FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
Commission File No. 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. Employer
incorporation or organization) Identification Number)
22160 North Pepper Road, Barrington, Illinois 60060
(Address of principal executive offices) (Zip Code)
(847) 382-1000
(Registrant's telephone number, including area code)
Registrant 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 and
has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK, $.065 par value, 2,735,202 outstanding Shares and CLASS B
COMMON STOCK, $.091 par value, 1,098,901 outstanding Shares, as of February 28,
1998.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements of the Registrant are
attached to this Form 10-QSB:
1. Interim Balance Sheet as of January 31, 1998 and
Balance Sheet as of October 31, 1997.
2. Interim Statements of Operations for the three month
periods ending January 31, 1998 and January 31, 1997.
3. Interim Statements of Cash Flows for the three month
periods ending January 31, 1998 and January 31, 1997.
The Financial Statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of results for the periods
presented.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Sales. For the fiscal quarter ended January 31, 1998, net sales
increased to $5,839,000 from $4,672,000 for the first fiscal quarter of 1997, an
increase of approximately 25%. The Company experienced increases in sales, as
compared to the first quarter of fiscal 1997, in each of its product lines --
mylar balloons, latex balloons and printed and laminated films.
Cost of Sales. For the quarter ended January 31, 1998, cost of sales
decreased to 59.3% of net sales as compared to 67.9% of net sales in the first
fiscal quarter of 1997. The decrease was a result of reduced overhead expenses
and lower material costs.
Administrative. For the quarter ended January 31, 1998, administrative
expenses were $526,000 or 9% of sales as compared to $431,000, or 9.2% of sales
for the first fiscal quarter of 1997.
Selling. For the quarter ended January 31, 1998, selling expenses were
$741,000, or 12.7% of net sales, as compared to $671,000, or 14.4% of net sales
for the first fiscal quarter of 1997. The percentage decrease was due to the
Company's ability to increase sales while maintaining selling expense levels.
Advertising and Marketing. For the quarter ended January 31, 1998,
advertising and marketing expenses were $479,000 as compared to $203,000 in the
first fiscal quarter of 1997. The increase in these expenses was a result of
catalogue printing costs and service fees and rebates paid on national account
sales programs.
2
<PAGE>
Net Income or Loss. For the quarter ended January 31, 1998, the Company
had net income of $325,000 as compared to net income of $98,000 the first fiscal
quarter of 1997. The provision for income taxes for the first quarter of fiscal
1998 was $207,000 as compared to no allowance for the first quarter of 1997 as a
result of loss carry forwards. For the first quarter of 1998, the entire income
of $325,000 was allocable to Common Stock, whereas in the first quarter 1997,
$65,000 of income was allocable to the Common Stock and the remaining $33,000
was allocable to the then outstanding Convertible Preferred Stock. Convertible
Preferred Stock was converted to Class B Common Stock in November of 1997.
Financial Condition
Liquidity and Capital Resources. Cash flow used in operations during
the quarter ended January 31, 1998, was $1,281,000. This resulted primarily from
increased sales and resulting increases in accounts receivable and inventory of
over $2,596,000. During the first fiscal quarter of 1997, the Company had cash
flows used in operations of $1,076,000 mainly as a result of increases in
accounts receivable of $1,777,000.
At October 31, 1997, the Company maintained a cash balance of $237,000.
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. The Company's cash
balance at January 31, 1998 was $2,922,000.
Investment Activities. During the quarter ended January 31, 1998 and
January 31, 1997, the Company invested $897,000 and $11,000, respectively, in
machinery and equipment and merchandise displays at customer locations. The
Company also invested $500,000 in its Mexican supplier of latex balloons in the
first fiscal quarter of 1998.
Financing Activities. For the quarter ended January 31, 1998, the
Company generated $5,369,000 in financing activities, primarily as a result of
the proceeds of the Company's initial public offering of its Common Stock in
November of 1997. Cash flow provided by financing activities for the quarter
ended January 31, 1997, was $967,000 resulting primarily from advances on lines
of credit.
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
3
<PAGE>
in June and July in recent years. The sale of latex balloons and laminated film
products have not historically been seasonal.
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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in 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. 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.
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 the
initial public offering 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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
4
<PAGE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
(b) The Company has not filed a Current Report during the
quarter covered by this report.
* Also incorporated by reference the Exhibits filed as
part of the SB-2 Registration Statement of the
Registrant, effective November 5, 1997, and
subsequent periodic filings.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 23, 1998 CTI INDUSTRIES CORPORATION
By: /s/ Stephen M. Merrick
----------------------------------
Stephen M. Merrick, Chief Executive
Officer and Principal Financial Officer
6
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
January 31, 1998 October 31, 1997
(Unaudited) (See note)
----------------- --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 2,921,958 $ 237,230
Accounts receivable (less allowance for
doubtful accounts of $134,532 and $136,050
at January 31, 1998 and October 31, 1997) 5,098,807 3,045,696
Inventories 5,597,423 5,073,861
Deferred Tax Assets 327,035 327,035
Other 1,189,640 483,652
------------- --------------
Total current assets 15,134,863 9,167,474
Property and equipment:
Machinery and equipment 7,502,925 6,711,978
Building 2,181,647 2,175,713
Office furniture and equipment 1,385,941 1,058,150
Land 250,000 250,000
Leasehold improvements 147,128 147,128
Projects under construction 174,545 402,714
------------- --------------
11,642,186 10,745,683
Less: accumulated depreciation (7,034,317) (6,851,148)
------------- --------------
Total property and equipment, net 4,607,869 3,894,535
Other assets:
Deferred IPO costs - 445,067
Deferred financing costs, net 55,795 56,671
Investment in subsidiaries 881,980 81,816
Note receivable 730,000 300,000
Deferred tax assets 272,063 272,063
------------- --------------
Total other assets 1,939,838 1,155,617
------------- --------------
TOTAL ASSETS $ 21,682,570 $ 14,217,626
============= ==============
</TABLE>
See accompanying notes
7
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
January 31, 1998 October 31, 1997
(Unaudited) (See note)
----------------- --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Accounts Payable $ 3,654,846 $ 3,725,500
Line of Credit 3,233,093 3,017,940
Stock redemption contract payable -
current portion 8,333 30,533
Advances from related parties 3,750 3,750
Notes payable - current portion 1,348,367 580,097
Accrued liabilities 1,869,913 867,432
------------- --------------
Total current liabilities 10,118,302 8,225,252
Long-term liabilities:
Notes payable 2,805,126 2,885,151
Subordinated Debt 865,000 865,000
------------- --------------
Total long-term liabilities 3,670,126 3,750,151
Redeemable Common Stock 450,000 450,000
Stockholders' equity
Convertible Preferred stock - $.91 par value,
2,000,000 shares authorized,
1,098,901 shares issued and outstanding,
including accumulated dividends
of $63,917 at October 31, 1997 - 1,063,917
Common stock - $.065 par value, 11,000,000 shares
authorized, 3,834,103 (January 31, 1998) and
1,154,584 (October 31, 1997) shares issued,
3,689,721 (January 31, 1998) and 1,010,202
(October 31, 1997) shares outstanding 187,337 75,048
Class B Common stock - $.91 par value,
1,100,000 shares authorized, 1,098,901
shares outstanding at January 31, 1998 1,000,000 -
Paid-in-capital 5,537,942 248,348
Retained earnings 1,504,527 1,179,274
Foreign currency translation adjustment 43,486 51,036
Less:
Treasury stock - 144,382 shares at cost (370,700) (370,700)
Redeemable common stock (450,000) (450,000)
Stock subscription receivable (4,700) (4,700)
------------- --------------
Total stockholders' equity 7,447,892 1,792,223
------------- --------------
Total liabilities and stockholders' equity $ 21,686,320 $ 14,217,626
============= ==============
</TABLE>
Note: The balance sheet at October 31, 1997 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete statements.
See accompanying notes
8
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statement of Operations
Quarter Ended January 31
1998 1997
(Unaudited) (Unaudited)
--------------- --------------
Net sales $ 5,839,234 $ 4,671,596
Cost of sales 3,461,089 3,173,654
--------------- --------------
Gross profit on sales 2,378,145 1,497,942
Operating expenses:
Administrative 525,982 430,922
Selling 740,559 671,022
Advertising and marketing 478,696 203,025
--------------- --------------
Total operating expenses 1,745,237 1,304,969
--------------- --------------
Income from operations 632,908 192,973
--------------- --------------
Other income (expense):
Interest expense (177,158) (142,842)
Other 76,210 47,713
--------------- --------------
Total other expense (100,948) (95,129)
--------------- --------------
Income before income taxes 531,960 97,844
Income tax expense 206,700 158
--------------- --------------
Net income 325,260 97,686
Dividends applicable to convertible
preferred stock - (32,500)
--------------- --------------
Income applicable to
common shares $ 325,260 $ 65,186
=============== ==============
Basic income per common share $0.09 $0.07
=============== ==============
Diluted income per common share
and common equivalent share $0.08 $0.05
=============== ==============
Weighted average number of shares
and equivalent shares of common
stock outstanding
Basic 3,698,270 987,125
=============== ==============
Diluted 4,086,783 2,086,026
=============== ==============
See accompanying notes
9
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Quarter Ended January 31
1/31/98 1/31/97
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
Cash Flow Provided by Operations:
Net Income $ 325,257 $ 97,686
Adjustments to reconcile net income:
Depreciation and amortization 184,044 133,347
Gain on sale of property and equipment - (40,000)
Provision for losses on A/R & inventory 19,126 45,669
Change in assets and liabilities:
Change in accounts receivable (2,057,236) (1,776,831)
Change in inventory (538,562) 275,428
Change in other assets (141,085) 58,155
Change in accounts payable & accrued expenses 927,951 130,511
---------- ----------
Total Cash Flow Used by Operations (1,280,505) (1,076,035)
Cash Flow Provided by Investing Activities:
Purchases of property and equipment (896,502) (10,978)
Investment in P&TF (500,000) -
Investment in joint venture - (10,000)
---------- ----------
Total Cash Flow used by Investing Activities (1,396,502) (20,978)
Cash Flow Provided by Financing Activities:
Stock redemption contract payments (22,200) (17,807)
Advances on line of credit 3,430,000 3,888,804
Repayments on line of credit (3,214,847) (2,948,362)
Proceeds from issuance of long term debt 10,630 -
Proceeds from issurance of short term debt 850,000 -
Repayment of long term debt (172,385) (99,234)
Proceeds from issuance of preferred stock - 160,000
Proceeds from issurance of common stock 5,401,883 -
Loan to P&TF (850,000) -
Conversion of preferred stock (1,000,000) -
Proceeds from conversion of preferred stock 1,000,000 -
Dividends paid (63,917) (16,250)
---------- ----------
Total Cash Flow Provided by Financing Activities 5,369,164 967,151
---------- ----------
Effect of exchange rate changes on cash (7,429) -
---------- ----------
Increase (Decrease) in Cash & Equivalents 2,684,728 (129,862)
Cash and Equivalents at Beginning of Quarter 237,230 130,818
---------- ----------
Cash and Equivalents at End of Quarter $2,921,958 $ 956
========== ==========
</TABLE>
See accompanying notes
10
<PAGE>
January 31, 1998
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended January 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended October 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant Company
and Subsidiaries' annual report on Form 10-K for the year ended October 31,
1997.
Note 2 - P&TF Transaction
On January 26, 1998, the Company and Pulidoes et Terminados Finos S.A.
de C.V. ("P&TF") entered into an agreement under which (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 collateralized 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 was effective February 1, 1998, and the
purchase price for the capital stock was 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 sales of the two pieces of
equipment to P&TF. Funding for the purchase of the P&TF stock was provided from
general operating funds of the Company and, for the loan to P&TF, by a loan to
the Company and with proceeds of a bank loan. At the time of the transaction,
the suspension of payments proceeding relating to P&TF (in the nature of a
Chapter XI bankruptcy reorganization proceeding) was terminated. Although the
stock purchase was not effective until February 1, 1998, the above transactions
have been reflected in the January 31, 1998 financial statements.
Note 3 - Earnings Per Share
In November 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
per Share". Adoption of this pronouncement did not have a material impact on the
Company's financial statements. The provisions of SFAS No. 128 were applied to
the prior period presented.
Basic income per common share is computed by dividing income available to common
shareholders, net income less preferred stock dividends, if applicable, by the
weighted average number of shares of common stock outstanding during each
period.
Diluted income per common share for the quarter ended January 31, 1998 is
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents (stock options and warrants), unless
anti-dilutive, during the period.
Diluted income per common share for the quarter ended January 31, 1997 is
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents (stock options, warrants and
convertible preferrred stock), unless anti-dilutive, during the period. The
weighted average number of shares and equivalent shares of common stock
outstanding during the period ended January 31, 1997 reflects conversion of all
convertible preferred stock into 1,098,901 shares of common stock as of the
beginning of the period.
11
<PAGE>
Income per common share for the quarterly periods ended January 31, 1998 and
1997 was computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended January 31
------------------------------
Line 1998 1997
- --------- ------------ ------------
Basic
Average shares outstanding:
<S> <C> <C>
Weighted average number of shares of common stock
outstanding during the period 3,698,270 987,125
============ ============
Net Income
Net income $325 $97
Less preferred stock dividends - (32)
------------ ------------
Amount for per share computation $325 $65
============ ============
Per share amount $0.09 $0.07
============ ============
Diluted
Average shares outstanding
Weighted average number of shares of common stock
outstanding during the period 3,698,270 987,125
Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares 388,513 -
Additional shares assuming conversion of
convertible preferred stock - 1,098,901
------------ ------------
Weighted average number of shares and equivalent shares
of common stock outstanding during the period 4,086,783 2,086,026
============ ============
Net Income
Net income $325 $97
Less preferred stock dividends - (32)
------------ ------------
Income applicable to common shares
Add dividends on preferred stock assumed converted
into common shares - 32
------------ ------------
Amount for per share computation $325 $97
============ ============
Per share amount $0.08 $0.05
============ ============
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Corporation
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 2,922
<SECURITIES> 0
<RECEIVABLES> 5,234
<ALLOWANCES> 135
<INVENTORY> 5,597
<CURRENT-ASSETS> 15,135
<PP&E> 11,642
<DEPRECIATION> 7,034
<TOTAL-ASSETS> 14,218
<CURRENT-LIABILITIES> 10,118
<BONDS> 0
0
0
<COMMON> 187
<OTHER-SE> 7,261
<TOTAL-LIABILITY-AND-EQUITY> 7,448
<SALES> 5,839
<TOTAL-REVENUES> 5,839
<CGS> 3,461
<TOTAL-COSTS> 3,461
<OTHER-EXPENSES> 1,669
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177
<INCOME-PRETAX> 532
<INCOME-TAX> 207
<INCOME-CONTINUING> 325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
