<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 2000
Commission File Number: 0-15754
CREATIVE TECHNOLOGIES CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2721083
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation of organization)
170 53rd Street, Brooklyn, New York 11232
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(718) 492-8400
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, Par Value $.09 16,698,870
---------------------------- ------------------------------
(Title of each class) (Outstanding at June 30, 2000)
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements
Balance Sheet as at June 30, 2000 and December 31, 1999 3
Statement of Operations
For the Three and Six Months ended
June 30, 2000 and June 30, 1999 4
Statement of Stockholders' Deficiency
For the Six Months ended June 30, 2000 5
Statement of Cash Flows
For the Six Months ended
June 30, 2000 and June 30, 1999 6
Notes to Condensed Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit 27 21
Financial Data Schedule
2
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ --------------
<S> <C> <C>
Assets Unaudited Audited
Current assets:
Cash $ 1,000 $ 63,000
Accounts receivable-net 2,661,000 3,170,000
Inventories 1,549,000 1,772,000
Prepaid expenses and other current assets 358,000 278,000
------------ ------------
Total current assets 4,569,000 5,283,000
Fixed assets - less accumulated depreciation of
$37,000 and $23,000 respectively 98,000 107,000
Other assets 798,000 816,000
------------ ------------
Total Assets $ 5,465,000 $ 6,206,000
============ ============
Liabilities and Stockholders' Deficiency Current liabilities:
Loans payable - financial institution $ 2,449,000 $ 2,266,000
Notes payable - others 1,082,000 --
Notes payable - related parties 2,359,000 3,439,000
Accounts payable and accrued expenses 4,123,000 4,980,000
Due to related party 641,000 636,000
------------ ------------
Total current liabilities 10,654,000 11,321,000
Notes payable related parties 415,000 476,000
Subordinated note payable - affiliate 400,000 400,000
------------ ------------
Total liabilities 11,469,000 12,197,000
------------ ------------
Redeemable Preferred Stock - $.01 par value;
authorized 5,000,000 shares; 4,000
shares of nonconvertible stock designated as
1997-A preferred stock - $1,000
stated value; issued and outstanding
3,500 shares (redemption and
liquidation value $3,500,000) 375,000 351,000
------------ ------------
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 550 shares and 600 shares,
respectively (liquidation value $550,000 and $600,000) 550,000 600,000
10,000 shares of convertible stock designated as
1996-A preferred stock - $1,000 stated value; issued
and outstanding 340 shares and 1,170 shares,
respectively (liquidation value $340,000 and $1,170,000) 340,000 1,170,000
Common Stock - $.09 par value; authorized
20,000,000 shares, issued and outstanding
16,699,000 shares and 4,127,000 shares, respectively 1,503,000 371,000
Additional paid-in capital 8,163,000 8,649,000
Accumulated deficit (16,935,000) (17,132,000)
------------ ------------
Stockholders' deficiency (6,379,000) (6,342,000)
------------ ------------
Total Liabilities and Stockholders' Deficiency $ 5,465,000 $ 6,206,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 3,169,000 $ 3,857,000 $ 6,562,000 $ 7,423,000
Cost of sales 2,269,000 2,449,000 4,407,000 4,667,000
----------- ----------- ----------- -----------
Gross profit 900,000 1,408,000 2,155,000 2,756,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 640,000 787,000 1,355,000 1,632,000
Warehousing expense 222,000 213,000 520,000 433,000
Interest expense and financing costs 223,000 264,000 458,000 494,000
----------- ----------- ----------- -----------
1,085,000 1,264,000 2,333,000 2,559,000
----------- ----------- ----------- -----------
Net income (loss) (185,000) 144,000 (178,000) 197,000
Less undeclared dividends on
preferred stock (158,000) -- (316,000) (137,000)
----------- ----------- ----------- -----------
Net income (loss) applicable to common shares $ (343,000) $ 144,000 $ (494,000) $ 60,000
=========== =========== =========== ===========
Net income (loss) per common share -
basic $(.08) $.02 $(.12) $.01
===== ==== ===== ====
diluted $(.08) $.01 $(.12) $.00
===== ==== ===== ====
Weighted average number of shares -
basic 4,127,000 7,581,000 4,127,000 5,854,000
=========== =========== =========== ===========
diluted 4,127,000 23,095,000 4,127,000 26,588,000
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30,2000
(Unaudited)
<CAPTION>
1996 1996-A
Preferred Stock Preferred Stock Common Stock
------------------- -------------------- ------------------- Additional
Number Number Number Paid-in Accumulated
of shares Amount of Shares Amount of Shares Amount Capital Deficit Total
--------- ------ --------- ------ --------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 600 $600,000 1,170 $1,170,000 4,127,000 $371,000 $8,649,000 $(17,132,000) $(6,342,000)
Conversion of 50 shares of
1996 preferred stock into
common shares (50) (50,000) 715,000 65,000 (15,000)
Conversion of 830 shares of
1996-A preferred stock into
common shares (830) (830,000) 11,857,000 1,067,000 (237,000)
Increase in carrying value of
1997-A preferred stock issued
in connection with acquisition (24,000) (24,000)
1997-A preferred stock dividend
accrued (210,000) (210,000)
Net income for the period 197,000 197,000
--- -------- --- -------- ---------- ---------- ---------- ------------ -----------
Balance at June 30, 2000 550 $550,000 340 $340,000 16,699,000 $1,503,000 $8,163,000 $(16,935,000) $(6,379,000)
=== ======== === ======== ========== ========== ========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (178,000) $ 197,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 31,000 15,000
Amortization of goodwill 17,000 18,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (170,000) 509,000
Decrease in inventories 315,000 223,000
Increase in prepaid expenses and other current assets (108,000) (80,000)
Decrease in accounts payable and accrued expenses (228,000) (1,067,000)
----------- -----------
Net cash used in operating activities (321,000) (185,000)
----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (70,000) (6,000)
----------- -----------
Cash flows from financing activities:
Net repayments of loans payable - financial institution (103,000) 183,000
Proceeds from notes payable - other -- 1,082,000
Proceeds from notes payable - related parties 200,000 --
Repayment of notes payable - related parties (218,000) (1,141,000)
Proceeds from related parties 685,000 20,000
Repayment to related parties (173,000) (15,000)
Net cash provided by financing activities 391,000 129,000
----------- -----------
Net decrease in cash -- (62,000)
Cash at beginning of period 1,000 63,000
----------- -----------
Cash at end of period $ 1,000 $ 1,000
=========== ===========
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 212,000 $ 368,000
=========== ===========
Income Taxes -- $ 8,000
=========== ===========
Supplemental schedule of non cash financing activities:
Payments of $685,000 of principal and $352,000 of interest to noteholders
by guarantors on behalf of the Company $ 1,037,000 $ --
=========== ===========
Note issued to guarantors $ 1,037,000 $ --
=========== ===========
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 $ --
=========== ===========
Issuance of 12,571,000 shares of common stock for 50 shares of 1996 preferred
stock and 830 shares of 1996-A preferred stock:
common stock 1,132,000
additional paid in capital (252,000) $ -- $ 880,000
--------- =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - A Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1999.
Creative Technologies Corp. ("CTC") and Subsidiary (collectively the "Company")
are engaged in importing and marketing small household products (principally to
specialty and discount stores, catalogues and other retailers) and medical,
janitorial and dietary products to hospitals and other healthcare facilities.
The consolidated financial statements include the accounts of CTC and its wholly
owned 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.
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 for the three-month and six-month periods ended June 30,
1999, since the Company's outstanding stock options and warrants have not been
included in the calculation because their effect would have been antidilutive.
Note - B Notes Payable and Related Party Transactions
At June 30, 2000, the Company had outstanding related party notes payable
totaling $2,774,000 as follows:
Twelve Months Ended
June 30, Amount
-------------------- ----------
2001 $2,359,000
2002 179,000
2003 236,000
----------
2,774,000
Current Portion 2,359,000
----------
$ 415,000
----------
7
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Of this amount, $2,033,000 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 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 $2,724,000 are
personally guaranteed by certain stockholders of the Company.
At June 30, 2000 the Company had outstanding notes to others totaling $1,082,000
which bear interest at 12% and are due on demand. The Company pledged all of the
shares of Ace and IHW to the holders of these notes, subject to the prior
security interest of the financial institution and other noteholders.
At June 30, 2000, the Company owed $2,449,000 pursuant to a loan and security
agreement entered into with a financial institution whereby the Company is
required to maintain an outstanding combined loan balance of not less than
$1,500,000, but no more than $3,000,000, as defined, which expires June 2001.
The loan is collateralized by substantially all 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 (9.50% at June 30, 2000) plus 2.5% plus
other fees and all of the lender's out-of-pocket costs and expenses. The
agreement, among other matters, restricts the Company with respect to (i)
incurring any lien or encumbrance on its property or assets, (ii) entering into
new indebtedness, (iii) incurring capital expenditures in any fiscal year in an
amount in excess of $100,000, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to maintain certain
ownership percentages throughout the term of the agreement.
At June 30, 2000, the Company was not in compliance with certain provisions of
the agreement, which have been waived by the financial institution.
At June 30, 2000, 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 June 30, 2000 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 $145,000 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 June 30, 2000 is an
amount due from a major shareholder, consisting of interest and principle,
aggregating $139,000. The note is due on demand, is collateralized, and interest
on the loan is at 12% per year.
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 the six-month periods each ended June 30,
2000 and 1999, $60,000 was charged to operations for each of these individuals.
8
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - C Preferred Stock
During October 1997, in connection with the acquisition of Ace, the board of
directors designated 4,000 shares of redeemable preferred stock as "1997-A
Preferred Stock" having a stated 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 per $1,000,
when, as and if declared by the board of directors of the Company;
(ii) redemption of their preferred stock on the later of 20 years from date of
issuance or October 1, 2017 at a redemption price of $1,000 per share plus
accrued but unpaid dividends; and
(iii) liquidation preference of $1,000 per share plus accrued but unpaid
dividends.
The holders of 1997-A Preferred Stock are not entitled to:
(i) convert the 1997-A Preferred Stock into common stock; or
(ii) vote at any meeting of the stockholders of the Company unless the dividends
are in arrears longer than one year at which time the holders of the 1997-A
Preferred Stock shall be entitled to 1,000 votes per share and shall vote
along with the holders of common stock as one class.
At June 30, 2000, $706,000 of dividends were in arrears longer than one year and
as a result, holders of the 1997-A Preferred Stock are entitled to 3,500,000
votes along with holders of 16,699,000 shares of common stock.
At the effective date of the Ace merger, the estimated fair value of the 1997-A
Preferred Stock amounted to approximately $265,000 pursuant to a valuation by an
independent financial advisory firm.
Cumulative unpaid 1997-A Preferred Stock dividends aggregated approximately
$1,126,000 at June 30, 2000.
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;
9
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(ii) convert each share of preferred stock into shares of common stock, at the
rate of $.10 per share or the lowest price during the twelve months ended
June 1, 2000;
(iii) redemption of their preferred shares on September 1, 2002 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 September 1, 2002, as amended.
During June 2000 the Company and certain holders of the 1996 Preferred Stock
agreed to convert 50 shares of Preferred Stock into 715,000 Shares of Common
Stock.
Management intends to satisfy the balance of the cumulative unpaid 1996
Preferred Stock dividends, which aggregated approximately $270,000 at June 30,
2000 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 shares of common stock, at the
rate of $.10 per share or the lowest price during the twelve months ended
June 1 2000;
(iii) redemption of their preferred shares on September 1, 2002 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 September 1, 2002, as amended.
10
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During June 2000 the Company and certain holders of the 1996-A Preferred Stock
agreed to convert 830 Shares of Preferred Stock into 11,857,000 shares of Common
Stock.
Management intends to satisfy the balance of the cumulative unpaid 1996-A
Preferred Stock dividends, which aggregated approximately $155,000 at June 30,
2000 through the issuance of securities of the Company.
As a result of the conversion of both the 1996 Preferred Stock and the 1996-A
Preferred Stock, cumulative unpaid dividends in the amount of $126,000 were
forfeited by the holders. For the three-month period ended June 30, 2000
undeclared dividends of Preferred Stock have been reduced by $105,000 and for
the six-month period ended June 30, 2000, undeclared dividends of Preferred
Stock have been reduced by $126,000, respectively.
Note - D 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 these claims.
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company in the normal course of business. While the amounts
claimed or expected to be claimed may be substantial, the ultimate liability
cannot be determined because of the inherent uncertainties surrounding the
litigation and the considerable uncertainties that exist. Based on facts
currently available, management believes that the disposition of matters that
are pending or asserted will not have a materially adverse effect on the
financial position or results of operations of the Company.
Note - E Business Segments
In accordance with SFAS No. 131, the Company's business segments are organized
around its product lines, small household products and medical, janitorial and
dietary products. The following table is a summary of these segments for the
three-month and six-month periods ended June 30, 1999 and 2000.
11
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Month Period Ended June 30, 1999
<TABLE>
<CAPTION>
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
----------- ----------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 1,586,000 $ 1,583,000 $ - $ - $ 3,169,000
----------- ----------- ---------- ------- -----------
Total sales $ 1,586,000 $ 1,583,000 $ - $ - $ 3,169,000
----------- ----------- --------- ------- -----------
Operating income (loss) $ 33,000 $ 108,000 $(103,000) $ - $ 38,000
Interest expense (168,000) (55,000) - - (223,000)
=========== =========== ========= ======= ===========
Net income (loss) $(135,000) $ 53,000 $ (103,000) $ - $ (185,000)
----------- ----------- --------- ------- -----------
Depreciation and
amortization of
fixed assets $ 9,000 $ 3,000 $ - $ - $ 12,000
=========== =========== ========= ======= ===========
Amortization
of intangibles $ - $ 8,000 $ - $ - $ 8,000
=========== =========== ========= ======= ===========
Capital expenditures $ 70,000 $ - $ - $ - $ 70,000
=========== =========== ========= ======= ===========
</TABLE>
12
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Month Period Ended June 30, 1999
<TABLE>
<CAPTION>
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
---------- ---------------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $3,230,000 $3,332,000 $ - $ - $6,562,000
Intersegment sales 1,000 - - (1,000) -
========== ========== ========== ======== ==========
Total sales $3,231,000 $3,332,000 $ - $ (1,000) $6,562,000
---------- ---------- ---------- -------- ----------
Operating income (loss) $ 185,000 $ 289,000 $ (194,000) $ - $ 280,000
Interest expense (340,000) (118,000) - - (458,000)
========== ========== ========== ======== ==========
Net Income (loss) $ (155,000) $ 171,000 $ (194,000) $ - $ (178,000)
---------- ---------- ---------- -------- ----------
Depreciation and
amortization of
fixed assets $ 23,000 $ 8,000 $ - $ - $ 31,000
========== ========== ========== ======== ==========
Amortization
of intangibles $ - $ 17,000 $ - $ - $ 17,000
========== ========== ========== ======== ==========
Capital expenditures $ 70,000 $ - $ - $ - $ 70,000
========== ========== ========== ======== ==========
</TABLE>
13
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Month Period Ended June 30, 2000
<TABLE>
<CAPTION>
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 2,484,000 $ 1,373,000 $ -- -- $ 3,857,000
----------- ----------- ----------- ---------- -----------
Total sales $ 2,484,000 $ 1,373,000 $ -- $ -- $ 3,857,000
----------- ----------- ----------- ---------- -----------
Operating profit (loss) $ 397,000 $ 122,000 $ (111,000) $ -- $ 408,000
Interest expense (217,000) (47,000) -- -- (264,000)
----------- ----------- ----------- ---------- -----------
Net income (loss) $ 180,000 $ 75,000 $ (111,000) $ -- $ 144,000
----------- ----------- ----------- ---------- -----------
Depreciation of
fixed assets $ 9,000 $ 1,000 $ -- $ -- $ 10,000
----------- ----------- ----------- ---------- -----------
Amortization of
intangibles $ -- $ 9,000 $ -- $ -- $ 9,000
----------- ----------- ----------- ---------- -----------
Capital expenditures $ 6,000 $ -- $ -- $ -- $ 6,000
----------- ----------- ----------- ---------- -----------
</TABLE>
14
<PAGE>
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Month Period Ended June 30, 2000
<TABLE>
<CAPTION>
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 4,510,000 $ 2,913,000 $ -- -- $ 7,423,000
----------- ----------- ----------- ----------- -----------
Total sales $ 4,510,000 $ 2,913,000 $ -- $ -- $ 7,423,000
----------- ----------- ----------- ----------- -----------
Operating profit (loss) $ 589,000 $ 295,000 $ (193,000) $ -- $ 691,000
Interest expense (395,000) (99,000) -- -- (494,000)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 194,000 $ 196,000 $ (193,000) $ -- $ 197,000
----------- ----------- ----------- ----------- -----------
Depreciation of
fixed assets $ 13,000 $ 2,000 $ -- $ -- $ 15,000
----------- ----------- ----------- ----------- -----------
Amortization of
intangibles $ -- $ 18,000 $ -- $ -- $ 18,000
----------- ----------- ----------- ----------- -----------
Capital expenditures $ 6,000 $ -- $ -- $ -- $ 6,000
----------- ----------- ----------- ----------- -----------
Identifiable assets at
June 30, 2000 $ 3,082,000 $ 2,582,000 $ 484,000 $ (683,000) $ 5,465,000
----------- ----------- ----------- ----------- -----------
</TABLE>
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Creative Technologies Corp. ("CTC") is a holding company owning the stock of
IHW, Inc. ("IHW") an operating company which 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, Foppa Pedretti S.p.A., and Evoluzione,
SRL. IHW is continually looking to distribute other complementary lines that
meet its various criteria.
For the six-month period ended June 30, 2000, cash used in operating activities
was $185,000, cash used in investing activities was $6,000 and cash of $129,000
was provided by financing activities. As a result, at June 30, 2000, cash
decreased by $62,000 from $63,000 at December 31, 1999 to $1,000 at June 30,
2000. The Company had a negative working capital of $6,085,000 at June 30, 2000.
Accounts payable and other liabilities decreased to $4,123,000 at June 30, 2000
from $4,980,000 at December 31, 1999 primarily due to increased borrowings from
the financial institution and a reduction in both inventory and accounts
receivable.
During the six-month period ended June 30, 2000, debt to a financial institution
increased by $183,000 to $2,449,000 and notes payable decreased by $59,000 to
$4,256,000.
At June 30, 2000, the Company had outstanding related party notes payable
totaling $2,774,000 as follows:
Twelve Months Ended
June 30 Amount
-------------------- ----------
2001 $2,359,000
2002 179,000
2003 236,000
----------
2,774,000
Current Portion 2,359,000
----------
$ 415,000
----------
Of this amount, $2,033,000 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 note holders have been granted a
security interest in the assets of CTC subordinated to the rights of the
financial institution described below. Notes payables aggregating $2,724,000 are
personally guaranteed by certain stockholders of the Company.
At June 30, 2000, the Company owed $2,449,000 pursuant to a loan and security
agreement with a financial institution which expires June 2001. The Company,
under this agreement is required to maintain an outstanding
16
<PAGE>
combined loan balance of not less than $1,500,000, but no more than $3,000,000.
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 (9.50% at June 30, 2000) plus 2.5% plus
other fees and all of the lender's out-of-pocket costs and expenses. The
agreement, among other matters, restricts the Company with respect to (i)
incurring any lien or encumbrance on its property or assets, (ii) entering into
new indebtedness, (iii) incurring capital expenditures in any fiscal year in an
amount in excess of $100,000, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to maintain certain
ownership percentages throughout the term of the agreement.
At June 30, 2000, 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 June 30, 2000 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 $145,000 for net advances received from them. Interest on
these obligations are payable at the rate of 12% per annum.
During the month of June 2000 the Company and certain holders of the 1996 and
1996-A Preferred Stock agreed to convert 50 shares and 830 shares of the 1996
and 1996-A Preferred, respectively, for a total of 12,572,000 shares of Common
Stock, the cumulative dividends on these preferred shares, in the amount of
$126,000 were forfeited by the holders.
17
<PAGE>
Results of Operations
The Company had net sales of $3,857,000 and $3,169,000, respectively, for the
three-month periods ended June 30, 2000 and June 30, 1999 and $7,423,000 and
6,562,000, respectively, for the six-month periods ended June 30, 2000 and June
30, 1999. The increase in sales is primarily due to higher IHW sales which more
then offset lower Ace sales.
Gross profit margins for the second quarter ended June 30, 2000 and June 30,
1999 were 37% and 28%, respectively and for the six month periods ended June
30,2000 and June 30, 1999 were 37% and 33%, respectively. The increase in gross
profit margin is attributable to a strong dollar and higher gross profit margin
on Ace's sales.
Selling, general and administrative expenses were $787,000 and $640,000 or 20%
of net sales, respectively, in the three-month periods ended June 30, 2000 and
June 30, 1999, and $1,632,000 and $1,355,000 or 22% and 21% of net sales,
respectively, in the six month periods ended June 30, 2000 and June 30, 1999.
Selling, general and administrative expenses increased in absolute terms because
of higher sales and increased payroll and professional fees, but remained
constant as a percentage of overall sales for the three-month period.
Warehousing expenses were $213,000 and $222,000 or 6% and 7% of net sales,
respectively, for the three-month periods ended June 30, 2000 and June 30, 1999,
and $433,000 and $520,000 or 6% and 8% of net sales respectively for the
six-month periods ended June 30, 2000 and June 30, 1999. The decrease is
primarily attributable to lower expenses associated with the Company's move into
smaller warehouse space and utilizing outside warehousing.
Interest expense increased to $264,000 from $223,000 for the three-month period
ended June 30, 2000, compared to the three-month period ended June 30, 1999, and
increased to $494,000 from $458,000 for the six-month period ended June 30, 2000
compared to the six-month period ended June 30, 1999. The increase of $36,000
for the six-month period ended June 30, 2000 compared to the six-month period
ended June 30. 1999 was primarily due to higher levels of outstanding borrowings
and an increase in the prime rate.
Inventory was $1,549,000 at June 30, 2000 compared to $1,034,000 at June 30,
1999. The increase in inventory is primarily the result of increased sales and
large opportune purchases made from Brabantia at year-end Accounts receivable
net was $2,661,000 at June 30, 2000 compared to $3,046,000 at June 30, 1999. The
decrease in receivables reflects a decrease in average days for collection in
Ace.
Due to the foregoing, the Company reported a net profit of $144,000 compared to
a net loss of $(185,000), respectively, for the three-month periods ended June
30, 2000 and June 30, 1999, and a net profit of $197,000 compared to a net loss
of $(178,000), respectively, for the six-month periods ended June 30, 2000 and
June 30, 1999.
18
<PAGE>
PART II OTHER INFORMATION
Item 6. a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on form 8-K
The Registrant did not file reports on Form 8-K during the three
months ended June 30, 2000.
19
<PAGE>
CREATIVE TECHNOLOGIES CORP.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE TECHNOLOGIES CORP.
---------------------------
Registrant
Dated: August 14, 2000 By: /s/ Richard Helfman
------------------------------
Richard Helfman, President
