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, 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, 2,735,831 outstanding Shares and CLASS B
COMMON STOCK, $.091 par value, 1,098,901 outstanding Shares, as of February 26,
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 January 31, 1999 and
Balance Sheet as of October 31, 1998.
2. Interim Statements of Operations for the three month
periods ending January 31, 1999 and January 31, 1998.
3. Interim Statements of Cash Flows for the three month
periods ending January 31, 1999 and January 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
Results of Operations
Net Sales. For the fiscal quarter ended January 31, 1999, net sales
were $4,988,000, as compared to sales of $5,839,000 for the first quarter of
1998. The decline in sales is due to a decrease in metallized balloon sales of
$680,000, and a decrease in printed and laminated film sales of $185,000.
Cost of Sales. For the quarter ended January 31, 1999, cost of sales
increased to 61.7% of net sales as compared to 59.3% of net sales in the first
fiscal quarter of 1998. The increase was a result of lower production levels and
costs incurred in purchasing and installing new equipment. Included in these
costs are increased depreciation expenses.
Administrative. For the quarter ended January 31, 1999, administrative
expenses were $532,000 or 10.7% of sales as compared to $526,000, or 9% of sales
for the first fiscal quarter of 1998.
Selling. For the quarter ended January 31, 1999, selling expenses were
$645,000, or 12.9% of net sales, as compared to $741,000, or 12.7% of net sales
for the first fiscal quarter of 1998. The decrease in selling expenses was
primarily due to lower sales and to lower commissions paid as fewer sales were
made through the Company's independent sales representative network.
2
<PAGE>
Advertising and Marketing. For the quarter ended January 31, 1999,
advertising and marketing expenses were $478,000, or 9.6% of sales as compared
to $479,000, or 8.2% of sales in the first fiscal quarter of 1998.
Other Income or Expense. Interest expense increased to $221,000 for the
quarter ended January 31, 1999, as compared to $177,000 for the first quarter of
fiscal 1998 as a result of interest paid on the new equipment loan, and a higher
balance on the revolving line of credit.
Net Income or Loss. For the quarter ended January 31, 1999, the Company
had net income of $60,000 as compared to net income of $325,000 the first fiscal
quarter of 1998. The reserve for income tax for the first quarter of fiscal 1999
was $13,000 as compared to $207,000 for the first quarter of 1998. The Company's
net income was affected by the reduced level of sales, a small decline in
margins and by increased interest and depreciation costs arising from the
Company's investment in plant and equipment.
Financial Condition
Liquidity and Capital Resources. Cash flow provided by operations
during the quarter ended January 31, 1999, was $642,000. This resulted primarily
from a decrease in inventory and increase in accrued liabilities. During the
first fiscal quarter of 1998, the Company had cash flows used in operations of
$1,280,505 mainly as a result of increases in accounts receivable and inventory
of over $2,596,000.
At January 31, 1999, the Company maintained a cash balance of $317,000.
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 January 31,
1999, the Company had working capital of $2,977,000. Working capital at October
31, 1998, was $3,313,000.
Investment Activities. During the quarters ended January 31, 1999 and
January 31, 1998, the Company invested $1,340,000 and $897,000, respectively, in
machinery and equipment and merchandise displays at customer locations. The
Company also invested $14,000 and $500,000, respectively, in its Mexican
supplier of latex balloons in the first fiscal quarter of 1999 and 1998.
Financing Activities. Cash flow provided by financing activities for
the quarter ended January 31, 1999, was $798,000 resulting primarily from
advances on lines of credit and proceeds from long term debt. 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.
The Company believes that existing capital resources and cash generated
from operations will be sufficient to meet the Company's requirements for at
least the next twelve 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.
3
<PAGE>
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) 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.
4
<PAGE>
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.
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.
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 17, 1999 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
as of January 31, 1999 and October 31, 1998
January 31, 1999 October 31, 1998
(Unaudited) (See note)
------------ ------------
ASSETS
Current assets:
Cash $ 317,275 $ 235,333
Accounts Receivable (less allowance
for doubtful accounts of $141,730
and $132,211 at January 31, 1999
and October 31, 1998) 4,062,944 3,276,894
Inventories 7,222,745 7,641,381
Deferred tax assets 176,549 176,549
Other 1,155,388 1,089,058
------------ ------------
Total current assets 12,934,901 12,419,215
Property and equipment:
Machinery and equipment 6,994,080 6,812,069
Building 3,503,801 3,503,801
Office furniture and equipment 1,561,719 1,556,742
Land 535,000 535,000
Leasehold improvements 161,885 161,885
Fixtures and equipment
at customer locations 2,010,015 1,907,358
Projects under construction 2,573,441 1,522,893
------------ ------------
17,339,941 15,999,748
Less : accumulated depreciation (7,987,844) (7,674,299)
------------ ------------
Total property and equipment, net 9,352,097 8,325,449
Other assets:
Deferred financing costs, net 40,578 44,383
Investment in joint venture 79,688 77,975
Invesment in subsidiary 888,860 879,800
Note receivable 715,422 715,422
Deferred tax assets 391,377 391,377
------------ ------------
Total other assets 2,115,925 2,108,957
------------ ------------
TOTAL ASSETS $ 24,402,923 $ 22,853,621
============ ============
See accompanying notes
7
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of January 31, 1999 and October 31, 1998
January 31, 1999 October 31, 1998
(Unaudited) (See note)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,309,431 $ 3,070,545
Line of credit 4,401,105 4,178,246
Notes payable - current portion 751,568 817,569
Accrued liabilities 1,495,591 1,039,742
------------ ------------
Total current liabiliites 9,957,695 9,106,102
Long-term liabilities:
Notes payable 5,921,393 5,280,692
Subordinated debt 865,000 865,000
------------ ------------
Total long-term liabilities 6,786,393 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 shares issued at
January 31, 1999 and October 31, 1998,
and 2,735,831 shares outstanding at
January 31, 1999 and October 31, 1998 188,434 188,434
Class B common stock - $.91 par value,
1,100,000 shares authorized,
1,098,901 shares outstanding at
January 31, 1999 and October 31, 1998 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Retained earnings 1,361,546 1,301,134
Foreign currency translation adjustment 22,973 26,377
Less:
Treasury stock - 163,149 shares
at cost at January 31, 1999
and October 31, 1998 (407,294) (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 7,245,429 7,188,421
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 24,402,923 $ 22,853,621
============ ============
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
For the quarter ended January 31
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Net Sales $ 4,988,303 $ 5,839,234
Cost of Sales 3,076,804 3,461,089
----------- -----------
Gross profit on sales 1,911,499 2,378,145
Operating expenses:
Administrative 532,364 525,982
Selling 645,127 740,559
Advertising and marketing 477,897 478,696
----------- -----------
Total operating expenses 1,655,388 1,745,237
----------- -----------
Income from operations 256,111 632,908
Other income (expense):
Interest expense (220,642) (177,158)
Interest income 22,418 50,818
Other 15,792 25,392
----------- -----------
Total other expense (182,432) (100,948)
----------- -----------
Income before income taxes 73,679 531,960
Income tax expense (benefit) 13,267 206,700
----------- -----------
Net income $ 60,412 $ 325,260
=========== ===========
Basic income per common and
common equivalent shares $ 0.02 $ 0.09
=========== ===========
Diluted income per common
and common equivalent shares $ 0.02 $ 0.08
=========== ===========
Weighted average number of shares and
equivalent shares of common stock
outstanding
Basic 3,834,732 3,698,270
=========== ===========
Diluted 4,002,977 4,086,783
=========== ===========
See accompanying notes
9
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the quarter ended January 31
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash Flow Provided by Operations:
Net income $ 60,412 $ 325,257
Adjustments to net income:
Depreciation and amortization 317,349 184,044
Equity in earnings of P&TF and CTF 3,467 --
Provision for losses on A/R & inventory 99,116 19,126
Change in assets and liabilities:
Change in accounts receivable (801,030) (2,057,236)
Change in inventory 334,500 (538,562)
Change in other assets (66,329) (141,085)
Change in accounts payable & accrued expenses 694,736 927,951
----------- -----------
Total Cash Flow Provided (Used) by Operations 642,221 (1,280,505)
Cash Flow Provided by Investing Activities:
Purchases of property and equipment (1,340,193) (896,502)
Investment in and advances to P&TF (14,240) (500,000)
----------- -----------
Total Cash Flow Used by Investing Activities (1,354,433) (1,396,502)
Cash Flow Provided by Financing Activities:
Stock redemption contract payments -- (22,200)
Advances on line of credit 4,215,000 3,430,000
Repayments on line of credit (3,992,141) (3,214,847)
Proceeds from issuance of long term debt 695,367 10,630
Proceeds from issuance of short term debt -- 850,000
Repayment of long term debt (120,668) (172,385)
Proceeds from issuance of common stock -- 5,401,883
Loan to P&TF -- (850,000)
Dividends paid -- (63,917)
----------- -----------
Total Cash Flow Provided by Financing Activities 797,558 5,369,164
Effect of exchange rate changes on cash (3,404) (7,429)
----------- -----------
Increase (Decrease) in Cash and Equivalents 81,942 2,684,728
Cash and Equivalents at Beginning of Period 235,333 237,230
----------- -----------
Cash and Equivalents at End of Period $ 317,275 $ 2,921,958
=========== ===========
</TABLE>
See accompanying notes
10
<PAGE>
January 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 three-month period ended January 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 - 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 January 31, 1999 and 1998 was computed
as follows:
11
<PAGE>
CTI Industries Corporation and Subsidiary
Quarter Ended January 31
1999 1998
---------- ----------
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 3,834,732 3,698,270
========== ==========
Net income:
Net income $ 60,412 $ 325,260
Less preferred stock dividends -- --
---------- ----------
Amount for per share computation $ 60,412 $ 325,260
========== ==========
Per share amount $ 0.02 $ 0.09
========== ==========
Diluted Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 3,834,732 3,698,270
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock 168,245 388,513
---------- ----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 4,002,977 4,086,783
========== ==========
Net income:
Net income $ 60,412 $ 325,260
Less preferred stock dividends -- --
---------- ----------
Income applicable to common shares $ 60,412 $ 325,260
Add dividends on preferred stock assumed
converted into common shares -- --
---------- ----------
Amount for per share computation $ 60,412 $ 325,260
========== ==========
Per share amount $ 0.02 $ 0.08
========== ==========
Warrants to purchase 277,244 shares of common stock at $3.12 were outstanding
during the first quarter of 1999 but were not included in the computation of
diluted EPS because the warrants' exercise price was greater than the average
market price of the common shares.
Options to purchase 329,000 shares of common stock at $2.50 - $4.00 were
outstanding during the first quarter of 1999 but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
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<NAME> CTI Industries Corporation
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<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
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