FORM 10-QSB/A
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: September 30, 1999
Commission File Number: 0-15754
CREATIVE TECHNOLOGIES CORP.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2721083
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification 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 4,127,444
- - ---------------------------- -----------------------------------
(Title of each class) (Outstanding at September 30, 1999)
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Balance Sheet as at September 30, 1999 3
Statement of Operations
For the Three and Nine Months ended
September 30, 1999 and September 30, 1998 4
Statement of Stockholders' Deficiency
For the Nine Months ended September 30, 1999 5
Statement of Cash Flows
For the Nine Months ended
September 30, 1999 and September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote of Securities Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit 27 21
Financial Data Schedule
2
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
Assets
Current assets:
Cash $ 10,000
Accounts receivable-net 3,415,000
Inventories 1,063,000
Prepaid expenses and other current assets 338,000
-----------
Total current assets 4,826,000
Fixed assets - less accumulated depreciation
and amortization of $17,000 103,000
Other assets 825,000
-----------
Total assets $ 5,754,000
===========
Liabilities and Stockholders' Deficiency Current liabilities:
Loans payable - financial institution $ 2,219,000
Notes payable - related parties 3,408,000
Accounts & other payables and accrued expenses 4,385,000
Due to related party 731,000
-----------
Total current liabilities 10,743,000
Notes payable-related parties 503,000
Subordinated note payable - affiliate 400,000
-----------
Total liabilities 11,646,000
-----------
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) 340,000
-----------
Stockholders' Deficiency
Preferred stock - $.01 par value; authorized 5,000,000 shares: 10,000 shares
of convertible stock designated as 1996 preferred stock - $1,000 stated
value; issued and outstanding 600 shares (liquidation
Value $600,000) 600,000
10,000 shares of convertible stock designated as 1996-A preferred stock -
$1,000 stated value; issued and outstanding 1,170 shares (liquidation
Value $1,170,000) 1,170,000
Common Stock - $.09 par value; authorized 20,000,000 shares, issued and
Outstanding 4,127,000 shares 371,000
Additional paid-in capital 8,765,000
Accumulated deficit (17,138,000)
-----------
Stockholders' deficiency (6,232,000)
-----------
Total liabilities and stockholders' deficiency $ 5,754,000
===========
See notes to condensed consolidated financial statements.
3
CREATIVE TECHNOLOGIES CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
Net Sales $3,739,000 $4,201,000 $11,244,000 $10,763,000
Cost of sales 2,434,000 2,769,000 7,260,000 7,176,000
---------- ---------- ----------- -----------
Gross profit 1,305,000 1,432,000 3,984,000 3,587,000
---------- ---------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 739,000 767,000 2,369,000 2,122,000
Warehousing expense 297,000 203,000 863,000 723,000
Interest expense and financing costs 217,000 234,000 660,000 692,000
---------- ---------- ----------- -----------
1,253,000 1,204,000 3,892,000 3,537,000
---------- ---------- ----------- -----------
Net income 52,000 228,000 92,000 50,000
Less undeclared dividends on
preferred stock (158,000) (158,000) (474,000) (474,000)
---------- ---------- ----------- -----------
Net income (loss) applicable to common shares $ (106,000) $ 70,000 $ (382,000) $ (424,000)
========== ========== =========== ===========
Per common share - basic and diluted
Net income (loss) $ (.03) $ .02 $ (.09) $ (.10)
Weighted average number of shares 4,117,000 4,127,000 4,115,000 4,127,000
========== ========== =========== ===========
See notes to condensed consolidated financial statements.
4
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1999
(Unaudited)
1996 1996-A
Preferred Stock Preferred Stock Common Stock
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
--------- ------ --------- ------ --------- ------
Balance at January 1, 1999 600 $600,000 1,170 $1,170,000 4,127,000 $371,000
Increase in carrying value of
1997-A preferred stock issued
in connection with acquisition
1997-A preferred stock
dividend accrued
Capital contribution arising
from restructuring of related
party debt
Net income for the period
Balance at September 30, 1999 600 $600,000 1,170 $1,170,000 4,127,000 $371,000
=== ======== ===== ========== ========= ========
Additional
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
Balance at January 1, 1999 $8,692,000 $(17,188,000) $(6,355,000)
Increase in carrying value of
1997-A preferred stock issued
in connection with acquisition (32,000) (32,000)
1997-A preferred stock
dividend accrued (315,000) (315,000)
Capital contribution arising
from restructuring of related
party debt 420,000 420,000
Net income for the period 50,000 50,000
Balance at September 30, 1999 $8,765,000 $(17,138,000) $(6,232,000)
========== ============= ============
See notes to condensed consolidated financial statements.
5
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1998 1999
---- ----
Cash flows from operating activities:
Net income $92,000 $50,000
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 65,000 37,000
Amortization of goodwill 24,000 26,000
Noncash professional fees 54,000 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 207,000 (539,000)
Decrease in inventories 325,000 285,000
Increase in prepaid expenses and other current assets and other assets (118,000) (161,000)
Increase (decrease) in accounts payable and accrued expenses (526,000) 8,000
-------- ----------
Net cash (used in) provided by operating activities 123,000 (294,000)
-------- ----------
Cash flows from investing activities:
Acquisition of fixed assets (4,000) (87,000)
-------- ----------
Cash flows from financing activities:
Net repayments of loans payable - financial institution (108,000) (64,000)
Proceeds from notes payable - related parties 310,000 200,000
Repayment of notes payable - related parties (334,000) (244,000)
Proceeds from related party - 685,000
Repayments to related party - (187,000)
-------- ----------
Net cash provided by (used in) financing activities (132,000) 390,000
-------- ----------
Net increase (decrease) in cash (13,000) 9,000
Cash at beginning of period 16,000 1,000
-------- ----------
Cash at end of period $ 3,000 $ 10,000
======== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $450,000 $ 728,000
======== =========
Supplemental schedule of non cash financing activities:
Payments of $685,000 of principal and $352,000 of interest to noteholders
by guarantors on behalf of the Company $ 0 $1,037,000
======== ==========
Note issued to guarantors $ 0 $1,037,000
======== ==========
Restructuring of related party debt including interest of $233,000 $ 0 $420,000
======== ==========
Net fixed assets transferred to a related party in satisfaction of certain obligations $ 0 $135,000
======== ==========
Issuance of common stock for services $ 54,000 $ 0
======== ==========
See notes to condensed consolidated financial statements.
6
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 and nine-month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the financial statements and footnotes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1998.
Creative Technologies Corp. ("CTC") and Subsidiaries (collectively the
"Company") are engaged in importing and marketing small household products
(principally to specialty stores, catalogues and other retailers) and medical,
janitorial and dietary products to hospitals and other healthcare facilities and
performing janitorial services and repairing janitorial equipment.
The consolidated financial statements include the accounts of CTC and its wholly
owned subsidiaries, IHW, Inc. ("IHW") and Ace Surgical Supply Co., Inc ("Ace").
All material intercompany balances and transactions have been eliminated in
consolidation.
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 Earnings per Share. Basic net
loss per common share is based on the weighted-average number of shares
outstanding during the period while diluted net loss per common share considers
the dilutive effect of stock options and warrants reflected under the treasury
stock method. Both basic net loss per share and diluted net loss per share are
the same since the Company's outstanding stock options and warrants have not
been included in the calculation because their effect would have been
antidilutive.
7
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - B NOTES PAYABLE AND RELATED PARTY TRANSACTIONS
During May 1999, certain related party noteholders demanded payment of a portion
of their notes from the Company. As the Company was unable to meet these
demands, payments of principal of $685,000 and interest of $352,000 totaling
$1,037,000 were made by the guarantors of these notes. The Company delivered a
promissory note to the guarantors in said amount with principal and interest at
the rate of 12% per year due upon demand. The Company pledged all of the shares
of Ace and IHW to the guarantors, subject to the prior security interest of the
financial institution and the other noteholders.
In addition, certain of these related party noteholders 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 had been recorded as an extraordinary item in the statement of
operations in the Form 10-QSB for the quarter ended September 30, 1999. This
report restates such transaction to reflect it as a capital contribution arising
from the restructure of this related party debt. Principal and interest in the
amount of $402,000 and $6,000 respectively, was paid as part of the $1,037,000
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.
At September 30, 1999, the Company had outstanding related party notes totaling
$3,911,000 payable as follows:
Twelve Months Ending
September 30 Amount
2000 $3,408,000
2001 130,000
2002 195,000
2003 178,000
----------
3,911,000
Current portion 3,408,000
----------
$503,000
==========
Of the $3,911,000 of related party notes, $3,170,000 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
$2,797,000 are personally guaranteed by certain stockholders of the Company.
At September 30, 1999, the Company owed $2,219,000 pursuant to a loan and
security agreement entered into with a financial institution whereby the Company
is required to maintain an outstanding combined loan balance of not less than
$1,500,000, but no more than $3,000,000 as defined, which expires June 2001. The
loan is collateralized by substantially all the assets of the Company and is
partially guaranteed by an officer of the Company. Under the agreement, the
Company receives revolving credit advances based on accounts receivable and
inventory available, as defined, and is required to pay interest at a rate equal
to the greater of 9% or the prime rate (8.25% effective August 25, 1999) plus
2.5% plus other fees and all of the lender's out-of-pocket costs and expenses.
The agreement, among other matters, restricts the Company with respect to (i)
incurring any lien or encumbrance on its property or assets, (ii) entering into
new indebtedness, (iii) incurring capital expenditures in any fiscal year in an
amount in excess of $100,000, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to maintain certain
ownership percentages throughout the term of the agreement.
8
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At September 30, 1999 the Company owed a related party $496,000 for the prior
rental of its office and warehousing space. During April 1999, the related party
sold the building occupied by the Company and the Company moved into
substantially less office and warehousing space at the same location. In
addition, the company also owed this entity an additional $235,000 for advances
received from them. Interest on these obligations are payable at the rate of 12%
per annum.
At September 30, 1999 the Company had an outstanding note payable (aggregating
$400,000) to an affiliate subordinated to the obligations due the financial
institution discussed above. Interest is payable on the note at the rate of 12%
per annum.
Pursuant to an October 27, 1997 merger agreement between the Company and Ace,
the Company agreed to continue an obligation to pay $10,000 per month each in
consulting fees to two related parties, a principal stockholder and the spouse
of a principal stockholder of the Company. During the nine-month periods ended
September 30, 1999 and 1998, $90,000 was paid to each of these individuals.
Note - C PREFERRED STOCK
During October 1997, in connection with the acquisition of Ace, the board of
directors designated 4,000 shares of redeemable preferred stock as "1997-A
Preferred Stock" having a stated valued of $1,000 per share. The holders of
1997-A Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum, when, as
and if declared by the board of directors of the Company;
(ii) redemption of their preferred stock on the later of 20 years from date
of issuance or October 1, 2017 at a redemption price of $1,000 per
share plus accrued but unpaid dividends; and
(iii) liquidation preference of $1,000 per share plus accrued but unpaid
dividends.
The holders of 1997-A Preferred Stock are not entitled to:
(i) convert the 1997-A Preferred Stock into common stock; or
(ii) vote at any meeting of the stockholders of the Company unless the
dividends are in arrears longer than one year at which time the holders
of the 1997-A Preferred Stock shall be entitled to 1,000 votes per
share and shall vote along with the holders of common stock as one
Class.
At September 30, 1999 $391,000 of dividends was in arrears longer than one year
and as a result, holders of the 1997- A Preferred Stock are entitled to
3,500,000 votes along with holders of 4,127,000 shares of common stock.
At the effective date of the Ace merger, the estimated fair value of the 1997-A
Preferred stock amounted to approximately $265,000 pursuant to a valuation by an
independent financial advisory firm.
Cumulative unpaid 1997-A Preferred Stock dividends aggregated $811,000 at
September 30, 1999.
In June 1996, the board of directors designated 10,000 shares of preferred stock
as "1996 Preferred Stock" valued at $1,000 per share. The holders of 1996
Preferred Stock are entitled to:
9
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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
(iv) no voting rights.
The Company, at its option, has the right to redeem all or any portion of the
1996 Preferred Stock at $1,100 per share plus accrued and unpaid dividends prior
to June 1, 2000 as amended.
Management intends to satisfy the cumulative unpaid 1996 Preferred Stock
dividends, which aggregated approximately $240,000 at September 30, 1999 through
the issuance of securities, and, therefore, such amounts have not been accrued.
On September 30, 1996, the board of directors designated 10,000 shares of
preferred stock as "1996-A Preferred Stock" valued at $1,000 per share. The
holders of 1996-A Preferred Stock are entitled to:
(i) receive cumulative dividends at the rate of $120 per annum payable
quarterly in cash or common stock at the option of the Company;
(ii) convert each share of preferred stock into approximately 1,600 shares
of common stock subject to adjustment, as defined;
(iii) redemption of their preferred shares on October 1, 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 approximately $429,000 at September 30, 1999 through
the issuance of securities, and, therefore, such amounts have not been accrued.
10
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - D COMMITMENTS AND CONTINGENCIES
During April 1999, the building which the Company leased from a related
party was sold and its lease was terminated by the mutual consent of both
parties.
As an inducement to the Company for canceling its lease, the related
party agreed to assume fixed assets aggregating $135,000 in satisfaction of
certain obligations aggregating $135,000 and to reimburse the Company for any
costs associated with its relocation which amounted to approximately $66,000 at
September 30, 1999 and an additional amount to be negotiated.
The Company is currently leasing substantially less office and
warehousing space from the related party on a month to month basis at a cost of
$13,200 per month inclusive of real estate taxes.
Note - E PRODUCT LIABILITY AND LITIGATION:
The Company has received notice that several consumers claim to have suffered
finger injuries while using one of the Company's appliance products. All but one
of the claims is covered by the Company's product liability insurance carrier.
The Company 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.
Note - F BUSINESS SEGMENTS
In accordance with SFAS No. 131, the Company's business segments are organized
around its product lines, small household products and medical, janitorial and
dietary products. The following table is a summary of these segments for the
three and nine-month periods ended September 30, 1998 and 1999.
11
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Month Period Ended September, 1998
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- - ----------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $1,875,000 $1,864,000 $- $- $3,739,000
Intersegment sales 1,000 - - (1,000) -
- - ---------------------------------------------------------------------------------------------------------------------------
Total sales $1,876,000 $1,864,000 $- $(1,000) $3,739,000
- - ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $158,000 $212,000 $(101,000) $- $269,000
Interest expense (149,000) (68,000) - - (217,000)
- - ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax $9,000 $144,000 $(101,000) $- $52,000
- - ---------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $17,000 $5,000 $- $- $22,000
- - ---------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $9,000 $- $- $9,000
- - ---------------------------------------------------------------------------------------------------------------------------
Capital expenditures $- $1,000 $- $- $1,000
- - ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,915,000 $2,968,000 $484,000 $(996,000) $5,371,000
at September 30, 1998
- - ---------------------------------------------------------------------------------------------------------------------------
12
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- - ----------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $5,264,000 $5,980,000 $- $- $11,244,000
Intersegment sales 10,000 - - $(10,000) -
- - ---------------------------------------------------------------------------------------------------------------------------
Total sales $5,274,000 $5,980,000 $- $(10,000) $11,244,000
- - ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $274,000 $768,000 $(290,000) $- $752,000
Interest expense (446,000) (214,000) - - (660,000)
- - ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax $(172,000) $554,000 $(290,000) $- $92,000
- - ---------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $50,000 $15,000 $- $- $65,000
- - ---------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $24,000 $- $- $24,000
- - ---------------------------------------------------------------------------------------------------------------------------
Capital expenditures $3,000 $1,000 $- $- $4,000
- - ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,915,000 $2,968,000 $484,000 $(996,000) $5,371,000
at September 30, 1998
- - ---------------------------------------------------------------------------------------------------------------------------
13
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Month Period Ended September 30, 1999
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- - ----------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $2,524,000 $1,677,000 $- $- $4,201,000
Intersegment sales - - - - -
- - ---------------------------------------------------------------------------------------------------------------------------
Total sales $2,524,000 $1,677,000 $- $- $4,201,000
- - ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $411,000 $173,000 $(122,000) $- $462,000
Interest expense (178,000) (56,000) - - (234,000)
- - ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax $233,000 $117,000 $(122,000) $- $228,000
- - ---------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $4,000 $2,000 $- $- $6,000
- - ---------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $9,000 $- $- $9,000
- - ---------------------------------------------------------------------------------------------------------------------------
Capital expenditures $17,000 $- $- $- $17,000
- - ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,837,000 $2,326,000 $484,000 ($694,000) $4,953,000
at September 30, 1999
- - ---------------------------------------------------------------------------------------------------------------------------
14
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine month Period Ended September 30, 1999
Small Medical
Household Janitorial &
Products Dietary Products Corporate Elimination's Consolidated
- - ----------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $5,574,000 $5,009,000 $- $- $10,763,000
Intersegment sales 1,000 - - (1,000) -
- - ---------------------------------------------------------------------------------------------------------------------------
Total sales $5,755,000 $5,009,000 $- $(1,000) $10,763,000
- - ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $596,000 $462,000 $(316,000) $- $742,000
Interest expense (518,000) (174,000) - - (692,000)
- - ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income
tax $78,000 $288,000 $(316,000) $- $50,000
- - ---------------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization of
fixed assets $27,000 $10,000 $- $- $37,000
- - ---------------------------------------------------------------------------------------------------------------------------
Amortization
of intangibles $- $26,000 $- $- $26,000
- - ---------------------------------------------------------------------------------------------------------------------------
Capital expenditures $87,000 $- $- $- $87,000
- - ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,837,000 $2,326,000 $484,000 $(694,000) $4,953,000
at September 30, 1999
- - ---------------------------------------------------------------------------------------------------------------------------
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Creative Technologies Corp. ("CTC") through its wholly owned subsidiary, IHW
Inc. ("IHW") which was incorporated in 1997, is exclusive distributor of
Brabantia International ("Brabantia"), Soehnle-Waagen Gmbh & Co. (Soehnle"),
products in the US and Canada. Brabantia, headquartered in the Netherlands, is a
leading European manufacturer of top of the line metal houseware products.
Soehnle headquartered in Murrhardt, Germany, manufactures a full line of
bathroom scales. IHW is looking for other products that it believes would
compliment the products that they are currently selling.
In October 1997, the Company acquired Ace surgical Co., Inc., ("Ace"), a company
which distributes medical, janitorial and dietary products in the tri-state
area, generally to hospitals, nursing homes and medical care facilities. Ace has
been in business since 1974. Their product line can generally be categorized as
disposables and include branded and non-branded lines of wound dressing,
incontinence products, dietary supplies, house keeping supplies and cleaning
chemicals. These products are purchased by Ace from a variety of domestic
suppliers.
For the nine-month period ended September 30, 1999, cash used in operating
activities was $294,000, $87,000 was used in investing activities and cash of
$390,000 was provided by financing activities. As a result, at September 30,
1999, cash was $10,000 compared to $1,000 at December 31, 1998. The Company had
a negative working capital of $5,917,000 at September 30, 1999.
Accounts payable and other liabilities decreased to $4,385,000 at September 30,
1999 from $4,647,000 at December 31, 1998 primarily due to the Company's
reduction of inventory.
During the nine-month period ended September 30, 1999 the Company was also able
to reduce debt to financial institution by $64,000 to $2,219,000. Notes payable
to related parties increased by $121,000 to $3,911,000.
During May 1999, certain related party noteholders demanded payment of a portion
of their notes from the Company. As the Company was unable to meet these
demands, payments of principal of $685,000 and interest of $352,000 totaling
$1,037,000 were made by the guarantors of these notes. The Company delivered a
promissory note to the guarantors in said amount with principal and interest at
the rate of 12% per year due upon demand. The Company pledged all of the shares
of Ace and IHW to the guarantors, subject to the prior security interest of the
financial institution and the other noteholders.
In addition, certain of these related party noteholders 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 totaling
$420,000 had been recorded as an extraordinary item in the statement of
operations in the Form 10-QSB for the quarter ended September 30, 1999. This
report restates such transaction to reflect it as a capital contribution arising
from the restructuring of this related party debt. Principal and interest in the
amount of $402,000 and $6,000 respectively, was paid as part of the $1,037,000
of payments made by the guarantors as described above and repayment of the
remaining $591,000 of debt is being made in varying monthly amounts over 48
months with interest at the rate of 12% per annum.
16
At September 30, 1999, the Company had outstanding related party notes totaling
$3,911,000 payable as follows:
Twelve Months Ending
--------------------
September 30 Amount
------------ ------
2000 $3,408,000
2001 $ 130,000
2002 $ 195,000
2003 $ 178,000
----------
3,911,000
Current portion 3,408,000
----------
$ 503,000
==========
Of the $3,911,000, $3,170,000 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 $2,797,000 are
personally guaranteed by certain stockholders of the Company.
At September 30, 1999, the Company owed $2,219,000 pursuant to a loan and
security agreement entered into with a financial institution whereby the Company
is required to maintain an outstanding combined loan balance of not less than
$1,500,000, but no more than $3,000,000 as defined, which expires June 2001. The
loan is collateralized by substantially all the assets of the Company and is
partially guaranteed by an officer of the Company. Under the agreement, the
Company receives revolving credit advances based on accounts receivable and
inventory available, as defined, and is required to pay interest at a rate equal
to the greater of 9% or the prime rate (8.25% effective August 25, 1999) plus
2.5% plus other fees and all of the lender's out-of-pocket costs and expenses.
The agreement, among other matters, restricts the Company with respect to (i)
incurring any lien or encumbrance on its property or assets, (ii) entering into
new indebtedness, (iii) incurring capital expenditures in any fiscal year in an
amount in excess of $100,000, (iv) declaring or paying dividends on common or
preferred stock and (v) requires an officer of the Company to maintain certain
ownership percentages throughout the term of the agreement.
At September 30, 1999 the Company owed a related party $496,000 for the prior
rental of its office and warehousing space. During April 1999, the related party
sold the building occupied by the Company and the Company moved into
substantially less office and warehousing space at the same location. In
addition, the company also owed this entity an additional $235,000 for advances
received from them. Interest on these obligations are payable at the rate of 12%
per annum.
At September 30, 1999 the Company had an outstanding note payable (aggregating
$400,000) to an affiliate subordinated to the obligations due the financial
institution discussed above. Interest is payable on the note at the rate of 12%
per annum.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and has
developed an implementation plan to resolve the issue. The Company has modified
its existing software, converted to new software and replaced some of its
hardware, so that the Year 2000 problem does not pose any significant
operational problems.
17
Results of Operations
The Company had net sales of $4,201,000 and $3,739,000, respectively, for the
three-month periods ended September 30, 1999 and September 30, 1998 and
$10,763,000 and $11,244,000, respectively for the nine-month periods ended
September 30, 1999 and September 30, 1998. The increase in sales during the
comparable third quarters is primarily attributable to strong demand for
household products. The decrease in sales during the comparable nine-month
periods was due to Ace losing several accounts to competitors with national
contracts.
Gross profit margins for the third quarter ended September 30, 1999 and
September 30, 1998 were 34% and 35%, respectively and for the nine-month periods
ended September 30, 1999 and September 30, 1998 were 33% and 35%, respectively.
The decrease in gross profit margin is attributable to the lower gross profit
margins of Ace sales, changing product mixes, and closing out slow moving and
obsolete inventory
Selling, general and administrative expenses were $767,000 and $739,000 or 18%
and 20% of net sales, respectively, in the three-month periods ended September
30, 1999 and September 30, 1998, and $2,122,000 and $2,369,000 or 20% and 21% of
net sales respectively in the nine-month periods ended September 30, 1999 and
September 30, 1998.
Interest expense increased to $234,000 from $217,000 for the three-month period
ended September 30, 1999, compared to the comparable three-month period ended
September 30, 1998 and increased to $692,000 from $660,000 for the nine- month
period ended September 30, 1999 compared to the comparable nine-month period
ended September 30, 1998. The increase of $32,000 was primarily due to increased
debt owed by the Company.
Inventory was $1,063,000 at September 30, 1999 compared to $1,784,000 at
September 30, 1998. The decrease in inventory is attributable to lower sales,
management's ability to better forecast IHW sales based on historic experience,
and relying more on just in time deliveries from Brabantia. Accounts receivable
were $3,415,000 at September 30, 1999, compared to $3,065,000 at September 30,
1998 and reflects the fact that Ace extends more liberal terms to their
customers as an inducement to do business and strong IHW sales in the third
quarter of 1999.
Due to the foregoing, the Company reported net income of $228,000 compared to
net income of $52,000 respectively, for the three-month periods ended September
30, 1999 and 1998 and net income of $50,000 compared to net income of $92,000
respectively, for the nine-month periods ended September 30, 1999 and 1998.
18
PART II OTHER INFORMATION
Item 4. Submission of Matters to a vote of Securities Holders
The Company held its annual shareholders' meeting on October 5, 1999.
Richard Helfman, David Guttmann, and Lala Bessler were re-elected
directors.
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 nine months
ended September 30, 1999
19
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: April 4, 2000 By: S/Richard Helfman
------------------------------------
Richard Helfman, President
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