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, 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)
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(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
- ---------------------------- ------------------------------
(Title of each class) (Outstanding at June 30, 2002)
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Balance Sheet as at June 30, 2002 and December 31, 2001 3
Statement of Operations
For the Three and Six Months ended
June 30, 2002 and June 30, 2001 4
Statement of Cash Flows
For the Six Months ended
June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2002 2001
---- ----
Assets Unaudited Audited
Current assets:
Cash $ 58,000 $ 56,000
Accounts receivable-net 2,385,000 2,030,000
Inventories 1,261,000 1,584,000
Prepaid expenses and other current assets 297,000 242,000
------------ ------------
Total current assets 4,001,000 3,912,000
Fixed assets - less accumulated depreciation of $119,000 and $88,000 respectively 132,000 80,000
Other assets 747,000 745,000
------------ ------------
Total Assets $ 4,880,000 $ 4,737,000
============ ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Loans payable - financial institution $ 2,489,000 $ 2,566,000
Notes payable - others 1,082,000 1,082,000
Notes payable - related parties 2,132,000 2,028,000
Accounts payable and accrued expenses 4,582,000 3,972,000
Subordinated note payable - affiliate 120,000 120,000
Due to related party 64,000 64,000
------------ ------------
Total current liabilities 10,469,000 9,832,000
Notes payable related parties 676,000 830,000
Subordinated note payable - affiliate 216,000 220,000
------------ ------------
Total liabilities 11,361,000 10,882,000
------------ ------------
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) 486,000 455,000
------------ ------------
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 (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 7,750,000 7,991,000
Accumulated deficit (17,355,000) (17,229,000)
------------ ------------
Stockholders' deficiency (6,967,000) (6,600,000)
------------ ------------
Total Liabilities and Stockholders' Deficiency $ 4,880,000 $ 4,737,000
============ ============
See notes to condensed consolidated financial statements
3
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Net Sales $ 4,289,000 $ 4,090,000 $ 8,228,000 $ 7,761,000
Cost of sales 2,799,000 2,480,000 5,289,000 4,784,000
------------ ------------ ------------ ------------
Gross profit 1,490,000 1,610,000 2,939,000 2,977,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 981,000 1,160,000 1,930,000 2,181,000
Warehousing expense 258,000 250,000 501,000 510,000
Interest expense and financing costs 233,000 222,000 464,000 412,000
------------ ------------ ------------ ------------
1,472,000 1,632,000 2,895,000 3,103,000
------------ ------------ ------------ ------------
Net income (loss) 18,000 (22,000) 44,000 (126,000)
Less undeclared dividends on
preferred stock (152,000) (153,000) (302,000) (306,000)
------------ ------------ ------------ ------------
Net loss applicable to common shares $ (134,000) $ (175,000) $ (258,000) $ (432,000)
============ ============ ============ ============
Net loss per common share - basic and diluted $(.01) $(.01) $(.02) $(.03)
============ ============ ============ ============
Weighted average number of shares - basic and diluted 16,699,000 17,199,000 16,699,000 17,199,000
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2001 2002
---- ----
Cash flows from operating activities:
Net income (loss) $ 44,000 $(126,000)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 16,000 31,000
Amortization of goodwill 17,000 -
Loss on disposition of fixed assets - 2,000
Decrease in allowance for doubtful accounts (100,000) (29,000)
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 2,000 (326,000)
(Increase) decrease in inventories (95,000) 323,000
Increase in prepaid expenses and other current assets (159,000) (55,000)
Increase in other assets (2,000) (2,000)
Increase in accounts payable and accrued expenses 336,000 400,000
--------- ---------
Net cash provided by operating activities 59,000 218,000
--------- ---------
Cash flows from investing activities:
Acquisition of fixed assets (16,000) (85,000)
Proceeds from sale of fixed assets 4,000 -
--------- ---------
Net cash used in investing activities (12,000) (85,000)
--------- ---------
Cash flows from financing activities:
Net proceeds of loans payable - financial institution 146,000 (77,000)
Proceeds from notes payable - related parties - 250,000
Repayment of notes payable - related parties (117,000) (300,000)
Repayment of subordinated note payable - affiliate - (4,000)
--------- ---------
Net cash (used in) provided by financing activities 29,000 (131,000)
--------- ---------
Net increase in cash 76,000 2,000
Cash at beginning of period 24,000 56,000
--------- ---------
Cash at end of period $ 100,000 $ 58,000
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 349,000 $ 184,000
========= =========
Income Taxes $ 12,000 $ 1,000
========= =========
See notes to condensed consolidated financial statements.
5
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 and six-month periods ended June 30, 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 for the three-month and
six-month periods ended June 30, 2002, 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 three-month period ended June 30,
2001, amounted to approximately $8,000 and for the six-month period ended June
30, 2001, amounted to approximately $17,000. Had such expense not been recorded
the Company's results of operations and loss per common share would approximate
the following:
3 months ended 6 months ended
June 30, 2001 June 30, 2001
Net income $26,000 $61,000
Net loss applicable to common shares $(126,000) $(241,000)
Net loss per common shares - Basic and diluted $(0.01) $(0.01)
Note - B Notes Payable and Related Party Transactions
At June 30, 2002, the Company had outstanding related party notes payable
totaling $2,808,000 as follows:
6
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
Twelve Months Ended
June 30, Amount
-------- ------
2003 $ 2,132,000
2004 155,000
2005 521,000
-----------
2,808,000
Current Portion 2,132,000
-----------
$ 676,000
-----------
Of this amount, $2,577,000 bears interest at 12% and $231,000 bears interest at
18%. Interest expense on these notes were $166,000 and $199,000 for the six
months ended June 30, 2002 and June 30, 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 $2,291,000 are personally guaranteed by certain
stockholders of the Company.
At June 30, 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 June 30, 2002, the Company owed $2,489,000 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 June 30, 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 June 30, 2002, the Company had an outstanding note payable (aggregating
$336,000) 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 June 30, 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 $4,000 for the six-month
periods ended June 30, 2002 and June 30, 2001.
Included in prepaid expenses and other current assets at June 30, 2002 is an
amount due from a major stockholder, 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.
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 major stockholders of the Company. During the six-month periods each ended
June 30, 2002 and 2001, $60,000 was charged to operations for each of these
individuals.
7
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note - C Research and Development
During the first six months the Company began developing a new product line for
home storage. The Company has recorded approximately $32,000 in Selling, General
and Administrative expenses for the planning and development stage and has
capitalized approximately $25,000 under Fixed assets.
Note - D 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, 2001 and 2002.
8
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three-Month Period Ended June 30, 2001
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 2,831,000 $ 1,458,000 $ - - $ 4,289,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,831,000 $ 1,458,000 $ - - $ 4,289,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 119,000 $ 141,000 $ (9,000) $ - $ 251,000
Interest expense (56,000) (43,000) (134,000) - (233,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 63,000 $ 98,000 $ (143,000) $ - $ 18,000
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation of fixed assets $ 7,000 $ 1,000 $ - $ - $ 8,000
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of intangibles $ - $ 8,000 $ - $ - $ 8,000
- -----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 6,000 $ 1,000 $ - $ - $ 7,000
===================================================================================================================================
9
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six-Month Period Ended June 30, 2001
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 5,298,000 $ 2,930,000 $ - - $ 8,228,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 5,298,000 $ 2,930,000 $ - - $ 8,228,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 237,000 $ 307,000 $ (36,000) $ - $ 508,000
Interest expense (108,000) (86,000) (270,000) - (464,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 129,000 $ 221,000 $ (306,000) $ - $ 44,000
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation fixed assets $ 13,000 $ 3,000 $ - $ - $ 16,000
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of intangibles $ - $ 17,000 $ - $ - $ 17,000
- -----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 6,000 $ 10,000 $ - $ - $ 16,000
===================================================================================================================================
10
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three-Month Period Ended June 30, 2002
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 2,598,000 $ 1,492,000 $ - - $ 4,090,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,598,000 $ 1,492,000 $ - - $ 4,090,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 150,000 $ 138,000 $ (88,000) $ - $ 200,000
Interest expense (83,000) (30,000) (109,000) - (222,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 67,000 $ 108,000 $ (197,000) $ - $ (22,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation of fixed assets $ 20,000 $ 2,000 $ - $ - $ 22,000
- -----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 78,000 $ 1,000 $ - $ - $ 79,000
===================================================================================================================================
11
CREATIVE TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six-Month Period Ended June 30, 2002
Medical,
Janitorial
Small and
Household Dietary
Products Products Corporate Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 4,815,000 $ 2,946,000 $ - - $ 7,761,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 4,815,000 $ 2,946,000 $ - - $ 7,761,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 227,000 $ 255,000 $ (196,000) $ - $ 286,000
Interest expense (133,000) (61,000) (218,000) - (412,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 94,000 $ 194,000 $ (414,000) $ - $ (126,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation fixed assets $ 26,000 $ 5,000 $ - $ - $ 31,000
- -----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 80,000 $ 5,000 $ - $ - $ 85,000
===================================================================================================================================
12
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 were distributed in 2002 by IHW were
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 six-month period ended June 30, 2002, cash provided by operating
activities was $218,000, cash used in investing activities was $85,000 and cash
of $131,000 was used in financing activities. As a result, at June 30, 2002,
cash increased by $2,000 from $56,000 at December 31, 2001 to $58,000 at June
30, 2002. The Company had a negative working capital of $6,468,000 at June 30,
2002.
Accounts payable and other liabilities increased to $4,582,000 at June 30, 2002
from $3,972,000 at December 31, 2001 primarily due to increased accruals for
interest, dividends and other expenses.
During the six-month period ended June 30, 2002, debt to a financial institution
decreased by $77,000 to $2,489,000 and notes payable to related parties
decreased by $50,000 to $2,808,000.
At June 30, 2002, the Company had outstanding related party notes payable
totaling $2,808,000 as follows:
Twelve Months Ended
June 30, Amount
-------- ------
2003 $2,132,000
2006 155,000
2007 521,000
----------
2,808,000
Current Portion 2,132,000
----------
$ 676,000
----------
Of this amount, $2,577,000 bears interest at 12% and $231,000 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 $2,291,000 are
personally guaranteed by certain stockholders of the Company.
At June 30, 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.
13
At June 30, 2002, the Company owed $2,489,000 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 June 30, 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 June 30, 2002, the Company had an outstanding note payable (aggregating
$336,000) 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 June 30, 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.
During the first half of this year the Company began to develop a new line of
home storage products in the household division. This new venture is still in
the development stage and that the full effect on sales will not occur until at
least 2003. During the six month period ended June 30, 2002, the Company
recognized in Selling, General and Administrative a charge of approximately
$32,000 and capitalized approximately $25,000 for the development of this line.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the result
of our operations are based upon our consolidated financial statements and the
data used to prepare them. The Company's financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. On an ongoing basis we re-evaluate our judgments and estimates including
those related to product returns, bad debts, inventories, long-lived assets,
investments, income taxes, litigation and contingencies. We base our estimates
and judgments on our historical experience, knowledge of current conditions and
our beliefs of what could occur in the future considering available information.
Actual results may differ from these estimates under different assumptions or
conditions. Our estimates are guided by observing the following critical
accounting policies.
REVENUE RECOGNITION
We generate our revenue by selling household products principally to
specialty and discount stores, catalogues and other retailers; and medical,
janitorial and dietary products to hospitals and other healthcare facilities,
hotels and entertainment facilities. The Company's policy is to recognize
revenue from sales to customers when the rights and risks of ownership have
passed to the customer, when persuasive evidence of an arrangement exists, the
product has been delivered, the price is fixed and determinable and collection
of the resulting receivable is reasonably assured.
We must make estimates of potential future product returns and revenue
adjustments related to current period product revenue. Management analyzes
historical returns, current economic trends, changes in customer demand and
acceptance of our products when evaluating the adequacy of our allowance for
sales returns. If management made different judgments or utilized different
estimates, material differences in the amount of our reported revenue may
result. We provide for these situations based on our experience with specific
customers and
14
our expectations for revenue adjustments based on economic conditions. At June
30, 2002 our reserve for sales returns was $28,000 and at June 30, 2001 it was
$9,000.
We maintain an allowance for doubtful accounts for losses that we
estimate will arise from our customers' inability to make required payments. We
make our estimates of the uncollectibility of our accounts receivable by
analyzing historical bad debts, specific customer creditworthiness and current
economic trends. At June 30, 2002 the allowance for doubtful accounts was
$165,000 and at June 30, 2001 it was $175,000.
ACCOUNTING FOR INCOME TAXES
The Company's record a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While we
consider historical levels of income, expectations and risks associated with
estimates of future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event that
we determine that we would be able to realize deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of the net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made. We have recorded
valuation allowances against our deferred tax assets of $7,667,000 at June 30,
2002 and $7,697,000 at June 30, 2001. The valuation allowances relate primarily
to the net operating loss carry forward deferred tax asset where the tax benefit
of such asset is not assured.
VALUATION OF INVENTORY
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand, selling.
prices and market conditions. If actual product demand or selling prices are
less favorable than we estimate we may be required to take additional inventory
write-downs.
VALUATION OF LONG-LIVED ASSETS
We assess the impairment in value to our company of long-lived assets
whenever events or circumstances indicate that their carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
o significant negative industry trends
o significant underutilization of the assets
o significant changes in how we use the assets or our plans for
their use.
If our review determines the future undiscounted cash flows related to
these assets will not be sufficient to recover their carrying value we will
reduce the carrying values of these assets down to our estimate of fair market
value and continue depreciating them over their remaining useful lives.
15
RESULTS OF OPERATIONS
The Company had net sales of $4,090,000 and $4,289,000, respectively, for the
three-month periods ended June 30, 2002 and June 30, 2001 and $7,761,000 and
$8,228,000, respectively, for the six-month periods ended June 30, 2002 and June
30, 2001. The decrease in sales, primarily in IHW, is due to increased
competition from the Far East.
Gross profit margins for the second quarter ended June 30, 2002 and June 30,
2001 were 39% and 35%, respectively and for the six-month periods ended June 30,
2002 and June 30, 2001 were 38% and 36%, respectively. The increase in gross
profit margin is primarily attributable to a more favorable foreign exchange
rate.
Selling, general and administrative expenses were $1,160,000 and $981,000 or 28%
and 23% of net sales, respectively, in the three-month periods ended June 30,
2002 and June 30, 2001, and $2,181,000 and $1,930,000 or 28% and 23% of net
sales, respectively, in the six-month periods ended June 30, 2002 and June 30,
2001. The increase is primarily due to an increase in payroll, greater
receivable write-offs, new research & development costs, higher marketing
expense and an increase in miscellaneous expenses.
Warehousing expenses were $250,000 and $258,000 or 6% of net sales,
respectively, for the three-month periods ended June 30, 2002 and June 30, 2001,
and $510,000 and $501,000 or 7% and 6% of net sales respectively for the
six-month periods ended June 30, 2002 and June 30, 2001. Warehousing expenses
decreased during the second quarter because of the move of the warehousing and
shipping functions of the Housewares division to an outside source.
Interest expense decreased to $222,000 from $233,000 for the three-month period
ended June 30, 2002, compared to the three-month period ended June 30, 2001, and
decreased to $412,000 from $464,000 for the six-month period ended June 30, 2002
compared to the six-month period ended June 30, 2001. The decrease of $52,000
for the six-month period ended June 30, 2002 compared to the six-month period
ended June 30, 2001 was primarily due to lower interest rates on the loan
payable - financial institution.
Inventory was $1,261,000 at June 30, 2002 compared to $1,831,000 at June 30,
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 $2,385,000 at June 30, 2002 compared to $2,926,000
at June 30, 2001. The decrease in receivables reflects the decrease in sales.
Due to the foregoing, the Company reported a net loss of $22,000 compared to a
net profit of $18,000, respectively, for the three-month periods ended June 30,
2002 and June 30, 2001, and a net loss of $126,000 compared to a net profit of
$44,000, respectively, for the six-month periods ended June 30, 2002 and June
30, 2001.
16
PART II OTHER INFORMATION
Item 6. a. Exhibits
99.1 Certification of Officers
b. Reports on form 8-K
The Registrant did not file reports on Form 8-K during the three
months ended June 30, 2002.
17
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 19, 2002 By: S/David Guttmann
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David Guttmann, Chief Executive Officer
S/Richard Helfman
-----------------
Richard Helfman, President and
Chief Financial Officer
18