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 July 31, 1999
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 60010
(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, 2,699,831 outstanding Shares and CLASS B
COMMON STOCK, $.91 par value, 1,098,901 outstanding Shares, as of July 31, 1999.
<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 July 31, 1999 and Balance
Sheet as of October 31, 1998.
2. Interim Statements of Operations for the three and
nine month periods ending July 31, 1999 and July 31,
1998.
3. Interim Statements of Cash Flows for the nine month
periods ending July 31, 1999 and July 31, 1998.
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 Operation
During the third quarter of fiscal 1999 ended July 31, 1999, the
Company had a net loss of $457,000 compared to net income for the same period in
the prior year of $115,000. For the nine month period ended July 31, 1999, the
Company had a net loss of $792,000 compared to a net profit of $679,000 for the
same period of 1998. The decline in income was the result principally of a
decline in revenues from the sale of mylar balloons for the fiscal year to date
compared to fiscal 1998 of approximately $2 million. Management believes the
decline is the result of general industry conditions causing weakness in mylar
balloon sales.
Income of the Company was also affected by increases in depreciation
expense arising from investment in machinery and equipment, and increases in
interest costs arising from increased levels of borrowing.
Results of Operations
Net Sales. For the fiscal quarter ended July 31, 1999, net sales were
$3,899,000, as compared to sales of $4,382,000 for the third quarter of 1998.
The decline in sales is mainly due to a decrease in metallized balloon sales of
15%. Net sales for the first nine months of fiscal 1999 were $13,750,000, as
compared to sales of $15,714,000 for the same period in 1998. The decline in
metallized balloon sales was the primary reason for the decrease in overall
sales, however, sales of printed, laminated and specialty film products have
increased 14% in the current fiscal year.
2
<PAGE>
Cost of Sales. For the fiscal quarter ended July 31, 1999, cost of
sales increased to 80.9% of net sales as compared to 52.6% of net sales in the
third fiscal quarter of 1998. The increase was a result of lower production
volumes and costs incurred in a new equipment project. Cost of goods sold were
71.5% of net sales for the first nine months of fiscal 1999, as compared to
57.2% for the same period of 1998.
Administrative. For the fiscal quarter ended July 31, 1999,
administrative expenses were $565,000 or 14.5% of sales as compared to $654,000,
or 14.9% of sales for the third fiscal quarter of 1998. For the first nine
months of fiscal 1999, administrative expenses were $1,654,000 or 12.0% of sales
as compared to $1,877,000, or 11.9% of sales for the same period of 1998. Lower
telephone costs and legal expenses contributed to the reduction in
administrative expenses.
Selling. For the fiscal quarter ended July 31, 1999, selling expenses
were $600,000 or 15.3% of sales, as compared to $635,000, or 14.5% of net sales
for the third fiscal quarter of 1998. For the first nine months of fiscal 1999,
selling expenses were $1,902,000 or 13.8% of sales as compared to $2,083,000, or
13.2% of net sales for the same period of 1998. The decline in selling expense
dollars is primarily related to the decline in sales volume and the selling
expenses directly associated with those sales.
Advertising and Marketing. For the fiscal quarter ended July 31, 1999,
advertising and marketing expenses were $331,000 or 8.5% of net sales as
compared to $463,000 or 10.6% of net sales in the third fiscal quarter of 1998.
For the first nine months of fiscal 1999, advertising and marketing expenses
were $1,209,000 or 8.8% of sales as compared to $1,404,000, or 8.9% of net sales
for the same period of 1998. The decrease in advertising and marketing expense
dollars was primarily related to changes in programs for national accounts,
resulting in lower servicing costs.
Other Income or Expense. Interest expense increased to $249,000 for the
quarter ended July 31, 1999, as compared to $194,000 for the third fiscal
quarter of 1998. Interest expense increased to $684,000 for the nine months
ended July 31, 1999, as compared to $562,000 for the same period in fiscal 1998.
The increased interest expense is a result of increases in the level of both
long term and short term borrowings.
Net Income or Loss. For the fiscal quarter ended July 31, 1999, the
Company had a loss before tax of $894,000 as compared to income before taxes of
$162,000 for the third fiscal quarter of 1998. The provision for income tax for
the third quarter of fiscal 1999 was $(436,000), resulting in a net loss of
$457,000. The provision for income tax for the third quarter of fiscal 1998 was
$47,000, resulting in net income of $115,000. For the nine months ended July 31,
1999, the net loss was $792,000 as compared to a net profit of $679,000 for the
first nine months of fiscal 1998.
3
<PAGE>
Financial Condition
Liquidity and Capital Resources. Cash flow provided by operations
during the nine months ended July 31, 1999 was $1,955,000, which was affected by
a decrease in inventory for the period of $1,560,000. During the first nine
months of 1998, cash flows used in operations was $2,477,000, mainly as a result
of increased sales and resulting increases in accounts receivable and inventory.
Investment Activities. During the nine months ended July 31, 1999 and
July 31, 1998, the Company invested $2,052,000 and $3,358,000, respectively, in
machinery and equipment, and its Mexican supplier of latex balloons.
Financing Activities. For the nine months ended July 31, 1999, the
Company generated $283,000 in financing activities, primarily as a result of
proceeds from the issuance of long term and short term debt. Cash flow provided
by financing activities for the nine months ended July 31, 1998 was $6,389,000
resulting primarily from the proceeds of the Company's initial public offering
of its Common Stock in November 1997.
At July 31, 1999, the Company maintained a cash balance of $404,000.
The Company's current cash management strategy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. At October
31, 1998, the Company had cash and cash equivalents of $235,000. At July 31,
1999, the Company had working capital of $2,000,000, and at October 31, 1998,
working capital was $3,313,000.
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.
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.
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
4
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits*
No.
---
Statement re: Computation of Per Share Earnings 11
(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: September 20, 1999 CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
-----------------------------
Howard W. Schwan, President
6
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of July 31, 1999 and October 31, 1998
<TABLE>
<CAPTION>
July 31, 1999 October 31, 1998
(Unaudited) (See note)
----------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash $ 404,445 $ 235,333
Accounts Receivable (less allowance for doubtful
accounts of $101,356 and $132,211 at July 31, 1999
and October 31, 1998) 2,938,841 3,276,894
Inventories 6,077,608 7,641,381
Deferred tax assets 176,549 176,549
Other 1,567,662 1,089,058
----------------- -----------------
Total current assets 11,165,105 12,419,215
Property and equipment:
Machinery and equipment 9,648,423 6,812,069
Building 3,564,125 3,503,801
Office furniture and equipment 1,578,030 1,556,742
Land 535,000 535,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 2,031,919 1,907,358
Projects under construction 465,534 1,522,893
----------------- -----------------
17,984,916 15,999,748
Less : accumulated depreciation (8,700,175) (7,674,299)
----------------- -----------------
Total property and equipment, net 9,284,741 8,325,449
Other assets:
Deferred financing costs, net 32,970 44,383
Investment in joint venture - 77,975
Invesment in subsidiary 920,162 879,800
Note receivable 715,422 715,422
Deferred tax assets 391,377 391,377
Non-current assets 102,895 -
----------------- -----------------
Total other assets 2,162,826 2,108,957
----------------- -----------------
TOTAL ASSETS $ 22,612,672 $ 22,853,621
================= =================
</TABLE>
See accompanying notes
7
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of July 31, 1999 and October 31, 1998
<TABLE>
<CAPTION>
July 31, 1999 October 31, 1998
(Unaudited) (See note)
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 3,147,612 $ 3,070,545
Line of credit 3,361,390 4,178,246
Notes payable - current portion 1,426,360 817,569
Accrued liabilities 1,229,729 1,039,742
----------------- -----------------
Total current liabiliites 9,165,091 9,106,102
Long-term liabilities:
Non-current liabilities 17,398 -
Notes payable 5,811,583 5,280,692
Subordinated debt 865,000 865,000
----------------- -----------------
Total long-term liabilities 6,693,981 6,145,692
Redeemable common stock 413,406 413,406
Stockholders' equity:
Common stock - $.065 par value, 11,000,000 shares authorized,
2,898,980 (July 31, 1999 and October 31, 1998) shares issued,
and 2,699,831 (July 31, 1999) and 2,735,831
(October 31, 1998) shares outstanding 188,434 188,434
Class B common stock - $.91 par value,
1,100,000 shares authorized, 1,098,901 shares
outstanding at July 31, 1999 and October 31, 1998 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Retained earnings 508,814 1,301,134
Foreign currency translation adjustment 10,163 26,377
Less:
Treasury stock - 199,149 shares at cost at July 31, 1999
and 163,149 shares at cost at October 31, 1998 (446,987) (407,294)
Redeemable common stock (413,406) (413,406)
Stock subscription receivable (4,700) (4,700)
Notes receivable from stockholders (56,456) (56,456)
----------------- -----------------
Total stockholders' equity 6,340,194 7,188,421
----------------- -----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 22,612,672 $ 22,853,621
================= =================
</TABLE>
Note: The balance sheet at October 31, 1998 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
<TABLE>
<CAPTION>
Quarter Ended July 31 Year to Date July 31
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ 3,899,451 $ 4,382,322 $13,749,733 $ 15,713,903
Cost of Sales 3,155,029 2,306,868 9,836,235 9,001,445
---------------- ---------------- --------------- -----------------
Gross profit on sales 744,422 2,075,454 3,913,498 6,712,458
Operating expenses:
Administrative 565,367 654,174 1,654,426 1,877,480
Selling 600,065 634,743 1,901,549 2,083,467
Advertising and marketing 331,288 462,716 1,208,867 1,403,864
---------------- ---------------- --------------- -----------------
Total operating expenses 1,496,720 1,751,633 4,764,842 5,364,811
---------------- ---------------- --------------- -----------------
Income (loss) from operations (752,298) 323,821 (851,344) 1,347,647
Other income (expense):
Interest expense (248,603) (193,561) (683,560) (561,897)
Interest income 20,752 32,924 66,177 124,501
Other 86,472 (952) 169,548 119,417
---------------- ---------------- --------------- -----------------
Total other expense (141,379) (161,589) (447,835) (317,979)
---------------- ---------------- --------------- -----------------
Income (loss) before income taxes (893,677) 162,232 (1,299,179) 1,029,668
Income tax expense (436,298) 46,800 (506,860) 351,000
---------------- ---------------- --------------- -----------------
Net income (loss) $ (457,379) $ 115,432 $ (792,319) $ 678,668
================ ================ =============== =================
Basic income (loss) per common and
common equivalent shares $ (0.12) $ 0.03 $ (0.21) $ 0.18
================ ================ =============== =================
Diluted income (loss) per common
and common equivalent shares $ (0.12) $ 0.03 $ (0.21) $ 0.16
================ ================ =============== =================
Weighted average number of shares and
equivalent shares of common stock
outstanding
Basic 3,820,843 3,825,954 3,829,999 3,785,523
================ ================ =============== =================
Diluted 3,820,843 4,110,965 3,829,999 4,124,527
================ ================ =============== =================
</TABLE>
See accompanying notes
9
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the nine months ended July 31
1999 1998
(Unaudited) (Unaudited)
----------------------------------------
Cash Flow Provided by Operations:
<S> <C> <C>
Net income (loss) $ (792,319) $ 678,669
Adjustment to net income:
Depreciation and amortization 1,029,620 688,790
Equity in earnings of P&TF and CTF 4,970 6,188
Provision for losses on A/R & inventory 205,589 207,500
Change in assets and liabilities:
Change in accounts receivable 286,855 (81,610)
Change in inventory 1,560,887 (3,846,766)
Change in other assets (402,309) 166,978
Change in accounts payable & accrued expenses 61,251 (296,620)
----------------- -----------------
Total Cash Flow Provided (Used) by Operations 1,954,544 (2,476,871)
Cash Flow Provided by Investing Activities:
Purchases of property and equipment (1,932,811) (1,999,220)
Investment in and advances to P&TF (45,515) (1,350,000)
Investment in joint venture - (8,747)
Acquisition of CTF International (74,024) -
----------------- -----------------
Total Cash Flow Used by Investing Activities (2,052,350) (3,357,967)
Cash Flow Provided by Financing Activities:
Stock redemption contract payments - (30,533)
Advances on line of credit 13,090,000 14,380,000
Repayments on line of credit (13,906,856) (14,213,846)
Proceeds from issuance of long term debt 1,187,281 2,344,959
Proceeds from issuance of short term debt 570,000 850,000
Repayment of long term debt (617,600) (1,413,866)
Repayment of short term debt - (850,000)
Proceeds from issuance of common stock - 5,401,883
Proceeds from warrants exercised - 17,650
Purchase of treasury stock (39,693) (33,349)
Dividends paid - (63,917)
----------------- -----------------
Total Cash Flow Provided by Financing Activities 283,132 6,388,981
Effect of exchange rate changes on cash (16,214) (27,041)
----------------- -----------------
Increase (Decrease) in Cash and Equivalents 169,112 527,102
Cash and Equivalents at Beginning of Period 235,333 237,230
----------------- -----------------
Cash and Equivalents at End of Period $ 404,445 $ 764,332
================= =================
</TABLE>
See accompanying notes
10
<PAGE>
July 31, 1999
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 nine-month period ended July 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended October 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant Company
and Subsidiaries' annual report on Form 10-KSB for the year ended October 31,
1998.
Note 2 - Acquisition
In July 1999, the Company acquired the remaining 50% of CTF International for
$74,024. The effect on revenues, income before income taxes, net income and
earnings per share for the period ended July 31, 1999 was insignificant.
Note 3 - Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," for the year ended
October 31, 1998. Adoption of this pronouncement did not have a material impact
on the Company's financial statements.
Basic earnings per share is computed by dividing the income available to common
shareholders, net earnings less preferred stock dividends, by the weighted
average number of shares of common stock outstanding during each period.
Diluted earnings per share 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 each period.
Earnings per share for the periods ended July 31, 1999 and 1998 was computed as
follows:
11
<PAGE>
CTI Industries Corporation and Subsidiary
<TABLE>
<CAPTION>
Quarter Ended July 31 Year to Date July 31
1999 1998 1999 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 3,820,843 3,825,954 3,829,999 3,785,523
============== ============== ============== ===============
Net income (loss):
Net income (loss) $ (457,379) $ 115,432 $ (792,319) $ 678,669
Amount for per share computation $ (457,379) $ 115,432 $ (792,319) $ 678,669
============== ============== ============== ===============
Per share amount $ (0.12) $ 0.03 $ (0.21) $ 0.18
============== ============== ============== ===============
Diluted
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 3,820,843 3,825,954 3,829,999 3,785,523
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock - 285,011 - 339,004
-------------- -------------- -------------- ---------------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 3,820,843 4,110,965 3,829,999 4,124,527
============== ============== ============== ===============
Net income (loss):
Net income (loss) $ (457,379) $ 115,432 $ (792,319) $ 678,669
Amount for per share computation $ (457,379) $ 115,432 $ (792,319) $ 678,669
============== ============== ============== ===============
Per share amount $ (0.12) $ 0.03 $ (0.21) $ 0.16
============== ============== ============== ===============
</TABLE>
Basic and diluted loss per share are the same for the quarter ended July 31,
1999, and the nine months ended July 31, 1999, since the shares associated
with options and warrants are not included because they are anti-dilutive.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JULY 31, 1999 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> 9-mos
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 404
<SECURITIES> 0
<RECEIVABLES> 3,040
<ALLOWANCES> 101
<INVENTORY> 6,077
<CURRENT-ASSETS> 11,165
<PP&E> 17,985
<DEPRECIATION> 8,700
<TOTAL-ASSETS> 22,613
<CURRENT-LIABILITIES> 9,165
<BONDS> 6,694
0
0
<COMMON> 188
<OTHER-SE> 6,152
<TOTAL-LIABILITY-AND-EQUITY> 22,613
<SALES> 13,750
<TOTAL-REVENUES> 13,750
<CGS> 9,836
<TOTAL-COSTS> 9,836
<OTHER-EXPENSES> 4,529
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684
<INCOME-PRETAX> (1,299)
<INCOME-TAX> (507)
<INCOME-CONTINUING> (792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (792)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
