10QSB 1 form10-qsb_24155.txt TRANSITION REPORT FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from November 1, 1999 to December 31, 1999 Commission File No. 000-23115 CTI INDUSTRIES CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-2848943 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 22160 North Pepper Road, Barrington, Illinois 60010 (Address of principal executive offices) (Zip Code) (847) 382-1000 (Registrant's telephone number, including area code) October 31, 1999 (Former name, former address and former fiscal year, if changed since last report) Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. APPLICABLE ONLY TO CORPORATE ISSUERS: COMMON STOCK, $.195 par value, 841,644 outstanding Shares and CLASS B COMMON STOCK, $2.73 par value, 366,300 outstanding Shares, as of December 31, 1999. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one) Yes _______ No ___X___ Part I. FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements of the Registrant are attached to this Form 10-QSB: 1. Consolidated Balance Sheet as of October 31, 1999, and consolidated Balance Sheet as of December 31, 1999. 2. Consolidated Statements of Operations for the two months ended December 31, 1999 and December 31, 1998. 3. Consolidated Statements of Cash Flows for the two months ended December 31, 1999 and December 31, 1998. The Financial Statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of results for the periods presented. A review of the financial statements attached to this Form 10-QSB has not been performed by an independent certified public accountant in accordance with Statement of Auditing Standards No. 71. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations Net Sales. For the two months ended December 31, 1999, net sales were $3,906,000, as compared to sales of $3,151,000 for the two months ended December 31, 1998, an increase of 24.0%. Sales increased over all product lines - mylar balloons, latex balloons and laminated and printed films. Net sales grew over $700,000 in the laminations and printed films product line, and latex balloon sales increased through the acquisition of PTF Industrias, S.A. de C.V. ("PTF"). Cost of Sales. For the two months ended December 31, 1999, cost of sales increased to 68.3% of net sales as compared to 62.1% of net sales for the same period in 1998. The increase was primarily the result of consolidating the results of PTF's operations which currently operate with a higher cost of goods sold percentage than domestic operations. Administrative. For the two months ended December 31, 1999, administrative expenses were $646,000 or 16.5% of sales as compared to $353,000, or 11.2% of sales for the same period in 1998. The primary increase in administrative expenses came from the acquisition of PTF. Beginning in January, 2000, PTF's administrative expenses have been reduced, and management plans to continue reducing expenses during the remainder of the fiscal year. Domestically, administrative expenses increased due to costs associated with the reverse stock split, and consulting fees incurred in a corporate wide project to improve cost accounting procedures. 2 Selling. For the two months ended December 31, 1999, selling expenses were $343,000 or 8.8% of sales, as compared to $426,0000, or 13.5% of net sales for the same period in 1998. The decline in selling expense dollars is primarily related to the re-negotiation of certain licensing agreements, reducing royalty expenses in the current year. Advertising and Marketing. For the two months ended December 31, 1999, advertising and marketing expenses were $225,000 or 5.8% of net sales, as compared to $325,000 or 10.3% of net sales, in the same period 1998. The decrease in advertising and marketing expense dollars came from several items, mainly reduced servicing costs on several national account programs, and reduced expenditures related to the Company's attendance at fewer trade shows. Other Income or Expense. Interest expense increased to $231,000 for the two months ended December 31, 1999, as compared to $148,000 for the two months ended December 31, 1998. The increase was primarily due to the consolidation of PTF, whose interest expense totaled $80,000 for the two month period in 1999. During the two months ended December 31, 1999, the Company sold its building located next to its headquarters in Barrington, Illinois for a gain of $300,000, and entered into an agreement to lease back the facility. Net Income or Loss. For the two months ended December 31, 1999, the Company had income before taxes and minority interest of $126,000, as compared to a loss before taxes of $30,000 for the same two month period in 1998. The provision for income taxes for the two month period ended December 31, 1999, was $50,000, resulting in net income of $90,000. The tax benefit for the two month period ended December 31, 1998 was $18,000, resulting in a net loss of $12,000. Financial Condition Liquidity and Capital Resources. Cash flow used in operations during the two months ended December 31, 1999, was $400,000, which was due to increasing accounts receivable and inventory levels driven by increasing sales volume. During the two months ended December 31, 1998, cash flows provided by operations was $163,000, mainly as a result of non-cash depreciation expense and lower inventory levels. Investment Activities. During the two months ended December 31, 1999, cash flow provided by investing activities was $1,763,000. The cash inflow was provided by the proceeds from the sale of the building located next to the Company's headquarters. Investments in machinery and equipment were $133,000 for the two months ended December 31, 1999. In the two months ended December 31, 1998, $910,000 was used in investing activities, primarily for the purchase of machinery and equipment. Financing Activities. For the two months ended December 31, 1999, the Company used $1,589,000 in financing activities primarily to pay off the long-term mortgage loan that existed on the building which was sold. Cash flow provided by financing activities for the two months ended December 31, 1998, was $776,000 resulting from the proceeds of long-term debt and use of the short-term revolving line of credit. 3 At December 31, 1999, the Company had a cash balance of $132,000. The Company's current cash management strategy includes maintaining minimal cash balances and utilizing the revolving line of credit for liquidity. At October 31, 1999, the Company had cash and cash equivalents of $337,000. At December 31, 1999, the Company had working capital of ($720,000), and at October 31, 1999, working capital was $630,000. The Company believes that existing capital resources and cash generated from operations, will be sufficient to meet the Company's requirements for at least 12 months. Seasonality. In the mylar product line, sales have historically been seasonal with approximately 20% to 27% of annual sales of mylar being generated in December and January and 11% to 13% of annual mylar sales being generated in June and July in recent years. The sale of latex balloons and laminated film products have not historically been seasonal. Safe Harbor Provision of the Private Securities Litigation Act of 1995 and forward Looking Statements. The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for mylar and latex balloon products is generally characterized by intense competition, frequent new product introductions and changes in customer tastes which can render existing products unmarketable. The statements contained in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operation) that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in the Company's filings with the Securities and Exchange Commission including, without limitation, those described under "Risk Factors" in the Company's Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997. The forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2000 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's limited operating history on which expectations regarding its future performance can be based, competition from, among others, national and regional balloon, packaging and custom film product manufacturers and sellers that have greater financial, technical and marketing resources and distribution capabilities than the Company, the availability of sufficient capital, the maturation and success of the Company's strategy to develop, market and sell its products, risks inherent in conducting international business, risks associated with securing licenses, changes in the Company's product mix and pricing, the effectiveness of the Company's efforts to control operating expenses, general economic and business conditions affecting the Company and its customers in the United States and other countries in which the Company sells and anticipates selling its products and services and the Company's ability to (i) adjust to 4 changes in technology, customer preferences, enhanced competition and new competitors; (ii) protect its intellectual property rights from infringement or misappropriation; (iii) maintain or enhance its relationships with other businesses and vendors; and (iv) attract and retain key employees. There can be no assurance that the Company will be able to identify, develop, market, sell or support new products successfully, that any such new products will gain market acceptance, or that the Company will be able to respond effectively to changes in customer preferences. There can be no assurance that the Company will not encounter technical or other difficulties that could delay introduction of new or updated products in the future. If the Company is unable to introduce new products and respond to industry changes or customer preferences on a timely basis, its business could be materially adversely affected. The Company is not obligated to update or revise these forward-looking statements to reflect new events or circumstances. Part II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders On October 25, 1999, the Company solicited the written consent of its Common and Class B Common stockholders with respect to the approval of a one-for-three reverse split of the Company's $.065 Common and $.91 par value Class B Common Stock, whereby every three shares of the Company's Common stock would be reclassified and changed into one share of the Company's Common Stock with a new par value of $.195 per share, and every three shares of the Company's Class B Common Stock would be reclassified and changed into one share of the Company's Class B Common Stock, with a new par value of $2.73 per share. The written consents of the Common and Class B Common shareholders of record as of the close of business on October 20, 1999, were solicited in lieu of a special meeting pursuant to Section 228 of Delaware General Corporation Law. The requisite notice of solicitation and definitive proxy materials were mailed to said stockholders and filed with the Securities Exchange Commission on October 25, 1999. On October 20, 1999, there were 2,635,831 shares of the Company's Common Stock, and 1,098,901 shares of the Company's Class B Common Stock issued and outstanding. A total of 2,445,729 shares of Common stock were voted; of these 2,409,739 shares of Common Stock were voted in favor of the proposed 1-for-3 reverse 5 stock split, while 33,790 shares were voted against the proposed 1-for-3 reverse stock split. 2,200 of the 2,445,729 shares of voted Common Stock were abstentions. A total of 989,011 shares of Class B Common Stock were voted, all in favor of the proposed 1 for 3 reverse stock split. Thus, of the 3,734,732 combined shares of Common and Class B Common Stock eligible to vote with respect to the proposed reverse stock split, 3,434,740 total shares were voted, and of these shares, 3,398,750 (or approximately 91% of the shares eligible to vote) voted in favor of the proposed 1-for-3 reverse stock split, 33,790 (or less than 1% of the shares eligible to vote) voted against the proposed 1 for 3 reverse stock split, and there were 2,200 abstentions. The reverse stock split became effective at the close of business (Eastern Time) on November 4, 1999. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits * *Incorporated by reference are the Exhibits filed as part of the Registrant's SB-2 Registration Statement, effective November 5, 1997, and subsequent periodic filings. (b) Reports on Form 8-K: (i) Form 8-K filed November 5, 1999, reporting the effectuation of a 1 for 3 reverse split of the Company's $.065 par value Common Stock and $.91 par value Class B Common Stock, effective at the close of business (Eastern Time) on November 4, 1999. (ii) Form 8-K filed November 30, 1999, reporting the Company's acquisition of PTF Industrias, S.A. de C.V., (a Guadalajara, Mexico manufacturer of latex balloons) effective November 12, 1999. 6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 21, 2000 CTI INDUSTRIES CORPORATION By: /s/ Howard W. Schwan ----------------------------------- Howard W. Schwan, President 7 CTI Industries Corporation and Subsidiaries Consolidated Balance Sheet as of October 31, 1999 and December 31, 1999
October 31, 1999 December 31, 1999 (See note) (Unaudited) ------------ ------------ ASSETS Current assets: Cash $ 336,832 $ 131,858 Accounts receivable (less allowance for doubtful accounts of $186,251 and $227,638 at October 31, 1999 and December 31, 1999) 3,225,802 4,383,473 Inventories 5,425,769 6,647,353 Deferred tax assets 208,926 208,926 Other 754,303 618,242 ------------ ------------ Total current assets 9,951,632 11,989,852 Property and equipment: Machinery and equipment 9,752,302 12,949,429 Building 3,643,675 2,363,744 Office furniture and equipment 1,588,382 1,588,719 Land 535,000 250,000 Leasehold improvements 161,885 161,885 Fixtures and equipment at customer locations 2,031,919 2,031,919 Projects under construction 391,719 321,930 ------------ ------------ 18,104,882 19,667,626 Less : accumulated depreciation (9,048,413) (9,227,243) ------------ ------------ Total property and equipment, net 9,056,469 10,440,383 Other assets: Deferred financing costs, net 29,165 26,629 Goodwill associated with acquisition of PTF -- 590,188 Invesment in subsidiary 809,773 (0) Note receivable 715,422 -- Deferred tax assets 766,000 766,000 Other assets 110,526 309,876 ------------ ------------ Total other assets 2,430,886 1,692,693 ------------ ------------ TOTAL ASSETS $ 21,438,987 $ 24,122,928 ============ ============
See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Balance Sheet as of October 31, 1999 and December 31, 1999
October 31, 1999 December 31, 1999 (See note) (Unaudited) ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,980,500 $ 5,787,196 Line of credit 3,574,023 3,849,203 Notes payable - current portion 1,367,070 957,469 Accrued liabilities 1,399,689 2,115,640 ------------ ------------ Total current liabiliites 9,321,282 12,709,508 Long-term liabilities: Other liabilities 15,928 93,256 Notes payable 5,534,876 4,167,828 Subordinated debt 865,000 840,000 ------------ ------------ Total long-term liabilities 6,415,804 5,101,084 Redeemable common stock 413,406 413,406 Minority interest -- 561,411 Stockholders' equity: Common stock - $.195 par value, 5,000,000 shares authorized, 966,327 shares issued, 870,944 (October 31, 1999) and 841,644 (December 31, 1999) shares outstanding 188,434 188,434 Class B Common stock - $2.73 par value, 500,000 shares authorized, 366,300 shares issued and outstanding 1,000,000 1,000,000 Paid-in-capital 5,554,332 5,554,332 Retained earnings (deficit) (481,136) (391,206) Accumulated other comprehensive earnings 14,548 35,905 Less: Treasury stock - 95,383 (October 31, 1999) and 124,683 (December 31, 1999) shares (513,121) (575,384) Redeemable common stock (413,406) (413,406) Stock subscription receivable (4,700) (4,700) Notes receivable from stockholders (56,456) (56,456) ------------ ------------ Total stockholders' equity 5,288,495 5,337,519 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 21,438,987 $ 24,122,928 ============ ============
Note: The balance sheet at October 31, 1999 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete statements. See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Statements of Operations
Two months ended December 31 1999 1998 (Unaudited) (Unaudited) ----------- ----------- Net Sales $ 3,905,896 $ 3,151,192 Cost of Sales 2,667,907 1,956,365 ----------- ----------- Gross profit on sales 1,237,989 1,194,827 Operating expenses: Administrative 645,592 353,422 Selling 342,957 425,615 Advertising and marketing 224,663 324,662 ----------- ----------- Total operating expenses 1,213,212 1,103,699 ----------- ----------- Income from operations 24,777 91,128 Other income (expense): Interest expense (230,605) (147,616) Interest income 5,448 14,010 Gain on sale of assets 300,467 -- Other 28,467 12,191 ----------- ----------- Total other income (expense) 103,777 (121,415) ----------- ----------- Income (loss) before income taxes and minority interest 128,554 (30,287) Income tax expense (benefit) 50,383 (18,093) ----------- ----------- Income (loss) before minority interest 78,171 (12,194) Minority interest in (loss) of subsidiary (11,759) -- ----------- ----------- Net income (loss) $ 89,930 $ (12,194) =========== =========== Income (loss) applicable to common shares $ 89,930 $ (12,194) =========== =========== Basic income (loss) per common and common equivalent shares $ 0.07 $ (0.01) =========== =========== Diluted income (loss) per common and common equivalent shares $ 0.07 $ (0.01) =========== =========== Weighted average number of shares and equivalent shares of common stock outstanding: Basic 1,222,549 1,278,244 =========== =========== Diluted 1,257,397 1,322,285 =========== ===========
CTI Industries Corporation and Subsidiaries Consolidated Statements of Cash Flows
For the two months ended December 31 1999 1998 (Unaudited) (Unaudited) ----------- ----------- Cash flows from operating activities: Net income (loss) $ 89,930 $ (12,194) Adjustment to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 264,616 208,041 Equity in loss of subsidiary and joint venture -- 3,467 Minority interest in loss of subsidiary (11,759) -- Gain on sale of fixed assets (300,467) -- Provision for losses on accounts receivable & inventory 32,760 66,084 Change in assets and liabilities: Accounts receivable (524,106) (517,110) Inventory (732,686) 120,827 Other assets (113,312) 57,190 Accounts payable and accrued expenses 894,902 236,292 ----------- ----------- Net cash provided by (used in) operating activities (400,122) 162,597 Cash flows from investing activities: Proceeds from sale of property and equipment 1,841,984 -- Purchases of property and equipment (133,490) (909,914) Cash acquired in acquisition of PTF 54,029 -- ----------- ----------- Net cash provided by (used in) investing acitivites 1,762,523 (909,914) Cash flows from financing activities: Net change in line of credit 275,180 161,054 Proceeds from issuance of long-term debt -- 695,366 Repayment of long-term debt (1,396,649) (80,578) Repayment of short-term debt (380,000) -- Repayment of subordinated debt (25,000) -- Purchase of treasury stock (62,263) -- ----------- ----------- Net cash provided by (used in) financing activities (1,588,732) 775,842 Effect of exchange rate changes on cash 21,357 50,937 ----------- ----------- Net increase (decrease) in cash (204,974) 79,462 Cash and Equivalents at Beginning of Period 336,832 235,333 ----------- ----------- Cash and Equivalents at End of Period $ 131,858 $ 314,795 =========== ===========
See accompanying notes December 31, 1999 Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company and Subsidiaries' annual report on Form 10-KSB for the year ended October 31, 1999. On October 13, 2000, the Board of Directors of CTI Industries Corporation elected to change its fiscal year end from October 31 to December 31. Accordingly, the unaudited consolidated financial statements are presented for the transition period from November 1, 1999 through December 31, 1999. Note 2 - Stock Split On November 4, 1999, a one-for-three reverse stock split became effective. As a result of the reverse stock split, every three shares of the Company's Common Stock were reclassified and changed into one share of the Company's Common Stock with a new par value of $.195 per share, and every three shares of the Company's Class B Common Stock were reclassified and changed into one share of the Company's Class B Common Stock, with a new par value of $2.73 per share. Note 3 -- Warrants Issued In November 1999, warrants issued in 1997 to purchase up to 76,388 shares of the Company's Common Stock for $9.36 were cancelled. New warrants to purchase up to 423,579 shares of the Company's Common Stock at $1.688 were issued. The new warrants expire on November 9, 2004. Note 4 -- Acquisition of majority interest in PTF On November 12, 1999, the Company entered into an agreement to acquire additional shares of PTF Industrias S.A. de C.V., bringing the Company's Common Stock ownership to approximately 74%. The Company contributed to the capital of PTF certain outstanding indebtedness of PTF to the Company in the amount of $989,400, and certain equipment valued at $855,600, in exchange for capital stock of PTF. The acquisition resulted in the recording of goodwill in the amount of $621,395, which is being amortized over a period of 15 years. Note 5 - Earnings Per Share The Company adopted SFAS No. 128, "Earnings per Share," for the year ended October 31, 1998. Adoption of this pronouncement did not have a material impact on the Company's financial statements. Basic earnings per share is computed by dividing the income available to common shareholders, net earnings less preferred stock dividends, by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (stock options and warrants), unless anti-dilutive, during each period. Earnings per share for the periods ended December 31, 1999 and 1998 was computed as follows: CTI Industries Corporation and Subsidiaries Two months ended December 31 1999 1998 ----------- ----------- Basic Average shares outstanding: Weighted average number of shares of common stock outstanding during the period 1,222,549 1,278,244 =========== =========== Net income: Net income $ 89,930 $ (12,194) Amount for per share computation $ 89,930 $ (12,194) =========== =========== Per share amount $ 0.07 $ (0.01) =========== =========== Diluted Average shares outstanding: Weighted average number of shares of common stock outstanding during the period 1,222,549 1,278,244 Net additional shares assuming stock options and warrants exercised and proceeds used to purchase treasury stock 34,848 -- ----------- ----------- Weighted average number of shares and equivalent shares of common stock outstanding during the period 1,257,397 1,320,332 =========== =========== Net income: Net income $ 89,930 $ (12,194) Amount for per share computation $ 89,930 $ (12,194) =========== =========== Per share amount $ 0.07 $ (0.01) =========== ===========