SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1999
Commission File Number
000-23115
CTI INDUSTRIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2848943
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22160 North Pepper Road
Barrington, Illinois 60010
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(Address of principal executive offices) (Zip Code)
(847) 382-1000
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Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
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Common Stock, .195 par value NASDAQ SmallCap Market
Check whether the Registrant (1) 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 (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
|X| Yes |_| No
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-KSB or any amendment to the Form 10-KSB.
|_|
The Registrant's revenues for the fiscal year ended October 31, 1999,
were $18,606,000
Based upon the closing price of $1.750 per share of Registrant's Common
Stock as reported on NASDAQ SmallCap Market at January 20, 2000, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
then approximately $1,406,496. (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose).
The number of shares of the Registrant's Common Stock outstanding as of
January 20, 2000 was 878,610 (excluding treasury shares) and the number of
shares of Class B Common Stock outstanding as of that date was 366,300.
Transitional Small Business Disclosure Format (check one):
|_| Yes |X| No
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PART I
Item No. 1 Description of Business
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Background.
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CTI Industries Corporation (the "Company") was incorporated as
Container Merger Company, Inc. under the laws of the State of Delaware on
October 14, 1983, and changed its name to CTI Industries Corporation on August
2, 1985. A predecessor company, Creative Technology, Inc., was organized as an
Illinois corporation on December 9, 1975 and was merged into the Company in
February, 1984. CTI Balloons Ltd. ("CTI Balloons"), the Company's wholly-owned
subsidiary, was organized as a corporation under the laws of the United Kingdom
on October 2, 1996. On October 24, 1996, the Company entered into an agreement
with CTI Balloons pursuant to which all of the assets and liabilities of the
Company in its branch operation in the United Kingdom were sold and transferred
to CTI Balloons and all of the capital stock of CTI Balloons was issued and
delivered to the Company. Unless otherwise specified, all references herein to
the Company shall refer to the Company, its predecessor Creative Technology,
Inc. and its wholly-owned subsidiary, CTI Balloons.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 366,300 shares of
Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled to
an annual cumulative dividend of 13% of the purchase price, and was convertible
into one share of Common Stock. The shares of Preferred Stock, voting separately
as a class, were entitled to elect four of the Company's directors. Members of
such investment group included Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, current members of management.
In July, 1997, the Company effected a recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock, approved a 1 for 2.6 reverse stock split on both the Common Stock and
Preferred Stock, and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 366,300 shares of
Class B Common Stock. The conversion was effective upon the closing of an
initial public offering of 575,000 shares of the Company's Common Stock on
November 5, 1997. The shares of Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, vote on all other matters, including the election of the remaining
directors. The recapitalization, initial public offering and related
transactions were approved by written consent of the shareholders.
On October 15, 1999, the Company's Board of Directors approved a 1 for
3 reverse split of the Company's Common Stock and Class B Common Stock. The 1
for 3 reverse stock split became effective at the close of business on November
4, 1999, upon the approval and consent of a majority of Common and Class B
Common Stockholders voting together as a single class. As a result of the
reverse stock split, every three shares of the Company's Common Stock were
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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. Except as otherwise
indicated, share figures in this document have been restated to reflect the
stock splits described above.
Business Overview
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The Company manufactures, markets and sells metalized ("mylar")
balloons, latex balloons and latex toy products and produces laminated and
specialty films for food packaging and other commercial uses. The Company's
mylar and latex balloon products are sold throughout the United States and in 30
foreign countries through a wide variety of retail outlets including grocery,
general merchandise and drugstore chains, grocery chains, card and gift shops,
and party goods stores, as well as through florists and balloon decorators.
The mylar balloon, actually a balloon made of a nylon based material
with metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(R) characters, Garfield(R), Precious Moments(R)
and Hallmark.
To meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
applications. The Company's expertise in multi-color printing using water-based
ink, in particular, has enabled the Company to expand its business to include
the production of film wrappers for consumables. The Company produces, laminates
and prints films for food packaging companies and provides custom film products
for other commercial uses.
The Company is a fully integrated designer and manufacturer of its
mylar balloon product line. The Company recently became the owner of a majority
interest of a Mexican manufacturer of latex balloons. The Company thus has a
competitive source of supply of quality latex balloon products which it markets
with its mylar balloon line. The Company has also recently become the owner of
all of the outstanding shares of capital stock in another Mexican corporation
engaged in the packaging of balloon products and the printing of latex balloons.
The Industry
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The mylar balloon came into existence in the late 1970s. During the
1980s, the market for mylar balloons grew rapidly. Initially, the product was
sold principally to individual vendors, small retail outlets and at fairs,
amusement parks, shopping centers and other outdoor facilities and functions.
Because of its ability to remain buoyant for a long period of time when filled
with helium and its facility for the printing of graphics and messages, the
product has significant appeal as a novelty and message item. Mylar balloons
became part of the "social expression" industry, carrying graphics designs,
characters and messages like greeting cards. In the mid-1980s, the Company and
other participants in the market began licensing character and
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cartoon images for printing on the balloons and directed marketing of the
balloons to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators.
Mylar balloons are sold in the United States and in Europe, several
countries in the Far East, Canada and to an increasing extent in Latin America.
The United States, however, is by far the largest market for these products.
There are presently at least seven manufacturers of mylar balloons
whose products are sold in the United States. Six of these companies maintain
their own production facilities in the United States. Several companies market
and sell mylar balloons designed by them and manufactured by others for them.
Mylar balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. Often the
sale of mylar balloons by the wholesalers/distributors is accompanied by related
products including latex balloons, floral supplies and candy containers.
Although the latex balloon market overlaps the mylar balloon market, the latex
balloon market has been in existence for a longer period than mylar balloons and
extends to more customers and market categories than mylar balloons.
There are three separate latex balloon product lines: (i) high quality
decorator balloons, (ii) standard novelty balloons and (iii) printed balloons.
The high quality decorator balloons are generally sold to and through balloon
decorators and are generally of higher quality and price than the standard line
of balloons. The standard line of balloons is sold widely in retail stores
including many of the same outlets as mylar balloons. Printed latex balloons are
sold both in retail outlets and for balloon decoration purposes including floral
designs.
There are at least seven manufacturers of latex balloons whose products
are sold in the United States.
Products
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Mylar Balloons. The mylar balloon is actually composed of a base nylon
material which is coated on one side with a metal deposit and on the other with
polyethylene. Typically, the balloon film is printed with graphic designs and
messages.
The Company manufactures over 450 balloon designs, in different shapes
and sizes, including the following:
o Superloons(R) are 18" balloons in round or heart shape,
generally made to be filled with helium and remain buoyant for
long periods. This is the predominant mylar balloon size.
o Ultraloons(R) are 34" balloons made to be filled with helium
and remain buoyant.
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o Miniloons(R) are 9" balloons made to be air-filled and sold on
holder-sticks or for use in decorations.
o Card-B-Loons(R) (4 1/2") and Pixiloons(TM) (2 1/2") are
air-filled balloons, often sold on a stick, used in floral
arrangements or with a container of candy.
o Shape-A-Loons(R) are shaped balloons made to be filled with
helium.
o Minishapes are small shaped balloons designed to be air filled
and sold on sticks as toys or inflated characters.
o Walk-abouts(R) are helium filled shaped balloons with attached
arms and legs.
o Smackers(R)are helium filled red lip-shaped balloons.
o You Name It(R) are balloons to which lettering can be attached
for a personalized message.
In addition to size and shape, a principal element of the Company's
mylar balloon products is the printed design or message contained on the
balloon. These designs include figures and licensed characters many of which are
well-known licensed characters. The Company maintains licenses for Peanuts(R),
Garfield(R), Precious Moments(R), Hallmark, Elephantz(R), Paddington(R), Postman
Pat(R), Betty Boop(R), and several others. See "Patent, Trademarks and
Copyrights" below.
Latex Balloons. The Company sells a high end line of latex balloons
under the product line name Hi-Tex(R) and a standard line of latex balloons
marketed under the name Partyloons(R). The Company also manufactures toy balloon
products including punch balls and water bombs.
Packaging Films. The Company fabricates and prints films for use in
food packaging. The Company has developed sophisticated methods for the printing
of films, including the use of water-based ink. These techniques have proven
desirable for companies engaged in packaging food products, particularly candy
and snack items, with the result that the Company now provides printed packaging
films for several food packaging companies, and intends to expand and extend
this business line.
Custom Film Products. In addition to printed films for food packaging,
the Company fabricates custom film products for various commercial and
industrial purposes. These now include "dunnage" bags (inflatable film products)
used in the packaging of goods and bags for the storage of clothing items.
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Marketing, Sales and Distribution
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The Company markets and sells its mylar balloon, latex balloon and
related novelty products throughout the United States and in over 30 foreign
countries. The Company maintains a marketing, sales staff and support staff of
12 individuals and a customer service department of 8 individuals. European
sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. Sales in other foreign countries are made generally to distributors in
those countries and are managed at the Company's principal offices.
The Company sells and distributes its products principally through a
network of over 350 distributors and wholesalers situated throughout the United
States and in a number of foreign countries. These distributors and wholesalers
are engaged principally in the sale of balloons and related products (including
such items as plush toys, mugs, containers, floral supplies and other items).
These distributors and wholesalers, in turn, sell balloons and related products
to retail outlets including grocery, general merchandise and drug store chains,
card and gift shops, party goods stores as well as florists and balloon
decorators. While the Company will continue to focus on the core U.S. market, it
will also seek to exploit other world markets such as Europe and South America.
Most sales are on an individual order basis.
The Company also sells balloons and related products to certain
national chain stores including grocery, general merchandise and drug store
chains and party goods stores. The Company's largest chain store customer is
Eckerd Drug Stores. During the 1999 fiscal year, Eckerd Drug Stores accounted
for approximately 16.2% of the Company's total sales revenues. The Company also
sells its balloons to individual retail outlets generally through coordinated
efforts with its distributors.
The Company has established independent sales representatives for the
sale of its toy/novelty line which include the standard quality latex balloon,
punch balls and water bombs. These products constitute a separate product class
requiring a different distribution network.
The Company engages in a variety of advertising and promotional
activities to promote the sale of its balloon products. Each year, the Company
produces a complete catalogue of its balloon products, and also prepares various
flyers and brochures for special or seasonal products, which are disseminated to
thousands of customers, potential customers and others. The Company participates
in numerous trade shows for the gift, novelty, balloon and other industries and
advertises in a number of trade and other publications. The Company also attends
licensing shows for the purpose of seeking out additional design licenses.
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The Company markets and sells its printed and laminated films directly
and through independent sales representatives. The Company markets these
products to companies which package their products in plastic wrapping, in
particular food products such as candies.
The Company markets its custom film products, including its "dunnage"
bags (inflatable film products) directly. During the 1999 fiscal year, a single
customer of the Company's custom film product business accounted for
approximately 14.3% of the Company's total sales revenues.
Manufacturing
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Production and Operations. At the Barrington, Illinois headquarters,
the Company owns and operates a modern facility which includes machines of its
own design and construction which fabricate mylar balloons and packaging bags.
These production systems include a patented system for the production and
insertion of valves in balloons. These machines have the capacity to manufacture
approximately 55 million 18" balloons annually.
The Company owns and operates graphic machinery at its facility in
Barrington, Illinois that is used for the printing of films for mylar balloons
and for printed and laminated films. The Company's use of water-based ink makes
its printed films attractive to food processors for the packaging of their
products. At the Barrington facility, the Company also owns and operates
laminating machines.
A new extruder machine was custom made for the Company in 1998, and
increased the Company's capacity to produce enough film to make as many as
85,000 metallized balloons per hour as opposed to previously existing equipment,
which afforded the Company the capacity to produce 12,000 metallized balloons
per hour.
The Company also maintains a graphic arts and development department
which designs its balloon products and graphics. The Creative Department
operates a networked, computerized graphic arts system for the production of
these designs and of printed materials including catalogues, advertisements and
other promotional materials.
The Barrington facility also includes a computerized customer service
department which receives and fulfills over 56,500 orders annually.
CTI Mexico. The Company's latex balloons are manufactured for it by CTI
Mexico S.A. de C.V. ("CTI Mexico"), formerly known as Pulidos et Terminados
Finos S.A. de C.V., a Guadalajara, Mexico company engaged principally in the
manufacture of latex balloons. In 1995, the Company entered into an agreement
with CTI Mexico under which (i) the Company sold to CTI Mexico all of its latex
balloon manufacturing equipment (for the manufacture of decorator balloons) and
(ii) CTI Mexico agreed for a period of 10 years to supply balloons exclusively
to the Company for the United States and Canada manufactured on such equipment
and (iii) for such 10 year period, CTI Mexico agreed to supply to the Company,
exclusively in the United States except as to two other companies, all balloons
manufactured by CTI Mexico. Commencing in 1996, CTI Mexico began manufacturing
the Company's high-end line of latex balloons exclusively for the Company for
the United States and also a standard line of latex balloons which the Company
distributes throughout the United States and in various foreign countries under
the product line name Partyloons(R).
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On January 26, 1998, the Company and CTI Mexico entered into an
agreement whereby, (i) the Company subscribed for 45% of the outstanding capital
stock of CTI Mexico for $800,000, (ii) the Company loaned to CTI Mexico
$850,000, which loan was collateralized by certain latex balloon manufacturing
equipment and (iii) the 1995 equipment purchase agreement
between the parties was cancelled with respect to two pieces of latex balloon
manufacturing equipment, which equipment was owned by CTI and leased to CTI
Mexico. The purchase of the capital stock was consummated on February 1, 1998,
and the purchase price for the capital stock was paid by (i) applying $400,000
of advances made to CTI Mexico prior to closing and (ii) a cash payment for the
balance. The $400,000 debt owing to the Company from the 1995 acquisition was
extinguished as a result of the cancellation of the sale of the two pieces of
equipment to CTI Mexico.
In November, 1999, the Company acquired additional shares of capital
stock of CTI Mexico and now owns approximately 72% of CTI Mexico's outstanding
capital stock. The transaction was concluded through an agreement with a
principal shareholder of CTI Mexico and by approval of the requisite number of
CTI Mexico shareholders at a shareholders' meeting held on November 12, 1999. In
the transaction, the Company allowed CTI Mexico to capitalize certain of CTI
Mexico's outstanding indebtedness to the Company, amounting to approximately
$975,000, together with certain equipment with a total value of approximately
$745,000, both in exchange for capital stock of CTI Mexico. In addition, the
Company agreed to purchase additional shares of stock from some CTI Mexico
shareholders, and has the right to acquire substantially all of the remaining
outstanding stock of CTI Mexico from another shareholder. At the shareholders'
meeting, the company's name was changed to CTI Mexico S.A. de C.V.
Through CTI Mexico, the Company maintains two manufacturing facilities
in Guadalajara, Mexico totaling approximately 60,000 square feet of
manufacturing, office and warehouse space and operates seven latex balloon
machines.
CTF International. In September, 1996, the Company and CTI Mexico
entered into a joint venture agreement to organize and operate CTF
International, a Mexican corporation ("CTF"). The joint venture was initially
owned in equal measure by the Company and CTI Mexico. CTF leases a facility of
15,000 square feet in Guadalajara, Mexico. CTF engages in the packaging of
balloons for the Company and CTI Mexico and in the printing of latex balloons.
In July, 1999, the Company purchased CTI Mexico's stock in CTF for $40,000 in
cash, and the assignment to CTI Mexico of three of the Company's manual latex
silk screening machines.
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Competition
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The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven major manufacturers of mylar balloons
whose products are sold in the United States including Anagram International,
Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic
Balloon and Betallic. Several companies, including American Greetings, Amscan
and Flowers, Inc., market and sell mylar balloons designed by them and
manufactured by others for them. In 1998, Anagram International, Inc. was
acquired by Amscan.
There are at least seven manufacturers of latex balloons whose products
are sold in the United States. The market for film packaging and custom products
is fragmented, and competition in this area is difficult to gauge. However,
there are numerous participants in this market and the Company can expect to
experience intense quality and price competition.
Many of these Companies offer products and services which are the same
or similar to those offered by the Company and the Company's ability to compete
depends on many factors within and outside its control. There are a number of
well-established competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical resources
and established, extensive, direct and indirect channels of distribution for
their products and services. As a result, such competitors may be able to
respond more quickly to new developments and changes in customer requirements,
or devote greater resources to the development, promotion and sale of their
products and services than the Company. Competitive pressures include, among
other things, price competition, new designs and product development and
copyright licensing.
Patents, Trademarks and Copyrights
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In connection principally with its mylar balloon business, the Company
has developed or acquired a number of intellectual property rights which are
significant to its business.
Copyright Licenses. The most significant of these rights are licenses
on a number of popular characters. The Company presently maintains approximately
20 licenses and produces balloon designs utilizing the characters covered by the
licenses. Licenses are generally maintained for a one or two year term, although
the Company has maintained long term relationships with a number of its
licensors and has been able to obtain renewal of its license agreements with
them.
Trademarks. The Company is the owner of over 23 registered trademarks
in the United States relating to its products. Many of these trademarks are
registered in foreign countries, principally in the European Community.
Patent Rights. The Company is the owner of, or licensee under, several
patents relating to balloon products. These include (i) ownership of two
patents, and a license under a third, relating to self-sealing valves for mylar
balloons and methods of making balloons with such valves and (ii) a patent on a
combination of a greeting card and balloon connected by a ribbon contained in
single package.
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Research and Development
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The Company maintains a product development and research department of
six individuals for the development or identification of new balloons and
related products, product components and sources of supply. Research and
development includes (i) creative product development, (ii) creative marketing,
and (iii) engineering development. During fiscal years 1998 and 1999, the
Company estimates that the total amount spent on research and development
activities was approximately $252,000 and $257,000, respectively.
Employees
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As of October 31, 1999, the Company had 147 full-time employees in the
United States, of whom 11 are executive or supervisory, 17 are in sales, 112 are
in manufacturing and 7 are clerical. As of that same date, the Company had 12
full time employees in England, of whom 2 are executive or supervisory, 3 are in
sales, 6 are in warehousing and 1 is clerical. In Mexico as of October 31, 1999,
the Company had 50 full-time employees, of whom 2 are executive or supervisory,
1 is in sales, 45 are in manufacturing and 2 are clerical. The Company is not a
party to any collective bargaining agreement, has not experienced any work
stoppages and believes that its relationship with its employees is satisfactory.
Regulatory Matters
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The Company's manufacturing operations are subject to the U.S.
Occupational Safety and Health Act ("OSHA"). The Company believes it is in
material compliance with OSHA. The Environmental Protection Agency regulates the
handling and disposal of hazardous materials. As the Company's printing
operations utilize only water-based ink, the waste generated by the Company's
production process is not deemed hazardous. The Company believes it is in
material compliance with applicable environmental rules and regulations. A
number of states have enacted laws limiting or restricting the release of helium
filled mylar balloons. The Company does not believe such legislation will have
any material effect on its operations.
Item No. 2 Description of Property
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The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space.
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In August, 1998, the Company purchased a building that is adjacent to
its principal plant and offices. This facility includes approximately 29,000
square feet of combined office and warehouse space. The Company is presently
leasing approximately 11,000 square feet of this office and warehouse space to a
tenant for $7,350 in monthly rent under a lease that expires in May of 2000.
The Company also leases 15,000 square feet of office and warehouse
space in Rugby, England at an annual lease cost of $51,700, expiring 2013. This
facility is utilized for product packaging operations and to manage and service
the Company's operations in England and Europe.
Item No. 3 Legal Proceedings
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Not Applicable.
Item No. 4 Submission of Matters to a Vote of Security Holders
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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 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.
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The reverse stock split became effective at the close of business on
November 4, 1999.
PART II
Item No.5 Market for Registrant's Common Equity and Related Stockholder Matters
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Market Information. The Company's Common Stock was admitted to trading
on the NASDAQ SmallCap Market under the symbol CTIB on November 5, 1997. Prior
to that time, there was no established public trading market for the Company's
Common Stock. As a result, there is no available trading information for the
period from November 1, 1997 to November 4, 1997. There is no public market for
the Company's Class B Common Stock, which is convertible into Common Stock on a
share per share basis.
The high and low sales prices for the last eight fiscal quarters
(retroactively adjusted to reflect post-reverse split share values), according
to the NASDAQ Stock Market's Stock Price History Report, were:
High Low
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November 5, 1997 to January 31, 1998 20.156 15.000
February 1, 1998 to April 30, 1998 18.469 12.750
May 1, 1998 to July 31, 1998 16.875 11.250
August 1, 1998 to October 31, 1998 12.750 6.563
November 1, 1998 to January 31, 1999 9.000 5.250
February 1, 1999 to April 30, 1999 6.750 2.625
May 1, 1999 to July 31, 1999 3.750 2.156
August 1, 1999 to October 31, 1999 3.375 1.219
As of January 20, 2000, there were approximately 46 holders of record
of the Company's Common Stock and two holders of record of Class B Common Stock.
The Company has never paid any dividends on its Common Stock and does
not currently intend to pay dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all its earnings to finance the
development and expansion of its business. Under the terms of its current loan
agreement, the Company has covenanted not to declare any dividend or other
distribution on its shares or redeem or purchase any of its shares in excess of
$250,000 in any year. It is also likely that the Company will be required to
agree to restrictions on the payment of dividends in connection with future
financings, if any.
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Recent Sales of Unregistered Securities. In March and May of 1996, a
group of investors made an equity investment of $1,000,000 in the Company in
return for 1,098,901 shares of Preferred Stock, $.91 par value. CTI Investors,
L.L.C., an Illinois limited liability company, invested $900,000 in the shares
of Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan,
John H. Schwan and Stephen M. Merrick, members of management, and one other
accredited investor. One other accredited investor invested the remaining
$100,000. The sale was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") as a transaction not
involving a public offering as sales were made to a small number of accredited
investors, including members of management, who were sophisticated and had
access to information about the Company. The shares of Preferred Stock were
subsequently converted into 1,098,901 shares of Class B Common Stock. These
shares of Class B Common Stock were reverse-split on a 1-for-3 basis along with
the Company's Common Stock on November 4, 1999, resulting in a total of 366,300
shares of Class B Common Stock being presently outstanding.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, were each issued warrants to purchase up to
25,641 shares of the Company's Common Stock at an exercise price of $2.73 per
share in consideration of their facilitating and guaranteeing a bank loan to the
Company in the amount of $6.3 million. The issuance was exempt from registration
under Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.
In July, 1998, John H. Schwan and Stephen M. Merrick exercised a total
of 6,465 of their warrants to purchase shares of the Company's Common Stock at
an exercise price of $2.73 per share (5,000 and 1,465 warrants, respectively).
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 92,415
shares of the Company's Common Stock at an exercise price of $9.36 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and warrants. The offering was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.
In June, 1999, Mr. Davis' June, 1997, $150,000 note was cancelled and
reissued in the same principal amount with a new maturity date of February 28,
2001. Mr. Davis' June, 1997, warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $9.36 per share was cancelled in
September, 1999, and a new warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $1.688 per share, with an
expiration date of June 30, 2003, was issued in its place.
12
<PAGE>
In June, 1999, the June, 1997, $50,000, $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively, came due. On November 9,
1999, new notes in the same principal amounts were issued to Messrs. H. Schwan,
J. Schwan and Merrick, in payment and replacement of the prior notes with
maturity dates for each of November 9, 2001. In November, 1999, the June, 1997
warrants of Messrs. H. Schwan, J. Schwan and Merrick to purchase up to
(respectively) 5,342, 37,393 and 33,653 shares of the Company's Common Stock at
an exercise price of $9.36 per share were cancelled. At that time, new warrants
to purchase up to 29,621, 207,346 and 186,612 shares of the Company's Common
Stock at an exercise price of $1.688 per share were issued to Messrs. H. Schwan,
J. Schwan and Merrick, respectively. These warrants expire on November 9, 2004.
The new 1999 notes and new warrants issued to Messrs. Davis, H. Schwan,
J. Schwan and Merrick were issued in a private offering which was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving a public offering as all participants were
sophisticated investors who had access to information about the Company.
13
<PAGE>
Item No. 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following table sets forth selected financial data of the Company
for the three years ended October 31, 1999, 1998 and 1997 (in thousands, except
per share data):
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------
1997 1998 1999
<S> <C> <C> <C>
Consolidated Stmt. of Operations Data:
Net sales....................................... $ 16,431 $ 19,953 $ 18,606
Cost of sales................................... 10,265 12,707 13,670
-------- -------- --------
Gross profit.................................... 6,166 7,246 4,936
Operating Expenses:
General and administrative..................... 1,864 2,353 2,350
Selling........................................ 2,375 2,587 2,448
Advertising and marketing...................... 983 1,805 1,504
-------- -------- --------
Total operating expenses........................ 5,222 6,745 6,302
-------- -------- --------
Operating income (loss)......................... 944 501 (1,366)
-------- -------- --------
Other income (expense).......................... (354) (319) (796)
-------- -------- --------
Income (loss) before income taxes............... 590 182 (2,162)
Income tax benefit (expense).................... 550 (60) 380
-------- -------- --------
Net income (loss)............................... 1,140 122 (1,782)
Dividends applicable to Convertible
Preferred Stock................................ (98) --- ---
-------- -------- --------
Net income (loss) applicable to
common shares.................................. $ 1,042 $ 122 $ (1,782)
======== ======== ========
Net income (loss) per share
Basic ....................................... $ 3.13 $ 0.10 $ (1.40)
======== ======== ========
Diluted........................................ $ 1.54 $ 0.09 $ (1.40)
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic ....................................... 333,208 1,266,003 1,269,984
========= ========= =========
Diluted....................................... 741,778 1,373,789 1,269,984
========= ========= =========
</TABLE>
14
<PAGE>
Results of Operations
- ---------------------
Net Sales. For the fiscal year ended October 31, 1999, net sales
decreased to $18,606,000 from $19,953,000 for fiscal 1998, a decrease of
approximately 7%. The decline in net sales is the net result of a decline in the
sales of metallized and latex balloons, partially offset by an increase in
laminated and printed film sales. For fiscal 1999, international sales were
$2,436,000 or 13.1 % of sales, as compared to $2,498,000, or 12.5% of net sales
for fiscal 1998.
During fiscal 1999, mylar balloons represented 67% of sales, latex
balloons 12 % of sales and laminated and printed films 21% of sales. For fiscal
1998, mylar balloons represented 71% of sales, latex balloons 12% of sales, and
laminated and printed films 17% of sales. The Company anticipates that the
percentage of sales represented by latex balloons and laminated and printed
films will again increase during fiscal 2000. For fiscal 1999, the profit
margins on mylar balloons, latex balloons, and laminated and printed materials
were 33%, 18%, and 23%, respectively.
Cost of Sales. For fiscal 1999, cost of sales increased to 73.5% of net
sales as compared to 63.9% of net sales in fiscal 1998. The increase was the
result of a number of items including decreased units of production absorbing
more overhead per unit, and costs associated with the installation and start-up
of new extruding equipment.
Administrative. For fiscal 1999, administrative expenses were
$2,350,000 or 12.6% of net sales, as compared to $2,353,000 or 11.8% of net
sales for fiscal 1998. The dollar level of administrative expenses remained
constant from 1998 to 1999 due to most administrative costs being fixed rather
than variable based on sales.
Selling. For fiscal 1999, selling expenses were $2,448,000 or 13.2% of
net sales, as compared to $2,587,000 or 13.0% of net sales for fiscal 1998. The
slight decline in selling expenses is related to the decrease in sales in the
mylar balloon product line and the variable expenses associated with those
sales.
Advertising and Marketing. For fiscal 1999, advertising and marketing
expenses were $1,504,000 or 8.1% of net sales, as compared to $1,806,000 or 9.1%
of sales for fiscal 1998. The decrease in these expenses came from several
items, mainly reduced servicing costs on certain national account programs, and
reduced expenditures related to trade show attendance.
Other Income and Expense. The Company had lease and rental income in
fiscal 1999 of $131,000 as compared to $86,000 of lease income in fiscal 1998.
The increase resulted from a full year's ownership of a new facility where a
portion of the building is leased out. Interest income for fiscal 1999 was
$92,000, compared to $161,000 in fiscal 1998. The decrease was due to a smaller
amount of funds held for investment purposes. For fiscal 1999, interest expense
was $942,000, as compared to $765,000 for fiscal 1998. The increase in interest
expense is the result of interest paid on the new extruding equipment, and a
higher outstanding balance on the revolving line of credit.
15
<PAGE>
Net Income or Loss. For fiscal 1999, the Company had a net loss before
income taxes of $2,162,000, as compared to net income before income taxes of
$182,000 in fiscal 1998. The net loss for fiscal 1999 was $1,782,000 as compared
to net income of $122,000 for fiscal 1998. Included in the net loss is tax
benefit of $380,000, which reflects the net result of establishing a tax
valuation allowance of $400,000.
Contracts with foreign suppliers are stated in U.S. dollars and the
Company is not subject to currency rate fluctuations on these transactions. The
effect of currency rate fluctuations on intercompany transactions with the
Company's England subsidiary and Mexico subsidiary has been immaterial. As a
result, the Company has determined not to provide any hedge against currency
rate fluctuations.
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operations for the year ended October 31, 1999
was $2,192,000. This resulted primarily from a decrease in inventory of
$2,199,000, and non-cash depreciation and amortization expenses of $1,382,000.
During fiscal 1998, the Company's cash flow used by operations was $2,384,000, a
result of increased accounts receivable and inventory of $3,170,000.
During fiscal 1999, the Company invested $2,053,000 in machinery and
equipment. The Company also completed the acquisition on CTF International, and
now owns 100% of the subsidiary. During fiscal 1998, the Company invested
$5,254,000 in machinery and equipment, a new facility, and merchandise displays
at customer locations. The Company also invested in and made advances of
$1,419,000 to its Mexican supplier of latex balloons.
Cash flow provided by financing activities for the year ended October
31, 1999 was $94,000. This resulted from the issuance of long-term and
short-term debt. During fiscal 1998, the Company generated $9,082,000 from
financing activities, primarily from the sale of 575,000 shares of its Common
Stock at $12.00 per share in an initial public offering, and the proceeds of
long-term debt. The net proceeds from the offering to the Company were
approximately $5,500,000.
In September 1996, the Company entered into a Loan Agreement with a
bank under which the bank provided loans and a line of credit to the Company
aggregating $6,300,000. The agreement included term loans in the amount of
$3,300,000 and a revolving line of credit providing for maximum advances of
$3,000,000 (increased to $4,500,000 in September 1998), of which $926,000 was
unused at October 31, 1999. The second term loan is due on September 1, 2001 and
bears an interest rate of 8.25%. The revolving line of credit, bearing an
interest rate of prime plus .5%, was due on July 1, 1998, and has been renewed
until June 1, 2000. During 1998, the Company restructured its debt with the
Bank. The first term loan was consolidated with two other term loans, forming a
new term loan bearing an interest rate of 8.25%, due May 1, 2002. In May 1998,
the Company's bank provided a term loan in the amount of $2,258,000 for the
purchase of new extrusion equipment. This term loan bears an interest rate of
8.25% and is due February 1, 2004. In August 1998, the bank provided financing
of $1,268,000 for the
16
<PAGE>
purchase of the facility adjacent to the Company's Barrington headquarters. The
term loan bears an interest rate of 8.25% and matures on September 1, 2003. In
June 1999, the bank provided short-term financing in the amount of $570,000 at
prime plus 1% with three equal installments due in October, November and
December of 1999. All these loans are secured by all assets of the Company.
Three principal shareholders of the Company, John H. Schwan, Howard W. Schwan
and Stephen M. Merrick have guaranteed these obligations.
At October 31, 1999, the Company maintained a cash balance of $337,000.
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. Working capital
at October 31, 1999 was $630,000, compared to working capital of $3,313,000 at
October 31, 1998.
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 30% 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, and to the extent sales in these areas
increase as a percentage of total sales, this should decrease the seasonality of
the Company's total net sales.
Year 2000 Issue
- ---------------
The Year 2000 issue (i.e. the ability of computer systems to recognize
a date using "00" as the year 2000 rather than 1900) affects all companies and
organizations. As a result of the Company's Year 2000 efforts, no significant
internal problems have occurred to date. The Company has not experienced any
problems with suppliers, vendors, customers, or financial institutions. There
were no significant expenditures related to Year 2000 compliance, and the
Company does not anticipate any further expenses associated with Year 2000.
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 1 (Description of
Business) and Item 6 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) 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
17
<PAGE>
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 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.
18
<PAGE>
Item No. 7 Financial Statements
- ---------- --------------------
Reference is made to the Consolidated Financial Statements attached
hereto.
Item No. 8 Changes in and Disagreements with Accountants on Accounting and
- ---------- ---------------------------------------------------------------
Financial Disclosure
--------------------
Effective July 27, 1999, the Company engaged Grant Thornton LLP as the
Company's principal accountants to audit the Company's financial statements for
the year ending October 31, 1999. Grant Thornton LLP replaced
PricewaterhouseCoopers LLP ("PwC") who had previously been engaged for the same
purpose, and whose dismissal was effective July 27, 1999. The decisions to
change the Company's principal accountants was approved by the Company's Board
of Directors on July 23, 1999.
The reports of PwC on the Company's financial statements for the past
two fiscal years ended October 31, 1997, and October 31, 1998 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
During the Company's last two fiscal years ended October 31, 1997, and
October 31, 1998, and in the subsequent interim periods through July 27, 1999,
there were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PwC, would have caused it
to make reference to the subject matter of the disagreements in connection with
its reports on the financial statements for such periods.
PwC did not inform the Company of any reportable events during the
Company's last two fiscal years ended October 31, 1997, and October 31, 1998,
and in subsequent interim periods through July 27, 1999.
PART III
Item No. 9 Directors, Executive Officers, Promoters and Control Persons;
- ---------- -------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Directors and Executive Officers
- --------------------------------
The Company's current directors and executive officers and their ages,
as of January 20, 2000, are as follows:
19
<PAGE>
Name Age Position with Company
- --------------------- ----- ---------------------------------------
John H. Schwan 55 Chairman and Director
Stephen M. Merrick 58 Executive Vice President, Secretary,
Chief Financial Officer and Director
Howard W. Schwan 45 President and Director
Sharon Konny 41 Manager of Finance and Administration
Brent Anderson 33 Vice President of Manufacturing
Stanley M. Brown 53 Director
Bret Tayne 41 Director
All directors hold office until the annual meeting of stockholders next
following their election and/or until their successors are elected and
qualified. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. Information with respect to the business experience
and affiliation of the directors and the executive officers of the Company is
set forth below.
John H. Schwan, Chairman. Mr. Schwan has been an officer and director
of the Company since January, 1996. Mr. Schwan has been the President and
principal executive officer of Packaging Systems, Inc. and affiliated companies
for over the last 12 years. Mr. Schwan devotes approximately 20% of his time to
his position as Chairman of the Company and the balance of his time to Packaging
Systems, Inc. and affiliates. Mr. Schwan has over 20 years of general management
experience, including manufacturing, marketing and sales. Mr. Schwan served in
the U.S. Army Infantry in Vietnam from 1966 to 1969, where he attained the rank
of First Lieutenant.
Stephen M. Merrick, Executive Vice President and Secretary. Mr. Merrick
was President of the Company from January, 1996 to June, 1997 when he became
Chief Executive Officer of the Company. In October, 1999, Mr. Merrick became
Executive Vice President. Mr. Merrick devotes approximately 20% of his time to
his position as Executive Vice President of the Company. Mr. Merrick is a
principal of the law firm of Merrick & Klimek, P.C. of Chicago, Illinois and has
been engaged in the practice of law for more than 30 years. He is also Senior
Vice President, Director and a member of the Management Committee of Reliv
International, Inc. (NASDAQ), a manufacturer and direct marketer of nutritional
supplements and food products.
Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 19 years principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, was appointed as a director in
20
<PAGE>
January, 1996, and was appointed as President in June, 1997. Mr. Schwan manages
administration, production and engineering functions as well as the sales
function for latex balloons and custom and created films.
Sharon Konny, Manager of Finance and Administration. Ms. Konny has been
Manager of Finance and Administration at the Company since October, 1996. From
November of 1992 to 1996, she was an Assistant Vice President of First Chicago
Corporation, initially as Loan Servicing Manager of the Mortgage Services
Division and in December, 1994, achieving the position of Manager of Financial
Administration for the First Card Division. She became a Certified Public
Accountant in 1992.
Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been
employed by the Company since January, 1989, and has held a number of
engineering positions with the Company including Plant Engineer and Plant
Manager. In such capacities Mr. Anderson was responsible for the design and
manufacture of much of the Company's manufacturing equipment. Mr. Anderson was
appointed Vice President of Manufacturing in June, 1997.
Stanley M. Brown, Director. Mr. Brown was appointed as a director of
the Company in January, 1996. Mr. Brown has been President of Inn-Room Systems,
Inc., a manufacturer and lessor of in-room vending systems for hotels since
March, 1996. From 1968 to 1989, Mr. Brown was with the United States Navy as a
naval aviator, achieving the rank of Captain.
Bret Tayne, Director. Mr. Tayne was appointed as a director of the
Company in December, 1997. Mr. Tayne has been President of Everede Tool Company,
a manufacturer of industrial cutting tools, since January, 1992. Prior to that,
Mr Tayne was Executive Vice President of Unifin, a commercial finance company,
since 1986. Mr. Tayne received a Bachelor of Science Degree from Tufts
University and an MBA from Northwestern University.
John H. Schwan and Howard W. Schwan are brothers.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
There were no late filings required by Section 16(a) during the most
recent fiscal year or prior years by any officer, director or 10% shareholder.
Item No. 10 Executive Compensation
- ----------- ----------------------
Executive Compensation
- ----------------------
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company to its President, Chief Executive
Officer and any other officer who received compensation in excess of $100,000
("Named Executive Officers").
21
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
--------------------------- --------------------------
Securities All Other
Name and Salary Other Annual Underlying Compensation
Principal Position Year ($) Compensation Options ($)
- ------------------ ---- -------- ------------- ---------- ------------
<S> <C> <C> <C>
Stephen M. 1999 $ 53,750 ---- ---- ----
Merrick 1998 $ 75,000 ---- 13,333(3) ----
Executive 1997 $ 63,750 ---- ---- ----
Vice-President
Howard W. 1999 $129,900 $ 13,675(1) ---- $ 1,650(5)
Schwan 1998 $135,000 $ 6,145(1) 13,333(4) $ 1,115(5)
President 1997 $121,600 $ 6,145(1) ---- $ 1,115(5)
John C. Davis 1999 $120,000 $ 5,500(2) ---- $ 1,529(5)
Executive Vice 1998 $132,115 $ 6,562(2) ---- $ 1,800(5)
President-Sales 1997 $150,000 $ 8,374(2) ---- $ 1,666(5)
- ----------------------
<FN>
(1) Perquisites include country club membership ($5,000) in 1997 and 1998 and
$7,360 in 1999.
(2) Perquisites include country club membership ($5,000) in 1997 and 1998 and
allocated personal use of vehicles ($5,500 in 1999, $1,562 in 1998, and
$3,374 in 1997).
(3) Stock options to purchase up to 13,333 shares of the Company's Common stock
at $8.25 per share.
(4) Stock options to purchase up to 13,333 shares of the Company's Common Stock
at $7.50 per share.
(5) Company contribution to the Company 401(k) Plan as pre-tax salary deferral.
</FN>
</TABLE>
Certain Named Executive Officers have received warrants to purchase
Common Stock of the Company in connection with their guarantee of certain bank
loans secured by the Company and in connection with their participation in a
private offering of notes and warrants conducted by the Company. See Item 12. No
stock option grants were made to any of the Company's Executive Officers in
connection with their employment in the fiscal year ending October 31, 1999.
22
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Shares Value Unexercised Options at In-the-Money Options
Acquired on Realized Year End (#) at Fiscal Year End ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------ ------------- -------- ---------------------------- --------------------------
<S> <C> <C> <C> <C>
Stephen M. Merrick 0 0 13,333/0 $0/0(1)
Howard W. Schwan 0 0 13,333/0 $0/0(1)
- -----------------------
<FN>
(1) The value of unexercised in-the-money options is based on the
difference between the exercise price and the fair market value of the
Company's Common Stock on October 31, 1999.
</FN>
</TABLE>
Employment Agreements
- ---------------------
In April, 1996, the Company entered into an employment agreement with
John C. Davis as Executive Vice President-Sales, which provided for an annual
salary of $150,000. The term of the agreement was through January 31, 1998. On
June 27, 1997, the agreement was amended to extend the term through January 31,
2000, and to provide for an annual salary of $120,000 per year. The agreement
contains covenants of Mr. Davis not to use the Company's confidential
information while such information remains confidential and establishing the
Company's rights to inventions created by Mr. Davis during the term of
employment. Mr. Davis' agreement does not contain a covenant not to compete.
Effective February 1, 1999, Mr. Davis retired from his position as Executive
Vice President-Sales with the Company, and currently provides services to the
Company as a special project consultant under the terms of his Employment
Agreement, as it was amended on June 27, 1997.
In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of not less
than $135,000. The term of the Agreement is through June 30, 2002. The Agreement
contains covenants of Mr. Schwan with respect to the use of the Company's
confidential information, establishes the Company's right to inventions created
by Mr. Schwan during the term of his employment, and includes a covenant of Mr.
Schwan not to compete with the Company for a period of three years after the
date of termination of the Agreement.
Director Compensation
- ---------------------
Directors are not compensated for their services as directors. John
Schwan was compensated in the amount of $34,400 in fiscal 1999 for his services
as Chairman of the Board of Directors.
23
<PAGE>
Item No. 11 Security Ownership of Certain Beneficial Owners and Management
- ----------- --------------------------------------------------------------
Principal Stockholders
- ----------------------
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of January 17, 2000 by
(i) each stockholder who is known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock or Class B Common Stock, (ii) each
director and executive officer of the Company who owns any shares of Common
Stock or Class B Common Stock, and (iii) all executive officers and directors as
a group. Except as otherwise indicated, the Company believes that the beneficial
owners of the shares listed below have sole investment and voting power with
respect to such shares. All shares listed in the following table and the
footnotes thereto have been adjusted to reflect the Company's recent 1 for 3
reverse split of its Common and Class B Common Stock.
<TABLE>
<CAPTION>
Shares of Class B Shares of Common
Common Stock Stock Beneficially Percent of
Name and Address(1) Beneficially Owned(2)(3) Owned(2) Common Stock(4)
- ----------------------------- ------------------------ ------------------ ----------------
<S> <C> <C> <C>
Stephen M. Merrick 73,260 275,095(5) 23.71
John H. Schwan 109,890 260,188(6) 24.90
Howard W. Schwan 54,945 71,463(7) 9.69
John C. Davis -- 148,505(8) 11.78
Sharon Konny -- 4,000(9) *
Brent Anderson -- 4,400(9) *
Stanley M. Brown -- 3,952(10) *
747 Glenn Avenue
Wheeling, Illinois
Frances Ann Rohlen 91,575 1,170 7.45
c/o Cheshire Partners
1504 Wells
Chicago, Illinois 60610
Philip W. Colburn 36,630 39,422(11) 6.11
Bret Tayne -- 2,837(12) *
6834 N. Kostner Avenue
Lincolnwood, Illinois 60646
All directors and executive 238,095 621,935 47.99
officers as a group (7 persons)
- --------------
<FN>
*less than one percent
(footnotes continued on next page)
23
<PAGE>
(1) Except as otherwise indicated, the address of each stockholder listed
above is c/o CTI Industries Corporation, 22160 North Pepper Road,
Barrington, Illinois 60010.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the
exercise of any option, warrant or right. Shares of Common Stock
subject to options, warrants or rights that are currently exercisable
or exercisable within 60 days are deemed outstanding for purposes of
computing the percentage ownership of the person holding such options,
warrants or rights, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person.
(3) Figures below represent all Class B Common Stock outstanding.
Beneficial ownership of shares of Class B Common Stock for Messrs.
Merrick, John Schwan, Howard Schwan and Ms. Rohlen include indirect
ownership of such shares through CTI Investors, L.L.C. See "Certain
Transactions."
(4) Assumes conversion of all shares of Class B Common Stock into shares of
Common Stock.
(5) Includes warrants to purchase up to 24,176 shares of Common Stock at
$2.73 per share, warrants to purchase up to 186,612 shares of Common
Stock at $1.688 per share and options to purchase up to 13,333 shares
of Common stock at $8.25 per share granted under the Company's 1997
Stock Option Plan.
(6) Includes warrants to purchase up to 20,641 shares of Common Stock at
$2.73 per share, warrants to purchase up to 207,346 shares of Common
Stock at $1.688 per share and options to purchase up to 13,333 shares
of Common stock at $8.25 per share granted under the Company's 1997
Stock Option Plan.
(7) Includes warrants to purchase up to 25,641 shares of Common Stock at
$2.73 per share, warrants to purchase up to 29,621 shares of Common
Stock at $1.688 per share, and options to purchase up to 13,333 shares
of Common Stock at $7.50 per share granted under the Company's 1997
Stock Option Plan.
(8) Includes warrants to purchase up to 16,026 shares of Common Stock at
$1.688 per share, and 70,667 shares of Common Stock subject to
redemption by the Company. See "Certain Transactions."
(9) Includes options to purchase up to 4,000 shares of Common Stock at
$7.50 per share granted under the Company's 1997 Stock Option Plan.
(10) Includes options to purchase up to 1,667 shares of Common Stock at
$7.50 per share and options to purchase up to 1,667 shares of Common
Stock at $12.00 per share, both granted under the Company's 1997 Stock
Option Plan.
(footnotes continued on next page)
25
<PAGE>
(11) Includes shares held by immediate family members.
(12) Includes options to purchase up to 1,667 shares of Common Stock at
$7.50 per share granted under the Company's 1997 Stock Option Plan.
</FN>
</TABLE>
Item No. 12 Certain Relationships and Related Transactions
- ----------- ----------------------------------------------
Certain Transactions
- --------------------
In March 1996, the Company entered into a Stock Redemption Agreement
with John C. Davis which was subsequently amended June 27, 1997. Under the
amended Stock Redemption Agreement the Company was obligated to redeem 34,188
shares of Common Stock and has the right, but not the obligation, to redeem up
to an additional 76,923 shares of Common Stock owned by Mr. Davis at the price
of $5.85 per share at any time through January 31, 1998. Commencing March 1,
1998 through February 28, 2000, the Company is obligated to pay to Mr. Davis,
for the redemption of shares at $5.85 per share (i) an amount equal to 2% of the
Company's pretax profits each fiscal quarter (beginning with the fiscal quarter
ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed
$8,000) of the amount by which latex and mylar balloon revenues exceed $1.3
million in any month. The Company's obligations terminate once a total of
111,111 shares of Common Stock have been redeemed under the Stock Redemption
Agreement. The Company also has the right to redeem additional shares of Common
Stock from Mr. Davis during this period at $5.85 per share, provided that the
total number of shares subject to redemption under the Stock Redemption
Agreement does not exceed 111,111. As of January 1, 2000, 40,444 shares of
Common Stock had been redeemed pursuant to the Stock Redemption Agreement.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 366,300 shares of
Preferred Stock, $2.73 par value. Each share of Preferred Stock was entitled to
an annual cumulative dividend of 13% of the purchase price, and was convertible
into one share of Common Stock. The shares of Preferred Stock, voting separately
as a class, were entitled to elect four of the Company's directors. CTI
Investors, L.L.C., an Illinois limited liability company, invested $900,000 in
the shares of Preferred Stock. Members of CTI Investors, L.L.C. include Howard
W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, and
Frances Ann Rohlen.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick were each issued warrants to purchase 25,641 shares of the Company's
Common Stock at an exercise price of $2.73 per share in consideration of their
facilitating and guaranteeing a bank loan to the Company in the amount of $6.3
million. The warrants have a term of six years. In July, 1998, John H. Schwan
and Stephen M. Merrick exercised 5,000 and 1,465 of these warrants,
respectively.
26
<PAGE>
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 92,415
shares of the Company's Common Stock at an exercise price of $9.36 per share.
The warrants had a term of five years. Howard W. Schwan, John H. Schwan, Stephen
M. Merrick and John C. Davis, members of management, purchased $50,000, $350,000
and $315,000 and $150,000, respectively, of the notes and warrants. Mr. John
Schwan and Mr. Merrick applied advances of $200,000 each, made to the Company in
January, 1997, toward the purchase of the notes and warrants.
In June, 1999, Mr. Davis' June, 1997, $150,000 Note was cancelled, and
reissued in the same principal amount with a new maturity date of February 28,
2001. Mr. Davis' June, 1997, warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $9.36 per share was cancelled in
September, 1999, and a new warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $1.688 per share, with an
expiration date of June 30, 2003 was issued in its place.
In June, 1999, the June, 1997, $50,000 $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively came due. On November 9,
1999, new notes in the same principal amounts were issued to these persons, in
payment and replacement of the prior notes, with maturity dates for each of
November 9, 2001. In November, 1999, the June, 1997, warrants of Messrs. H.
Schwan, J. Schwan and Merrick to purchase up to (respectively) 5,342, 37,393 and
33,653 shares of the Company's Common Stock at an exercise price of $9.36 per
share were cancelled. At that time, new warrants to purchase up to 29,621,
207,346, and 186,612 shares of the Company's Common Stock at an exercise price
of $1.688 per share were issued to Messrs. H. Schwan, J. Schwan and Merrick,
respectively. These warrants expire on November 9, 2004.
Stephen M. Merrick, Executive Vice President of the Company, is a
principal of the law firm of Merrick & Klimek, P.C., which serves as general
counsel of the Company. Mr. Merrick was a principal in the law firm of Fishman,
Merrick, Miller, Genelly, Springer, Klimek & Anderson, P.C., which formerly
served as general counsel to the Company until December 1, 1998. In addition,
Mr. Merrick is a principal stockholder of the Company. (See Item No. 11). Other
principals of the firm of Merrick & Klimek, P.C. own less than 1% of the
Company's outstanding Common Stock. Legal fees incurred from the firm of
Fishman, Merrick, Miller, Genelly, Springer, Klimek & Anderson, P.C. were
$195,200 and $10,380 for the years ended October 31, 1998 and October 31, 1999,
respectively. No fees were paid to Merrick & Klimek, P.C. during the year ended
October 31, 1998. Legal fees incurred from the firm of Merrick & Klimek, P.C.
for the fiscal year ended October 31, 1999 was $90,634. Mr. Merrick is also an
officer and director of Reliv International, Inc. (NASDAQ-RELV).
27
<PAGE>
John H. Schwan is President and a shareholder of Packaging Systems,
Inc. and affiliated companies. The Company made purchases of packaging materials
from these entities in the amount of $458,347 and $251,203 during each of the
years ended October 31, 1998, and October 31, 1999, respectively.
The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into, on
terms as fair as those obtainable from independent third parties. All related
party transactions, including loans and forgiveness of debt, must be approved by
a majority of disinterested directors.
Item No. 13 Exhibits and Reports on Form 8-K
- ----------- --------------------------------
Exhibits
- --------
Exhibit
Number Description
------ -----------
* 3.1 Third Restated Certificate of Incorporation of CTI Industries
Corporation
** 3.2 By-laws of CTI Industries Corporation
** 4.1 Form of Certificate for Common Stock of CTI Industries
Corporation
***10.1 CTI Industries Corporation Stock Option Plan
**10.2 Employment Agreement dated April 29, 1996 between CTI
Industries Corporation and John C. Davis
**10.3 Stock Redemption Agreement dated March 1, 1996 between CTI
Industries Corporation and John C. Davis
**10.4 Agreement dated June 27, 1997 between CTI Industries
Corporation and John C. Davis
**10.6 Form of Warrant dated December 3, 1996 to purchase shares of
Common Stock
**10.7 Form of Subscription Agreement dated March, 1996, for purchase
of Preferred Stock
**10.8 Form of Subscription Agreement dated June 20, 1997 for
promissory notes and warrants to purchase shares of Common
Stock
**10.9 Employment Agreement dated June 30, 1997, between CTI
Industries Corporation and Howard W. Schwan
**10.10 Joint Venture Agreement dated September 16, 1996, between CTI
Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
**10.11 Agreement for purchase of assets dated September 8, 1995,
between CTI Industries Corporation and Pulidos & Terminados
Finos S.A. de C.V.
**10.12 Amendment dated May 24, 1996, to Agreement for purchase of
assets between CTI Industries Corporation and Pulidos &
Terminados Finos S.A. de C.V.
****10.13 Form of Agreement dated July 14, 1997 between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
28
<PAGE>
****10.14 Amended and Restated Loan and Security Agreement dated May 1,
1998 between the Company and First American Bank
****10.15 First Term Note in the sum of $1,788,328 dated May 1, 1998
made by CTI Industries Corporation to First American Bank.
****10.16 First Amendment to Second Term Note dated May 1, 1998 made by
CTI Industries Corporation to First American Bank.
****10.17 Third Term Note in the sum of $2,258,000 dated May 1, 1998
made by CTI Industries Corporation to First American Bank.
****10.18 Revolving Note in the sum of $4,000,000 dated May 1, 1998 made
by the Company to First American Bank.
****10.19 First Amendment to Loan and Security Agreement dated August
24, 1998, between CTI Industries Corporation and First
American Bank.
****10.20 Fourth Term Note in the sum of $1,268,000 dated August 24,
1998 made by CTI Industries Corporation and First American
Bank.
****10.21 Mortgage dated August 24, 1998 for benefit of First American
Bank.
****10.22 Second Amendment to Loan and Security Agreement dated August
27, 1998 between CTI Industries Corporation and First American
Bank.
****10.23 Third Amendment to Loan and Security Agreement dated September
1, 1998 between CTI Industries Corporation and First American
Bank.
****10.24 First Amendment to Third Term Note dated September 1, 1998
made by CTI Industries Corporation to First American Bank.
****10.25 Revolving Note in the sum of $4,500,000 dated September 1,
1998 made by CTI Industries Corporation to First American
Bank.
****10.26 Guaranty dated September 1, 1998, by Stephen M. Merrick,
Howard W. Schwan and John H. Schwan for benefit of First
American Bank.
**10.27 Form of Financial Advisory and Consulting Agreement.
*****10.28 Subscription and Loan Agreement dated January 26, 1998,
between CTI Industries Corporation and Pulidos & Terminados
Finos S.A. de C.V.
11.1 Computation of Earnings Per Share - Annual
21 Subsidiaries (incorporate description in Form 10-KSB under
Item No. 1)
27 Financial Data Schedule
* Incorporated by reference to Exhibit A contained in Registrant's
Schedule 14A Definitive Proxy Statement for solicitation of written
consent of shareholders, as filed with the Commission on October 25,
1999.
** Incorporated by reference to Exhibits, contained in Registrant's
Form SB-2 Registration Statement (File No. 333-31969) effective
November 5, 1997.
*** Incorporated by reference to Exhibit contained in Registrant's Schedule
14A Definitive Proxy Statement, as filed with the Commission on March
26, 1999.
**** Incorporated by reference to Exhibits contained in Registrant's Form
10KSB Annual Report, for the fiscal year ended October 31, 1998.
***** Incorporated by reference to Exhibit contained in Registrant's Form 10
KSB Annual Report, for year ended October 31, 1997.
Reports on Form 8-K
- -------------------
The following report on Form 8-K was filed by the Company during the
last quarter of fiscal 1999:
(1) On August 8, 1999, the Company filed a Report on Form 8-K
disclosing a change in the Company's certifying accountant,
effective July 27, 1999.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on February 14, 2000.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
---------------------------
Howard W. Schwan, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Howard W. Schwan President and Director February 14, 2000
- --------------------------
Howard W. Schwan
/s/ John H. Schwan Chairman and Director February 14, 2000
- --------------------------
John H. Schwan
/s/ Stephen M. Merrick Chief Executive Officer, February 14, 2000
- -------------------------- Secretary, Chief Financial
Stephen M. Merrick Officer and Director
/s/ Stanley M. Brown Director February 14, 2000
- --------------------------
Stanley M. Brown
/s/ Bret Tayne Director February 14, 2000
- --------------------------
Bret Tayne
30
<PAGE>
CTI Industries Corporation and Subsidiaries
Table of Contents
Page(s)
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of
October 31, 1998 and 1999 F-2 - F-3
Consolidated Statements of Operations for
years ended October 31, 1998 and 1999 F-4
Consolidated Statements of Stockholders'
Equity for the years ended October 31,
1998 and 1999 F-5 - F-6
Consolidated Statements of Cash Flows for
the years ended October 31, 1998
and 1999 F-7
Notes to Consolidated Financial Statements F-8 - F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
CTI Industries Corporation
We have audited the accompanying balance sheet of CTI Industries Corporation and
Subsidiaries as of October 31, 1999, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of CTI Industries Corporation and
Subsidiaries as of and for the year ended October 31, 1998, were audited by
other auditors whose report dated February 16, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of CTI Industries Corporation
and Subsidiaries as of October 31, 1999, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
January 6, 2000
Report of Independent Accountants
To the Board of Directors and
Shareholders of CTI Industries Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CTI
Industries Corporation and its subsidiary at October 31, 1998, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management, our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit on these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Pricewaterhouse Coopers LLP
Chicago, Illinois February 16, 1999, except for share and per share data which
is as of November 4, 1999
F-1
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of October 31, 1998 and October 31, 1999
1998 1999
------------ ------------
ASSETS
Current assets:
Cash $ 235,333 $ 336,832
Accounts receivable (less allowance for
doubtful accounts of $132,211 and
$186,251 at October 31, 1998 and 1999) 3,276,894 3,225,802
Inventories 7,641,381 5,425,769
Deferred tax assets 176,549 208,926
Other 1,089,058 754,303
------------ ------------
Total current assets 12,419,215 9,951,632
Property and equipment:
Machinery and equipment 6,812,069 9,752,302
Building 3,503,801 3,643,675
Office furniture and equipment 1,556,742 1,588,382
Land 535,000 535,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 1,907,358 2,031,919
Projects under construction 1,522,893 391,719
------------ ------------
15,999,748 18,104,882
Less : accumulated depreciation (7,674,299) (9,048,413)
------------ ------------
Total property and equipment, net 8,325,449 9,056,469
Other assets:
Deferred financing costs, net 44,383 29,165
Investment in joint venture 77,975 --
Invesment in subsidiary 879,800 809,773
Note receivable 715,422 715,422
Deferred tax assets 391,377 766,000
Other assets -- 110,526
------------ ------------
Total other assets 2,108,957 2,430,886
------------ ------------
TOTAL ASSETS $ 22,853,621 $ 21,438,987
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of October 31, 1998 and October 31, 1999
1998 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,070,545 $ 2,980,500
Line of credit 4,178,246 3,574,023
Notes payable - current portion 817,569 1,367,070
Accrued liabilities 1,039,742 1,399,689
------------ ------------
Total current liabiliites 9,106,102 9,321,282
Long-term liabilities:
Other liabilities -- 15,928
Notes payable 5,280,692 5,534,876
Subordinated debt 865,000 865,000
------------ ------------
Total long-term liabilities 6,145,692 6,415,804
Redeemable common stock 413,406 413,406
Stockholders' equity:
Common stock - $.195 par value,
5,000,000 shares authorized,
966,327 shares issued, 911,944
(October 31, 1998) 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) 1,301,134 (481,136)
Accumulated other comprehensive earnings 26,377 14,548
Less:
Treasury stock - 54,383
(October 31, 1998) and 95,383
(October 31, 1999) shares (407,294) (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 7,188,421 5,288,495
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 22,853,621 $ 21,438,987
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended October 31, 1998 and 1999
1998 1999
------------ ------------
Net Sales $ 19,952,823 $ 18,606,414
Cost of Sales 12,706,460 13,670,402
------------ ------------
Gross profit on sales 7,246,363 4,936,012
Operating expenses:
Administrative 2,352,959 2,349,531
Selling 2,586,798 2,448,276
Advertising and marketing 1,805,603 1,503,819
------------ ------------
Total operating expenses 6,745,360 6,301,626
------------ ------------
Income (loss) from operations 501,003 (1,365,614)
Other income (expense):
Interest expense (765,425) (942,301)
Interest income 161,201 91,899
Other 285,094 54,495
------------ ------------
Total other expense (319,130) (795,907)
------------ ------------
Income (loss) before income taxes 181,873 (2,161,521)
Income tax expense (benefit) 60,013 (379,251)
------------ ------------
Net income (loss) $ 121,860 $ (1,782,270)
============ ============
Income (loss) applicable to common shares $ 121,860 $ (1,782,270)
============ ============
Basic income (loss) per common
and common equivalent shares $ 0.10 $ (1.40)
============ ============
Diluted income (loss) per common
and common equivalent shares $ 0.09 $ (1.40)
============ ============
Weighted average number of shares
and equivalent shares of
common stock outstanding:
Basic 1,266,003 1,269,984
============ ============
Diluted 1,373,789 1,269,984
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1998 and 1999
<TABLE>
<CAPTION>
Common Stock Class B Common Stock Paid-in Preferred Stock
------------ -------------------- ------- ---------------
Shares Amount Shares Amount Capital Shares Amount
------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 384,861 $ 75,048 - $ - $ 248,348 1,098,901 $1,063,917
Conversion of preferred
stock into Class B common 366,300 $1,000,000 (1,098,901) (1,063,917)
Issuance of common stock 575,000 112,125 5,289,594
Common stock warrants
exercised 6,466 1,261 16,390
Acquisition of
treasury stock
Notes receivable from
stockholders
Net income
Other comprehensive income
Foreign currency transalation
Total comprehensive income
------- -------- ------- ---------- ----------- -------- --------
Balance, October 31, 1998 966,327 $188,434 366,300 $1,000,000 $ 5,554,332 - $ -
</TABLE>
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1998 and 1999
<TABLE>
<CAPTION>
Accumulated
Other Less
Retained Comprehensive Treasury Stock Redeemable Stock Notes Recvble
Earnings Earnings Shares Amount Common Stock Sub Recvble Shareholders TOTAL
-------- -------- ------ ------ ------------ ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 $1,179,274 $ 51,036 48,127 ($370,700) ($ 450,000) ($ 4,700) $ - $ 1,792,223
Conversion of preferred
stock into Class B common $ (63,917)
Issuance of common stock $ 5,401,719
Common stock warrants
exercised $ 17,651
Acquisition of
treasury stock 6,256 (36,594) 36,594 $ -
Notes receivable from
stockholders (56,456) $ (56,456)
Net income 121,860 $ 121,860
Other comprehensive income
Foreign currency transalation (24,659) $ (24,659)
------------
Total comprehensive income 97,201
------------
---------- --------- ------ -------- ---------- --------- ---------- ------------
Balance, October 31, 1998 $1,301,134 $ 26,377 54,383 ($407,294) ($ 413,406) ($ 4,700) ($ 56,456) $ 7,188,421
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1998 and 1999
<TABLE>
<CAPTION>
Common Stock Class B Common Stock Paid-in Preferred Stock
------------ -------------------- ------- ---------------
Shares Amount Shares Amount Capital Shares Amount
------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1998 966,327 $ 188,434 366,300 $1,000,000 $5,554,332 - $ -
Acquisition of treasury
stock on open market
Net income
Other comprehensive income
Foreign currenty translation
Total comprehensive income
------- --------- ------- ---------- ---------- ------ ---------
Balance, October 31, 1999 966,327 $ 188,434 366,300 $1,000,000 $5,554,332 - $ -
======= ========= ======= ========== ========== ====== =========
</TABLE>
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1998 and 1999
<TABLE>
<CAPTION>
Accumulated
Other Treasury Stock Less
Retained Comprehensive -------------- Redeemable Stock Notes Recvble
Earnings Earnings Shares Amount Common Stock Sub Recvble Shareholders TOTAL
-------- -------- ------ ------ ------------ ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1998 $1,301,134 $ 26,377 54,383 ($407,294) ($ 413,406) ($ 4,700) ($ 56,456) $ 7,188,421
Acquisition of treasury 41,000 (105,827) $ (105,827)
stock on open market
Net (loss) (1,782,270) $(1,782,270)
Other comprehensive income
Foreign currenty translation (11,829) $ (11,829)
-----------
Total comprehensive income $(1,794,099)
-----------
---------- --------- ------ --------- ----------- --------- ---------- ------------
Balance, October 31, 1999 $ (481,136) $ 14,548 95,383 ($513,121) ($ 413,406) ($ 4,700) ($ 56,456) $ 5,288,495
========== ========= ====== ========= =========== ========= ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended October 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 121,860 $ (1,782,270)
Adjustment to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 835,439 1,381,663
Equity in loss of subsidiary and joint venture 9,466 115,360
Provision for losses on accounts receivable & inventory 371,569 332,988
Deferred income taxes 27,963 (407,000)
Change in assets and liabilities:
Accounts receivable (305,645) (114,240)
Inventory (2,864,641) 2,199,461
Other assets (96,795) 403,418
Accounts payable and accrued expenses (483,351) 62,630
------------ ------------
Net cash provided by (used in) operating activities (2,384,135) 2,192,010
Cash flows from investing activities:
Purchases of property and equipment (5,254,065) (2,052,777)
Investment in and advances to P&TF (1,419,318) (45,515)
Investment in joint venture (1,529) --
Acquisition of CTF International -- (74,024)
------------ ------------
Net cash used in investing acitivites (6,674,912) (2,172,316)
Cash flows from financing activities:
Stock redemption contract payments (30,533) --
Advances on line of credit 19,235,217 17,299,183
Repayments on line of credit (18,074,747) (17,903,406)
Proceeds from issuance of long-term debt 4,158,959 1,202,281
Proceeds from issuance of short-term debt 850,000 570,000
Repayment of long-term debt (1,525,946) (778,597)
Repayment of short-term debt (850,000) (190,000)
Proceeds from issuance of common stock 5,401,719 --
Proceeds from warrants exercised 17,650 --
Purchase of treasury stock (36,594) (105,827)
Dividends paid (63,917) --
------------ ------------
Net cash provided by financing activities 9,081,808 93,634
Effect of exchange rate changes on cash (24,658) (11,829)
------------ ------------
Net increase (decrease) in cash (1,897) 101,499
Cash and Equivalents at Beginning of Period 237,230 235,333
------------ ------------
Cash and Equivalents at End of Period $ 235,333 $ 336,832
============ ============
Supplemental disclosures:
Cash paid for interest $ 750,565 $ 905,218
Cash paid for income taxes $ 215,000 $ --
Noncash financing activities:
Conversion of preferred stock into Class B Common stock $ 1,000,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Operations
CTI Industries Corporation (the "Company"), its United Kingdom subsidiary (CTI
Balloons Limited), and Mexican subsidiary (CTF International S.A. de C.V.)
design, manufacture and distribute balloon products throughout the world. The
Company also operates systems for the production, lamination and printing of
films used for food packaging and other commercial uses.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CTI Industries
Corporation, and its wholly owned subsidiaries CTI Balloons Limited and CTF
International S.A. de C.V. All significant intercompany accounts and
transactions have been eliminated upon consolidation.
Foreign Currency Translation
The financial statements of foreign operations are translated into U.S. dollars
in accordance with Statement of Financial Accounting Standards (SFAS) No. 52.
Accordingly, all assets and liabilities are translated at current rates of
exchange, and operating transactions are translated at weighted average rates
during the year. The translation gains and losses, to the extent material, are
accumulated as a separate component of stockholders' equity.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
standard costs which approximates costing determined on a first-in, first-out
basis.
Property and Equipment
Property and equipment is stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation is computed using
the straight-line and declining-balance methods over estimated useful lives of
the related assets. The estimated useful lives range as follows:
Building 25 - 30 years
Machinery and equipment 3 - 15 years
Office furniture and equipment 5 - 8 years
Leasehold improvements 5 - 8 years
Fixtures and equipment at
customer locations 1 - 3 years
Depreciation expense was $823,151 and $1,366,446 for the years ended October 31,
1998 and 1999, respectively.
Deferred Financing Costs
Deferred financing costs consist of unamortized financing costs incurred in
connection with the refinancing of long-term debt during fiscal 1996. These
costs are being amortized on a straight-line basis over the term of the loans.
Amortization expense was $12,288 and $15,217 for the years ended October 31,
1998 and 1999 respectively.
F-8
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Income Taxes
Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting for
Income Taxes. Under the asset and liability method of Statement No. 109, the
Company recognizes the amount of income taxes currently payable and deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years these temporary differences are expected to be
recovered or settled.
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting when title
transfers upon shipment.
Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally limited due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations. For the year ended October 31, 1999, the
Company had two customers that accounted for approximately 16.2% and 14.3%,
respectively, of consolidated net sales. Corresponding percentages of
consolidated net sales generated by these customers for the year ended October
31, 1998, were approximately 15.2% and 11.1%, respectively. At October 31, 1999,
the outstanding accounts receivable balances due from these two customers were
$447,944 and $916,665, respectively.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock-Based Compensation
Effective for the fiscal year ending October 31, 1997, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation". The pronouncement
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on new fair value accounting rules. The Company did not adopt the new fair
value accounting, but instead chose to comply with the disclosure requirements
of SFAS No. 123. Accordingly, the adoption of SFAS No. 123 did not have a
material impact on the Company's financial statements.
F-9
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share," for the year ended
October 31, 1998. The pronouncement specifies the computation, presentation, and
disclosure requirements for earnings per share. Adoption of this pronouncement,
which was applied to prior periods presented, did not have a material impact on
the Company's financial statements.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company assesses the impairment of its long-lived
assets, including goodwill and property, plant and equipment, whenever economic
events or changes in circumstances indicate that the carrying amounts of the
assets may not be recoverable. Long-lived assets are considered to be impaired
when the sum of the expected future cash flows, undiscounted and without
interest charges, is less than the carrying amounts of the related assets.
3. Inventory
Inventory is comprised of the following:
October 31, 1998 October 31, 1999
Raw materials $ 223,530 $ 384,880
Work in process 874,994 810,803
Finished goods 6,542,857 4,230,086
---------- ----------
Total inventory $7,641,381 $5,425,769
========== ==========
4. Line of Credit
The Company has a bank line of credit, due June 1, 2000, which provides for a
maximum borrowing limit of $4,500,000, of which $321,754 and $925,977 was
available at October 31, 1998 and 1999, respectively. Advances under the line of
credit are subject to a borrowing base, as defined in the line of credit
agreement. Interest is payable monthly at prime plus .5% (prime was 8.0% and
8.25% at October 31, 1998 and 1999, respectively). The line of credit is
collateralized by all assets of the Company. The line of credit agreement
contains, among other provisions, certain financial convenants relating to the
maintenance of tangible net worth and the ratio of debt to equity.
F-10
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
5. Notes Payable
<TABLE>
<CAPTION>
Long-term debt at October 31, 1999 consists of:
<S> <C>
First Term Loan, payable in monthly installments of $43,979 including
interest at 8.25% due May, 2002. Collateralized by all assets of
the Company. $ 1,222,072
Second Term Loan, payable in monthly installments of $19,617 including
interest at 8.25% due September, 2001. Collateralized by all assets of
the Company. 2,038,218
Third Term Loan, payable in monthly installments of $46,195 including
interest at 8.25% due February, 2004. Collateralized by all assets of
the Company. 1,958,559
Fourth Term Loan, payable in monthly installments of $10,919 including
interest at 8.25% due September, 2003. Collateralized by all assets of
the Company. 1,241,912
Fifth Term Loan, payable in monthly installments of $190,000 plus
interest at prime plus 1%, due December, 1999. Collateralized by all
assets of the Company. 380,000
Installment Loan, payable in monthly installments of $565 including
interest at 7.99% due March, 2000. Collateralized by company vehicle. 2,754
Installment Loan, payable in monthly installments of $3,633 including
interest at 8.25% due May, 2001. Collateralized by equipment. 58,431
------------
Total 6,901,946
Less current portion (1,367,070)
------------
Total long-term debt $ 5,534,876
============
</TABLE>
Future Minimum principal payments for amounts outstanding under these long-term
debt agreements are as follows for the years ended October 31:
2000 $ 1,367,070
2001 2,937,155
2002 811,627
2003 1,670,057
2004 116,037
-------------
$ 6,901,946
=============
F-11
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
5. Notes Payable, continued
The loan agreements contain, among other provisions, certain financial
convenants relating to the maintenance of tangible net worth and the ratio of
debt to equity. The agreements impose limitations on the Company with respect to
dividends and also contain a clause allowing for the subjective accumulation of
amounts due under the loan agreements. The Company received a waiver of the
tangible net worth and the ratio of debt to equity covenants which enabled the
Company to comply with the loan agreement covenant at October 31, 1999.
Borrowings under the line of credit (Note 4) and the above term loans have been
guaranteed by three of the principal officers of the Corporation.
6. Stock Redemption
In March 1996, the Company entered into a Stock Redemption agreement with a
shareholder which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement, the Company has the right but not the obligation to
redeem up to 111,111 shares of Common Stock owned by the shareholder at the
price of $5.85 per share at any time through January 31, 1998. Commencing March
1, 1998 through February 28, 2000, the Company is obligated to redeem shares at
$5.85 per share. The number of shares required to be redeemed quarterly is based
on the sum of (i) an amount equal to 2% of the Company's pretax profits each
fiscal quarter (beginning with the quarter ended February 28, 1998) and (ii) an
amount equal to 2% (but not to exceed $3,000) of the amount that latex and mylar
balloon revenues exceed $1.3 million in any month. The company also has the
right to redeem additional shares of Common Stock from the shareholder during
this period at $5.85 per share, provided total number of shares subject to
redemption under the Stock Redemption Agreement does not exceed 111,111.
Redeemable Common Stock has been reflected as a liability with a contra equity
account on the balance sheet. As of October 31, 1999, 40,444 shares of Common
Stock have been redeemed under the Stock Redemption Agreement.
7. Income Taxes
The income tax provisions (benefits) as of October 31, are comprised of the
following:
1998 1999
Current:
Federal $ -- $ --
State 32,208 --
Foreign -- 27,749
--------- ---------
32,208 27,749
Deferred:
Federal 22,672 (354,800)
State 5,133 (52,200)
--------- ---------
27,805 (407,700)
--------- ---------
Total income tax provision (benefit) $ 60,013 $(379,251)
========= =========
F-12
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
7. Income Taxes, continued
The components of the net deferred tax asset(liability)are as follows:
1998 1999
Deferred tax assets:
Accounts receivable allowance $ 50,349 $ 84,000
Inventory valuation 56,784 74,300
Accrued liabilities 49,979 50,873
Net operating loss carryforwards 695,062 1,465,600
Alternative minimum tax credit carryforwards 338,612 338,612
----------- -----------
Total deferred tax assets 1,190,786 2,013,385
Deferred tax liabilities:
Book over tax basis of capital assets 622,859 638,459
----------- -----------
567,927 1,374,926
Less: Valuation allowance -- (400,000)
----------- -----------
Net deferred tax asset $ 567,927 $ 974,926
=========== ===========
At October 31, 1999, the Company maintained a valuation allowance with respect
to deferred tax assets as a result of the uncertainty of ultimate realization.
At October 31, 1998 and 1999 the Company has net operating loss carryforwards
for tax purposes of approximately $1,800,000 and $3,718,000. The carryforwards
expire in the years 2011 and 2014. In addition, the Company has approximately
$339,000 of alternative minimum tax credits as of October 31, 1998 and 1999
which have no expiration date. Unremitted earnings of foreign subsidiaries have
been indefinitely reinvested.
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
1998 1999
Taxes at statutory rate $ 61,838 $(735,000)
State income taxes 3,388 (104,000)
Foreign taxes paid 32,208 27,749
Foreign income (51,194) --
Changes in deferred
valuation allowance -- 400,000
Other 13,773 32,000
--------- ---------
Income tax provision (benefit) $ 60,013 $(379,251)
========= =========
8. Research and Development
The Company conducts product development and research activities which includes
(i) creative product development, (ii) creative marketing, and (iii) engineering
development. During the years ended October 31, 1998 and 1999, the Company
estimates that the total amount spent on research and development activities was
approximately $252,000 and $257,000, respectively.
F-13
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
9. Employee Benefit Plan
Effective January 1, 1993, the Company established a defined contribution plan
for substantially all employees. The plan provides for the Company matching
contributions on the first $300 of employee contributions with an additional
bonus match of 1% of compensation for all participants who are employees on the
last date of the plan year. Profit sharing contributions may also be made at the
discretion of the Board of Directors. Employer contributions to the plan totaled
$58,188 and $62,506 for the years ended October 31, 1998 and 1999, respectively.
The total other expense charged to operations relating to this plan amounted to
$9,995 and $5,138 for the years ended October 31, 1998 and 1999, respectively.
10. Related Party Transactions
The Company obtains legal services from law firms in which several shareholders
of the law firms are also shareholders of the Company, and in which one
shareholder of the law firms is both a director and a shareholder of the
Company. Legal fees incurred with these firms were $195,200 and $101,014 for the
years ended October 31, 1998 and 1999.
The Company purchases packaging materials from entities in which shareholders of
the Company maintain an ownership interest. Purchases from these affiliates were
$458,347 and $251,203 for the years ended October 31, 1998 and 1999.
In 1998 the Company advanced funds totaling $81,352 to officers of the Company.
$56,456 of these funds were used to purchase common stock of the Company and is
reflected as a contra equity account at October 31, 1999.
11. Joint Venture
Effective September 16, 1996, the Company entered into a joint venture agreement
with a manufacturer in Mexico. The joint venture, CTF International, was formed
to engage in the production and packaging of balloons. Under the agreement, both
entities will hold a 50% interest in the joint venture. As of October 31, 1998,
the Company has made a total capital investment in the joint venture of $77,975
and accounted for its proportionate share of income or loss using the equity
method. In July 1999, the Company acquired the remaining 50% of CTF
International for $40,000.
12. Investment in Subsidiary
On January 26, 1998, the Company and Pulidos Y Terminados Finos S.A. de C.V.
("P&TF") entered into an agreement under which (i) the Company subscribed for
45% of the outstanding capital stock of P&TF for $800,000, (ii) the Company
loaned to P&TF $850,000 collateralized by certain latex balloon manufacturing
equipment, and (iii) the 1995 equipment purchase agreement between the parties
was cancelled with respect to 2 pieces of latex balloon manufacturing equipment,
which is now owned by CTI and leased to P&TF. The purchase of the capital stock
was effective February 1, 1998. The Company accounts for the investment using
the equity method.
F-14
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
13. Commitments and Contingencies
Operating Leases
The Company leases certain production facilities under a noncancellable lease
with monthly payments of $21,432 expiring December 31, 1999. The Company
subleases approximately 90% of this facility through December 31, 1999. The
Company's United Kingdom subsidiary also maintains a lease for office and
warehouse space which expires in 2019.
The Company leases office equipment under operating leases which expire on
various dates between November 1999 and April 2004.
The net rent expense of all lease payments was $115,519 in 1998 and $109,056 in
1999.
The future aggregate minimum net lease payments under existing agreements are as
of October 31, as follows:
Lease payments Sublease Income Net
2000 $ 151,666 $ 42,696 $ 108,970
2001 106,102 -- 106,102
2002 93,408 -- 93,408
2003 69,833 -- 69,833
2004 60,767 -- 60,767
Thereafter 775,500 -- 775,500
Licenses
The Company has certain merchandising license agreements that require royalty
payments based upon the Company's net sales of the respective products. The
agreements call for guaranteed minimum commitments that are determined on a
calendar year basis. Future guaranteed commitments due, as computed on a pro
rata basis, as of October 31, are as follows:
2000 $ 735,155
2001 783,676
2002 132,085
F-15
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
14. Recapitalization
In July 1997, the Company authorized a recapitalization (the "recapitalization")
without a formal reorganization. As part of the recapitalization, the Board of
Directors approved the creation of Class B Common Stock and negotiated a
conversion of all then outstanding shares of the Company's Convertible Preferred
Stock into an aggregate of 366,300 shares of Class B Common Stock. The
conversion was effective upon the closing of an initial public offering of
500,000 shares of the Company's Common Stock on November 5, 1997. The shares of
the Class B Common Stock contain rights identical to shares of Common Stock,
except that shares of Class B Common Stock, voting separately as a class, have
the right to elect four of the Company's seven directors. Shares of the Common
Stock and Class B Common Stock, voting together as a class, vote on all other
matters, including the election of the remaining directors. The Board of
Directors also approved a 1 for 2.6 reverse stock split on both the Common Stock
and Class B Common Stock. The recapitalization and related transactions were
approved by written consent of the shareholders.
15. Public Offering of Securities
In November of 1997, the Company issued 500,000 shares of Common Stock to the
public at $12.00 per share. The underwriting discounts and commissions against
the sale were $868,443 and the direct costs incurred by the Company were
$445,067.
Also in November of 1997, in connection with the underwriting option to purchase
additional shares to cover over-allotments, the Company issued 75,000 additional
shares of Common Stock to the public at $12.00 per share. The underwriting
discount and commissions against the sale were $117,000 with the net proceeds to
the Company amounting to $783,000.
16. Stock Options
On March 19, 1999, the Board of Directors approved for adoption, effective May
6, 1999, the 1999 Stock Option Plan ("Plan"). The Plan authorizes the grant of
options to purchase up to an aggregate of 133,333 shares of the Company's Common
Stock. As of October 31, 1999, no options had been granted under the 1999 Stock
Option Plan.
F-16
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
16. Stock Options, continued
Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total of
100,000 shares of Common Stock are reserved for issuance under the Stock Option
Plan. Options to purchase 99,667 shares of Common Stock have been granted as of
October 31, 1998 and 1999. The options are exercisable immediately upon grant
and have a term of ten years. The Plan provides for the award of options, which
may either be incentive stock options ("ISOs") within the meaning of Section
422A of the Internal Revenue Code of 1986, as amended (the "Code") or
non-qualified options ("NQOs") which are not subject to special tax treatment
under the Code. The Plan is administered by the Board or a committee appointed
by the Board (the "Administrator"). Officers, directors, and employees of, and
consultants to, the Company or any parent or subsidiary corporation selected by
the Administrator are eligible to receive options under the Plan. Subject to
certain restrictions, the Administrator is authorized to designate the number of
shares to be covered by each award, the terms of the award, the date on which
and the rates at which options or other awards may be exercised, the method of
payment and other terms.
The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market value in
the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an option to
the extent it was exercisable on the date of termination for a period of time
after termination.
In September, 1998 the Company issued an option to purchase 10,000 shares of the
Company's Common Stock at an exercise price of $7.50 per share to Thornhill
Capital LLC in consideration for services. The option has a term of 10 years.
In December, 1996, certain members of company management were issued warrants to
purchase 76,923 shares of the Company's Common Stock at an exercise price of
$2.73 per share in consideration of their facilitating and guaranteeing a bank
loan to the Company in the amount of $6.3 million. The warrants have a term of
six years.
In June, 1997, the Company issued in a private placement notes in the principal
amount of $865,000, together with warrants to purchase up to 92,415 shares of
the Company's Common Stock at an exercise price of $9.36 per share. The warrants
have a term of five years.
In September, 1999, warrants to purchase 16,026 shares of the Company's Common
Stock at an exercise price of $9.36 per share were cancelled and reissued at an
exercise price of $1.69 per share.
F-17
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
16. Stock Options, continued
The following is a summary of the activity in the Company's stock option plans
and other options issued for the year ended October 31, 1998, and 1999,
respectively.
1998 1999
Outstanding, beginning of period 209,671 272,539
Granted 70,667 16,026
Exercised (6,466) --
Cancelled (1,333) (17,360)
-------- --------
Outstanding at the end of period 272,539 271,205
======== ========
Weighted average exercise price per share $ 7.00 $ 6.54
======== ========
Exercisable at end of period 272,539 271,205
======== ========
Available for grant at end of period 333 133,666
======== ========
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", for its employee stock-based
compensation programs. Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Although expense recognition for employee stock based compensation is not
mandatory, SFAS No. 123 requires companies that choose not to adopt the new fair
value accounting to disclose pro-forma net income and earnings per share under
the new method.
The Company recognizes compensation cost for stock-based compensation awards
equal to the difference between the quoted market price of the stock at the date
of grant or award and the price to be paid by the employee upon exercise in
accordance with the provisions of APB No. 25. Based upon the terms of Company's
current stock option plans, the stock price on the date of grant and price paid
upon exercise are the same, thus no compensation charges is required to be
recognized.
As allowed by SFAS No. 123, the Company will continue to apply the provisions of
APB No. 25 in accounting for its stock-based employee compensation arrangements
and will disclose pro forma net income and earnings per share information in its
footnotes as if the fair value method suggested in SFAS No. 123 had been
applied.
F-18
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
16. Stock Options, continued
If compensation cost based on fair value method of the options had been used,
the Company's net income and earnings per common share (EPS) would have been as
follows:
1998
Net income (loss) $ 122
(89)
EPS $ 0.03
(0.02)
The pro forma effect of compensation cost based on the fair value method of the
warrants issued in 1999 was not significant.
The fair value of each option was estimated as of the date of the grant using
the Black-Scholes option pricing model based on the following assumptions:
1998 1999
Expected life (years) 5 3.75
Volatility 20% 20%
Risk-free interest rate 5.0% 6.0%
Dividend yield - -
The weighted average fair value of options granted during the years ending
October 31, 1998 and 1999 was $1,00 and $0.44 per share, respectively.
Significant option and warrant groups outstanding at October 31, 1999 and
related weighted average price and remaining life information are as follows:
Remaining Life
Grant Date Outstanding Exercisable Exercise Price (Years)
September 1998 70,667 70,667 $ 7.78 8
September 1997 37,666 37,666 $ 7.70 7
June 1997 76,389 76,389 $ 9.36 3
September 1999 16,026 16,026 $ 1.69 3
December 1996 70,457 70,457 $ 2.73 2
17. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," for the year ended
October 31, 1998. Adoption of this pronouncement, which was applied to prior
periods presented, did not have a material impact on the Company's financial
statements.
F-19
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
17. Earnings Per Share, continued
Basic earnings per share is computed by dividing the income available to common
shareholders, net earnings, less redeemable preferred stock dividends and
redeemable common stock accretion, by the weighted average number of shares of
common stock outstanding during each period.
Diluted earnings per share is computed by dividing the net earnings by the
weighted average number of shares of common stock and common stock equivalents
(redeemable common stock, stock options and warrants), unless anti-dilutive,
during each period.
Earnings per share for each of the two fiscal years in the period ended October
31, 1999 was computed as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1998 October 31, 1999
------------------------- --------------------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Average shares outstanding:
Weighted average shares
outstanding 1,266,003 1,266,003 1,269,984 1,269,984
Common stock equivalents
(options/warrants) -- 107,786 -- --
----------- ----------- ----------- -----------
1,266,003 1,373,789 1,269,984 1,269,984
Earnings:
Net income (loss) $ 121,860 $ 121,860 $(1,782,270) $(1,782,270)
Dividends applicable to
Redeemable Preferred stock -- -- -- --
----------- ----------- ----------- -----------
Income (loss) available to
common stockholders $ 121,860 $ 121,860 $(1,782,270) $(1,782,270)
=========== =========== =========== ===========
Net earnings (loss)applicable
to common shares $ 0.10 $ 0.09 $ (1.40) $ (1.40)
=========== =========== =========== ===========
</TABLE>
18. Future Adoption of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000.
Management has not determined what impact this standard, when adopted, will have
on the Company's financial statements.
F-20
<PAGE>
CTI Industries Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
19. Geographic Segment Data
The Company's operations consist of a business segment which designs,
manufactures, and distributes balloon products. Transfers between geographic
areas were primarily at cost. The Company's subsidiaries have assets consisting
primarily of trade accounts receivable and inventory. Sales and selected
financial information by geographic area for the years ended October 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
United States United Kingdom Mexico Eliminations Consolidated
1998
<S> <C> <C> <C> <C> <C>
Revenues $ 19,008,359 $ 1,751,131 $ -- $ (806,667) $ 19,952,823
Operating income 363,115 137,888 -- -- 501,003
Net income 3,509 118,351 -- -- 121,860
Total Assets 22,454,142 769,092 -- (369,613) $ 22,853,621
1999
Revenues $ 17,388,540 $ 1,826,874 $ 437,410 $ (1,046,410) $ 18,606,414
Operating income (1,481,723) 130,829 (14,720) -- (1,365,614)
Net income (1,874,456) 108,622 (16,436) -- (1,782,270)
Total Assets 20,677,206 839,891 412,262 $ (490,372) $ 21,438,987
</TABLE>
20. Fourth Quarter Adjustments
During the fourth quarter of the year ended October 31, 1998, the Company
recorded net charges against pre-tax income of approximately $581,000 primarily
related to a revaluation of inventory.
21. Subsequent Events
On November 4, 1999, a one-for-three reverse stock split became effective. The
information presented in these financial statements has been restated to reflect
the effect of the reverse split.
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 72%. The Company contributed to the capital of PTF certain
outstanding indebtedness of PTF to the company in the amount of approximately
$975,000, and certain equipment valued in total at approximately $745,000, in
exchange for capital stock of PTF.
In November 1999, 1997 warrants issued 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 per share were issued.
The new warrants have a term of five years.
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-KSB FOR THE
YEAR ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-KSB.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Corporation
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 336,832
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<RECEIVABLES> 3,412,053
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