SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1997
Commission File Number
000-23115
CTI INDUSTRIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2848943
(State or other jurisdiction of (I.R.S. EmployerIdentification Number)
incorporation or organization)
22160 North Pepper Road
Barrington, Illinois 60010
(Address of principal executive offices) (Zip Code)
(847) 382-1000
Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
-------------- --------------------
Common Stock, .065 par value NASDAQ SmallCap Market
Check 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.
|X| Yes |_| No
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-KSB or any amendment to the Form 10-KSB.
|_|
The Registrant's revenues for the fiscal year ended October 31, 1997,
were $16,431,000.
Based upon the closing price of $5.625 per share of Registrant's Common
Stock as reported on NASDAQ SmallCap Market at January 15, 1998, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
then approximately $11,586,420. (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose).
The number of shares of the Registrant's Common Stock outstanding as of
January 15, 1998 was 2,735,202 (excluding treasury shares) and the number of
shares of Class B Common Stock outstanding as of that date was 1,098,901.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one):
|_| Yes |X| No
<PAGE>
PART I
Item No. 1 Description of Business
Background.
CTI Industries Corporation (the "Company") was incorporated as
Container Merger Company, Inc. under the laws of the State of Delaware on
October 14, 1983, and changed its name to CTI Industries Corporation on August
2, 1985. A predecessor company, Creative Technology, Inc., was organized as an
Illinois corporation on December 9, 1975 and was merged into the Company in
February, 1984. CTI Balloons Ltd. ("CTI Balloons"), the Company's wholly-owned
subsidiary, was organized as a corporation under the laws of the United Kingdom
on October 2, 1996. On October 24, 1996, the Company entered into an agreement
with CTI Balloons pursuant to which all of the assets and liabilities of the
Company in its branch operation in the United Kingdom were sold and transferred
to CTI Balloons and all of the capital stock of CTI Balloons was issued and
delivered to the Company. Unless otherwise specified, all references herein to
the Company shall refer to the Company, its predecessor Creative Technology,
Inc. and its wholly-owned subsidiary, CTI Balloons.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 1,098,901 shares of
Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled to
an annual cumulative dividend of 13% of the purchase price, and was convertible
into one share of Common Stock. The shares of Preferred Stock, voting separately
as a class, were entitled to elect four of the Company's directors. Members of
such investment group included Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, current members of management.
In July, 1997, the Company effected a recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock, approved a 1 for 2.6 reverse stock split on both the Common Stock and
Preferred Stock, and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 1,098,901 shares
of Class B Common Stock. The conversion was effective upon the closing of an
initial public offering of 1,725,000 shares of the Company's Common Stock in
November of 1997. The shares of Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, vote on all other matters, including the election of the remaining
directors. The recapitalization, initial public offering and related
transactions were approved by written consent of the shareholders.
Business Overview
The Company is one of the leading manufacturers and sellers of mylar
balloons in the world. The Company also sells latex balloons, novelty and
"message" items, such as mugs and banners, and toy products, such as inflatable
masks, punch balls and water bombs, and produces laminated and
1
<PAGE>
specialty films for food packaging and other commercial uses. The Company's
products are sold throughout the United States and in 30 foreign countries
through a wide variety of retail outlets including grocery, general merchandise
and drugstore chains, such as Eckerd Drug Stores and Safeway and Winn Dixie
grocery chains, card and gift shops, such as Hallmark and Factory Card Outlet
stores, and party goods stores, such as Party City, as well as through florists
and balloon decorators.
The mylar balloon, actually a balloon made of a nylon based material
with metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(R) characters, Garfield(R), Precious Moments(R)
and Hallmark.
To meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
application. The Company's expertise in multi-color printing using water-based
ink, in particular, has enabled the Company to expand its business to include
the production of film wrappers for consumables. The Company produces, laminates
and prints films for food packaging companies and provides custom film products
for other commercial uses.
The Company is a fully integrated designer and manufacturer of its
mylar balloon product line. The Company is a party to a long term agreement with
a Mexican manufacturer under which a broad line of latex balloons are
manufactured for the Company. The Company has recently entered into an agreement
with the Mexican supplier whereby the Company has agreed to acquire an equity
interest in and has made loans to the Mexican firm. The Company thereby has a
competitive source of supply of quality latex balloon products which it markets
with its mylar balloon line. The Company has also established a joint venture
with this Mexican manufacturer for the packaging of balloon products and
printing of latex balloons.
The Industry
The mylar balloon came into existence in the late 1970s. During the
1980s, the market for mylar balloons grew rapidly. Initially, the product was
sold principally to individual vendors, small retail outlets and at fairs,
amusement parks, shopping centers and other outdoor facilities and functions.
Because of its ability to remain buoyant for a long period of time when filled
with helium and its facility for the printing of graphics and messages, the
product has significant appeal as a novelty and message item. Mylar balloons
became part of the "social expression" industry, carrying graphics designs,
characters and messages like greeting cards. In the mid-1980s, the Company and
other participants in the market began licensing character and cartoon images
for printing on the balloons and directed marketing of the balloons to retail
outlets including grocery, general merchandise and drug store chains, card and
gift shops, party goods stores as well as florists and balloon decorators.
The Company estimates that the wholesale world market for mylar
balloons is approximately $120 million. Mylar balloons are sold in the United
States and in Europe, several countries in the
2
<PAGE>
Far East, Canada and to an increasing extent in Latin America. The United
States, however, is by far the largest market for these products.
There are presently seven manufacturers of mylar balloons whose
products are sold in the United States. Five of these companies maintain their
own production facilities in the United States. Several companies market and
sell mylar balloons designed by them and manufactured by others for them.
Mylar balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. Often the
sale of mylar balloons by the wholesalers/distributors is accompanied by related
products including latex balloons, floral supplies and candy containers.
Although the latex balloon market overlaps the mylar balloon market, the latex
balloon market has been in existence for a longer period than mylar balloons and
extends to more customers and market categories than mylar balloons.
There are three separate latex balloon product lines: (i) high quality
decorator balloons, (ii) standard novelty balloons and (iii) printed balloons.
The high quality decorator balloons are generally sold to and through balloon
decorators and are generally of higher quality and price than the standard line
of balloons. The standard line of balloons is sold widely in retail stores
including many of the same outlets as mylar balloons. Printed latex balloons are
sold both in retail outlets and for balloon decoration purposes including floral
designs.
There are at least seven manufacturers of latex balloons whose products
are sold in the United States. It is estimated that the wholesale world market
for latex balloons exceeds $450 million.
Products
Mylar Balloons. The mylar balloon is actually composed of a base nylon
material which is coated on one side with a metal deposit and on the other with
polyethylene. Typically, the balloon film is printed with graphic designs and
messages.
The Company manufactures over 380 balloon designs, in different shapes
and sizes, including the following:
o Superloons(R) are 18" balloons in round or heart shape,
generally made to be filled with helium and remain buoyant for
long periods. This is the predominant mylar balloon size.
o Ultraloons(R) are 34" balloons made to be filled with helium
and remain buoyant.
o Miniloons(R) are 9" balloons made to be air-filled and sold on
holder-sticks or for use in decorations.
3
<PAGE>
o Card-B-Loons(R) (4 1/2") and Pixiloons(TM) (2 1/2") are
air-filled balloons, often sold on a stick, used in floral
arrangements or with a container of candy.
o Shape-A-Loons(R) are shaped balloons made to be filled with
helium.
o Minishapes are small shaped balloons designed to be air filled
and sold on sticks as toys or inflated characters.
o Walk-abouts(R) are helium filled shaped balloons with attached
arms and legs.
o Smackers(R) are helium filled red lip-shaped balloons.
o You Name It(R) are balloons to which lettering can be attached
for a personalized message.
In addition to size and shape, a principal element of the Company's
mylar balloon products is the printed design or message contained on the
balloon. These designs include figures and licensed characters many of which are
well-known licensed characters. The Company maintains licenses for Peanuts(R),
Garfield(R), Precious Moments(R), Hallmark, Ziggy(R), Grimmy(R), Elephantz(R),
Paddington(R), Face-Offs(R), Gibson Greetings(R), Postman Pat(R) and several
others. See "Patent, Trademarks and Copyrights" below.
Latex Balloons. The Company sells a high end line of latex balloons
under the product line name Hi-Tex(R) and a standard line of latex balloons
marketed under the name Partyloons(R).
Toys and Novelty. The Company also manufactures or sells additional and
related novelty items including mugs, banners and inflatable masks. With its
standard line of latex balloons and newly introduced inflatable masks, the
Company has made entry into the toy market. The Company intends to develop and
acquire additional novelty and toy lines of products, in many cases products
which can be sold in conjunction with its existing products including latex
punch balls and water bombs.
Packaging Films. The Company fabricates and prints films for use in
food packaging. The Company has developed sophisticated methods for the printing
of films, including the use of water-based ink. These techniques have proven
desirable for companies engaged in packaging food products, particularly candy
and snack items, with the result that the Company now provides printed packaging
films for several food packaging companies, including Farley Candies, and
intends to expand and extend this business line.
Custom Film Products. In addition to printed films for food packaging,
the Company fabricates custom film products for various commercial and
industrial purposes. These now include "dunnage" bags (inflatable film products)
used in the packaging of goods and systems for the storage of clothing items.
4
<PAGE>
Marketing, Sales and Distribution
The Company markets and sells its mylar balloon, latex balloon and
related novelty products throughout the United States and in over 30 foreign
countries. The Company maintains a marketing, sales staff and support staff of
13 individuals and a customer service department of 16 individuals. European
sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. Sales in other foreign countries are made generally to distributors in
those countries and are managed at the Company's principal offices.
The Company sells and distributes its products principally through a
network of over 350 distributors and wholesalers situated throughout the United
States and in a number of foreign countries. These distributors and wholesalers
are engaged principally in the sale of balloons and related products (including
such items as plush toys, mugs, containers, floral supplies and other items).
These distributors and wholesalers, in turn, sell balloons and related products
to retail outlets including grocery, general merchandise and drug store chains,
card and gift shops, party goods stores as well as florists and balloon
decorators. While the Company will continue to focus on the core U.S. market, it
will also seek to exploit other world markets such as Europe and South America.
No distributor or other customer accounts for more than 10% of the Company's
sales revenues. Most sales are on an individual order basis.
The Company also sells balloons and related products to certain
national chain stores including grocery, general merchandise and drug store
chains and party goods stores. The Company's largest chain store customer is
Eckerd Drug Stores. The Company also sells its balloons to individual retail
outlets generally through coordinated efforts with its distributors.
The Company has entered into an agreement with a major greeting card
company under which such company will act as an agent for the sale of the
Company's balloon products in retail outlets to which such company sells
greeting cards. Under the agreement, this company takes orders for balloons,
services the display of balloons and maintains inventory in the stores. The
Company pays this company a commission on sales the company generates and
services. The Company is pursuing similar strategic partnerships with other
companies in the expression industry.
The Company has established independent sales representatives for the
sale of its toy/novelty line which include the standard quality latex balloon,
inflatable masks, punch balls and water bombs. These products constitute a
separate product class requiring a different distribution network.
The Company engages in a variety of advertising and promotional
activities to promote the sale of its balloon products. Each year, the Company
produces a complete catalogue of its balloon products, and also prepares various
flyers and brochures for special or seasonal products, which are disseminated to
thousands of customers, potential customers and others. The Company participates
in numerous trade shows for the gift, novelty, balloon and other industries and
advertises in a number of trade and other publications. The Company also attends
licensing shows for the purpose of seeking out additional design licenses.
5
<PAGE>
The Company markets and sells its printed and laminated films directly
and through independent sales representatives. The Company markets these
products to companies which package their products in plastic wrapping, in
particular food products such as candies.
Manufacturing
Production and Operations. At the Barrington, Illinois headquarters,
the Company owns and operates a modern facility which includes machines of its
own design and construction which fabricate mylar balloons, banners and
packaging bags. These production systems include a patented system for the
production and insertion of valves in balloons. These machines have the capacity
to manufacture approximately 55 million 18" balloons annually.
The Company owns and operates graphic machinery at its facility in
Barrington, Illinois that is used for the printing of films for mylar balloons
and for printed and laminated films. The Company's use of water-based ink makes
its printed films attractive to food processors for the packaging of their
products. At the Barrington facility, the Company also owns and operates
laminating machines.
The Company also maintains a graphic arts and development department
which designs its balloon products and graphics. The Creative Department
operates a networked, computerized graphic arts system for the production of
these designs and of printed materials including catalogues, advertisements and
other promotional materials.
The Barrington facility also includes a computerized customer service
department which receives and fulfills over 50,000 orders annually.
Pulidos et Terminados Finos. The Company's latex balloons are
manufactured for it by Pulidos et Terminados Finos S.A. de C.V. ("P&TF"), a
Guadalajara, Mexico company engaged principally in the manufacture of latex
balloons. In 1995, the Company entered into an agreement with P&TF under which
(i) the Company sold to P&TF all of its latex balloon manufacturing equipment
(for the manufacture of decorator balloons) and (ii) P&TF has agreed for a
period of 10 years to supply balloons exclusively to the Company for the United
States and Canada manufactured on such equipment and (iii) for such 10 year
period, P&TF has agreed to supply to the Company, exclusively in the United
States except as to two other companies, all balloons manufactured by P&TF.
Commencing in 1996, P&TF began manufacturing the Company's high-end line of
latex balloons exclusively for the Company for the United States and also
manufactures a standard line of latex balloons which the Company distributes
throughout the United States and in various foreign countries under the product
line name Partyloons(R).
P&TF has experienced financial difficulties and in 1995, sought
protection from creditors in a "Suspension of Payment" proceeding in Mexico
similar, but not identical to, a reorganization under U.S. bankruptcy laws. In
the event of the loss of P&TF as a supplier, there can be no assurance that the
Company will be able to obtain an alternative source of supply on favorable
terms or at all. The Company believes it has an opportunity to further secure
its source of supply by providing necessary funding to P&TF. In July, 1997, the
Company entered into an Agreement with P&TF whereby it agreed to subscribe for a
note of P&TF in the principal amount of U.S.$1,200,000 and an option to purchase
a portion of P&TF's capital stock. On January 26, 1998, the Company and
6
<PAGE>
P&TF entered into an agreement which supersedes the July, 1997 agreement. Under
the new agreement, (i) the Company subscribed for 45% of the outstanding capital
stock of P&TF for $800,000, (ii) the Company loaned to P&TF $850,000, which loan
is secured by certain latex balloon manufacturing equipment and (iii) the 1995
equipment purchase agreement between the parties was cancelled with respect to 2
pieces of latex balloon manufacturing equipment, which equipment is now owned by
CTI and leased to P&TF. The purchase of the capital stock will be effective
February 1, 1998, and the purchase price for the capital stock will be paid by
(i) applying $400,000 of advances made to P&TF prior to closing and (ii) a cash
payment for the balance. The $400,000 debt owing to the Company from the 1995
acquisition was extinguished as a result of the cancellation of the sale of the
two pieces of equipment to P&TF. The Company's obligations were subject to the
termination of P&TF's Suspension of Payment proceeding and the payment or
settlement of P&TF's current bank debt. The Company believes this relationship
provides the Company with a competitive advantage over its competition.
P&TF maintains two manufacturing facilities in Guadalajara, Mexico
totaling approximately 60,000 square feet of manufacturing, office and warehouse
space and operates seven latex balloon machines.
CTF International. In September, 1996, the Company and P&TF entered
into a joint venture agreement to organize and operate CTF International, a
Mexican corporation. The joint venture is owned equally by the Company and P&TF.
CTF leases a facility of 15,000 square feet in Guadalajara, Mexico. CTF engages
in the packaging of balloons for the Company and P&TF and in the printing of
latex balloons. The Company believes it can achieve significant savings in
overhead, labor and other operating costs through the operation of CTF and
expects CTF to be an independent profit center.
Competition
The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven major manufacturers of mylar balloons
whose products are sold in the United States including Anagram International,
Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic
Balloon and Betallic. Several companies, including American Greetings, Amscan
and Flowers, Inc., market and sell mylar balloons designed by them and
manufactured by others for them.
There are at least seven manufacturers of latex balloons whose products
are sold in the United States including Globus Occidental, Pioneer Balloon,
National Latex, Maple City, Tilco and P&TF. The market for film packaging and
custom products is fragmented, and competition in this area is difficult to
gauge. However, there are numerous participants in this market and the Company
can expect to experience intense quality and price competition.
Many of these Companies offer products and services which are the same
or similar to those offered by the Company and the Company's ability to compete
depends on many factors within and outside its control. There are a number of
well-established competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical
7
<PAGE>
resources and established, extensive, direct and indirect channels of
distribution for their products and services. As a result, such competitors may
be able to respond more quickly to new developments and changes in customer
requirements, or devote greater resources to the development, promotion and sale
of their products and services than the Company. Competitive pressures include,
among other things, price competition, new designs and product development and
copyright licensing.
Patents, Trademarks and Copyrights
In connection principally with its mylar balloon business, the Company
has developed or acquired a number of intellectual property rights which are
significant to its business.
Copyright Licenses. The most significant of these rights are licenses
on a number of popular characters. The Company presently maintains approximately
20 licenses and produces balloon designs utilizing the characters covered by the
licenses. Licenses are generally maintained for a one or two year term, although
the Company has maintained long term relationships with a number of its
licensors and has been able to obtain renewal of its license agreements with
them. The Company has held a license on Peanuts(R) characters for over 11 years,
on Garfield(R) for more than 10 years and on Hallmark designs for approximately
10 years.
Trademarks. The Company is the owner of over 23 registered trademarks
in the United States relating to its products. Many of these trademarks are
registered in foreign countries, principally in the European Community.
Patent Rights. The Company is the owner of, or licensee under, several
patents relating to balloon products. These include (i) ownership of two
patents, and a license under a third, relating to self-sealing valves for mylar
balloons and methods of making balloons with such valves and (ii) a patent on a
combination of a greeting card and balloon connected by a ribbon contained in
single package.
Research and Development
The Company maintains a product development and research department of
six individuals for the development or identification of new balloons and
related products, product components and sources of supply. Research and
development includes (i) creative product development, (ii) creative marketing,
and (iii) engineering development. During fiscal years 1996 and 1997, the
Company estimates that the total amount spent on research and development
activities was approximately $201,000 and $238,000, respectively.
Employees
As of October 31, 1997, the Company had 161 full-time employees in the
United States, of whom 9 are executive or supervisory, 24 are in sales, 120 are
in manufacturing and 8 are clerical. As of that same date, the Company had 11
full time employees in England, of whom 2 are executive or supervisory, 3 are in
sales, 5 are in warehousing and 1 are clerical. The Company is not a party
8
<PAGE>
to any collective bargaining agreement, has not experienced any work stoppages
and believes that its relationship with its employees is satisfactory.
Regulatory Matters
The Company's manufacturing operations are subject to the U.S.
Occupational Safety and Health Act ("OSHA"). The Company believes it is in
material compliance with OSHA. The Environmental Protection Agency regulates the
handling and disposal of hazardous materials. As the Company's printing
operations utilize only water-based ink, the waste generated by the Company's
production process is not deemed hazardous. The Company believes it is in
material compliance with applicable environmental rules and regulations. A
number of states have enacted laws limiting or restricting the release of helium
filled mylar balloons. The Company does not believe such legislation will have
any material effect on its operations.
Item No. 2 Description of Property
The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space.
The Company also leases approximately 62,500 square feet of space in
Cary, Illinois expiring December 31, 1999. The Company has subleased
approximately 70% of this space through August, 1998. The Company's monthly rent
(net of subleases) is $5,957. The facility is utilized for warehouse and latex
balloon printing.
The Company leases 15,000 square feet of office and warehouse space in
Rugby, England at an annual lease cost of $51,700 expiring 2013. This facility
is utilized for product packaging operations and to manage and service the
Company's operations in England and Europe.
Item No. 3 Legal Proceedings
Not Applicable.
Item No. 4 Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item No. 5 Market for Registrant's Common Equity and Related Stockholder
Matters
Market Information. The Company's Common Stock was admitted to trading
on the NASDAQ SmallCap Market under the symbol CTIB on November 5, 1997. Prior
to that time, there was no established public trading market for the Company's
Common Stock. As a result there is no available trading information for fiscal
year 1997 or prior years. There is no public market for
9
<PAGE>
the Company's Class B Common Stock which is convertible into Common Stock on a
share per share basis.
As of January 15, 1998, there was approximately 27 holders of record of
the Company's Common Stock and 2 holders of record of Class B Common Stock.
The Company has never paid any dividends on its Common Stock and does
not currently intend to pay dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all its earnings to finance the
development and expansion of its business. Under the terms of its current loan
agreement, the Company has covenanted not to declare any dividend or other
distribution on its shares or redeem or purchase any of its shares in excess of
$250,000 in any year. It is also likely that the Company will be required to
agree to restrictions on the payment of dividends in connection with future
financings, if any.
Recent Sales of Unregistered Securities. In March and May of 1996, a
group of investors made an equity investment of $1,000,000 in the Company in
return for 1,098,901 shares of Preferred Stock, $.91 par value. CTI Investors,
L.L.C., an Illinois limited liability company, invested $900,000 in the shares
of Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan,
John H. Schwan and Stephen M. Merrick, members of management, and one other
accredited investor. One other accredited investor invested the remaining
$100,000. The sale was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") as a transaction not
involving a public offering as sales were made to a small number of accredited
investors, including members of management, who were sophisticated and had
access to information about the Company. The shares of Preferred Stock were
subsequently converted into 1,098,901 shares of Class B Common Stock.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, were each issued warrants to purchase 76,923
shares of the Company's Common Stock at an exercise price of $.91 per share in
consideration of their facilitating and guaranteeing a bank loan to the Company
in the amount of $6.3 million. The issuance was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and warrants. The offering was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.
10
<PAGE>
Item No. 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
In February, 1996, there was a change of control and management of the
Company. Since that time, new management has focused its efforts on (i) reducing
costs of operations, (ii) achieving liquidity, (iii) formulating and
implementing plans and programs to increase revenues and (iv) achieving
profitability. Operating expenses were reduced from 1995 to 1996 by over $5
million, a reduction of approximately 50% and the Company was able to maintain
the lower operating cost figures in fiscal 1997. Included in the expense
reduction in 1996, was a $200,000 decrease in depreciation expense related to a
change in accounting estimate of the useful life of certain equipment. The net
loss of the Company was reduced from the 1995 level of $2,893,000 to $183,000
for fiscal 1996 and for fiscal 1997, the Company had net income of $1,140,000.
Included in income for fiscal 1997, was a tax benefit of $596,000 resulting from
the reversal of a tax valuation allowance created in prior years. The reversal
was based upon management's determination that the deferred tax benefits would
be utilized. $1,672,000 of the loss in fiscal 1995 related to the shutdown and
sale of the Company's latex balloon manufacturing operation. While net sales
decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal 1995, net
sales for fiscal 1997 have increased 18% to $16,431,000. Working capital
increased to $942,000 on October 31, 1997 from $347,000 on October 31, 1996.
During the past 2 years, the Company has introduced over 180 new mylar balloon
designs, has out-sourced the manufacture of and engaged in active marketing of
latex balloons and introduced several new products. Approximately $1.9 million
of new financing has been provided in private financings, a new bank loan and
line of credit in the aggregate amount of $6.3 million has been obtained and an
initial public offering of Common Stock of over $6 million was completed.
In November of 1997, the Company completed an initial public offering
of 1,725,000 shares of its Common Stock, for net proceeds of approximately
$5,500,000. The Company anticipates investing $1.1 million of the proceeds in
capital items and operations to improve the products, production capacity,
marketing efforts, product development and operations of the Company. The
Company plans to make capital investments of approximately $2.8 million, a
portion of which will be financed through equipment leases or otherwise, in
plant improvements and equipment which will increase production capacity and
which will allow the Company to print eight-color designs in the mylar product
line and the laminated and printed films business. The Company has invested
$800,000 in its Mexican supplier of latex balloons. The Company plans to invest
a portion of the proceeds of the offering for the hiring of personnel in
marketing, product design and development and sales to enhance the Company's
product design and development efforts, its product line, marketing, customer
service and support and sales effort.
11
<PAGE>
The following table sets forth selected financial data of the Company
for the three years ended October 31, 1997, 1996 and 1995 (in thousands, except
per share data:
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------
1995 1996 1997
------------- ---------------- ------------
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales ....................................... $ 22,784 $ 13,910 $ 16,431
Cost of sales ................................. 15,078 8,558 10,265
---------- ----------- ----------
Gross profit ................................. 7,706 5,352 6,166
Operating Expenses:
General and administrative ..................... 2,900 2,055 1,864
Selling ....................................... 3,770 2,387 2,375
Advertising and marketing ..................... 2,356 592 983
Plant shut down expense ........................ 850 -- --
Loss on disposition of latex equipment ......... 822 -- --
---------- ----------- ----------
Total operating expenses ..................... 10,698 5,034 5,222
---------- ----------- ----------
Operating income (loss) ........................ (2,992) 318 944
---------- ----------- ----------
Other income (expense) ........................ (675) (495) (354)
---------- ----------- ----------
Income (loss) before income taxes ............... (3,667) (177) 590
Income tax benefit (expense) .................. 774 (6) 550
---------- ----------- ----------
Net income (loss) .............................. (2,893) (183) 1,140
Dividends applicable to Convertible Preferred
Stock .......................................... -- (74) (98)
---------- ----------- ----------
Net income (loss) applicable to common shares $ (2,893) $ (257) $ 1,042
========== =========== ==========
Net income (loss) per common and common
equivalent share .............................. $ (2.18) $ (.20) $ .84
========== =========== ==========
Weighted average number of common an
common equivalent shares outstanding ......... 1,328,952 1,265,835 1,238,814
========== =========== ==========
</TABLE>
Results of Operation
Net Sales. For the fiscal year ended October 31, 1997, net sales
increased to $16,431,000 from $13,910,000 for fiscal 1996, an increase of
approximately 18%. This increase in net sales was a reflection principally of
increases in the sales of latex balloons and printed and laminated films. The
Company had no supply of latex balloons from October, 1995, to July, 1996, as a
result of the closing of the Company's latex balloon manufacturing operations in
September, 1995. Sales also increased as a result of the Company's efforts to
solidify and expand its distribution network. For fiscal 1997, international
sales were $2,622,000 or 16% of net sales, as compared to $1,777,000, or 12.8%
of net sales for fiscal 1996. Increases in England sales represented a
significant part of the increase.
During fiscal 1996, mylar balloons represented 87% of sales, latex
balloons 4% of sales and laminated and printed films 9% of sales. During fiscal
1997, mylar balloons represented 77% of sales, latex balloons 10% of sales and
laminated and printed films 13% of sales. The Company anticipates that the
percentage of sales represented by latex balloons and laminated and printed
films will continue to increase during fiscal 1998. The profit margins
associated with latex balloons and laminated and printed films are not
materially different from the profit margin on mylar balloons. For fiscal 1997,
the profit margins on mylar balloons, latex balloons and laminated and printed
materials were 28.6%, 30.4%, and 29.7%, respectively.
12
<PAGE>
Cost of Sales. For fiscal 1997, cost of sales remained relatively
unchanged at 62.5% of net sales as compared to 61.5% of net sales in fiscal
1996.
Administrative. For fiscal 1997, administrative expenses were
$1,864,000 or 11.3% of sales as compared to $2,055,000, or 14.8% of sales for
fiscal 1996. The decrease was the result of a number of items including the
reduction in accounting and financial staff, and reduction in certain executive
salaries and expenses, and a reduction in overhead expenses.
Selling. For fiscal 1997, selling expenses were $2,375,000 or 14.5% of
net sales, as compared to $2,387,000, or 17.2% of net sales for fiscal 1996. The
percentage decrease was due to the Company's ability to increase sales while
maintaining selling expense levels.
Advertising and Marketing. For fiscal 1997, advertising and marketing
expenses were $983,000 as compared to $592,000 in fiscal 1996. The increase in
these expenses in 1997 was a result of catalogue printing costs and service fees
paid on national account sales programs.
Other Expenses. For fiscal 1997, interest expense was $667,000 as
compared to $553,000 for fiscal 1996. The increase in interest expense for
fiscal 1997, as compared to 1996, is a result of interest paid on $865,000 of
notes issued in June, 1997.
Net Income or Loss. For fiscal 1997, the Company had net income of
$1,140,000 as compared to a net loss of $183,000 in fiscal 1996. Included in
income for 1997 was $596,000 of tax benefit resulting from a reversal of a tax
valuation allowance created in prior periods. The reversal was based upon
management's determination that the deferred tax benefits would be utilized.
Contracts with foreign suppliers are stated in U.S. dollars and the
Company is not subject to currency rate fluctuations on these transactions. The
effect of currency rate fluctuations on intercompany transactions with the
Company's England subsidiary has been immaterial. As a result, the Company has
determined not to provide any hedge against currency rate fluctuations.
Liquidity and Capital Resources
Cash flow used in operations during the year ended October 31, 1997 was
$837,000. This resulted primarily from increased sales and resulting increases
in accounts receivable and inventory of over $2,161,000. During fiscal 1996, the
Company had cash flows from operations of $840,000. During fiscal 1996, cash
raised from the issuance of Preferred Stock and the new revolving line of credit
was used in part to reduce accounts payable and accrued expenses.
At October 31, 1997 the Company maintained a cash balance of $237,000.
The Company's current cash management policy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. As of October
31, 1996, the Company had cash and cash equivalents of $131,000. As of October
31, 1997, the Company had working capital of $942,000.
Working capital as of October 31, 1996 was $347,000.
In November of 1997, the Company sold 1,725,000 shares of its Common
Stock at $4.00 per share in an initial public offering. The net proceeds from
the offering to the Company were approximately $5,500,000.
During the eighteen months preceding the completion of the Company's
initial public offering of Common Stock in November of 1997, the Company funded
its operations primarily through the cash provided by its operating activities,
a private placement financing of Preferred Stock, funding provided by a new bank
loan and line of credit and a private placement of notes and warrants. In early
1996, the Company completed a private placement of 1,098,901 shares of Preferred
Stock, par value $.91 per share, for gross proceeds of $1,000,000. The Preferred
Stock included a cumulative preferred dividend at the rate of 13%. The shares of
Preferred Stock were converted into 1,098,901 shares of Class B Common Stock
upon the closing of the public offering.
13
<PAGE>
In September, 1996, the Company entered into a Loan Agreement with a
bank under which the bank provided loans and a line of credit to the Company
aggregating $6,300,000. The arrangement included term loans in the amount of
$3,300,000 and a revolving line of credit providing for maximum advances of
$3,000,000 (increased to $3,250,000 in October, 1997) of which $232,000 was
unused at October 31, 1997. The term loans are due on September 1, 2001, and
bear interest at either 8.75% or prime plus 1%. The revolving loan was due on
September 1, 1997 and has been renewed until July 1, 1998. The revolving line of
credit bears interest at prime plus 1%. During July, 1997, the same bank
provided additional term loans to the Company in the aggregate amount of
$475,000. All these loans are secured by all of the Company's assets. Three
principal shareholders of the Company, John H. Schwan, Howard W. Schwan and
Stephen M. Merrick have guaranteed these obligations.
During June, 1997, the Company completed a private placement of notes
and warrants for gross proceeds of $865,000. The notes issued in the placement
are subordinated unsecured two year notes, bearing interest at the rate of 10%
per annum. Individuals participating in the placement received five year
warrants to purchase 277,244 shares of Common Stock of the Company at the price
of $3.12 per share. Two officers and directors of the Company applied advances
made by them to the Company in January, 1997, in the aggregate amount of
$400,000 toward the purchase of the notes and warrants. The proceeds of the
placement were used to reduce trade payables, to increase product inventories,
for acquiring product displays, for catalogue and artwork expenses, and for
providing loans to a Mexican supplier.
During fiscal 1997 and 1996, the Company invested $838,000 and
$496,000, respectively, in plant and equipment.
During fiscal 1996, the Company utilized $336,000 in financing
activities, principally the reduction of bank indebtedness. During the fiscal
1997, the Company generated $1,857,000 in financing activities.
The Company believes that existing capital resources and cash generated
from operations, will be sufficient to meet the Company's requirements for at
least 12 months. Thereafter the Company may require additional capital in order
to expand its business and there can be no assurance that the Company will be
able to secure additional debt or equity financing or that such financing will
be available on favorable terms.
Seasonality
In the mylar product line, sales have historically been seasonal with
approximately 20% to 27% of annual sales of mylar being generated in December
and January and 11% to 13% of annual mylar sales being generated in June and
July in recent years. The sale of latex balloons and laminated film products
have not historically been seasonal, and to the extent sales in these areas
increase as a percentage of total sales, this should decrease the seasonality of
the Company's total net sales.
Forward Looking Statements
Forward looking statements made in this filing involve material risks
and uncertainties that could cause actual results and events to differ
materially from those set forth, or implied, including (i) the Company's ability
to enter into contracts with licensors, suppliers, distributors, and strategic
partners, (ii) the Company's growth strategy and (iii) anticipated trends in the
Company's business, as well as other risks and uncertainties reported in the
Company's other SEC filings.
Item No. 7 Financial Statements
Reference is made to the Consolidated Financial Statements attached
hereto.
Item No. 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Previously filed.
14
<PAGE>
PART III
Item No. 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information called for by Item No. 9 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 10 Executive Compensation
Information called for by Item No. 10 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 11 Security Ownership of Certain Beneficial Owners and Management
Information called for by Item No. 11 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 12 Certain Relationships and Related Transactions
Information called for by Item No. 12 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 13 Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Description
*3.1 Second Restated Certificate of Incorporation of CTI Industries
Corporation
*3.2 By-laws of CTI Industries Corporation
*4.1 Form of Certificate for Common Stock of CTI Industries
Corporation
*10.1 CTI Industries Corporation Stock Option Plan
*10.2 Employment Agreement dated April 29, 1996 between CTI
Industries Corporation and John C. Davis
*10.3 Stock Redemption Agreement dated March 1, 1996 between CTI
Industries Corporation and John C. Davis
*10.4 Agreement dated June 27, 1997 between CTI Industries
Corporation and John C. Davis
*10.5 Third Amendment to Lease Agreement dated August 15, 1994, for
premises located at 675 Industrial Drive, Cary, Illinois
15
<PAGE>
Exhibit
Number Description
*10.6 Form of Warrant dated December 3, 1996 to purchase shares of
Common Stock.
*10.7 Form of Subscription Agreement dated March, 1996, for purchase
of Preferred Stock.
*10.8 Form of Subscription Agreement dated June 20, 1997 for
promissory notes and warrants to purchase shares of Common
Stock.
*10.9 Employment Agreement dated June 30, 1997, between CTI
Industries Corporation and Howard W. Schwan.
*10.10 Joint Venture Agreement dated September 16, 1996, between CTI
Industries Corporation and Pulidos & Terminados Finos S.A. de
C.V.
*10.11 Agreement for purchase of assets dated September 8, 1995,
between CTI Industries Corporation and Pulidos & Terminados
Finos S.A. de C.V.
*10.12 Amendment dated May 24, 1996, to Agreement for purchase of
assets between CTI Industries Corporation and Pulidos &
Terminados Finos S.A. de C.V.
*10.13 Form of Agreement dated July 14, 1997 between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
*10.14 Consulting Agreement dated March, 1996 between CTI Industries
Corporation and Michael R. Miller.
*10.15 Loan and Security Agreement dated August 22, 1996 between the
Company and First American Bank.
*10.16 Third Amendment to Loan and Security Agreement dated July 1,
1997, among CTI Industries Corporation, First American Bank,
Stephen M. Merrick, John H. Schwan and Howard W. Schwan.
*10.17 First Term Note in the sum of $1,100,000 dated August 22, 1996
made by CTI Industries Corporation to First American Bank.
*10.18 Second Term Note in the sum of $2,200,000 dated August 22,
1996 made by CTI Industries Corporation to First American
Bank.
*10.19 Revolving Note in the sum of $3,000,000 dated August 22, 1996
made by the Company to First American Bank.
*10.20 Mortgage dated August 22, 1996 for benefit of First American
Bank.
*10.21 Guaranty dated July 1, 1997, by Stephen M. Merrick, Howard W.
Schwan and John H. Schwan for benefit of First American Bank.
*10.22 Third Term Note in the sum of $275,000 dated July 1, 1997 made
by CTI Industries Corporation to First American Bank.
*10.23 Fourth Term Note in the sum of $200,000 dated July 1, 1997,
made by CTI Industries Corporation to First American Bank.
*10.24 First Amendment to Revolving Note dated July 1, 1997 made by
CTI Industries Corporation to First American Bank.
*10.25 Form of Financial Advisory and Consulting Agreement.
**10.26 Subscription and Loan Agreement dated January 26, 1998,
between CTI Industries Corporation and Pulidos & Terminados
Finos S.A. de C.V.
11.1 Computation of Earnings Per Share
21 Subsidiaries (incorporate description in Form 10-KSB under
Item No. 1)
27 Financial Data Schedule
* Incorporated by reference to Exhibit, under same exhibit number, contained
in Registrant's Form SB-2 Registration Statement (File No. 333-31969)
effective November 5, 1997.
** To be filed by Amendment.
16
<PAGE>
Reports on Form 8-K
There were no Reports on Form 8-K filed by the Company during the last
quarter of fiscal 1997.
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on January 29, 1998.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
-------------------------------
Howard W. Schwan, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Howard W. Schwan President and Director January 29, 1998
- -------------------------
Howard W. Schwan
/s/ John H. Schwan Chairman and Director January 29, 1998
- -------------------------
John H. Schwan
/s/ Stephen M. Merrick Chief Executive Officer, January 29, 1998
- -------------------------
Stephen M. Merrick Secretary, Chief Financial
Officer and Director
/s/ John C. Davis Vice President and Director January 29, 1998
- -------------------------
John C. Davis
/s/ Stanley M. Brown Director January 29, 1998
- -------------------------
Stanley M. Brown
18
<PAGE>
CTI Industries Corporation and Subsidiary
Table of Contents
Page(s)
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1996 and 1997 F-3 - F-4
Consolidated Statements of Operations for the
years ended October 31, 1996 and 1997 F-5
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1996 and 1997 F-6 - F-7
Consolidated Statements of Cash Flows for the years
ended October 31, 1996 and 1997 F-8
Notes to Consolidated Financial Statements F-9 - F-23
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors of
CTI Industries Corporation
We have audited the accompanying consolidated balance sheet of CTI Industries
Corporation and subsidiary as of October 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended October 31, 1996 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CTI Industries
Corporation and subsidiary as of October 31, 1996 and 1997, and the results of
their operations, stockholders' equity and their cash flows for the years ended
October 31, 1996 and 1997 in conformity with generally accepted accounting
principles.
Chicago, Illinois
January 27, 1998
F-2
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of October 31, 1996 and 1997
ASSETS 1996 1997
Current assets:
Cash $ 130,818 $ 237,230
Accounts receivable (less allowance for
doubtful accounts of $129,998 and
$136,050 at October 31, 1996 and 1997) 1,665,097 3,045,696
Inventories 4,582,593 5,073,861
Deferred tax assets -- 327,035
Other 218,879 483,652
------------ ------------
Total current assets 6,597,387 9,167,474
------------ ------------
Property and equipment:
Machinery and equipment 6,237,128 6,711,978
Building 2,168,563 2,175,713
Office furniture and equipment 1,082,665 1,058,150
Land 250,000 250,000
Leasehold improvements 147,128 147,128
Projects under construction 114,926 402,714
------------ ------------
10,000,410 10,745,683
Less: accumulated depreciation (6,418,486) (6,851,148)
------------ ------------
Total property and equipment, net 3,581,924 3,894,535
------------ ------------
Other assets:
Deferred IPO costs -- 445,067
Deferred financing costs, net 106,224 56,671
Investment in joint venture -- 81,816
Note receivable -- 300,000
Deferred tax assets -- 272,063
------------ ------------
106,224 1,155,617
------------ ------------
Total assets $ 10,285,535 $ 14,217,626
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet, Continued
as of October 31, 1996 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 2,755,700 $ 3,725,500
Line of credit 2,058,816 3,017,940
Stock redemption contract payable - current portion 100,000 30,533
Advances from related parties -- 3,750
Notes payable - current portion 402,798 580,097
Accrued liabilities 932,575 867,432
----------- -----------
Total current liabilities 6,249,889 8,225,252
----------- -----------
Stock redemption contract payable 47,908 --
Notes payable 3,056,923 2,885,151
Subordinated debt -- 865,000
----------- -----------
Total long-term liabilities 3,104,831 3,750,151
----------- -----------
Redeemable common stock 450,000 450,000
Stockholders' equity:
Convertible Preferred stock - $.91 par value,
2,000,000 shares shares authorized,
1,098,901 shares issued and outstanding, Pro Forma
including accumulated dividends of (unaudited)
$27,625 (October 31, 1996) and $63,917
(October 31, 1997) 1,027,625 1,063,917 $ --
Common stock - $.065 par value,
11,000,000 shares authorized,
1,131,507 (October 31, 1996),
1,154,584 (October 31, 1997) and
2,879,584 (pro forma) shares issued,
987,125 (October 31, 1996),
1,010,202 (October 31, 1997) and
2,735,202 (pro forma) shares outstanding 73,548 75,048 187,173
Class B Common stock - $.91 par value,
1,100,000 shares authorized,
1,098,901 shares outstanding -- -- 1,000,000
Paid-in-capital 230,348 248,348 5,605,713
Retained earnings 137,194 1,179,274 1,179,274
Foreign currency translation adjustment -- 51,036 51,036
Less:
Treasury stock - 144,382 shares at cost (370,700) (370,700) (370,700)
Redeemable common stock (450,000) (450,000) (450,000)
Stock subscription receivable (167,200) (4,700) (4,700)
----------- ----------- -----------
Total stockholders' equity 480,815 1,792,223 $ 7,197,796
----------- ----------- ===========
Total liabilities and stockholders' equity $10,285,535 $14,217,626
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Operations
for the years ended October 31, 1996 and 1997
1996 1997
Net sales $ 13,910,104 $ 16,431,418
Cost of sales 8,558,053 10,265,117
------------ ------------
Gross profit on sales 5,352,051 6,166,301
------------ ------------
Operating expenses:
Administrative 2,054,780 1,864,304
Selling 2,387,027 2,375,293
Advertising and marketing 592,309 983,161
------------ ------------
Total operating expenses 5,034,116 5,222,758
------------ ------------
Income from operations 317,935 943,543
------------ ------------
Other income (expense):
Interest expense (553,027) (667,060)
Other 57,986 312,911
------------ ------------
Total other expense (495,041) (354,149)
------------ ------------
Income (loss) before income taxes (177,106) 589,394
Income tax expense (benefit) 5,934 (550,184)
------------ ------------
Net income (loss) (183,040) 1,139,578
Dividends applicable to
convertible preferred stock (74,211) (97,500)
------------ ------------
Income (loss) applicable to common shares $ (257,251) $ 1,042,078
============ ============
Primary income (loss) per common and
common equivalent shares $ (0.20) $ 0.84
============ ============
Fully diluted income (loss) per common
and common equivalent shares $ -- $ 0.84
============ ============
Weighted average number of shares
and equivalent shares
of common stock outstanding 1,265,835 1,238,814
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1996 and 1997
<TABLE>
<CAPTION>
Less
---------------------------------------
Common Stock Preferred Stock Treasury Stock Redeemable Stock
----------------- Paid-In ----------------- Retained ---------------- Common Subscription
Shares Amount Capital Shares Amount Earnings Shares Amount Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 31, 1995 1,131,507 $73,548 $230,348 $394,445 41,818 $170,700 $126,450 $ 401,191
Payment on stock
subscription
receivable (119,250) 119,250
Preferred stock
subscription
receivable 160,000 (160,000)
Issuance of
preferred stock 1,098,901 $1,000,000 1,000,000
Accumulated
preferred stock
dividends 27,625 27,625
Redeemable
common stock $450,000 (450,000)
Acquisition of
treasury stock 102,564 200,000 (200,000)
Net loss (183,040) (183,040)
Preferred
dividends (74,211) (74,211)
--------- ------ -------- --------- ---------- --------- ------- -------- -------- -------- --------
Balance,
October 31, 1996 1,131,507 $73,548 $230,348 1,098,901 $1,027,625 $ 137,194 144,382 $370,700 $450,000 $167,200 $480,815
--------- ------ -------- --------- ---------- --------- ------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1996 and 1997
<TABLE>
<CAPTION>
Less
---------------------------------------
Common Stock Preferred Stock Treasury Stock Redeemable Stock
--------------- Paid-In ---------------- Retained Translation ------------- Common Subscription
Shares Amount Capital Shares Amount Earnings Adjustment Shares Amount Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 31,
1996 1,131,507 $73,548 $230,348 1,098,901 $1,027,625 $ 137,194 144,382 $370,700 $450,000 $167,200 $ 480,815
Payment on
stock
subscription
receivable (162,500) 162,500
Common stock
warrants
exercised 23,078 1,500 18,000 19,500
Accumulated
preferred
stock
dividends 36,292 36,292
Net income 1,139,580 1,139,580
Foreign
currency
translation
adjustment $51,036 51,036
Dividends
paid (97,500) (97,500)
--------- ------ -------- --------- ---------- ---------- ------- ------- -------- -------- ------- ----------
Balance,
October 31,
1997 1,154,585 $75,048 $248,348 1,098,901 $1,063,917 $1,179,274 $51,036 144,382 $370,700 $450,000 $ 4,700 $1,792,223
========= ====== ======== ========= ========== ========== ======= ======= ======== ======== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Cash Flows
for the years ended October 31, 1997 and 1996
1996 1997
Cash flows from operating activities:
Net income (loss) $ (183,040) $ 1,139,580
Adjustments to reconcile
net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 371,893 575,434
Gain on sale of property and equipment (20,712) (42,942)
Gain on settlement of legal claim -- (188,768)
Provision for losses on
accounts receivable and inventory 255,738 289,537
Deferred income taxes -- (599,098)
Change in assets and liabilities:
Accounts receivable 1,006,439 (1,458,699)
Inventories 486,483 (702,706)
Other assets (12,526) (1,009,841)
Accounts payable and accrued expenses (1,064,584) 1,160,540
----------- -----------
Net cash provided by (used in)
operating activities 839,691 (836,963)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of
property and equipment 45,415 2,942
Purchases of property and equipment (495,880) (838,491)
Cash surrender value -
officers' life insurance 10,700 --
Investment in joint venture -- (81,816)
----------- -----------
Net cash used in investing activities (439,765) (917,365)
----------- -----------
Cash flows from financing activities:
Stock redemption contract payments (52,092) (77,375)
Advances on line of credit 3,270,970 8,408,078
Repayments on line of credit (4,843,239) (7,448,954)
Proceeds from issuance of long-term debt 3,300,000 440,465
Repayment of long-term debt (2,694,358) (431,188)
Proceeds from debt issued to related parties -- 865,000
Proceeds from issuance of preferred stock 840,000 160,000
Payment of debt issue costs (110,400)
Payment on stock subscription receivable -- 2,500
Dividends paid (46,586) (61,208)
----------- -----------
Net cash provided by
(used in) financing activities (335,705) 1,857,318
----------- -----------
Effect of exchange rate changes on cash -- 3,422
----------- -----------
Net increase in cash 64,221 106,412
Cash at beginning of period 66,597 130,818
----------- -----------
Cash at end of period $ 130,818 $ 237,230
=========== ===========
Supplemental disclosures:
Cash paid for interest $ 617,952 $ 606,040
Cash paid for income taxes 5,776 --
Noncash financing activities:
Purchase of treasury stock
through issuance of
stock redemption contract payable $ 200,000 $ --
Assets exchanged for settlement of debt $ 40,000
Common stock warrants exercised
in exchange for contractual
services received $ 19,500
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements
1 Nature of Operations
CTI Industries Corporation (the "Company") and its United Kingdom
subsidiary (CTI Balloons, Ltd.) design, manufacture and distribute
balloon products throughout the world. The Company also operates systems
for the production, lamination and printing of films used for food
packaging and other commercial uses.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CTI
Industries Corporation and its subsidiary CTI Balloons Limited. All
significant intercompany accounts and transactions have been eliminated
upon consolidation.
Foreign Currency Translation
The financial statements of foreign operations are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52. Accordingly, all assets and liabilities are translated at
current rates of exchange, and operating transactions are translated at
weighted average rates during the year. The translation gains and losses,
to the extent material, are accumulated as a component of stockholders'
equity.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximates costing determined on a first-in,
first-out basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line and declining-balance methods over estimated useful
lives of the related assets. The estimated useful lives range as follows:
Building 25 years
Machinery and equipment 3-15 years
Office furniture and equipment 5-8 years
Leasehold improvements 5-8 years
Depreciation expense was $525,880 and $367,717 for the years ended
October 31, 1997 and 1996, respectively. Effective November 1, 1995,
management determined that the useful life of certain equipment was
longer than originally estimated. A change in accounting estimate was
recognized to reflect this decision, resulting in a reduction in
depreciation expense of $196,318 in 1996.
F-9
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Deferred Financing Costs
Deferred financing costs consist of unamortized financing costs incurred
in connection with the refinancing of long-term debt during fiscal 1996.
These costs are being amortized on a straight-line basis over the term of
the loans. Amortization expense was $4,176 and $49,554 for the years
ended October 31, 1996 and 1997, respectively.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts
are determined in accordance with SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities
are determined based on temporary differences between the basis of
certain assets and liabilities for income tax and financial reporting
purposes, if any. The deferred tax assets and liabilities are classified
according to the financial statement classification of the assets and
liabilities generating the differences. Income tax expense (benefit) is
comprised of the current tax payable for the period and the change during
the period in the deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting
when title transfers upon shipment.
Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the
Company's customer base. The Company performs ongoing credit evaluations
and provides an allowance for potential credit losses against the portion
of accounts receivable which is estimated to be uncollectible. Such
losses have historically been within management's expectations.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-10
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Unaudited Pro Forma Stockholders' Equity
The pro forma stockholders' equity as reflected on the Consolidated
balance sheet presents estimated effects of the Company's initial public
offering. (Note 18) The proforma information also reflects the
anticipated conversion of all outstanding shares of Preferred Stock into
shares of Class B Common Stock on a one-to-one ratio in conjunction with
the initial public offering.
Fair Value of Financial Instruments
The Company utilizes a line of credit to finance short-term obligations.
Management believes that this instrument bears interest at a rate which
approximates prevailing market rates for instruments with similar
characteristics, and accordingly, that the carrying value for this
instrument is a reasonable estimate of fair value.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." The Company assesses the
impairment of its long-lived assets, including goodwill and property,
plant and equipment, whenever economic events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable.
Long-lived assets are considered to be impaired when the sum of the
expected future cash flows, undiscounted and without interest charges, is
less than the carrying amounts of the related assets.
Computation of Income (Loss) Per Share
The computation of income (loss) per share as reflected on the
consolidated statement of operations is based on the weighted average
number of common and common equivalent shares outstanding during the
period. Common stock equivalents consist of outstanding stock options,
which pursuant to Staff Accounting Bulletin No. 83 of the Securities and
Exchange Commission, are included in the weighted average shares as if
they were outstanding for the entire period to the extent granted within
the twelve months preceding the contemplated public offering date, using
the treasury stock method until such time as shares are issued. The
primary weighted average number of common and equivalent shares
outstanding was 1,265,835 and 1,238,814 for the years ended October 31,
1996 and 1997.
F-11
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Computation of Income (Loss) Per Share, continued
Information regarding income (loss) per share has been computed on a
historical basis under the provisions of Accounting Principles Board
Opinion No. 15.
Years ended October 31,
----------------------------
1996 1997
Primary earnings per share:
Net income (loss) per share $ (0.25) $ 1.04
=========== ===========
Weighted average shares outstanding 1,026,572 999,551
=========== ===========
Fully diluted earnings per share:
Net income per share $ 0.57
===========
Weighted average shares outstanding 2,002,298
===========
For the year ended October 31, 1996, fully diluted earnings per share has
not been presented as the result would be anti-dilutive to the net loss
per share.
Reverse Stock Split
Effective July 22, 1997, the Company approved a reverse stock split of 1
share for every 2.6 shares of common stock outstanding. All share
information retroactively reflects the effect of this split.
3. Inventory
Inventory is comprised of the following:
October 31, October 31,
1996 1997
Raw materials $ 278,976 $ 243,858
Work in process 745,091 1,008,296
Finished goods 3,558,526 3,821,707
---------- ----------
Total inventory $4,582,593 $5,073,861
========== ==========
F-12
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
4. Line of Credit
The Company has a bank line of credit, due July 1, 1998, which provides
for a maximum borrowing limit of $3,250,000 of which $230,061 and
$941,184 was available at October 31, 1997 and 1996, respectively.
Advances under the line of credit are subject to a borrowing base, as
defined in the line of credit agreement. Interest is payable monthly at
prime plus 1% (prime was 8.5% and 8.25% at October 31, 1997 and 1996,
respectively). The line of credit is collateralized by all assets of the
Company. The line of credit agreement contains, among other provisions,
certain covenants relating to the maintenance of tangible net worth.
5. Stock Redemption
In March 1996, the Company entered into a Stock Redemption Agreement with
a shareholder which was subsequently amended June 27, 1997. Under the
amended Stock Redemption Agreement the Company has the right but not the
obligation to redeem up to 333,333 shares of Common Stock owned by the
shareholder at the price of $1.95 per share at any time through January
31, 1998. Commencing March 1, 1998 through February 28, 2000, the Company
is obligated to pay to the shareholder, for the redemption of shares at
$1.95 per share (i) an amount equal to 2% of the Company's pretax profits
each fiscal quarter (beginning with the quarter ended February 28, 1998)
and (ii) an amount equal to 2% (but not to exceed $3,000) of the amount
the latex and mylar balloon revenues exceed $1.3 million in any month.
The Company also has the right to redeem additional shares of Common
Stock from the shareholder during this period at $1.95 per share,
provided total number of shares subject to redemption under the Stock
Redemption Agreement does not exceed 333,333. Redeemable common stock has
been reflected as a liability with a contra equity account on the balance
sheet. As of the date of this report, 102,564 shares of Common Stock have
been redeemed under the Stock Redemption Agreement.
F-13
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
6. Notes Payable
Long-term debt at October 31, 1997 consists of:
<TABLE>
<CAPTION>
<S> <C>
First Term Loan, payable in monthly installments of $18,333
including interest at prime plus 1% due September 1,
2001. Collateralized by all assets of the Company. $ 2,151,264
Second Term Loan, payable in monthly installments of
$19,617 including interest at 8.75% due at various
times through September 1, 2001. Collateralized
by all assets of the Company. 861,667
Third Term Loan, payable in monthly installments of $7,739
plus interest at prime plus 1% due October 1, 2000.
Collateralized by all assets of the Company. 222,465
Fourth Term Loan, payable in monthly installments of $16,667
plus interest at prime plus 1% due July 1, 1998.
Collateralized by all assets of the Company. 149,999
Installment Loan, payable in monthly installments of $9,583
plus interest at 10.5% due May 1, 1998.
Collateralized by equipment purchased. 57,500
Installment Loans, payable in monthly installments of $1,674
including interest at 7.99% and 8.5% due at various
times through March, 2000.
Collateralized by vehicles purchased. 22,362
-----------
Total 3,465,257
Less current portion (580,097)
-----------
Total long-term debt $ 2,885,160
===========
</TABLE>
Future minimum principal payments for amounts outstanding under long-term
debt agreements are as follows for the years ended October 31:
1998 $ 580,097
1999 369,727
2000 315,024
2001 2,200,409
2002 --
-------------
$ 3,465,257
-------------
The loan agreements contain, among other provisions, certain covenants
relating to the maintenance of tangible net worth.
F-14
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
7. Convertible Preferred Stock
The Company restated its certificate of incorporation to provide for two
classes of capital stock, Common and Preferred.
The total number of shares of Preferred Stock authorized is 2,000,000,
with a par value of ninety-one cents ($.91) per share. The preferred
shares are entitled to preferential cumulative dividends at the rate of
13% per annum of the par value, payable only when, as, and if declared by
the Board of Directors. As long as the Preferred Stock is outstanding,
there shall be no dividends declared or paid on any shares of Common
Stock. Preferred shares may be converted by the holder into common shares
at any time (See Note 13).
8. Income Taxes
The income tax provisions (benefits) as of October 31, are comprised of
the following:
1996 1997
Current:
Federal $ (34) $ 3,209
State 192 --
Foreign 5,776 45,705
--------- ---------
5,934 48,914
--------- ---------
Deferred:
Federal -- (551,630)
State -- (47,468)
--------- ---------
-- (599,098)
--------- ---------
Total income tax provision (benefit) $ 5,934 $(550,184)
========= =========
F-15
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
8. Income Taxes, continued
The components of the net deferred tax asset (liability) are as follows:
1996 1997
Deferred tax assets:
Accounts receivable allowance $ 43,331 $ 51,369
Inventory valuation 54,826 78,519
Accrued liabilities 220,964 150,294
Net operating loss carryforwards 636,190 570,542
Alternative minimum tax credit carry forwards 338,612 341,979
---------- ----------
Total deferred tax assets 1,293,923 1,192,703
Deferred tax liabilities:
Book over tax basis of capital assets 458,706 593,605
Less: Valuation allowance 835,217 --
---------- ----------
Net deferred tax asset $ -- $ 599,098
========== ==========
As of October 31, 1996, the Company maintained a valuation allowance with
respect to deferred tax assets as a result of the uncertainty of ultimate
realization. At October 31, 1997, management determined it was more
likely than not that the net operating loss and alternative minimum tax
credit carryforwards would be realized, accordingly the valuation
allowance was removed. At October 31, 1996 and 1997 the Company has net
operating loss carryforwards for tax purposes of approximately $1,600,000
and $1,500,000. These carryforwards expire in the years 2010 and 2011. In
addition, the Company has approximately $339,000 and $342,000 as of
October 31, 1996 and 1997 of alternative minimum tax credits which have
no expiration date.
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
Years ended
-----------------------
October 31,
1996 1997
Taxes at statutory rate $ (60,216) $ 200,395
State income taxes 127 (31,455)
Foreign taxes paid 5,776 45,705
Foreign income -- (68,078)
Increase (decrease)
in valuation allowance 59,164 (564,276)
Correction of prior estimates 1,083 (141,592)
Other -- 9,117
--------- ---------
Income tax provision (benefit) $ 5,934 $(550,184)
========= =========
F-16
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
9. Employee Benefit Plan
Effective January 1, 1993, the Company established a defined contribution
plan for substantially all employees. The plan provides for the Company
matching contributions on the first $300 of employee contributions with
an additional bonus match of 1% of compensation for all participants who
are employees on the last day of the plan year. Profit sharing
contributions may also be made at the discretion of the Board of
Directors. Employer contributions to the plan totaled $52,903 and $52,369
for the years ended October 31, 1997 and 1996, respectively.
10. Related Party Transactions
The Company obtains legal services from a law firm in which several
shareholders of the law firm are also shareholders of the Company, and in
which one shareholder of the law firm is both a director and a
shareholder of the Company. Legal fees incurred with this firm were
$236,071 and $123,872 for the years ended October 31, 1997 and 1996.
The Company purchases packaging materials from entities in which
shareholders of the Company maintain an ownership interest. Purchases
from these affiliates were $233,842 and $1,106,649 for the years ended
October 31, 1997 and 1996.
11. Joint Venture
Effective September 16, 1996, the Company entered into a joint venture
agreement with a manufacturer in Mexico. The joint venture will engage in
the production and packaging of balloons. Under the agreement, both
entities will hold a 50% interest in the joint venture. As of October 31,
1997, the Company has made capital investment in the joint venture of
$81,816.
12. Commitments and Contingencies
Operating Leases
The Company leases certain production facilities under a noncancelable
lease with monthly payments of $21,432 expiring December 31, 1999. The
Company subleases approximately 70% of this facility through August,
1998. The Company's United Kingdom subsidiary also maintains a lease for
office and warehouse space which expires in 2019.
The Company leases a office equipment and automobiles under operating
leases which expire on various dates between November 1997 and September
2002.
F-17
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
12. Commitments and Contingencies, continued
Operating Leases, continued
The net rent expense of all leases was $401,242 in 1997 and $528,654 in
1996.
The future aggregate minimum net lease payments under existing agreements
as of October 31, are as follows:
Lease Sublease
Payments Income Net
1998 $ 351,410 $ 139,280 $ 212,130
1999 344,905 344,905
2000 11,608 116,608
2001 71,044 71,044
2002 71,044 71,044
Thereafter 930,600 930,600
Litigation
The Company is a defendant in business-related litigation. Management
does not believe the outcome of such litigation will have a material
adverse effect on the Company's financial position and results of
operations. Other income includes $188,000 resulting a negotiated
settlement at an amount less than previously estimated loss accruals.
The Company has certain merchandising license agreements that require
royalty payments based upon the Company's net sales of the respective
products. The agreements call for guaranteed minimum commitments that are
determined on a calendar year basis. Future guaranteed commitments due,
as computed on a pro rata basis, as of October 31, are as follows:
1998 $ 438,103
1999 9,464
2000 3,016
F-18
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
13. Recapitalization
In July 1997, the Company authorized a recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B
Common Stock and negotiated a conversion of all then outstanding shares
of the Company's Convertible Preferred Stock into an aggregate of
1,098,901 shares of Class B Common Stock effective with the proposed
initial public offering. The shares of the Class B Common Stock contain
rights identical to shares of Common Stock, except that shares of Class B
Common Stock, voting separately as a class, have the right to elect four
of the Company's seven directors. Shares of the Common Stock and Class B
Common Stock, voting together as a class, vote on all other matters,
including the election of the remaining directors. The Board of Directors
also approved a 1 for 2.6 reverse stock split on both the Common Stock
and Class B Common Stock. The recapitalization and related transactions
were approved by written consent of the shareholders.
14. Stock Options
Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a
total of 300,000 shares of Common Stock are reserved for issuance under
the Stock Option Plan. As of October 31, 1997, 121,000 options to
purchase shares of Common Stock have been granted. The options are
exercisable immediately upon grant and have a term of ten years. The Plan
provides for the award of options, which may either be incentive stock
options ("ISOs") within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code") or non-qualified options
("NQOs") which are not subject to special tax treatment under the Code.
The Plan is administered by the Board or a committee appointed by the
Board (the "Administrator"). Officers, directors, and employees of, and
consultants to, the Company or any parent or subsidiary corporation
selected by the Administrator are eligible to receive options under the
Plan. Subject to certain restrictions, the Administrator is authorized to
designate the number of shares to be covered by each award, the terms of
the award, the date on which and the rates at which options or other
awards may be exercised, the method of payment and other terms.
The exercise price for ISOs cannot be less than the fair market value of
the stock subject to the option on the grant date (110% of such fair
market value in the case of ISOs granted to a stockholder who owns more
than 10% of the Company's Common Stock). The exercise price of a NQO
shall be fixed by the Administrator at whatever price the Administrator
may determine in good faith. Unless the Administrator determines
otherwise, options generally have a 10-year term (or five years in the
case of ISOs granted to a participant owning more than 10% of the total
voting power of the Company's capital stock). Unless the Administrator
provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an
option to the extent it was exercisable on the date of termination for a
period of time after termination.
F-19
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
14. Stock Options, continued
In December, 1996, certain members of company management were issued
warrants to purchase 230,769 shares of the Company's Common Stock at an
exercise price of $.91 per share in consideration of their facilitating
and guaranteeing a bank loan to the Company in the amount of $6.3
million. The warrants have a term of six years.
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to
277,244 shares of the Company's Common Stock at an exercise price of
$3.12 per share. The warrants have a term of five years.
The following is a summary of the activity in the Company's stock option
plans and other options issued for the year ended October 31, 1997.
Outstanding, beginning of period --
Granted 629,013
Exercised --
Canceled --
-------
Outstanding at the end of period 629,013
=======
Weighted average exercise price per share $ 2.57
=======
Exercisable at end of period 629,013
=======
Available for grant at end of period 179,000
=======
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", for its employee
stock-based compensation programs. Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and other equity instruments
to employees based on new fair value accounting rules. Although expense
recognition for employee stock based compensation is not mandatory, SFAS
No. 123 requires companies that choose not to adopt the new fair value
accounting to disclose pro-forma net income and earnings per share under
the new method.
F-20
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
14. Stock Options, continued
Accounting for Stock Options, continued
The Company recognizes compensation cost for stock-based compensation
awards equal to the difference between the quoted market price of the
stock at the date of grant or award and the price to be paid by the
employee upon exercise in accordance with the provisions of APB No. 25.
Based upon the terms of Company's current stock option plans, the stock
price on the date of grant and price paid upon exercise are the same,
thus no compensation charges is required to be recognized.
As allowed by SFAS No. 123, the Company will continue to apply the
provisions of APB No. 25 in accounting for its stock-based employee
compensation arrangements and will disclose pro forma net income and
earnings per share information in its footnotes as if the fair value
method suggested in SFAS No. 123 had been applied.
If compensation cost based on fair value method of the options had been
used, the Company's net income and earnings per common share (EPS) would
have been as follows:
1997
Net income (loss) As reported $ 1,140
Pro Forma (312)
EPS As reported $ 0.84
Pro Forma (0.25)
The fair value of each option was estimated as of the date of the grant
using the Black-Scholes option pricing model based on the following
assumptions: volatility of 20.0%; expected life of 5 years; risk-free
interest rate of 6.5%; and no payment of dividends expected during the
life of the options. The weighted average fair value of options granted
during the year ending October 31, 1997 is $2.21 per share.
15. Private Placement
In June 1997, the Company issued notes in the principal amount of
$865,000, together with warrants to purchase 277,244 shares of the
Company's Common Stock at $3.12 per share. A substantial portion of these
notes and warrants were purchased by an investor group comprised
principally of members of Company management.
F-21
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
16. Future Adoption of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", SFAS
No. 129, "Disclosure of Information about Capital Structure," SFAS No.
130, "Reporting Comprehensive Income Summary," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information".
SFAS No. 128 establishes standards for the computation, presentation, and
disclosure requirements for earnings per share and is effective for both
interim and annual periods ending after December 15, 1997. FASB 128 is
not expected to have a material impact upon reported earnings per share.
SFAS No. 129 consolidates the existing requirements relating to
disclosure of certain information about an entity's capital structure.
SFAS No. 130 establishes standards for reporting comprehensive income to
present a measure of all changes in equity that result from renegotiated
transactions and other economic events of the period other than
transactions with owners in their capacity as owners. Comprehensive
income is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from
nonowner sources and includes net income. SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. This standard
requires that management identify operating segments based on the way
that management disaggregates the entity for making internal operating
decisions.
With the exception of SFAS No. 128, all of the aforementioned statements
are effective for fiscal years beginning after December 15, 1997.
Management has not determined what impact these standards, when adopted,
will have on the Company's financial statements.
F-22
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
17. Geographic Segment Data (Unaudited)
The Company's operations consist of a single business segment which
designs, manufactures, and distributes balloon products. Transfers
between geographic areas were primarily at cost. The Company's subsidiary
has assets consisting primarily of trade accounts receivable and
inventory. Sales and selected financial information by geographic area
for the years ended October 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
United
United Kingdom Eliminations Consolidated
1996 States
<S> <C> <C> <C> <C>
Revenues $ 13,055,900 $ 1,408,683 $ (554,479) $ 13,910,104
Operating income (loss) 289,521 28,414 317,935
Net income (loss) (208,784) 25,744 (183,040)
Total assets 9,613,062 672,473 10,285,535
1997
Revenues $ 15,435,746 $ 1,934,451 $ (938,779) $ 16,431,418
Operating income 815,771 127,772 943,543
Net income 985,055 154,523 1,139,578
Total assets 13,814,872 1,057,963 (655,209) 14,217,626
</TABLE>
18. Subsequent Events
On November 5, 1997, the Company issued 1,500,000 shares of common stock
to the public at $4.00 per share. The underwriting discounts and
commissions against the sale were $868,443 and the direct costs incurred
by the Company were $445,067.
On November 21, 1997, in connection with the underwriting option to
purchase additional shares to cover over-allotments, the Company issued
225,000 additional shares of common stock to the public at $4.00 per
share. The underwriting discount and commissions against the sale were
$117,000 with the net proceeds to the Company amounting to $783,000.
On January 26, 1998, the Company entered into an agreement to purchase a
45% common stock interest in a Mexican manufacturer for consideration of
$800,000. The purchase will be effective February 1, 1998.
F-23
EXHIBIT 11.1
CTI Industries Corporation
Computation of Earnings (Loss) Per Share
And Equivalent Share of Common Stock
for the years ended October 31, 1996 and 1997
<TABLE>
<CAPTION>
Year Ended October 31, 1996 Year Ended October 31, 1997
--------------------------- ---------------------------
Fully Fully
Primary Diluted Primary Diluted
---------- ---------- ---------- ----------
Line
----
AVERAGE SHARES OUTSTANDING
<S> <C> <C> <C> <C>
1 Weighted average number
of shares of common stock
outstanding during the period 1,026,572 1,026,572 999,551 999,551
2 Net additional shares assuming
stock options and warrants
exercised and proceeds used to
purchase treasury shares 239,263 239,263 239,263 239,263
---------- ---------- ---------- ----------
3 Weighted average number of shares
and equivalent shares
of common stock outstanding
during the period 1,265,835 1,265,835 1,238,814 1,238,814
========== ========== ========== ==========
EARNINGS (LOSS)
4 Net earnings (loss) ($183,040) ($183,040) $1,193,578 $1,139,578
5 Less dividends applicable to
convertible preferred stock (74,211) (74,211) (97,500) (97,500)
---------- ---------- ---------- ----------
6 Amount for per share computation ($257,251) ($257,251) $1,042,078 $1,042,078
========== ========== ========== ==========
PER SHARE AMOUNTS
Loss applicable to common shares
(line 6 / line 3) ($0.20) ($0.20) $0.84 $0.84
========== ========== ========== ==========
</TABLE>
Earnings (loss) per share is computed by dividing net earnings (loss), less
convertible preferred stock dividends, by the weighted average number of shares
of common stock and common stock equivalents (common stock warrants) outstanding
during the period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-KSB FOR THE
YEAR ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-KSB.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Corporation
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 237
<SECURITIES> 0
<RECEIVABLES> 3,182
<ALLOWANCES> 136
<INVENTORY> 5,074
<CURRENT-ASSETS> 9,167
<PP&E> 10,746
<DEPRECIATION> 6,851
<TOTAL-ASSETS> 14,218
<CURRENT-LIABILITIES> 8,225
<BONDS> 0
0
1,064
<COMMON> 75
<OTHER-SE> 653
<TOTAL-LIABILITY-AND-EQUITY> 1,792
<SALES> 16,431
<TOTAL-REVENUES> 16,431
<CGS> 10,265
<TOTAL-COSTS> 10,265
<OTHER-EXPENSES> 4,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667
<INCOME-PRETAX> 590
<INCOME-TAX> (550)
<INCOME-CONTINUING> 1,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,140
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
