FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from November 1, 1999 to December 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)
October 31, 1999
(Former name, former address and former fiscal year,
if changed since last report)
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 December 31,
1999.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(check one)
Yes _______ No ___X___
<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. Consolidated Balance Sheet as of October 31, 1999, and consolidated
Balance Sheet as of December 31, 1999.
2. Consolidated Statements of Operations for the two months ended
December 31, 1999 and December 31, 1998.
3. Consolidated Statements of Cash Flows for the two months ended
December 31, 1999 and December 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. A review of the financial statements attached to this Form 10-QSB 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 two months ended December 31, 1999, net sales were
$3,906,000, as compared to sales of $3,151,000 for the two months ended December
31, 1998, an increase of 24.0%. Sales increased over all product lines - mylar
balloons, latex balloons and laminated and printed films. Net sales grew over
$700,000 in the laminations and printed films product line, and latex balloon
sales increased through the acquisition of PTF Industrias, S.A. de C.V. ("PTF").
Cost of Sales. For the two months ended December 31, 1999, cost of sales
increased to 68.3% of net sales as compared to 62.1% of net sales for the same
period in 1998. 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 two months ended December 31, 1999, administrative
expenses were $646,000 or 16.5% of sales as compared to $353,000, or 11.2% of
sales for the same period in 1998. 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 fiscal year. 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.
2
<PAGE>
Selling. For the two months ended December 31, 1999, selling expenses were
$343,000 or 8.8% of sales, as compared to $426,0000, or 13.5% of net sales for
the same period in 1998. The decline in selling expense dollars is primarily
related to the re-negotiation of certain licensing agreements, reducing royalty
expenses in the current year.
Advertising and Marketing. For the two months ended December 31, 1999,
advertising and marketing expenses were $225,000 or 5.8% of net sales, as
compared to $325,000 or 10.3% of net sales, in the same period 1998. 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 $231,000 for the two
months ended December 31, 1999, as compared to $148,000 for the two months ended
December 31, 1998. The increase was primarily due to the consolidation of PTF,
whose interest expense totaled $80,000 for the two month period in 1999. During
the two months ended December 31, 1999, the Company sold its building located
next to its headquarters in Barrington, Illinois for a gain of $300,000, and
entered into an agreement to lease back the facility.
Net Income or Loss. For the two months ended December 31, 1999, the Company
had income before taxes and minority interest of $126,000, as compared to a loss
before taxes of $30,000 for the same two month period in 1998. The provision for
income taxes for the two month period ended December 31, 1999, was $50,000,
resulting in net income of $90,000. The tax benefit for the two month period
ended December 31, 1998 was $18,000, resulting in a net loss of $12,000.
Financial Condition
Liquidity and Capital Resources. Cash flow used in operations during the
two months ended December 31, 1999, was $400,000, which was due to increasing
accounts receivable and inventory levels driven by increasing sales volume.
During the two months ended December 31, 1998, cash flows provided by operations
was $163,000, mainly as a result of non-cash depreciation expense and lower
inventory levels.
Investment Activities. During the two months ended December 31, 1999, cash
flow provided by investing activities was $1,763,000. 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 $133,000 for
the two months ended December 31, 1999. In the two months ended December 31,
1998, $910,000 was used in investing activities, primarily for the purchase of
machinery and equipment.
Financing Activities. For the two months ended December 31, 1999, the
Company used $1,589,000 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 two months ended December 31, 1998, was
$776,000 resulting from the proceeds of long-term debt and use of the short-term
revolving line of credit.
3
<PAGE>
At December 31, 1999, the Company had a cash balance of $132,000. 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 December 31,
1999, the Company had working capital of ($720,000), and at October 31, 1999,
working capital was $630,000.
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) 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. 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
4
<PAGE>
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
On October 25, 1999, the Company solicited the written consent of its
Common and Class B Common stockholders with respect to the approval of a
one-for-three reverse split of the Company's $.065 Common and $.91 par value
Class B Common Stock, whereby every three shares of the Company's Common stock
would be 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 would be reclassified and changed into one share of the
Company's Class B Common Stock, with a new par value of $2.73 per share. The
written consents of the Common and Class B Common shareholders of record as of
the close of business on October 20, 1999, were solicited in lieu of a special
meeting pursuant to Section 228 of Delaware General Corporation Law. The
requisite notice of solicitation and definitive proxy materials were mailed to
said stockholders and filed with the Securities Exchange Commission on October
25, 1999.
On October 20, 1999, there were 2,635,831 shares of the Company's Common
Stock, and 1,098,901 shares of the Company's Class B Common Stock issued and
outstanding. A total of 2,445,729 shares of Common stock were voted; of these
2,409,739 shares of Common Stock were voted in favor of the proposed 1-for-3
reverse
5
<PAGE>
stock split, while 33,790 shares were voted against the proposed 1-for-3 reverse
stock split. 2,200 of the 2,445,729 shares of voted Common Stock were
abstentions. A total of 989,011 shares of Class B Common Stock were voted, all
in favor of the proposed 1 for 3 reverse stock split. Thus, of the 3,734,732
combined shares of Common and Class B Common Stock eligible to vote with respect
to the proposed reverse stock split, 3,434,740 total shares were voted, and of
these shares, 3,398,750 (or approximately 91% of the shares eligible to vote)
voted in favor of the proposed 1-for-3 reverse stock split, 33,790 (or less than
1% of the shares eligible to vote) voted against the proposed 1 for 3 reverse
stock split, and there were 2,200 abstentions.
The reverse stock split became effective at the close of business (Eastern
Time) on November 4, 1999.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits *
*Incorporated by reference are the Exhibits filed as part of the
Registrant's SB-2 Registration Statement, effective November 5, 1997, and
subsequent periodic filings.
(b) Reports on Form 8-K:
(i) Form 8-K filed November 5, 1999, reporting the effectuation of a
1 for 3 reverse split of the Company's $.065 par value Common
Stock and $.91 par value Class B Common Stock, effective at the
close of business (Eastern Time) on November 4, 1999.
(ii) Form 8-K filed November 30, 1999, reporting the Company's
acquisition of PTF Industrias, S.A. de C.V., (a Guadalajara,
Mexico manufacturer of latex balloons) effective November 12,
1999.
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: November 21, 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 October 31, 1999 and December 31, 1999
<TABLE>
<CAPTION>
October 31, 1999 December 31, 1999
(See note) (Unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 336,832 $ 131,858
Accounts receivable (less allowance for doubtful accounts of
$186,251 and $227,638 at October 31, 1999 and December 31, 1999) 3,225,802 4,383,473
Inventories 5,425,769 6,647,353
Deferred tax assets 208,926 208,926
Other 754,303 618,242
------------ ------------
Total current assets 9,951,632 11,989,852
Property and equipment:
Machinery and equipment 9,752,302 12,949,429
Building 3,643,675 2,363,744
Office furniture and equipment 1,588,382 1,588,719
Land 535,000 250,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 2,031,919 2,031,919
Projects under construction 391,719 321,930
------------ ------------
18,104,882 19,667,626
Less : accumulated depreciation (9,048,413) (9,227,243)
------------ ------------
Total property and equipment, net 9,056,469 10,440,383
Other assets:
Deferred financing costs, net 29,165 26,629
Goodwill associated with acquisition of PTF -- 590,188
Invesment in subsidiary 809,773 (0)
Note receivable 715,422 --
Deferred tax assets 766,000 766,000
Other assets 110,526 309,876
------------ ------------
Total other assets 2,430,886 1,692,693
------------ ------------
TOTAL ASSETS $ 21,438,987 $ 24,122,928
============ ============
</TABLE>
See accompanying notes
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of October 31, 1999 and December 31, 1999
<TABLE>
<CAPTION>
October 31, 1999 December 31, 1999
(See note) (Unaudited)
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,980,500 $ 5,787,196
Line of credit 3,574,023 3,849,203
Notes payable - current portion 1,367,070 957,469
Accrued liabilities 1,399,689 2,115,640
------------ ------------
Total current liabiliites 9,321,282 12,709,508
Long-term liabilities:
Other liabilities 15,928 93,256
Notes payable 5,534,876 4,167,828
Subordinated debt 865,000 840,000
------------ ------------
Total long-term liabilities 6,415,804 5,101,084
Redeemable common stock 413,406 413,406
Minority interest -- 561,411
Stockholders' equity:
Common stock - $.195 par value, 5,000,000 shares authorized,
966,327 shares issued, 870,944 (October 31, 1999) and
841,644 (December 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) (481,136) (391,206)
Accumulated other comprehensive earnings 14,548 35,905
Less:
Treasury stock - 95,383 (October 31, 1999) and
124,683 (December 31, 1999) shares (513,121) (575,384)
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 5,288,495 5,337,519
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 21,438,987 $ 24,122,928
============ ============
</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>
Two months ended December 31
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net Sales $ 3,905,896 $ 3,151,192
Cost of Sales 2,667,907 1,956,365
----------- -----------
Gross profit on sales 1,237,989 1,194,827
Operating expenses:
Administrative 645,592 353,422
Selling 342,957 425,615
Advertising and marketing 224,663 324,662
----------- -----------
Total operating expenses 1,213,212 1,103,699
----------- -----------
Income from operations 24,777 91,128
Other income (expense):
Interest expense (230,605) (147,616)
Interest income 5,448 14,010
Gain on sale of assets 300,467 --
Other 28,467 12,191
----------- -----------
Total other income (expense) 103,777 (121,415)
----------- -----------
Income (loss) before income taxes and minority interest 128,554 (30,287)
Income tax expense (benefit) 50,383 (18,093)
----------- -----------
Income (loss) before minority interest 78,171 (12,194)
Minority interest in (loss) of subsidiary (11,759) --
----------- -----------
Net income (loss) $ 89,930 $ (12,194)
=========== ===========
Income (loss) applicable to common shares $ 89,930 $ (12,194)
=========== ===========
Basic income (loss) per common and common equivalent shares $ 0.07 $ (0.01)
=========== ===========
Diluted income (loss) per common and common equivalent shares $ 0.07 $ (0.01)
=========== ===========
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,222,549 1,278,244
=========== ===========
Diluted 1,257,397 1,322,285
=========== ===========
</TABLE>
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the two months ended December 31
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 89,930 $ (12,194)
Adjustment to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 264,616 208,041
Equity in loss of subsidiary and joint venture -- 3,467
Minority interest in loss of subsidiary (11,759) --
Gain on sale of fixed assets (300,467) --
Provision for losses on accounts receivable & inventory 32,760 66,084
Change in assets and liabilities:
Accounts receivable (524,106) (517,110)
Inventory (732,686) 120,827
Other assets (113,312) 57,190
Accounts payable and accrued expenses 894,902 236,292
----------- -----------
Net cash provided by (used in) operating activities (400,122) 162,597
Cash flows from investing activities:
Proceeds from sale of property and equipment 1,841,984 --
Purchases of property and equipment (133,490) (909,914)
Cash acquired in acquisition of PTF 54,029 --
----------- -----------
Net cash provided by (used in) investing acitivites 1,762,523 (909,914)
Cash flows from financing activities:
Net change in line of credit 275,180 161,054
Proceeds from issuance of long-term debt -- 695,366
Repayment of long-term debt (1,396,649) (80,578)
Repayment of short-term debt (380,000) --
Repayment of subordinated debt (25,000) --
Purchase of treasury stock (62,263) --
----------- -----------
Net cash provided by (used in) financing activities (1,588,732) 775,842
Effect of exchange rate changes on cash 21,357 50,937
----------- -----------
Net increase (decrease) in cash (204,974) 79,462
Cash and Equivalents at Beginning of Period 336,832 235,333
----------- -----------
Cash and Equivalents at End of Period $ 131,858 $ 314,795
=========== ===========
</TABLE>
See accompanying notes
<PAGE>
December 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America 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 any interim period
are not necessarily indicative of the results to be expected for the full fiscal
year. 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.
On October 13, 2000, the Board of Directors of CTI Industries Corporation
elected to change its fiscal year end from October 31 to December 31.
Accordingly, the unaudited consolidated financial statements are presented for
the transition period from November 1, 1999 through December 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 December 31, 1999 and 1998 was computed
as follows:
<PAGE>
CTI Industries Corporation and Subsidiaries
Two months ended December 31
1999 1998
----------- -----------
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,222,549 1,278,244
=========== ===========
Net income:
Net income $ 89,930 $ (12,194)
Amount for per share computation $ 89,930 $ (12,194)
=========== ===========
Per share amount $ 0.07 $ (0.01)
=========== ===========
Diluted
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,222,549 1,278,244
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock 34,848 --
----------- -----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 1,257,397 1,320,332
=========== ===========
Net income:
Net income $ 89,930 $ (12,194)
Amount for per share computation $ 89,930 $ (12,194)
=========== ===========
Per share amount $ 0.07 $ (0.01)
=========== ===========
