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 April 30, 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, 2,733,831 outstanding Shares and CLASS B
COMMON STOCK, $.091 par value, 1,098,901 outstanding Shares, as of April 30,
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 April 30, 1999 and
Balance Sheet as of October 31, 1998.
2. Interim Statements of Operations for the three and
six month periods ending April 30, 1999 and April 30,
1998.
3. Interim Statements of Cash Flows for the sixth month
periods ending April 30, 1999 and April 30, 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 second quarter of fiscal 1999 ended April 30, 1999, the
Company had a net loss of $246,000 compared to net income for the same period in
the prior year of $238,000. For the six month period ended April 30, 1999, the
Company had a net loss of $185,000 compared to a net profit of $563,000 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 $1.3 million. Management believes the
decline is the result of general industry conditions causing weakness in mylar
balloon sales, including the bankruptcy reorganization of one principal party
good retail chain and financial difficulties of another.
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.
The Company's recent capital investments and its efforts have been
directed to increasing its revenues from the sale of printed, laminated and
specialty film products, and reducing the level of the Company's reliance on
mylar balloon sales.
2
<PAGE>
Results of Operations
Net Sales. For the fiscal quarter ended April 30, 1999, net sales were
$4,862,000, as compared to sales of $5,492,000 for the second quarter of 1998.
The decline in sales is mainly due to a decrease in metallized balloon sales of
$610,000. Net sales for the first six months of fiscal 1999 were $9,850,000, as
compared to sales of $11,332,000 for the same period in 1998. The decline in
metallized balloon sales was the primary reason for the decrease in overall
sales.
Cost of Sales. For the fiscal quarter ended April 30, 1999, cost of
sales increased to 69.2% of net sales as compared to 58.9% of net sales in the
second 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
65.4% of net sales for the first six months of fiscal 1999, as compared to 59.1%
for the same period of 1998.
Administrative. For the fiscal quarter ended April 30, 1999,
administrative expenses were $557,000 or 11.5% of sales as compared to $697,000,
or 12.7% of sales for the second fiscal quarter of 1998. For the first six
months of fiscal 1999, administrative expenses were $1,089,000 or 11.1% of sales
as compared to $1,223,000, or 10.8% of sales for the same period of 1998. The
decreases were due to reduced phone expenses, lower legal costs, and reduced
consulting fees.
Selling. For the fiscal quarter ended April 30, 1999, selling expenses
were $656,000 or 13.5% of sales, as compared to $708,000, or 12.9% of net sales
for the second fiscal quarter of 1998. For the first six months of fiscal 1999,
selling expenses were $1,301,000 or 13.2% of sales as compared to $1,449,000, or
12.8% 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 April 30, 1999,
advertising and marketing expenses were $400,000 or 8.2% of net sales as
compared to $462,000 or 8.4% of net sales in the second fiscal quarter of 1998.
For the first six months of fiscal 1999, advertising and marketing expenses were
$878,000 or 8.9% of sales as compared to $941,000, or 8.3% 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 and rebates to customers.
Other Income or Expense. Interest expense increased to $214,000 for the
quarter ended April 30, 1999, as compared to $191,000 for the second fiscal
quarter of 1998. Interest expense increased to $435,000 for the six months ended
April 30, 1999, as compared to $368,000 for the second fiscal quarter of 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 April 30, 1999, the
Company had a loss of $238,000 as compared to income before taxes of $335,000
for the second fiscal quarter of 1998. The provision for income tax for the
second quarter of fiscal 1999 was $8,000, resulting in a net loss of $246,000.
The provision for income tax for the second quarter of fiscal 1998 was $98,000,
resulting in net income of $238,000. For the six months ended April 30, 1999,
the net loss was $185,000 as compared to a net profit of $563,000 for the first
six months of fiscal 1998.
3
<PAGE>
Financial Condition
Liquidity and Capital Resources. Cash flow provided by operations
during the six months ended April 30, 1999 was $1,494,000, which was affected by
a decrease in inventory for the period of almost $1.4 million. During the first
six months of 1998, cash flows used in operations was $2,437,000, mainly as a
result of increased sales and resulting increases in accounts receivable and
inventory.
Investment Activities. During the six months ended April 30, 1999 and
April 30, 1998, the Company invested $1,632,000 and $2,550,000, respectively, in
machinery and equipment, and its Mexican supplier of latex balloons.
Financing Activities. For the six months ended April 30, 1999, the
Company generated $437,000 in financing activities, primarily as a result of
proceeds from the issuance of long term debt. Cash flow provided by financing
activities for the six months ended April 30, 1998 was $6,045,000 resulting
primarily from the proceeds of the Company's initial public offering of its
Common Stock in November 1997.
At April 30, 1999, the Company maintained a cash balance of $518,000 .
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 April 30,
1999, the Company had working capital of $2,616,000, 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.
Safe Harbor Provision of the Private Securities Litigation Act of 1995
and Forward Looking Statements. The Company operates in a dynamic and rapidly
changing environment that involves numerous risks and uncertainties. The market
for mylar and latex balloon products is generally characterized by intense
competition, frequent new product introductions and changes in customer tastes
which can render existing products unmarketable. The statements contained in
Item 2 (Management's Discussion and Analysis of Financial Condition and Results
of Operation) that are not historical facts may be forward-looking statements
(as such term is defined in the rules promulgated pursuant to the Securities
Exchange Act of 1934) that are subject to a variety of risks and uncertainties
more fully described in the Company's filings with the Securities and Exchange
Commission including, without limitation, those described under "Risk Factors"
in the Company's Form SB-2 Registration Statement (File No. 333-31969)
4
<PAGE>
effective November 5, 1997. The forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by, and
information currently available to the Company's management. Accordingly, these
statements are subject to significant risks, uncertainties and contingencies
which could cause the Company's actual growth, results, performance and business
prospects and opportunities in 1999 and beyond to differ materially from those
expressed in, or implied by, any such forward-looking statements. Wherever
possible, words such as "anticipate," "plan," "expect," "believe," "estimate,"
and similar expressions have been used to identify these forward-looking
statements, but are not the exclusive means of identifying such statements.
These risks, uncertainties and contingencies include, but are not limited to,
the Company's limited operating history on which expectations regarding its
future performance can be based, competition from, among others, national and
regional balloon, packaging and custom film product manufacturers and sellers
that have greater financial, technical and marketing resources and distribution
capabilities than the Company, the availability of sufficient capital, the
maturation and success of the Company's strategy to develop, market and sell its
products, risks inherent in conducting international business, risks associated
with securing licenses, changes in the Company's product mix and pricing, the
effectiveness of the Company's efforts to control operating expenses, general
economic and business conditions affecting the Company and its customers in the
United States and other countries in which the Company sells and anticipates
selling its products and services and the Company's ability to (i) adjust to
changes in technology, customer preferences, enhanced competition and new
competitors; (ii) protect its intellectual property rights from infringement or
misappropriation; (iii) maintain or enhance its relationships with other
businesses and vendors; and (iv) attract and retain key employees. There can be
no assurance that the Company will be able to identify, develop, market, sell or
support new products successfully, that any such new products will gain market
acceptance, or that the Company will be able to respond effectively to changes
in customer preferences. There can be no assurance that the Company will not
encounter technical or other difficulties that could delay introduction of new
or updated products in the future. If the Company is unable to introduce new
products and respond to industry changes or customer preferences on a timely
basis, its business could be materially adversely affected. The Company is not
obligated to update or revise these forward-looking statements to reflect new
events or circumstances.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable
5
<PAGE>
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
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*
---------
Description 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.
6
<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: June 14, 1999 CTI INDUSTRIES CORPORATION
By: /s/ Stephen M. Merrick
----------------------------------------
Stephen M. Merrick, Chief Executive
Officer and Principal Financial Officer
7
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of April 30, 1999 and October 31, 1998
<TABLE>
<CAPTION>
April 30, 1999 October 31, 1998
(Unaudited) (See note)
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 518,043 $ 235,333
Accounts Receivable (less allowance for
doubtful accounts of $80,206 and $132,211
at April 30, 1999 and October 31, 1998) 3,710,206 3,276,894
Inventories 6,144,921 7,641,381
Deferred tax assets 176,549 176,549
Other 1,257,721 1,089,058
------------ ------------
Total current assets 11,807,440 12,419,215
Property and equipment:
Machinery and equipment 7,070,309 6,812,069
Building 3,550,963 3,503,801
Office furniture and equipment 1,562,163 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 2,687,946 1,522,893
------------ ------------
17,600,185 15,999,748
Less : accumulated depreciation (8,322,608) (7,674,299)
------------ ------------
Total property and equipment, net 9,277,577 8,325,449
Other assets:
Deferred financing costs, net 36,774 44,383
Investment in joint venture 78,158 77,975
Invesment in subsidiary 936,237 879,800
Note receivable 715,422 715,422
Deferred tax assets 391,377 391,377
------------ ------------
Total other assets 2,157,968 2,108,957
------------ ------------
TOTAL ASSETS $ 23,242,985 $ 22,853,621
============ ============
</TABLE>
See accompanying notes
8
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of April 30, 1999 and October 31, 1998
<TABLE>
<CAPTION>
April 30, 1999 October 31, 1998
(Unaudited) (See note)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,663,937 $ 3,070,545
Line of credit 4,109,002 4,178,246
Notes payable - current portion 817,526 817,569
Accrued liabilities 1,600,947 1,039,742
------------ ------------
Total current liabiliites 9,191,412 9,106,102
Long-term liabilities:
Notes payable 5,789,855 5,280,692
Subordinated debt 865,000 865,000
------------ ------------
Total long-term liabilities 6,654,855 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
(April 30, 1999 and October 31, 1998)
shares issued, and 2,733,831 (April 30, 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 April 30, 1999 and October 31, 1998 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Retained earnings 1,115,945 1,301,134
Foreign currency translation adjustment 9,125 26,377
Less:
Treasury stock - 165,149 shares at cost
at April 30, 1999 and 163,149 shares
at cost at October 31, 1998 (409,962) (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 6,983,312 7,188,421
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 23,242,985 $ 22,853,621
============ ============
<FN>
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.
</FN>
</TABLE>
See accompanying notes
9
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Quarter Ended April 30 Year to Date April 30
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 4,861,980 $ 5,492,346 $ 9,850,282 $ 11,331,580
Cost of Sales 3,362,868 3,233,488 6,439,671 6,694,577
------------ ------------ ------------ ------------
Gross profit on sales 1,499,112 2,258,858 3,410,611 4,637,003
Operating expenses:
Administrative 556,693 697,324 1,089,058 1,223,306
Selling 656,357 708,165 1,301,485 1,448,724
Advertising and marketing 399,682 462,452 877,579 941,148
------------ ------------ ------------ ------------
Total operating expenses 1,612,732 1,867,941 3,268,122 3,613,178
------------ ------------ ------------ ------------
Income (loss) from operations (113,622) 390,917 142,489 1,023,825
Other income (expense):
Interest expense (214,315) (191,178) (434,957) (368,336)
Interest income 23,007 40,759 45,425 91,577
Other 67,284 94,977 83,076 120,369
------------ ------------ ------------ ------------
Total other expense (124,024) (55,442) (306,456) (156,390)
------------ ------------ ------------ ------------
Income (loss) before income taxes (237,646) 335,475 (163,967) 867,435
Income tax expense 7,954 97,500 21,221 304,200
------------ ------------ ------------ ------------
Net income (loss) $ (245,600) $ 237,975 $ (185,188) $ 563,235
============ ============ ============ ============
Basic income (loss) per common and
common equivalent shares $ (0.06) $ 0.06 $ (0.05) $ 0.15
============ ============ ============ ============
Diluted income (loss) per common
and common equivalent shares $ (0.06) $ 0.06 $ (0.05) $ 0.14
============ ============ ============ ============
Weighted average number of
shares and equivalent shares
of common stock outstanding
Basic 3,834,421 3,832,297 3,834,576 3,765,284
============ ============ ============ ============
Diluted 3,834,421 4,178,167 3,834,576 4,126,660
============ ============ ============ ============
</TABLE>
See accompanying notes
10
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the six months ended April 30
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash Flow Provided by Operations:
Net income (loss) $ (185,188) $ 563,235
Adjustment to net income:
Depreciation and amortization 655,917 432,308
Equity in earnings of P&TF and CTF (25,505) (50,456)
Provision for losses on A/R & inventory 142,459 111,255
Change in assets and liabilities:
Change in accounts receivable (470,209) (1,265,610)
Change in inventory 1,390,898 (1,907,548)
Change in other assets (168,662) 241,307
Change in accounts payable & accrued expenses 154,597 (561,111)
----------- -----------
Total Cash Flow Provided (Used) by Operations 1,494,307 (2,436,620)
Cash Flow Provided by Investing Activities:
Purchases of property and equipment (1,600,437) (1,198,730)
Investment in and advances to P&TF (31,115) (1,350,000)
Investment in joint venture -- (1,529)
----------- -----------
Total Cash Flow Used by Investing Activities (1,631,552) (2,550,259)
Cash Flow Provided by Financing Activities:
Stock redemption contract payments -- (30,533)
Advances on line of credit 9,110,000 9,460,000
Repayments on line of credit (9,179,244) (9,180,657)
Proceeds from issuance of long term debt 822,489 10,630
Proceeds from issuance of short term debt -- 850,000
Repayment of long term debt (313,370) (383,423)
Proceeds from issuance of common stock -- 5,401,883
Purchase of treasury stock (2,668) (18,639)
Dividends paid -- (63,917)
----------- -----------
Total Cash Flow Provided by Financing Activities 437,207 6,045,344
Effect of exchange rate changes on cash (17,252) (4,342)
----------- -----------
Increase (Decrease) in Cash and Equivalents 282,710 1,054,123
Cash and Equivalents at Beginning of Period 235,333 237,230
----------- -----------
Cash and Equivalents at End of Period $ 518,043 $ 1,291,353
=========== ===========
</TABLE>
See accompanying notes
11
<PAGE>
April 30, 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 six-month period ended April 30, 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 - 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 April 30, 1999 and 1998 was computed as
follows:
12
<PAGE>
CTI Industries Corporation and Subsidiary
<TABLE>
<CAPTION>
Quarter Ended April 30 Year to Date April 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
Basic
<S> <C> <C> <C> <C>
Average shares outstanding:
Weighted average number of shares
of common stock outstanding during
the period 3,834,421 3,832,297 3,834,576 3,765,284
=========== =========== =========== ===========
Net income:
Net income (loss) $ (245,600) $ 237,975 $ (185,188) $ 563,235
=========== =========== =========== ===========
Amount for per share computation $ (245,600) $ 237,975 $ (185,188) $ 563,235
=========== =========== =========== ===========
Per share amount $ (0.06) $ 0.06 $ (0.05) $ 0.15
=========== =========== =========== ===========
Diluted
Average shares outstanding:
Weighted average number of shares
of common stock outstanding during
the period 3,834,421 3,832,297 3,834,576 3,765,284
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock -- 345,870 -- 361,376
----------- ----------- ----------- -----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 3,920,182 4,178,167 3,945,516 4,126,660
=========== =========== =========== ===========
Net income:
Net income (loss) $ (245,600) $ 237,975 $ (185,188) $ 563,235
=========== =========== =========== ===========
Amount for per share computation $ (245,600) $ 237,975 $ (185,188) $ 563,235
=========== =========== =========== ===========
Per share amount $ (0.06) $ 0.06 $ (0.05) $ 0.14
=========== =========== =========== ===========
<FN>
Basic and diluted loss per share are the same for the quarter ended April 30,
1999 and the six months ended April 30, 1999 since the shares associated with
options and warrants are not included because they are anti-dilutive.
</FN>
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED APRIL 30, 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> 6-mos
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 518
<SECURITIES> 0
<RECEIVABLES> 3,790
<ALLOWANCES> 80
<INVENTORY> 6,145
<CURRENT-ASSETS> 11,807
<PP&E> 17,600
<DEPRECIATION> 8,323
<TOTAL-ASSETS> 23,243
<CURRENT-LIABILITIES> 9,191
<BONDS> 0
0
0
<COMMON> 188
<OTHER-SE> 6,795
<TOTAL-LIABILITY-AND-EQUITY> 23,243
<SALES> 9,850
<TOTAL-REVENUES> 9,850
<CGS> 6,440
<TOTAL-COSTS> 6,440
<OTHER-EXPENSES> 3,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435
<INCOME-PRETAX> (164)
<INCOME-TAX> 21
<INCOME-CONTINUING> (185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
