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, 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, 841,644 outstanding Shares and CLASS B
COMMON STOCK, $2.73 par value, 366,300 outstanding Shares, as of July 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 July 31, 2000 and Balance Sheet as of
October 31, 1999.
2. Interim Statements of Operations for the three and nine month periods
ending July 31, 2000, and July 31, 1999.
3. Interim Statements of Cash Flows for the nine month periods ending
July 31, 2000 and July 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. A quarterly review of the third quarter financial statements has not
been performed by an independent certified public accountant in accordance with
Statement of Auditing Standards No. 71.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations
Net Sales. For the fiscal quarter ended July 31, 2000, net sales were
$4,966,000, as compared to sales of $3,899,000 for the third quarter of 1999, an
increase of 27.4%. Net sales for the first nine months of fiscal 2000 increased
34.0% to $18,430,000 compared to sales of $13,750,000 for the same period in
1999. Sales increased over all product lines - mylar balloons, latex balloons
and laminated and printed films. Net sales in the laminations and printed films
product line increased 54.3% in the first nine months of 2000 as compared to the
first nine months of fiscal 1999. Latex balloons sales also increased due to the
acquisition of a majority equity interest in, and resulting consolidation of,
CTI Mexico Corporation, S.A. de C.V. ("CTI Mexico"), a manufacturer of latex
balloons.
Cost of Sales. For the fiscal quarter ended July 31, 2000, cost of sales
decreased to 71.4% of net sales as compared to 80.9% of net sales in the third
fiscal quarter of 1999. The decrease was a result of higher units of production
and increased gross margins in domestic operations. Cost of goods sold was 68.9%
of net sales for the first nine months of fiscal 2000, as compared to 71.5% for
the same period of 1999.
Administrative. For the fiscal quarter ended July 31, 2000, administrative
expenses were $809,000 or 16.3% of sales as compared to $565,000, or 14.5% of
sales for the third fiscal quarter of 1999. For the first nine months of fiscal
2000, administrative expenses were $2,599,000 or 14.1% of sales as compared to
$1,654,000, or 12.0% of sales for the same period of 1999. The primary increase
in administrative
2
<PAGE>
expenses for both the third quarter 2000 and first nine months of 2000 came from
the acquisition of CTI Mexico and the subsequent consolidation of administrative
expenses. Domestically, administrative expenses increased due to costs
associated with the reverse stock split, and consulting fees incurred in a
corporate wide project to improve cost accounting procedures.
Selling. For the fiscal quarter ended July 31, 2000, selling expenses were
$448,000 or 9.0% of sales, as compared to $600,000, or 15.4% of net sales for
the third fiscal quarter of 1999. For the first nine months of fiscal 2000,
selling expenses were $1,520,000 or 8.2% of sales as compared to $1,902,000, or
13.8% of net sales for the same period of 1999. The decline in selling expense
dollars is primarily related to the re-negotiation of certain licensing
agreements, reducing royalty expenses.
Advertising and Marketing. For the fiscal quarter ended July 31, 2000,
advertising and marketing expenses were $299,000 or 6.0% of net sales as
compared to $331,000 or 8.5% of net sales in the third fiscal quarter of 1999.
For the first nine months of fiscal 2000, advertising and marketing expenses
were $953,000 or 5.2% of sales as compared to $1,209,000, or 8.8% of net sales
for the same period of 1999. The decrease in advertising and marketing expense
dollars came from several items, 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 $304,000 for the
quarter ended July 31, 2000, as compared to $249,000 for the third fiscal
quarter of 1999. Interest expense increased to $969,000 for the nine months
ended July 31, 2000, as compared to $684,000 for the first nine months of 1999.
The increases were primarily due to the consolidation of CTI Mexico, whose
interest expense totaled $56,000 for the third quarter 2000, and $262,000 for
the first nine months of 2000. During the quarter ended January 31, 2000, the
Company sold its building located next to its headquarters in Barrington,
Illinois and entered into an agreement to lease back the facility.
Net Income or Loss. For the fiscal quarter ended July 31, 2000, the Company
had a loss before taxes and minority interest of $437,000 as compared to a loss
before taxes of $894,000 for the third fiscal quarter of 1999. The income tax
benefit for the third quarter of fiscal 2000 was $163,000, resulting in a net
loss of $265,000. The income tax benefit for the third quarter of fiscal 1999
was $436,000, resulting in a net loss of $457,000. For the nine months ended
July 31, 2000, net income was $23,000 as compared to a net loss of $792,000 for
the first nine months of fiscal 1999.
Financial Condition
Liquidity and Capital Resources. Cash flow provided by operations during
the nine months ended July 31, 2000 was $746,000, which was affected by
increases in accounts payable, accounts receivable and inventory. During the
first nine months of 1999, cash flows provided by operations was $1,955,000,
primarily the result of a decreasing inventory level.
Investment Activities. During the nine months ended July 31, 2000, cash
flow provided by investing activities was $1,365,000. The cash inflow was
provided by the
3
<PAGE>
proceeds from the sale of the building located next to the Company's
headquarters. Investments in machinery and equipment were $531,000 for the first
nine months of 2000. In the first nine months of 1999, $2,052,000 was used in
investing activities, primarily for the purchase of machinery and equipment.
Financing Activities. For the nine months ended July 31, 2000, the Company
used $2,134,000 in financing activities, primarily to pay off the long-term
mortgage loan that existed on the building which was sold. For the nine months
ended July 31, 1999, the Company generated $283,000 in financing activities,
mainly as a result of proceeds from the issuance of long-term debt.
At July 31, 2000, the Company maintained a cash balance of $308,000. 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 July 31,
2000, the Company had working capital of ($965,000), and at October 31, 1999,
working capital was $630,000. The reduction in working capital resulted
primarily from the consolidation of accounts with CTI Mexico.
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) 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 2000 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.
4
<PAGE>
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.
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.
5
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) 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.
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: September __, 2000 CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
-----------------------------------
Howard W. Schwan, President
7
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of July 31, 2000 and October 31, 1999
<TABLE>
<CAPTION>
July 31, 2000 October 31, 1999
(Unaudited) (See note)
------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 308,050 $ 336,832
Accounts receivable (less allowance for
doubtful accounts of $277,125. and $186,251
at July 31, 2000 and October 31, 1999) 4,267,724 3,225,802
Inventories 6,740,947 5,425,769
Deferred tax assets 208,926 208,926
Other 579,638 754,303
------------ ------------
Total current assets 12,105,285 9,951,632
Property and equipment:
Machinery and equipment 13,232,937 9,752,302
Building 2,369,069 3,643,675
Office furniture and equipment 1,607,429 1,588,382
Land 250,000 535,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 2,080,852 2,031,919
Projects under construction 306,062 391,719
------------ ------------
20,008,234 18,104,882
Less : accumulated depreciation (10,122,527) (9,048,413)
------------ ------------
Total property and equipment, net 9,885,707 9,056,469
Other assets:
Deferred financing costs, net 17,752 29,165
Goodwill associated with acquisition of CTI Mexico 712,464 --
Invesment in subsidiary -- 809,773
Note receivable -- 715,422
Deferred tax assets 766,000 766,000
Other assets 307,193 110,526
------------ ------------
Total other assets 1,803,409 2,430,886
------------ ------------
TOTAL ASSETS $ 23,794,401 $ 21,438,987
============ ============
</TABLE>
See accompanying notes
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of July 31, 2000 and October 31, 1999
<TABLE>
<CAPTION>
July 31, 2000 October 31, 1999
(Unaudited) (See note)
------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,025,244 $ 2,980,500
Line of credit 3,785,731 3,574,023
Notes payable - current portion 1,205,811 1,367,070
Accrued liabilities 3,053,443 1,399,689
------------ ------------
Total current liabiliites 13,070,229 9,321,282
Long-term liabilities:
Other liabilities 115,735 15,928
Notes payable 3,612,555 5,534,876
Subordinated debt 775,000 865,000
------------ ------------
Total long-term liabilities 4,503,290 6,415,804
Redeemable common stock -- 413,406
Minority interest 564,472 --
Stockholders' equity:
Common stock - $.195 par value, 5,000,000 shares
authorized, 966,327 shares issued, 841,644 (July 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) (457,856) (481,136)
Accumulated other comprehensive earnings 8,040 14,548
Less:
Treasury stock -- 124,683 (July 31, 2000) and 95,383
(October 31, 1999) shares (575,384) (513,121)
Redeemable common stock -- (413,406)
Stock subscription receivable (4,700) (4,700)
Notes receivable from stockholders (56,456) (56,456)
------------ ------------
Total stockholders' equity 5,656,410 5,288,495
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 23,794,401 $ 21,438,987
============ ============
</TABLE>
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
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Quarter Ended July 31 Year to Date July 31
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 4,966,109 $ 3,899,451 $ 18,430,064 $ 13,749,733
Cost of Sales 3,546,458 3,155,029 12,705,839 9,836,235
------------ ------------ ------------ ------------
Gross profit on sales 1,419,651 744,422 5,724,225 3,913,498
Operating expenses:
Administrative 808,916 565,367 2,598,741 1,654,426
Selling 448,323 600,065 1,520,234 1,901,549
Advertising and marketing 298,688 331,288 952,666 1,208,867
------------ ------------ ------------ ------------
Total operating expenses 1,555,927 1,496,720 5,071,641 4,764,842
------------ ------------ ------------ ------------
Income (loss) from operations (136,276) (752,298) 652,584 (851,344)
Other income (expense):
Interest expense (304,286) (248,603) (969,282) (683,560)
Interest income 1,815 20,752 10,452 66,177
Gain on sale of assets -- -- 300,467 --
Other 1,781 86,472 50,432 169,548
------------ ------------ ------------ ------------
Total other income (expense) (300,690) (141,379) (607,931) (447,835)
------------ ------------ ------------ ------------
Income (loss) before income taxes and minority interest (436,966) (893,677) 44,653 (1,299,179)
Income tax expense (benefit) (163,267) (436,298) 18,602 (506,860)
------------ ------------ ------------ ------------
Income (loss) before minority interest (273,699) (457,379) 26,051 (792,319)
Minority interest in profit (loss) of subsidiary (8,355) -- 2,771 --
------------ ------------ ------------ ------------
Net income (loss) $ (265,344) $ (457,379) $ 23,280 $ (792,319)
============ ============ ============ ============
Income (loss) applicable to common shares $ (265,344) $ (457,379) $ 23,280 $ (792,319)
============ ============ ============ ============
Basic income (loss) per common and common equivalent shares $ (0.22) $ (0.36) $ 0.02 $ (0.62)
============ ============ ============ ============
Diluted income (loss) per common and common equivalent shares $ (0.22) $ (0.36) $ 0.02 $ (0.62)
============ ============ ============ ============
Weighted average number of shares and equivalent shares of
common stock outstanding:
Basic 1,207,944 1,273,614 1,211,190 1,276,666
============ ============ ============ ============
Diluted 1,207,944 1,273,614 1,290,466 1,276,666
============ ============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the nine months ended July 31
2000 1999
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 23,280 $ (792,319)
Adjustment to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 1,201,869 1,029,620
Equity in loss of subsidiary and joint venture -- 4,970
Minority interest in profit of subsidiary 2,771 --
Gain on sale of fixed assets (300,467) --
Provision for losses on accounts receivable & inventory 168,055 205,589
Change in assets and liabilities:
Accounts receivable (468,405) 286,855
Inventory (901,526) 1,560,887
Other assets (228,360) (402,309)
Accounts payable and accrued expenses 1,249,251 61,251
------------ ------------
Net cash provided by operating activities 746,468 1,954,544
Cash flows from investing activities:
Proceeds from sale of property and equipment 1,841,984 --
Purchases of property and equipment (531,073) (1,932,811)
Investment in and advances to PTF -- (45,515)
Acquisition of CTF International -- (74,024)
Cash acquired in acquisition of PTF 54,029 --
------------ ------------
Net cash provided by (used in) investing acitivites 1,364,940 (2,052,350)
Cash flows from financing activities:
Advances on line of credit 15,144,295 13,090,000
Repayments on line of credit (14,932,587) (13,906,856)
Proceeds from issuance of long-term debt -- 1,187,281
Proceeds from issuance of short-term debt 250,000 570,000
Repayment of long-term debt (1,953,580) (617,600)
Repayment of short-term debt (380,000) --
Repayment of subordinated debt (90,000) --
Purchase of treasury stock (62,263) (39,693)
Purchase additional shares in CTI Mexico from minority (109,547) --
------------ ------------
Net cash provided by (used in) financing activities (2,133,682) 283,132
Effect of exchange rate changes on cash (6,508) (16,214)
------------ ------------
Net increase (decrease) in cash (28,782) 169,112
Cash and Equivalents at Beginning of Period 336,832 235,333
------------ ------------
Cash and Equivalents at End of Period $ 308,050 $ 404,445
============ ============
</TABLE>
See accompanying notes
<PAGE>
July 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 nine-month period ended July 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 CTI Mexico
On November 12, 1999, the Company entered into an agreement to acquire
additional shares of CTI Mexico Corporation, S.A. de C.V. ("CTI Mexico"),
bringing the Company's Common Stock ownership to approximately 74%. The Company
contributed to the capital of CTI Mexico certain outstanding indebtedness of CTI
Mexico to the Company in the amount of 989,400, and certain equipment valued at
$855,600, in exchange for capital stock of CTI Mexico. The acquisition resulted
in the recording of goodwill in the amount of $621,395, which is being amortized
over a period of 15 years. On March 8, 2000, the Company acquired an additional
2% interest in CTI Mexico. The new shares were purchased for $85,652 in cash,
resulting in $98,076 of additional goodwill.
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 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, 2000 and 1999 was computed as
follows:
<PAGE>
CTI Industries Corporation and Subsidiaries
<TABLE>
<CAPTION>
Quarter Ended July 31 Year to Date July 31
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,207,944 1,273,614 1,211,190 1,276,666
=========== =========== =========== ===========
Net income:
Net income (loss) $ (265,344) $ (457,379) $ 23,280 $ (792,319)
Amount for per share computation $ (265,344) $ (457,379) $ 23,280 $ (792,319)
=========== =========== =========== ===========
Per share amount $ (0.22) $ (0.36) $ 0.02 $ (0.62)
=========== =========== =========== ===========
Diluted Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,207,944 1,273,614 1,211,190 1,276,666
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock -- -- 79,276 --
----------- ----------- ----------- -----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 1,207,944 1,273,614 1,290,466 1,276,666
=========== =========== =========== ===========
Net income:
Net income (loss) $ (265,344) $ (457,379) $ 23,280 $ (792,319)
Amount for per share computation $ (265,344) $ (457,379) $ 23,280 $ (792,319)
=========== =========== =========== ===========
Per share amount $ (0.22) $ (0.36) $ 0.02 $ (0.62)
=========== =========== =========== ===========
</TABLE>
