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, 1996
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 $.03 7,834,183
(Title of each class) (Outstanding at June 30, 1996)
CREATIVE TECHNOLOGIES CORP.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
(Unaudited)
Balance Sheet as at June 30, 1996 3
Statements of Operations
for the Six Months ended
June 30, 1996 and June 30, 1995 4
Statement of Stockholders' Equity
for the Six Months ended June 30, 1996 5
Statements of Cash Flows
for the Six Months ended
June 30, 1996 and June 30, 1995 6
Notes to Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 27
Financial Data Schedule 17
CREATIVE TECHNOLOGIES CORP.
CONDENSED BALANCE SHEET
AS AT JUNE 30, 1996
(Unaudited)
Assets
Current assets:
Cash and equivalents $ 73,000
Accounts receivable-net 1,551,000
Inventories 2,908,000
Prepaid expenses and other assets 506,000
Total Current Assets 5,038,000
Fixed assets - at cost (less accumulated depreciation
and amortization of $1,687,000) 2,019,000
Intangible and other assets 153,000
Deferred tax benefit 45,000
Total $ 7,255,000
Liabilities
Current liabilities:
Notes payable $ 3,905,000
Accounts payable and accrued expenses 1,597,000
Total Current Liabilities 5,502,000
Note Payable - Fleet Capital Corporation 200,000
Total Liabilities 5,702,000
Stockholders' Equity
Preferred stock- 1996- (12% cumulative) $.01 par value;
authorized 10,000 shares; issued outstanding 600 shares at
redemption value of $1,000 per share 600,000
Common stock - $.03 par value; authorized
20,000,000 shares; issued and outstanding
7,834,000 shares 235,000
Additional paid -in capital 8,895,000
Deficit (8,177,000)
Total Stockholders' Equity 1,553,000
Total $7,255,000
See notes to condensed financial statements
3
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Net Sales $1,151,000 $4,647,000 $2,771,000 $8,577,000
Cost of Sales 510,000 1,690,000 1,451,000 3,778,000
Gross Profit 641,000 2,957,000 1,320,000 4,799,000
Operating Expenses:
Selling, general and
administrative expenses 765,000 1,213,000 1, 683,000 2,495,000
Warehousing expense 292,000 0 635,000 0
Advertising expense 45,000 1,593,000 225,000 2,562,000
Interest expense 190,000 248,000 430,000 514,000
1,292,000 3,054,000 2,973,000 5,571,000
Loss before provision for income taxes and
extraordinary item (651,000) (97,000) (1,653,000) (772,000)
Provision for income taxes 0 0 0 0
Loss before extraordinary item (651,000) (96,000) (1,653,000) (772,000)
Extraordinary item
Gain-debt settlement net of tax 0 0 1,150,000 0 0
Net Loss $(651,000) $(97,000) $(503,000) $(772,000)
Loss attributable to
common shareholders $(657,000) $(97,000) $(509,000) $(772,000)
Loss before extraordinary
item per common share $(.09) $(.02) $(.22) $(.16)
Extraordinary item
per common share $0 $0 $.15 $0
Fully diluted extraordinary
item per common share $0 $0 $.15 $0
Primary loss per common share $(.09) $(.02) $(.07) $(.16)
See notes to condensed financial statements.
4
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30,1996
(Unaudited)
Preferred Stock Common Stock
Additional
Number of Number of Par Paid-in
Shares Value Shares Value Capital Deficit
Balance December 31, 1995 7,501,000 $225,000 $8,577,000 $(7,674,000)
Stock issued for assumption
of debt in connection with
loan settlement 333,000 10,000 324,000
Sale of preferred stock 600 $600,000
Preferred stock dividend accrued (6,000)
Net loss (503,000)
Balance June 30, 1996 600 $600,000 7,834,000 $235,000 $8,895,000 $(8,177,000)
_____ ________ ________ ________ _________ ____________
See notes to condensed financial statements.
5
CREATIVE TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1996 1995
Net cash provided by (used in)
operating activities $559,000 $(5,259,000)
Cash flows from investing activities:
Acquisition of fixed assets (91,000) (486,000)
Acquisition of intangibles 0 (40,000)
Net cash used in investing activities (91,000) (526,000)
Cash flows from financing activities:
Net (repayment)borrowing of
revolving credit facility (2,658,000) 4,022,000
Proceeds from notes payable 1,800,000 2,480,000
Repayment of notes payable (958,000) (1,084,000)
Exercise of options 0 10,000
Proceeds from sale of common stock 50,000 0
Proceeds from sale of preferred stock 600,000 0
Net cash (used in) provided by financing activities (1,166,000) 5,428,000
Net decrease in cash (698,000) (357,000)
Cash at beginning of period 771,000 417,000
Cash at end of period $73,000 $60,000
Supplemental disclosures of cash flow information
Interest paid $475,000 $509,000
Taxes paid 0 $365,000
See notes to condensed financial statements.
6
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01
of Regulation S-X. Accordingly they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. 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, 1995.
Note B - Inventories
Inventories, which are stated at the lower of cost (first-in, first-out) or
market are summarized as follows:
June 30, 1996
Finished Goods $1,455,000
Work in Process and Parts 1,453,000
Total $2,908,000
Note C- Note Payable - Fleet Capital Corp.
In April of 1995 the Company obtained a line of credit and a term loan from
Fleet Capital Corporation ("Fleet") for $14,000,000 and $1,000,000,
respectively. Interest was being charged on both of these loans at a rate of
1 percent above prime and was collateralized by substantially all of the assets
of the Company and the term loan was personally guaranteed by a stockholder.
At September 30, 1995 and thereafter the Company was in default of certain
terms of the agreement.
Effective November 1, 1995 the Company and Fleet entered into a Post Default
Agreement which among other things allowed Fleet to continue to extend
financing to the Company under the credit facility at reduced advance rates
against collateral up to $5,500,000.
7
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In March of 1996, the Company entered into an agreement with the bank to pay
off its indebtedness and release both the Company and the bank from any
future obligations. The Company borrowed additional funds to pay off the
indebtedness. The resulting settlement which occurred March 8, 1996, is
summarized as follows:
Paid by the Company $1,500,000
Note payable - non-interest bearing issued by
the company due not later than March 8, 1998 200,000
Assumed by a stockholder of the Company in
exchange for 333,333 shares of common stock 333,000
Reduction of indebtedness due to settlement1,550,000
Loan balance subject to settlement $3,583,000
The gain to the Company due to this settlement amounted to $1,150,000 net of
income tax effect.
Note D- Preferred Stock - 1996 - (12% Cumulative)
The Company amended its Certificate of Incorporation to designate a new class
of 10,000 shares of 1996 preferred stock $ .01 par value, from 5,000,000
shares of preferred stock previously authorized and issued 600 shares of the
1996 preferred stock for $600,000 of debt owed to David Guttmann and related
entities. Each share of 1996 preferred stock is subject to mandatory
redemption on June 1, 1998 at $1,000 per share plus unpaid dividends payable
in cash, common stock or any combination thereof at the option of the
Company. At any time prior to redemption the preferred stockholders can at
their option convert their stock into 1,000 shares of common stock for each
share of preferred stock held. The 1996 preferred stock is entitled to a
cumulative dividend of $120 per share per annum and shall be payable in
quarterly installments on the first day of January, April, July and October
commencing January 1, 1997. At June 30, 1996, $6,000 of 1996 preferred stock
dividend was accrued.
Note E - Income Taxes
The Company's net operating loss carry forwards for income tax reporting
purposes aggregated approximately $7,672,000 as of December 31, 1995.
8
CREATIVE TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note F - 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
claims are covered by the Company's product liability insurance carrier. The
Company redesigned the appliance in August 1992, and believes that the
modification made should minimize the possibility of such injury. The
Consumer Product Safety Commission (the "CPSC") has made a preliminary
determination that the Company's appliance product represents a "substantial
product hazard" as that term is defined in the Consumer Product Safety Act.
The Company has disputed this preliminary determination and is currently
involved in negotiations with the CPSC to try to resolve this matter. The
Company believes that the ultimate resolution of this matter will not have a
material effect on its financial condition.
In November 1995, the Company filed a lawsuit against a vendor seeking
damages of $1,700,000 for breach of contract and breach of warranty with
respect to the vendor's manufacturing of certain products. In January 1996,
the vendor denied the allegations in the complaint and counterclaimed for
$1,400,000 predicated primarily upon allegations that the Company wrongfully
cancelled pending purchase orders. This matter has now been settled and did
not have a material effect on the Company's financial condition.
9
Item 2. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Company is engaged in the design, manufacture, marketing and distribution
of niche consumer products. The Company currently sells electric motor-
driven pasta machines and a food griller. Since January 1, 1996 the Company
is also the exclusive distributor of Brabantia International ("Brabantia")
products in the United States. These products include high quality bread
boxes, step-on pails, and waste paper baskets, ironing boards, 2 and 3 step
stools and a complete line of kitchen tools and other household items.
Brabantia, headquartered in the Netherlands, is a leading manufacturer of top
of the line houseware products in Europe. Its products are sold in 68
countries throughout the world.
For the six month period ending June 30, 1996, net cash provided by operating
activities was $559,000, net cash of $91,000 was used in investing activities
and net cash of $1,166,000 was used in financing activities. As a result,
for the six month period ending June 30, 1996 cash decreased by $698,000 to
$73,000. The accounts receivable decreased to $1,551,000 at June 30, 1996
from $2,907,000 at December 31, 1995, reflecting high collections and
relatively low sales volume during the first six month period. The accounts
payable and other liabilities decreased to $1,597,000 at June 30, 1996 from
$1,664,000 at December 31,1995.
The Company amended its Certificate of Incorporation to designate a new
class of 10,000 shares of 1996 preferred stock $ .01 par value, from
5,000,000 shares of preferred stock previously authorized and issued 600
shares of the 1996 preferred stock for $600,000 of debt owed to David
Guttmann and related entities. Each share of 1996 preferred stock is subject
to mandatory redemption on June 1, 1998 at $1,000 per share plus unpaid
dividends payable in cash, common stock or any combination thereof at the
option of the Company. At any time prior to redemption the preferred
stockholders can at their option convert their stock into 1,000 shares of
common stock for each share of preferred stock held. The 1996 preferred
stock is entitled to a cumulative dividend of $120 per share per annum and
shall be payable in quarterly installments on the first day of January,
April, July and October commencing January 1, 1997. At June 30, 1996, $6,000
of 1996 preferred stock dividend was accrued.
10
Until April 1995, the Company sold substantially all of its trade receivables
at various levels of recourse to Rosenthal & Rosenthal (the"factor"). On
April 19, 1995, the Company ceased the factoring arrangement with Rosenthal &
Rosenthal and instead obtained a one year credit facility from Fleet Capital
Corporation ("Fleet") in the total amount of $15,000,000, consisting of a one
year term loan of $1,000,000 and a revolving credit facility for the
remainder. The term loan was payable in twelve equal installments and was
personally guaranteed by David Guttmann, the Chief Executive Officer. Loans
on the revolving credit facility were available in amounts equal to 70% of
the Eligible Accounts Receivables plus the lesser of $7,500,000 or the sum of
the Eligible Inventory. The Company paid a closing fee of $100,000 to Fleet
and $120,000 to a finder. In February 1996, the Company and Fleet agreed to
discontinue the banking relationship. During March 1996 the Company repaid
Fleet $1,500,000 and executed a non-interest bearing unsecured two year note
to Fleet in the amount of $200,000. In addition, David Guttmann assumed the
payment of the remainder of the term loan in the total amount of $333,333.
In order to repay Fleet the workout amount, the Company obtained short term
loans of $1,000,000 from several individuals. The loans provided for
interest at 2% per month plus expenses. The Company derived a pre-tax profit
on the workout of $1,550,000. The Company is seeking to obtain a new line of
credit in order to repay the short term loans and for working capital. The
Company issued 333,333 shares during March 1996 to the designees to David
Guttmann in consideration for their assumption of the term note in the amount
of $333,333.
During the second quarter of 1996 the Company borrowed $650,000 net of
repayments from David Guttmann and related entities repayable within three
months. These funds together with funds received from various individuals
this quarter were used to repay $650,000 to certain individuals who had
loaned the Company this amount for the Fleet workout and for working capital
purposes. Effective May 1996 $600,000 of debt owed to David Guttmann and
related entities was exchanged for 600 shares of 1996 preferred stock - 12%
cumulative.
During July 1996 the Company borrowed $170,000 from David Guttman and Barry
Septimus repayable within three months with interest at 12% per annum. These
funds were used for working capital purposes. At June 30, 1996, the Company
had notes payable due September 30, 1996 in the amount of $1,000,000 payable
to an entity whose principal is a director of the Company. At June 30, 1996,
the Company also had $2,505,000 of notes outstanding to various individuals
and shareholders of the Company. Interest on loans of $3,905,000 vary from
18% to 12% per annum. Loans, amounting to $3,855,000 are guaranteed by David
Guttmann, the CEO and a principal stockholder of the Company, and Barry
Septimus, the husband of a principal stockholder of the Company.
11
In the third quarter of 1995, the Company raised $830,000 through the sale of
830,000 shares in a private placement. The Board of Directors authorized the
raising of an additional $4,000,000 in a private placement subject to
obtaining the approval of the shareholders in accordance with the NASDAQ
listing requirements. At a Shareholders' meeting held on January 26, 1996
the private placement was approved and 1,623,000 shares of common stock were
issued at $1.00 per share, effective December 31, 1995.
The Company expects to fund future operations by obtaining bank lines of
credit, if available, borrowing money privately and cash flows from
operations.
At July 30, 1996, the Company had outstanding approximately $135,000 in
commercial letters of credit covering production and importation of the Grill
Express.
In order to reduce future losses, the Company reduced expenses by cutting its
administrative staff, closing its assembly plant in Brooklyn, New York and
moving the manufacture of the pasta machine to China, cutting back or
eliminating the use of outside consulting services and otherwise reducing
overhead. In addition, certain key employees have taken voluntary pay cuts.
The Company has also identified and is currently using a more reliable
factory for manufacturing the Grill Express. This factory will also be
producing the Pasta Machine. The reliability of shipments from this factory
has allowed the Company to reduce its inventory of these products to an
approximate one month supply.
12
Results of Operations
The Company had net sales of $1,151,000 and $2,771,000 respectively for the
three and six month periods ending June 30, 1996 as compared to net sales of
approximately $4,647,000 and $8,577,000 for the three and six month periods
ending June 30, 1995. The decrease in sales for the comparative three and
six month periods is attributable to continued softness in demand for the
Grill Express and Pasta Machine offset by sales applicable to the
introduction of the Brabantia product line. For the three and six month
periods ending June 30, 1996 sales of electric products were approximately
70% and 80% respectively with non - electric products representing the
remainder in each period. For the three and six month periods ending June
30, 1995 electric products represented 100% of sales.
Gross profit margins for the second quarters ending June 30, 1996 and June
30,1995 were 55.7% and 63.6% respectively. Gross profit margins for the six
month periods ending June 30, 1996 and June 30, 1995 were 47.6% and 56%
respectively. The decrease in gross profit margins is attributable to
margins being lower on the imported Brabantia product line where the Company
acts as a distributor as opposed to higher gross profit margins on its own
manufactured products. These lower gross profit margins were offset by
certain expenses previously considered part of cost of sales when the Company
was assembling and manufacturing products in its Brooklyn facility and are
now being classified as Warehousing Expense. The benefit of high gross
profit margins is offset by media purchases (advertising expense) associated
with infomercial sales which are part of operating expenses. Profit margins
on sales after cost of sales and media purchases for the second quarters
ending June 30, 1996 and June 30, 1995 were 51.8% and 29.4% respectively and
for the six month periods ending June 30, 1996 and June 30, 1995 were 39.5%
and 26.1% respectively representing management's decision to reduce
expenditures for the airings of the infomercial during the first half of
1996. It is management's intention to increase its expenditures for
infomercial airings above current levels during the second half of the
Company's fiscal year.
Selling, general and administrative expenses were $765,000 and $1,213,000 or
66.5% and 26% respectively of net sales in the three month periods ending
June 30, 1996 and June 30, 1995. The selling, general and administrative
expenses were $1,682,00 or 60.7% in the six month period ending June 30, 1996
as compared to $2,495,000 or 29.1% for the six month period ending June 30,
1995 and reflects the effect of management's cost cutting program.
The Company is no longer assembling and manufacturing its products in its
Brooklyn facility. As a result, certain expenses previously shown as cost of
sales are now classified as Warehousing Expense. During the three and six
month periods ending June 30, 1996 these expenses amounted to $293,000 and
$635,000 respectively compared to $565,000 and $1,095,000 which were included
in cost of sales in the comparable periods of the prior year.
13
Advertising expenses for the three and six month periods ending June 30, 1996
were $45,000 and $225,000 respectively compared to $1,593,000 and $2,562,000
for the comparable periods of the prior year. The decrease in advertising
expenses were due to management's decision to reduce expenditures for the
airings of the infomercial during the first half of 1996.
Interest expense in the three month periods ending June 30, 1996 and June 30,
1995 was $190,000 and $248,000 respectively. This decrease of $58,000 is
primarily due lower borrowings. For the six month periods ending June 30,
1996 and June 30, 1995 interest expense was $430,000 and $514,000
respectively. The decrease of $84,000 was primarily due to the Fleet debt
settlement in the first quarter, lower interest rates on debt owed Fleet
during the first quarter verses interest rates on debt owed a factor in the
comparative quarter of the prior year and lower borrowings in the second
quarter of 1996 verses 1995.
The settlement of the Fleet debt during the three month period ending March
31, 1996 resulted in a gain to the Company of $1,550,000 reduced by
applicable income taxes of $400,000 or a net gain after income taxes of
$1,150,000 as follows:
Loan balance subject to settlement $3,583,000
Paid by the Company (1,500,000)
Note payable issued by the Company
non-interest bearing, due not later than March 8, 1996 (200,000)
Debt assumed by a stockholder of the Company in
exchange for 333,333 shares of common stock. (333,000)
Gain on debt settlement before income tax 1,550,000
Income Tax 400,000
Net gain on debt settlement $1,150,000
Due to the foregoing, the Company reported for the three and six month
periods ending June 30, 1996, a loss before extraordinary gain of $651,000
and $1,653,000 respectively compared to a loss before extraordinary gain of
$97,000 and $772,000 respectively in the comparable periods of the prior
year. For the three and six month periods ending June 30, 1996 the Company
reported a net loss of $651,000 and $503,000 respectively compared to a net
loss of $97,000 and $772,000 respectively in the comparable periods of the
prior year.
14
PART II - OTHER INFORMATION
Item 6. a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
The Registrant did not file reports on Form
8-K during the six months ended June 30, 1996.
15
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 12, 1996 By: S/David Guttmann
David Guttmann, CEO
16