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: March 31, 2002
Commission File Number: 0-15754
CREATIVE TECHNOLOGIES CORP.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-2721083
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(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation of organization)
170 53rd Street, Brooklyn, New York 11232
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(Address of principal executive offices) (Zip Code)
(718) 492-8400
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(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 17,198,831
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(Title of each class) (Outstanding at March 31, 2002)
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Balance Sheet as at March 31, 2002 and December 31, 2001 3
Statement of Operations
For the Three Months ended
March 31, 2002 and March 31, 2001 4
Statement of Cash Flows
For the Three Months ended
March 31, 2002 and March 31, 2001 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
2002 2001
---- ----
Assets Unaudited Audited
Current assets:
Cash $ 119,000 $ 56,000
Accounts receivable-net 2,891,000 2,030,000
Inventories 1,405,000 1,584,000
Prepaid expenses and other current assets 314,000 242,000
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Total current assets 4,729,000 3,912,000
Fixed assets - less accumulated depreciation of $97,000 and $88,000 respectively 75,000 80,000
Other assets 739,000 745,000
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Total Assets $ 5,543,000 $ 4,737,000
============ ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Loans payable - financial institution $ 2,750,000 $ 2,566,000
Notes payable-other 1,082,000 1,082,000
Notes payable - related parties 2,252,000 2,028,000
Accounts payable and accrued expenses 4,655,000 3,972,000
Subordinated note payable - affiliate 120,000 120,000
Due to related party 64,000 64,000
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Total current liabilities 10,923,000 9,832,000
Notes payable related parties 756,000 830,000
Subordinated note payable - affiliate 218,000 220,000
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Total liabilities 11,897,000 10,882,000
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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) 471,000 455,000
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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 (liquidation value $550,000) 550,000 550,000
10,000 shares of convertible stock designated as 1996-A preferred stock - $1,000
stated value; issued and outstanding 340 shares (liquidation value $340,000) 340,000 340,000
1,000 shares of convertible stock designated as 2000 preferred stock - $1,000
stated value; issued and outstanding 200 shares (liquidation value $200,000) 200,000 200,000
Common Stock - $.09 par value; authorized 45,000,000 shares, issued and
outstanding 17,199,000 shares 1,548,000 1,548,000
Additional paid-in capital 7,870,000 7,991,000
Accumulated deficit (17,333,000) (17,229,000)
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Stockholders' deficiency (6,825,000) (6,600,000)
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Total Liabilities and Stockholders' Deficiency $ 5,543,000 $ 4,737,000
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See notes to condensed consolidated financial statements.
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2001 2002
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Net Sales $ 3,939,000 $ 3,671,000
Cost of sales 2,490,000 2,304,000
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Gross profit 1,449,000 1,367,000
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Operating expenses:
Selling, general and administrative expenses 949,000 1,021,000
Warehousing expense 243,000 260,000
Interest expense and financing costs 231,000 190,000
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1,423,000 1,471,000
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Net income (loss) 26,000 (104,000)
Less undeclared dividends on preferred stock (150,000) (153,000)
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Net loss applicable to common shares $ (124,000) $ (257,000)
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Net loss per common share - basic and diluted $ (.01) $ (.01)
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Weighted average number of shares - basic and diluted 16,699,000 17,199,000
============ ============
See notes to condensed consolidated financial statements.
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2001 2002
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Cash flows from operating activities:
Net income (loss) $ 26,000 $(104,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 8,000 9,000
Amortization of goodwill 9,000 --
Decrease in allowance for doubtful accounts (77,000) (138,000)
Loss on disposition of fixed assets -- 2,000
Changes in operating assets and liabilities:
Increase in accounts receivable (212,000) (723,000)
Decrease (increase) in inventories (176,000) 179,000
Increase in prepaid expenses and other current assets (55,000) (72,000)
Decrease (increase) in other assets (2,000) 6,000
Increase in accounts payable and accrued expenses 430,000 578,000
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Net cash used in operating activities (49,000) (263,000)
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Cash flows from investing activities - Acquisition of fixed assets (9,000) (6,000)
Cash flows from financing activities:
Net proceeds of loans payable - financial institution 103,000 184,000
Proceeds from notes payable - related party -- 250,000
Repayment of notes payable - related party (69,000) (100,000)
Repayment of subordinated note payable - affiliate -- (2,000)
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Net cash provided by financing activities 34,000 332,000
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Net increase (decrease) in cash (24,000) 63,000
Cash at beginning of period 24,000 56,000
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Cash at end of period $ -- $ 119,000
========= =========
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 159,000 $ 92,000
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Income Taxes $ 12,000 $ 1,000
========= =========
See notes to condensed consolidated financial statements.
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 accounting principles generally accepted in the United
States of America 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 period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. 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, 2001.
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"). 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 and convertible preferred stock. 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.
Upon the adoption of Statement of Financial Accounting Standards No. 142, the
Company assigned previously recognized goodwill to individual reporting units
and undertook to review such goodwill for possible impairment. Although that
review is not yet complete it appears that no such impairment loss exists.
Amortization expense on goodwill during the period ended March 31, 2001,
amounted to approximately $9,000. Had such expense not been recorded the
Company's results of operations and loss per common share would approximate the
following:
Net income $ 35,000
Net loss applicable to common shares $(115,000)
Net loss per common shares - Basic and diluted $ (0.01)
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - B Notes Payable and Related Party Transactions
At March 31, 2001, the Company had outstanding related party notes payable
totaling $3,008,000 payable as follows:
Twelve Months Ended
March 31, Amount
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2003 $2,252,000
2004 235,000
2005 521,000
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3,008,000
Current Portion 2,252,000
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$ 756,000
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Of this amount, $2,577,000 bears interest at 12% and $431,000 bears interest at
18%. Interest expense on these notes were $91,000 and $100,000 for the three
months ended March 31, 2002 and March 31, 2001, respectively. 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 $2,491,000 are personally guaranteed by certain
stockholders of the Company.
At March 31, 2002 the Company had outstanding notes to another for $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 this note, subject to the prior
security interest of the financial institution and other noteholders.
At March 31, 2002, the Company owed $2,750,000 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 $4,000,000, as defined, which expires June 2003.
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 7.5% or the prime rate (4.75% at March 31, 2002) plus 2% plus
other fees and all of the lender's out-of-pocket costs and expenses. The
agreement, among other matters, has certain restrictions, as defined.
At March 31, 2002, the Company had an outstanding note payable (aggregating
$338,000) 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 been granted the option to pay $10,000 per month.
At March 31, 2002 the Company owed a related party $64,000 for the prior rental
of its office and warehousing space. Interest on these obligations are payable
at the rate of 12% per annum. Interest expense was $2,000 for the three-month
periods ended March 31, 2002 and March 31, 2001.
Included in prepaid expenses and other current assets at March 31, 2002 is an
amount due from a major shareholder, consisting of interest and principle,
aggregating $64,000. The note is due on demand, is collateralized, and interest
on the loan is at 12% per year.
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 principal stockholders of the Company. During the three-month periods ended
March 31, 2002 and 2001, $30,000, was charged to operations for each of these
individuals.
Note C - 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 periods ended March 31, 2001 and 2002.
Three-Month Period Ended March 31, 2001
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Sales to unaffiliated
customers $ 2,467,000 $ 1,472,000 $ - - $3,939,000
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Total sales $ 2,467,000 $ 1,472,000 $ - - $3,939,000
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Operating income (loss) $ 118,000 $ 166,000 $ (27,000) $ - $ 257,000
Interest expense (52,000) (43,000) (136,000) - (231,000)
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Net income (loss) $ 66,000 $ 123,000 $ (163,000) $ - $ 26,000
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Depreciation of
fixed assets $ 6,000 $ 2,000 $ - $ - $ 8,000
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Amortization of
intangibles $ - $ 9,000 $ - $ - $ 9,000
-------------------------- --------------------- ----------------------- -------------------- ------------------ ------------------
Capital expenditures $ - $ 9,000 $ - $ - $ 9,000
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Three-Month Period Ended March 31, 2002
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
------------------------- ---------------------- -------------------------- ----------------- ----------------- -------------------
Sales to unaffiliated
customers $ 2,217,000 $ 1,454,000 $ - - $3,671,000
------------------------- ---------------------- -------------------------- ----------------- ----------------- -------------------
Total sales $ 2,217,000 $ 1,454,000 $ - $ - $3,671,000
------------------------- ---------------------- -------------------------- ----------------- ----------------- -------------------
Operating income (loss) $ 77,000 $ 117,000 $ (108,000) $ - $ 86,000
Interest expense (50,000) (31,000) (109,000) - (190,000)
------------------------- ---------------------- -------------------------- ----------------- ----------------- -------------------
Net income (loss) $ 27,000 $ 86,000 $ (217,000) $ - $ (104,000)
------------------------- ---------------------- -------------------------- ----------------- ----------------- -------------------
Depreciation of
fixed assets $ 6,000 $ 3,000 $ - $ - $ 9,000
------------------------- --------------------- ----------------------- -------------------- ------------------ -------------------
Capital expenditures $ 2,000 $ 4,000 $ - $ - $ 6,000
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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"), a distributor for various European manufacturers of
moderate to high-end housewares. IHW also owns the stock of Ace Surgical
Supplies Co., Inc. ("Ace") an operating company, (collectively the "Company").
Ace, in business since 1974, 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 being
distributed in 2002 by IHW are Brabantia International BV, MAWA
Metallwarenfabrik Wagner GmbH ("Mawa"), Foppa Pedretti S.p.A., Evoluzione S.R.L.
and Framar S.P.A. IHW is continually looking to distribute other complementary
lines that meet its various criteria.
For the three-month period ended March 31, 2002, cash used in operating
activities was $263,000, cash used in investing activities was $6,000 and cash
of $332,000 was provided by financing activities. As a result, for the
three-month period ended March 31, 2002, cash increased by $63,000 from $56,000
at December 31, 2001 to $119,000 at March 31, 2002. The Company had a negative
working capital of $6,194,000 at March 31, 2002.
Accounts payable and accrued expenses increased to $4,655,000 at March 31, 2002
from $3,972,000 at December 31, 2001 primarily due to additional financing
needed to support the increase in sales over the fourth quarter in 2001 and the
resulting increase in accounts receivable.
During the three month period ended March 31, 2002, debt to a financial
institution increased by $184,000 to $2,750,000 and notes to related parties
increased by $150,000 to $3,008,000.
At March 31, 2002, the Company had outstanding related party notes payable
totaling $3,008,000 payable as follows:
Twelve Months Ended
March 31, Amount
--------- ------
2003 $ 2,252,000
2004 235,000
2005 521,000
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3,008,000
Current Portion 2,252,000
------------
$ 756,000
============
Of this amount, $2,577,000 bears interest at 12% and $431,000 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 $2,491,000 are
personally guaranteed by certain stockholders of the Company.
At March 31, 2002 the Company had outstanding notes to another for $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 this note, subject to the prior
security interest of the financial institution and other noteholders.
At March 31, 2002, the Company owed $2,750,000 pursuant to a loan and security
agreement with a financial institution that expires June 2003. The Company,
under this agreement is required to maintain an outstanding combined loan
balance of not less than $1,500,000, but no more than $4,000,000. 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 7.5% or the prime rate (4.75% at March 31, 2002) plus 2% plus
other fees and all of the lender's out-of-pocket costs and expenses. The
agreement, among other matters, has certain restrictions, as defined.
At March 31, 2002, the Company had an outstanding note payable (aggregating
$338,000) 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 been granted the option to pay $10,000 per month.
At March 31, 2002 the Company owed a related party $64,000 for the prior rental
of its office and warehousing space. Interest on these obligations are payable
at the rate of 12% per annum.
Results of Operations
The Company had net sales of $3,671,000 and $3,939,000, respectively, for the
three-month periods ended March 31, 2002 and March 31, 2001. The decrease in
sales, primarily in IHW, is due to increased competition from the Far East and
customers maintaining lower inventory level.
The gross profit margin for the first quarter ended March 31, 2002 remained
constant at 37% verses the first quarter ended March 31, 2001.
Selling, general and administrative expenses were $1,021,000 and $949,000,
respectively, in the three-month periods ended March 31, 2002 and March 31, 2001
or 28% and 24% of net sales, respectively. This increase is primarily due to a
larger payroll, greater receivable write-offs and an increase in miscellaneous
expenses.
Warehousing expenses were $260,000 and $243,000, respectively, for the
three-month periods ended March 31, 2002 and March 31, 2001 or 7% and 6% of net
sales, respectively. Management believes this increase is of a temporary nature,
and is the result of higher initial expenses during the transition to move the
warehousing and shipping functions of the Housewares division to an outside
source.
Inventory was $1,405,000 at March 31, 2002 compared to $1,912,000 at March 31,
2001. The decrease in inventory is primarily the result of better inventory
management in the Housewares division and implementation of a more flexible
purchasing arrangement with Brabantia to strive for "Just in time" inventory.
Accounts receivable net was $2,891,000 at March 31, 2002 compared to $3,117,000
at March 31, 2001.
Interest expense and financing costs were $190,000 and $231,000, respectively,
for the three-month period ended March 31, 2002 and March 31, 2001. This
decrease is primarily due to a lower interest rate on the loan payable -
financial institution.
Due to the foregoing, the Company reported a net loss of $104,000 compared to a
net profit of $26,000 respectively, for the three-month periods ended March 31,
2002 and March 31, 2001.
PART II OTHER INFORMATION
Item 6. a. Exhibits
NONE
b. Reports on form 8-K
The Registrant did not file reports on Form 8-K during the three
months ended March 31, 2002.
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: May 10, 2002 By: S/ Richard Helfman
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Richard Helfman, President