income 281,000 56,000
Less undeclared dividends on preferred stock (632,000) (632,000)
- --------------------------------------------------------------------------------------------------
Net loss applicable to common shares $ (351,000) $ (576,000)
==================================================================================================
Per common share - basic and diluted (Note 1):
Loss before extraordinary item $ (.13) $ (.14)
Extraordinary item .04 -
- --------------------------------------------------------------------------------------------------
Net loss $ (.09) $ (.14)
==================================================================================================
Weighted-average number of shares 4,117,000 4,127,000
==================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be read
in conjunction with the consolidated financial statements
F-3
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 AND 1999
- -----------------------------------------------------------------------------------------------------
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, 1998 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
Increase in carrying value of 1997-A
preferred stock issued in connection
with acquisition - - - - - -
1997-A preferred stock dividend accrued - - - - - -
Capital contribution arising from
restructuring of related party debt
(Note 8) - - - - - -
Net income for the year ended
December 31, 1999 - - - - - -
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1999 600 $600,000 1,170 $1,170,000 4,127,000 $371,000
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 AND 1999
- ---------------------------------------------------------------------------------
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1998 $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)
Increase in carrying value of 1997-A
preferred stock issued in connection
with acquisition (43,000) - (43,000)
1997-A preferred stock dividend accrued (420,000) - (420,000)
Capital contribution arising from
restructuring of related party debt
(Note 8) 420,000 - 420,000
Net income for the year ended
December 31, 1999 - 56,000 56,000
- ---------------------------------------------------------------------------------
Balance at December 31, 1999 $8,649,000 $(17,132,000) $(6,342,000)
=================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be read
in conjunction with the consolidated financial statements
F-4
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 281,000 $ 56,000
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 86,000 42,000
Amortization of goodwill 32,000 35,000
Debt forgiveness (188,000) -
Shares issued for services 56,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 397,000 (295,000)
Decrease (increase) in inventories 761,000 (423,000)
Increase in prepaid expenses and other current assets (3,000) (101,000)
Increase (decrease) in accounts payable and accrued expenses (1,636,000) 525,000
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (214,000) (161,000)
- --------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities - acquisition of fixed assets (11,000) (96,000)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayments of loans payable - financial institution (65,000) (17,000)
Repayment of loans payable - bank (12,000) -
Proceeds from notes payable - related parties 310,000 200,000
Repayment of notes payable - related parties (391,000) (285,000)
Proceeds from related party 368,000 790,000
Repayment to related party - (369,000)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 210,000 319,000
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (15,000) 62,000
Cash at beginning of year 16,000 1,000
- --------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,000 $ 63,000
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 594,000 $ 976,000
====================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Payments of $685,000 of principal and $397,000 of interest to noteholders
by guarantors on behalf of the Company - $1,082,000
====================================================================================================================
Note issued to guarantors - $1,082,000
====================================================================================================================
Restructuring of related party debt including interest of $233,000 - $ 420,000
====================================================================================================================
Net fixed assets transferred to a related party in satisfaction of certain
obligations - $ 135,000
====================================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be read
in conjunction with the consolidated financial statements
F-5
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Creative Technologies Corp. ("CTC") and Subsidiaries (collectively the
"Company") are engaged in importing and marketing small household products
(principally to department and discount stores, catalogues and other retailers)
and medical, janitorial and dietary products to hospitals and other healthcare
facilities.
The Company has a working capital deficiency of $6,038,000, a stockholders'
deficiency of $6,342,000 and is in default of certain provisions of a loan and
security agreement as of December 31, 1999. 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 it
will be able to do. Management believes that there are positive sales momentum
being generated by products sold pursuant to the distribution agreements
referred to in Note 7. The Company will continue to negotiate increased bank
credit availability referred to in Note 8. In addition, cost-cutting measures to
reduce overhead are continuing.
The consolidated financial statements include the accounts of CTC and its wholly
owned subsidiary, IHW, Inc. ("IHW") and IHW's wholly owned subsidiary, Ace
Surgical Supply Co., Inc. ("Ace") which IHW acquired from CTC on November 15,
1999. All material intercompany balances and transactions have been eliminated
in consolidation.
Depreciation 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 statement 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.
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 income reduced by the cumulative
dividend requirements on preferred stock of $632,000 for each of the years ended
December 31, 1998 and 1999 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 aggregating $794,000 at December 31, 1999 arising from business
acquisitions accounted for under the purchase method is being amortized over 25
years using the straight-line method and is included in other assets.
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.
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which were issued in June 1997. Adoption of SFAS Nos. 130 and 131 had no impact
on the Company's consolidated financial position, results of operation 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 OF CREDIT RISK:
Three customers comprised approximately 38% of the Company's accounts receivable
at December 31, 1999, and one of these customers comprised approximately 19% 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 $ 77,000 7 years
Furniture and fixtures 53,000 5 to 7 years
- ----------------------------------------------------------------------
130,000
Less accumulated depreciation 23,000
- ----------------------------------------------------------------------
$107,000
======================================================================
4. 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 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.
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 $916,000 at
December 31, 1999.
F-8
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 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
(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, 2000, as amended.
Management intends to satisfy the cumulative unpaid 1996 Preferred Stock
dividends which aggregated $258,000 at December 31, 1999 through the issuance of
securities of the Company.
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, 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
(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, 2000, as amended.
Management intends to satisfy the cumulative unpaid 1996-A Preferred Stock
dividends which aggregated $464,000 at December 31, 1999 through the issuance of
securities of the Company.
F-9
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The following are included in accounts payable and accrued expenses at December
31, 1999:
Accounts payable $3,079,000
Interest 271,000
Dividends on 1997-A preferred stock 916,000
Other accrued expenses 714,000
- -------------------------------------------------------------------
$4,980,000
===================================================================
6. CAPITAL STOCK:
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).
Stock option activity under the 1993 Plan and the 1998 Plan is summarized as
follows:
Year ended December 31, 1998 1999
- -----------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
- -----------------------------------------------------------------------------
Options outstanding at
beginning of year 149,994 $ 2.10 724,994 $ .57
Granted 580,000 $ .28 - -
Expired and canceled (5,000) $12.75 (11,666) $9.93
- -----------------------------------------------------------------------------
Options outstanding at end
of year 724,994 $ .57 713,328 $ .42
=============================================================================
Options exercisable at end
of year 721,660 $ .57 713,328 $ .42
=============================================================================
Weighted-average fair value of
options granted during the year 580,000 $ .28 - -
=============================================================================
F-10
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table presents information relating
to stock options outstanding at December 31, 1999:
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
- -------------------------------------------------------------------------------
$ .28 575,000 $ .28 3.92 575,000 $ .28
$ .44 116,663 $ .44 2.60 116,663 $ .44
$ 2.06 16,666 $ 2.06 3.44 16,666 $ 2.06
$ 7.50 1,667 $ 7.50 .49 1,667 $ 7.50
$11.63 3,332 $11.63 4.40 3,332 $11.63
- -------------------------------------------------------------------------------
713,328 3.68 713,328
===============================================================================
As of December 31, 1999, 28,339 and 175,000 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 income in 1998 would have been
$177,000 or ($.11) per share. No options were granted during the year ended
December 31, 1999.
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 years
============================================================================
Risk-free interest rate 4.5%
============================================================================
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.
F-11
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, 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 which is reflected in the financial statements as part of
selling, general and administrative expenses in the consolidated statement of
operations.
7. COMMITMENTS AND CONTINGENCIES:
During April 1999, the office and warehouse space which the Company leased from
a related party was sold and its lease was terminated by the mutual consent of
the parties. In addition, Ace's guarantee of a $2,400,000 bond issued in
connection with the office and warehouse facility has been terminated as a part
of the sale transaction.
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 the Company's relocation, the costs of which amounted to
approximately $87,000 during the year ended December 31, 1999.
The Company is currently leasing 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. Rent and other expenses charged to operations for office and
warehouse space aggregate $371,000 and $750,000 in 1999 and 1998, respectively.
The Company has distribution agreements with manufacturers of household products
which require the Company to make specified minimum purchases, aggregating
$3,375,000 per year through December 31, 2000. This agreement which grants the
Company exclusive distribution rights automatically renews provided that all
conditions are being met.
8. 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 of $685,000 and interest of $397,000 totaling
$1,082,000 were made by the guarantors of these notes, $1,037,000 during the
second quarter of 1999 and $45,000 during the fourth quarter of 1999. The
Company delivered promissory notes to the guarantors in said amount with
F-12
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 whose notes aggregated
$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. The waived interest and principal forgiven
totaling $420,000 has been recorded as a capital contribution. Principal and
interest in the amount of $402,000 and $6,000 respectively, was paid as part of
the $1,082,000 of payments made by the guarantors as described above and
repayment of the remaining $591,000 of debt is being made in varying monthly
installments over 48 months with interest at the rate of 12% per annum. During
the year ended December 31, 1999 principal payments related to these term loans
aggregated $33,000. In addition, the Company repaid $52,000 of loans from other
related party noteholders. Also the Company borrowed an additional $200,000 from
a related party which was repaid during the year.
At December 31, 1999, the Company had outstanding related party notes totaling
$3,915,000 payable as follows:
Year ending December 31,
2000 $3,439,000
2001 146,000
2002 212,000
2003 118,000
- -----------------------------------------------------------
3,915,000
Current portion 3,439,000
- -----------------------------------------------------------
$ 476,000
===========================================================
Of the $3,915,000 of related party notes, $3,174,000 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
$2,771,000 are personally guaranteed by certain stockholders of the Company.
At December 31, 1999, the Company owed $2,266,000 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. This agreement expires in
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 (8.50% at December 31,
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
F-13
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 December 31, 1999, the Company was not in compliance with certain provisions
of the agreement, which have been waived by the financial institution.
In addition, at December 31, 1999, the Company was in default of other
provisions of the loan and security agreement. The Company is attempting to
obtain a waiver from the financial institution. Prior to granting such waiver,
the financial institution has requested certain documents each in form and
substance satisfactory to the financial institution. The Company is attempting
to satisfy the requirements imposed by the financial institution. One of the
remedies upon the occurrence of an event of default is to demand immediate
repayment of the debt and terminate the loan and security agreement.
At December 31, 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.
At December 31, 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 office and
warehousing space at the same location. In addition, the Company also owed this
entity an additional $140,000 for net advances received from them. Interest on
these obligations are payable at the rate of 12% per annum.
Included in prepaid expenses and other current assets at December 31, 1999 is an
amount due from a related party aggregating $118,133.
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 noninterest-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.
The gain on settlement of debt in the amount of $188,000 which occurred during
November 1998, as described above, is shown as an extraordinary item in the
statement of operations for the year ended December 31, 1998. No provision for
income taxes is reflected on this transaction due to net operating loss
carryforwards available to the Company from prior years.
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 1998 and 1999, $120,000 was charged to
operations for each of these individuals.
F-14
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES:
The major deferred tax asset (liability) items at December 31, 1999 are as
follows:
Net operating loss carryforwards $ 8,265,000
Provision for doubtful accounts (29,000)
Depreciation of fixed assets 6,000
Amortization of goodwill 27,000
- -------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 8,269,000
Valuation allowance (8,269,000)
- -------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ - 0 -
=========================================================================
The difference between the tax provision (benefit) and the amount that would be
computed by applying the statutory federal income tax rate to income before
provision for taxes and extraordinary item is attributable to the following:
December 31, 1998 1999
- -------------------------------------------------------------------------
Income tax provision at 34% $ 32,000 $ 19,000
State and local income tax provision - net of
federal tax effect 7,000 5,000
Utilization of net operating loss carryforwards (97,000) (140,000)
Other 58,000 116,000
- -------------------------------------------------------------------------
$ - 0 - $ - 0 -
=========================================================================
The Company's net operating loss carryforwards for income tax reporting purposes
aggregate approximately $16,896,000 with the following expiration dates:
$6,672,000 in year 2010, $7,129,000 in year 2011, and the remaining balance of
$3,095,000 in year 2012.
10. PRODUCT LIABILITY AND LITIGATION:
The Company has received notice that several consumers claim to have suffered
finger injuries while using one of the Company's appliance products. The
Company's product liability insurance carrier covers all but one of the claims.
The Company denied any wrongdoing with respect to this claim and during July
1999, reached a settlement with the claimant for an amount that did not have a
material effect on the Company's financial position, results of operations or
cash flows.
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.
F-15
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. RETIREMENT PLAN:
A subsidiary of the Company maintains a 401(k) self-directed retirement plan
covering its eligible employees, as defined. There were no contributions made
during the year ended December 31, 1999. An officer serves as trustee of the
plan. At December 31, 1999, the Company has outstanding loans from the plan
aggregating approximately $200,000 due on demand with interest payable monthly
at 12%.
12. 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.
13. 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 tables summarize these segments for the years
ended December 31, 1998 and 1999:
<TABLE>
<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
=========================================================================================
</TABLE>
F-16
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1999
- ------------------------------------------------------------------------------------
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to
unaffiliated
customers $8,137,000 $6,792,000 - - $14,929,000
Intersegment sales 2,000 - - $ (2,000) -
- ----------------------------------------------------------------------------------------
Total sales $8,139,000 $6,792,000 - $ (2,000) $14,929,000
========================================================================================
Operating profit
(loss) $ 729,000 $ 695,000 $(440,000) - $ 984,000
Interest expense (701,000) (227,000) - - (928,000)
- ----------------------------------------------------------------------------------------
Profit (loss) before
provision for income
taxes $ 28,000 $ 468,000 $(440,000) - $ 56,000
========================================================================================
Depreciation and
amortization of
fixed assets $ 31,000 $ 11,000 - - $ 42,000
========================================================================================
Amortization of
intangibles - $ 35,000 - - $ 35,000
========================================================================================
Capital expenditures $ 96,000 - - - $ 96,000
========================================================================================
Identifiable assets
at December 31,
1999 $3,329,000 $3,065,000 $ 484,000 $(672,000) $ 6,206,000
========================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 63,000
<SECURITIES> 0
<RECEIVABLES> 3,556,000
<ALLOWANCES> 386,000
<INVENTORY> 1,772,000
<CURRENT-ASSETS> 5,283,000
<PP&E> 130,000
<DEPRECIATION> 23,000
<TOTAL-ASSETS> 6,206,000
<CURRENT-LIABILITIES> 11,321,000
<BONDS> 0
351,000
1,770,000
<COMMON> 371,000
<OTHER-SE> (8,483,000)
<TOTAL-LIABILITY-AND-EQUITY> 6,206,000
<SALES> 14,929,000
<TOTAL-REVENUES> 14,929,000
<CGS> 10,033,000
<TOTAL-COSTS> 10,033,000
<OTHER-EXPENSES> 3,912,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 928,000
<INCOME-PRETAX> 56,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 56,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,000
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
