10QSB 1 d25917_10qsb.txt 10QSB FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission File No. 000-23115 CTI INDUSTRIES CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-2848943 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 22160 North Pepper Road, Barrington, Illinois 60010 (Address of principal executive offices) (Zip Code) (847) 382-1000 (Registrant's telephone number, including area code) Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. APPLICABLE ONLY TO CORPORATE ISSUERS: COMMON STOCK, $.195 par value, 841,644 outstanding Shares and CLASS B COMMON STOCK, $2.73 par value, 366,300 outstanding Shares, as of March 31, 2001. Part I. FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements of the Registrant are attached to this Form 10-QSB: 1. Interim Balance Sheet as of March 31, 2001 and Balance Sheet as of December 31, 2000. 2. Interim Statements of Operations for the three month periods ending March 31, 2001, and March 31, 2000. 3. Interim Statements of Cash Flows for the three month periods ending March 31, 2001 and March 31, 2000. The Financial Statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of results for the periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations Net Sales. For the three months ended March 31, 2001, net sales were $6,081,000, as compared to sales of $7,162,000 for the three months ended March 31, 2000, a decrease of 15.1%. The decline in sales is due to a decrease in metallized balloon sales of approximately $1,400,000, which was partially offset by an increase in printed and laminated film sales of $350,000. Cost of Sales. For the three months ended March 31, 2001, cost of sales increased to 73.3% of net sales as compared to 69.1% of net sales for the same period in 2000. The increase was primarily the result of lower than expected margins in the production and sale of latex balloons. Administrative. For the three months ended March 31, 2001, administrative expenses were $747,000 or 12.3% of sales as compared to $858,000, or 12.0% of sales for the same period in 2000. The majority of the decrease in administrative expense dollars came from reduced expenditures in the Company's Mexico operation. Selling. For the three months ended March 31, 2001, selling expenses were $426,000 or 7.0% of sales, as compared to $523,000, or 7.3% of net sales for the same period in 2000. The decline in selling expense dollars is primarily related to the decline in sales volume and the selling expenses directly associated with those sales. Advertising and Marketing. For the three months ended March 31, 2001, advertising and marketing expenses were $271,000 or 4.5% of net sales as compared to $314,000 or 4.4% of net sales in the same period 2000. The decrease in advertising and marketing expense dollars came from several items, mainly reduced spending for printed 2 advertising media, and reduced expenditures related to the Company's participation in trade shows. Other Income or Expense. Interest expense increased to $300,000 for the three months ended March 31, 2001, as compared to $285,000 for the three months ended March 31, 2000. The increase in interest expense is due to the Company's increased level of borrowings. Net Income or Loss. For the three months ended March 31, 2001, the Company had a loss before taxes and minority interest of $148,000, as compared to income before taxes and minority interest of $263,000 for the same three month period in 2000. The provision for income taxes for the three-month period ended March 31, 2001 was $9,000, resulting in a net loss of $133,000. The provision for income taxes for the three-month period ended March 31, 2000 was $57,000, resulting in net income of $176,000. Financial Condition Liquidity and Capital Resources. Cash flow used in operations during the three months ended March 31, 2001 was $1,085,000, which resulted principally from an increase accounts receivable. During the three months ended March 31, 2000, cash flow provided by operations was $86,000, mainly a result of non-cash depreciation and amortization expense and lower inventory levels. Investment Activities. During the three months ended March 31, 2001 cash flow used in investing activities for the purchase of machinery and equipment was $82,000. In the three months ended March 31, 2000, $152,000 was used in investing activities, primarily for the purchase of machinery and equipment, and the purchase of additional equity ownership in CTI Mexico. Financing Activities. For the three months ended March 31, 2001, cash flow provided by financing activities was $1,208,000. The two primary sources of this cash flow were the refinancing of the Company's debt which netted additional cash of approximately $800,000, and the cash flow provided by the short-term revolving line of credit. Cash flow provided by financing activities for the three months ended March 31, 2000 was $171,000, resulting from the use of the short-term revolving line of credit. At March 31, 2001, the Company had a cash balance of $435,000. The Company's current cash management strategy includes maintaining minimal cash balances and utilizing the revolving line of credit for liquidity. At December 31, 2000, the Company had cash and cash equivalents of $393,000. At March 31, 2001, the Company had working capital of ($1,180,000), and at December 31, 2000, working capital was ($3,862,000). 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 3 years. The sale of latex balloons and laminated film products have not historically been seasonal. Safe Harbor Provision of the Private Securities Litigation Act of 1995 and Forward Looking Statements. The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for mylar and latex balloon products is generally characterized by intense competition, frequent new product introductions and changes in customer tastes which can render existing products unmarketable. The statements contained in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operation) that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in the Company's filings with the Securities and Exchange Commission including, without limitation, those described under "Risk Factors" in the Company's Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997. The forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 1999 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's limited operating history on which expectations regarding its future performance can be based, competition from, among others, national and regional balloon, packaging and custom film product manufacturers and sellers that have greater financial, technical and marketing resources and distribution capabilities than the Company, the availability of sufficient capital, the maturation and success of the Company's strategy to develop, market and sell its products, risks inherent in conducting international business, risks associated with securing licenses, changes in the Company's product mix and pricing, the effectiveness of the Company's efforts to control operating expenses, general economic and business conditions affecting the Company and its customers in the United States and other countries in which the Company sells and anticipates selling its products and services and the Company's ability to (i) adjust to changes in technology, customer preferences, enhanced competition and new competitors; (ii) protect its intellectual property rights from infringement or misappropriation; (iii) maintain or enhance its relationships with other businesses and vendors; 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. 4 Part II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. 5 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits* No. --- Statement re: Computation of Per Share Earnings 11 (b) The Company has not filed a Current Report on Form 8-K during the quarter covered by this report. * Also incorporated by reference the Exhibits filed as part of the SB-2 Registration Statement of the Registrant, effective November 5, 1997, and subsequent periodic filings. 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: May 18, 2001 CTI INDUSTRIES CORPORATION By: /s/ Howard W. Schwan --------------------------------- Howard W. Schwan, President 7 CTI Industries Corporation and Subsidiaries Consolidated Balance Sheets March 31, December 31, 2001 2000 (Unaudited) (Audited) ------------ ------------ ASSETS Current assets: Cash $ 434,803 $ 392,534 Accounts receivable (less allowance for doubtful accounts of $328,086 and $312,572 at March 31, 2001 and December 31,2000, respectively) 4,150,754 2,573,577 Inventories 6,930,016 7,060,996 Deferred tax assets 65,700 65,700 Other 727,888 659,371 ------------ ------------ Total current assets 12,309,161 10,752,178 Property and equipment: Machinery and equipment 13,482,893 13,472,187 Building 2,383,530 2,370,644 Office furniture and equipment 1,672,143 1,652,823 Land 250,000 250,000 Leasehold improvements 161,885 161,885 Fixtures and equipment at customer locations 2,202,743 2,202,743 Projects under construction 495,155 405,748 ------------ ------------ 20,648,349 20,516,030 Less: accumulated depreciation (11,720,171) (11,342,792) ------------ ------------ Total property and equipment, net 8,928,178 9,173,238 Other assets: Deferred financing costs, net 125,958 11,412 Goodwill associated with acquisition of CTI Mexico, net 1,179,493 1,199,771 Deferred tax assets 811,202 812,591 Other assets 360,765 269,600 ------------ ------------ Total other assets 2,477,418 2,293,374 ------------ ------------ TOTAL ASSETS $ 23,714,757 $ 22,218,790 ============ ============ See accompanying notes LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 2001 2000 (Unaudited) (Audited) ------------ ------------ Current liabilities: Accounts payable $ 5,123,753 $ 5,045,773 Line of credit 4,520,311 3,609,541 Notes payable - current portion 1,715,918 4,176,934 Accrued liabilities 2,129,482 1,781,984 ------------ ------------ Total current liabilities 13,489,464 14,614,232 Long-term liabilities: Other liabilities 824,809 802,596 Notes payable 4,091,362 1,301,022 Subordinated debt 486,640 496,640 ------------ ------------ Total long-term liabilities 5,402,811 2,600,258 Minority interest 215,300 238,787 Stockholders' equity: Common stock - $.195 par value, 5,000,000 shares authorized, 966,327 shares issued, 841,644 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 Warrants issued in connection with subordinated debt 228,360 228,360 Accumulated deficit (1,660,098) (1,526,829) Accumulated other comprehensive earnings (67,306) (42,244) Less: Treasury stock - 124,683 shares (575,384) (575,384) Stock subscription receivable (4,700) (4,700) Notes receivable from stockholders (56,456) (56,456) ------------ ------------ Total stockholders' equity 4,607,182 4,765,513 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 23,714,757 $ 22,218,790 ============ ============ See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Statements of Operations Quarter Ended March 31 2001 2000 (Unaudited) (Unaudited) Net Sales $ 6,080,573 $ 7,162,326 Cost of Sales 4,457,778 4,948,329 ----------- ----------- Gross profit on sales 1,622,795 2,213,997 Operating expenses: Administrative 746,925 857,522 Selling 425,581 522,774 Advertising and marketing 271,199 314,226 ----------- ----------- Total operating expenses 1,443,705 1,694,522 ----------- ----------- Income from operations 179,090 519,475 Other income (expense): Interest expense (299,904) (285,411) Interest income 741 9,580 Gain on sale of assets 7,512 7,512 Other (35,072) 11,592 ----------- ----------- Total other income (expense) (326,723) (256,727) ----------- ----------- Income (loss) before income taxes and minority interest (147,633) 262,748 Income tax expense 9,123 57,251 ----------- ----------- Income (loss) before minority interest (156,756) 205,497 Minority interest in profit (loss) of subsidiary (23,487) 29,287 ----------- ----------- Net income (loss) $ (133,269) $ 176,210 =========== =========== Income (loss) applicable to common shares $ (133,269) $ 176,210 =========== =========== Basic income (loss) per common and common equivalent shares $ (0.11) $ 0.15 =========== =========== Diluted income (loss) per common and common equivalent shares $ (0.11) $ 0.13 =========== =========== Weighted average number of shares and equivalent shares of common stock outstanding: Basic 1,207,944 1,207,944 =========== =========== Diluted 1,207,944 1,315,442 =========== =========== See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Statements of Cash Flows
Quarter Ended March 31 2001 2000 (Unaudited) (Unaudited) ----------- --------- Cash flows from operating activities: Net profit (loss) $ (133,269) $ 176,210 Adjustment to reconcile net profit (loss) to cash provided by operating activities: Depreciation and amortization 390,936 440,293 Minority interest in profit (loss) of subsidiary (23,487) 29,287 Gain on sale of fixed assets (7,512) (7,512) Provision for losses on accounts receivable & inventory 50,000 49,500 Change in assets and liabilities: Accounts receivable (1,338,556) (478,582) Inventory (215,727) 286,218 Other assets 204,184 (153,813) Accounts payable and accrued expenses (11,642) (255,323) ----------- --------- Net cash (used in) provided by operating activities (1,085,073) 86,278 Cash flows from investing activities: Purchases of property and equipment (81,938) (66,752) Purchase additional interest in CTI Mexico -- (85,652) ----------- --------- Net cash used in investing activities (81,938) (152,404) Cash flows from financing activities: Net change in revolving line of credit 910,770 422,166 Proceeds from issuance of long-term debt 4,655,035 -- Proceeds from issuance of short-term debt 1,131,819 -- Repayment of long-term debt (4,464,216) (236,654) Repayment of short-term debt (1,014,920) -- Repayment of subordinated debt (10,000) (15,000) ----------- --------- Net cash provided by financing activities 1,208,488 170,512 Effect of exchange rate changes on cash 792 8,475 ----------- --------- Net increase in cash 42,269 112,861 Cash and Equivalents at Beginning of Period 392,534 130,103 ----------- --------- Cash and Equivalents at End of Period $ 434,803 $ 242,964 =========== =========
See accompanying notes March 31, 2001 Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 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 December 31, 2000. Note 2 - Company Debt Restructure In January 2001, the Company entered into a Loan and Security Agreement with a new lender under which the lender has provided the Company with a credit facility in the amount of $9,500,000, secured by equipment, inventory, receivables, and other assets of the Company. The credit facility includes a term loan of $1,426,000, at an interest rate of prime plus 0.75%, and a revolving line of credit at an interest rate of prime plus 0.50%, the amount of which is based on advances of up to 85% of eligible receivables and 50% of the value of the Company's inventory. The credit facility is secured by substantially all assets of the Company. The term of this credit facility is for a period of three years, which may be extended by either party for an additional year. Also in January 2001, another lender loaned to the Company the sum of $2,873,000 in a refinance of the Company's principal office building and property situated in Barrington, Illinois. The loan is secured by the aforementioned building and property, and has been made in the form of two notes. The first note is in the principal amount of $2,700,000, bears interest at the rate of 9.75%, and has a term of five years with an amortization period of 25 years. The second note is in the principal amount of $173,000 with an interest rate of 10%, and has a term of three years. Note 3 - Earnings Per Share The Company adopted SFAS No. 128, "Earnings per Share," for the year ended October 31, 1998. Adoption of this pronouncement did not have a material impact on the Company's financial statements. Basic earnings per share is computed by dividing the income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (stock options and warrants), unless anti-dilutive, during each period. Earnings per share for the periods ended March 31, 2001 and 2000 was computed as follows: CTI Industries Corporation and Subsidiaries Quarter Ended March 31 2001 2000 (Unaudited) (Unaudited) ----------- ----------- Basic Average shares outstanding: Weighted average number of shares of common stock outstanding during the period 1,207,944 1,207,944 =========== ========== Net income: Net income (loss) $ (133,269) $ 176,210 Amount for per share computation $ (133,269) $ 176,210 =========== ========== Per share amount $ (0.11) $ 0.15 =========== ========== Diluted Average shares outstanding: Weighted average number of shares of common stock outstanding during the period 1,207,944 1,207,944 Net additional shares assuming stock options and warrants exercised and proceeds used to purchase treasury stock -- 107,498 ----------- ---------- Weighted average number of shares and equivalent shares of common stock outstanding during the period 1,207,944 1,315,442 =========== ========== Net income: Net income (loss) $ (133,269) $ 176,210 Amount for per share computation $ (133,269) $ 176,210 =========== ========== Per share amount $ (0.11) $ 0.13 =========== ==========