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, 2000
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, $.195 par value, 789,736 outstanding Shares and CLASS B
COMMON STOCK, $2.73 par value, 366,300 outstanding Shares, as of January 31,
2000.
<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, 2000 and
Balance Sheet as of October 31, 1999.
2. Interim Statements of Operations for the three month
periods ending January 31, 2000, and January 31, 1999.
3. Interim Statements of Cash Flows for the three month
periods ending January 31, 2000 and January 31, 1999.
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 first fiscal quarter ended January 31, 2000, net
sales were $7,013,000, as compared to sales of $4,988,000 for the first quarter
of 1999, an increase of 40.6%. Sales increased over all product lines - mylar
balloons, latex balloons and laminated and printed films. Net sales grew
$1,100,000 in the laminations and printed films product line. Latex balloon
sales also increased due to the acquisition of an additional equity interest in
Pulidos et Terminados Finos, S.A. de C.V., a manufacturer of latex balloons
("PTF").
Cost of Sales. For the fiscal quarter ended January 31, 2000, cost of
sales increased to 67.8% of net sales as compared to 61.7% of net sales in the
first fiscal quarter of 1999. The increase was primarily the result of
consolidating the results of PTF's operations which currently operate with a
higher cost of goods sold percentage than domestic operations.
Administrative. For the fiscal quarter ended January 31, 2000,
administrative expenses were $928,000 or 13.2% of sales as compared to $532,000,
or 10.7% of sales for the first quarter of 1999. The primary increase in
administrative expenses came from the acquisition of PTF. Beginning in January
2000, PTF's administrative expenses have been reduced and management plans to
continue reducing expenses during the remainder of the current fiscal year.
Domestically, administrative expenses increased due to costs associated with the
reverse stock split, effective in November 1999, and consulting fees incurred in
a corporate wide project to improve cost accounting procedures.
Selling. For the fiscal quarter ended January 31, 2000, selling
expenses were $549,000 or 7.8% of sales, as compared to $645,0000, or 12.9% of
net sales for the first fiscal quarter of 1999. The decline in selling expense
2
<PAGE>
dollars is primarily related to the re-negotiation of certain licensing
agreements, which has resulted in a reduction in royalty expenses in the current
fiscal year.
Advertising and Marketing. For the fiscal quarter ended January 31,
2000, advertising and marketing expenses were $332,000 or 4.7% of net sales as
compared to $478,000 or 9.6% of net sales in the first quarter of 1999. The
decrease in advertising and marketing expense dollars was the result of several
factors, mainly reduced servicing costs on several national account programs,
and reduced expenditures related to the Company's attendance at fewer trade
shows.
Other Income or Expense. Interest expense increased to $341,000 for the
quarter ended January 31, 2000, as compared to $221,000 for the first fiscal
quarter of 1999. The increased was due to the consolidation of PTF, whose
interest expense totalled $114,000 for the first quarter. During the quarter
ended January 31, 2000, the Company sold its building located next to its
headquarters in Barrington, IL for a gain of $300,000, and entered into an
agreement to lease back the facility.
Net Income or Loss. For the fiscal quarter ended January 31, 2000, the
Company had income before taxes of $442,000 as compared to income before taxes
of $74,000 for the first fiscal quarter of 1999. The provision for income taxes
for the first fiscal quarter of 2000 was $179,000, resulting in net income of
$263,000. The tax provision for the first fiscal quarter of 1999 was $13,000,
resulting in net income of $60,000.
Financial Condition
Liquidity and Capital Resources. Cash flow used in operations during
the three months ended January 31, 2000 was $299,000, which was due to
increasing accounts receivable driven by increased sales volume. During the
first three months of 1999, cash flow provided by operations was $642,000,
mainly the result of non-cash depreciation expense and lower inventory levels.
Investment Activities. During the three months ended January 31, 2000,
cash flow provided by investing activities was $1,664,000. The cash inflow was
provided by the proceeds from the sale of the building located next to the
Company's headquarters. Investments in machinery and equipment were $232,000 for
the first quarter of 2000. In the first three months of fiscal 1999, $1,354,000
was used in investing activities, primarily for the purchase of machinery and
equipment.
Financing Activities. For the three months ended January 31, 2000, the
Company used $1,504,000 in financing activities, primarily to pay off the
long-term mortgage loan that existed on the building which was sold. Cash flow
provided by financing activities for the three months ended January 31, 1999 was
$798,000, resulting from the proceeds of long-term debt and use of the
short-term revolving line of credit.
At January 31, 2000, the Company had a cash balance of $154,000. The
Company's current cash management strategy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. At October
31, 1999, the Company had cash and cash equivalents of $337,000. At January 31,
2000, the Company had working capital of ($539,000), and at October 31, 1999,
working capital was $630,000.
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<PAGE>
The Company believes that existing capital resources and cash generated
from operations will be sufficient to meet the Company's cash 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) 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;
4
<PAGE>
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.
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*
No.
---
Statement re: Computation of Per Share Earnings 11
(b) The Company has not filed a Current Report on Form 8-K
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 21, 2000 CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
----------------------
Howard W. Schwan, President
6
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of January 31, 2000 and October 31, 1999
January 31, 2000 October 31, 1999
(Unaudited) (See note)
------------ ------------
ASSETS
Current assets:
Cash $ 154,161 $ 336,832
Accounts receivable (less allowance
for doubtful accounts of $235,170
and $186,251 at January 31, 2000
and October 31, 1999) 6,155,258 3,225,802
Inventories 6,109,164 5,425,769
Deferred tax assets 208,926 208,926
Other 562,859 754,303
------------ ------------
Total current assets 13,190,368 9,951,632
Property and equipment:
Machinery and equipment 13,088,308 9,752,302
Building 2,363,744 3,643,675
Office furniture and equipment 1,588,707 1,588,382
Land 250,000 535,000
Leasehold improvements 161,885 161,885
Fixtures and equipment
at customer locations 2,031,919 2,031,919
Projects under construction 347,826 391,719
------------ ------------
19,832,389 18,104,882
Less : accumulated depreciation (9,504,578) (9,048,413)
------------ ------------
Total property and equipment, net 10,327,811 9,056,469
Other assets:
Deferred financing costs, net 25,361 29,165
Goodwill associated with acquisition of PTF 635,386 --
Invesment in subsidiary -- 809,773
Note receivable -- 715,422
Deferred tax assets 766,000 766,000
Other assets 298,357 110,526
------------ ------------
Total other assets 1,725,104 2,430,886
------------ ------------
TOTAL ASSETS $ 25,243,283 $ 21,438,987
============ ============
See accompanying notes
7
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of January 31, 2000 and October 31, 1999
January 31, 2000 October 31, 1999
(Unaudited) (See note)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,398,386 $ 2,980,500
Line of credit 4,016,316 3,574,023
Notes payable - current portion 956,916 1,367,070
Accrued liabilities 3,357,883 1,399,689
------------ ------------
Total current liabiliites 13,729,501 9,321,282
Long-term liabilities:
Other liabilities 92,107 15,928
Notes payable 4,090,803 5,534,876
Subordinated debt 835,000 865,000
------------ ------------
Total long-term liabilities 5,017,910 6,415,804
Redeemable common stock 413,406 413,406
Minority interest 571,046 --
Stockholders' equity:
Common stock - $.195 par value,
5,000,000 shares authorized,
966,327 shares issued, 841,644
(January 31, 2000) and 870,944
(October 31, 1999) shares outstanding 188,434 188,434
Class B Common stock - $2.73 par value,
500,000 shares authorized,
366,300 shares issued and outstanding 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Retained earnings (deficit) (218,251) (481,136)
Accumulated other comprehensive earnings 36,851 14,548
Less:
Treasury stock - 124,683 (January 31, 2000)
and 95,383 (October 31, 1999) shares (575,384) (513,121)
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 5,511,420 5,288,495
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 25,243,283 $ 21,438,987
============ ============
Note: The balance sheet at October 31, 1999 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 Subsidiaries
Consolidated Statements of Operations
Quarter Ended January 31
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Net Sales $ 7,013,024 $ 4,988,302
Cost of Sales 4,756,244 3,076,803
----------- -----------
Gross profit on sales 2,256,780 1,911,499
Operating expenses:
Administrative 928,285 532,364
Selling 549,400 645,127
Advertising and marketing 332,138 477,897
----------- -----------
Total operating expenses 1,809,823 1,655,388
----------- -----------
Income from operations 446,957 256,111
Other income (expense):
Interest expense (340,775) (220,642)
Interest income 5,776 22,418
Gain on sale of assets 300,467 --
Other 27,765 15,792
----------- -----------
Total other expense (6,767) (182,432)
----------- -----------
Income before income taxes and minority interest 440,190 73,679
Income tax expense 179,430 13,267
----------- -----------
Income before minority interest 260,760 60,412
Minority interest in (loss) of subsidiary (2,125) --
----------- -----------
Net income $ 262,885 $ 60,412
=========== ===========
Income applicable to common shares $ 262,885 $ 60,412
=========== ===========
Basic income per common and
common equivalent shares $ 0.22 $ 0.05
=========== ===========
Diluted income per common and
common equivalent shares $ 0.21 $ 0.05
=========== ===========
Weighted average number of shares and
equivalent shares of common stock outstanding:
Basic 1,217,681 1,278,244
=========== ===========
Diluted 1,251,377 1,320,332
=========== ===========
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<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the quarter ended January 31
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 262,885 $ 60,412
Adjustment to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 396,924 317,349
Equity in loss of subsidiary and joint venture -- 3,467
Minority interest in loss of subsidiary (2,125) --
Gain on sale of fixed assets (300,467) --
Provision for losses on accounts receivable & inventory 49,143 99,116
Change in assets and liabilities:
Accounts receivable (2,301,194) (801,030)
Inventory (205,576) 334,500
Other assets 543,266 (66,329)
Accounts payable and accrued expenses 1,258,556 694,736
----------- -----------
Net cash provided by (used in) operating activities (298,588) 642,221
Cash flows from investing activities:
Proceeds from sale of property and equipment 1,841,984 --
Purchases of property and equipment (232,388) (1,340,193)
Investment in and advances to PTF -- (14,240)
Cash acquired in acquisition of PTF 54,029 --
----------- -----------
Net cash provided by (used in) investing acitivites 1,663,625 (1,354,433)
Cash flows from financing activities:
Advances on line of credit 4,700,720 4,215,000
Repayments on line of credit (4,258,427) (3,992,141)
Proceeds from issuance of long-term debt -- 695,367
Repayment of long-term debt (1,474,227) (120,668)
Repayment of short-term debt (380,000) --
Repayment of subordinated debt (30,000) --
Purchase of treasury stock (62,263) --
----------- -----------
Net cash provided by (used in) financing activities (1,504,197) 797,558
Effect of exchange rate changes on cash (43,511) (3,404)
----------- -----------
Net increase (decrease) in cash (182,671) 81,942
Cash and Equivalents at Beginning of Period 336,832 235,333
----------- -----------
Cash and Equivalents at End of Period $ 154,161 $ 317,275
=========== ===========
</TABLE>
See accompanying notes
10
<PAGE>
January 31, 2000
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,
2000 are not necessarily indicative of the results that may be expected for the
year ended October 31, 2000. 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,
1999.
Note 2 - Stock Split
On November 4, 1999, a one-for-three reverse stock split became effective. As a
result of the reverse stock split, every three shares of the Company's Common
Stock were reclassified and changed into one share of the Company's Common Stock
with a new par value of $.195 per share, and every three shares of the Company's
Class B Common Stock were reclassified and changed into one share of the
Company's Class B Common Stock, with a new par value of $2.73 per share.
Note 3 -- Warrants Issued
In November 1999, warrants issued in 1997 to purchase up to 76,388 shares of the
Company's Common Stock for $9.36 were cancelled. New warrants to purchase up to
423,579 shares of the Company's Common Stock at $1.688 were issued. The new
warrants expire on November 9, 2004.
Note 4 -- Acquisition of majority interest in PTF
On November 12, 1999, the Company entered into an agreement to acquire
additional shares of PTF Industrias S.A. de C.V., bringing the Company's Common
Stock ownership to approximately 74%. The Company contributed to the capital of
PTF certain outstanding indebtedness of PTF to the Company in the amount of
989,400, and certain equipment valued at $855,600, in exchange for capital stock
of PTF. The acquisition resulted in the recording of goodwill in the amount of
$621,395, which is being amortized over a period of 15 years.
Note 5 - 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, 2000 and 1999 was computed
as follows:
11
<PAGE>
CTI Industries Corporation and Subsidiaries
Quarter Ended January 31
2000 1999
---------- ----------
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,217,681 1,278,244
========== ==========
Net income:
Net income $ 262,885 $ 60,412
Amount for per share computation $ 262,885 $ 60,412
========== ==========
Per share amount $ 0.22 $ 0.05
========== ==========
Diluted Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,217,681 1,278,244
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock 33,696 42,088
---------- ----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 1,251,377 1,320,332
========== ==========
Net income:
Net income $ 262,885 $ 60,412
Amount for per share computation $ 262,885 $ 60,412
========== ==========
Per share amount $ 0.21 $ 0.05
========== ==========
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Corporation
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<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<EXCHANGE-RATE> 1.000
<CASH> 154
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