10QSB 1 d26633_10-qsb.txt FORM 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 June 30, 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 June 30, 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 June 30, 2001 and Balance Sheet as of December 31, 2000. 2. Interim Statements of Operations for the three and six month periods ending June 30, 2001, and June 30, 2000. 3. Interim Statements of Cash Flows for the six month periods ending June 30, 2001 and June 30, 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 fiscal quarter ended June 30, 2001, net sales were $6,876,000, compared to net sales of $5,434,000 for the three months ended June 30, 2000, an increase of 26.5%. Net sales for the first six months of fiscal 2001 increased 2.9% to $12,957,000, compared to net sales of $12,596,000 for the six months ended June 30, 2000. For the six month period, sales of laminated, specialty and printed films increased by 78.0% compared to the same period of the prior year. This increase was offset by a decline in the sales of metallized balloons for the same period. Cost of Sales. For the fiscal quarter ended June 30, 2001, cost of sales increased to 73.7% of net sales as compared to 66.1% of net sales in the three month period ended June 30, 2000. This increase was the result principally of the shift in sales to laminated films and latex balloons. Cost of goods sold was 73.5% of net sales for the first six months of fiscal 2001, compared to 67.8% for the six-month period ended June 30, 2000. Administrative. For the fiscal quarter ended June 3, 2001, administrative expenses were $818,000, or 11.9% of net sales as compared to $858,000, or 15.8% of net sales for the three month period ended June 30, 2000. For the first six months of fiscal 2001, administrative expenses were $1,565,000, or 12.1% of net sales as compared to $1,715,000, or 13.6% of net sales for the six month period ended June 30, 2000. The decrease in administrative expenses is attributable principally to a reduction in personnel. 2 Selling. For the fiscal quarter ended June 30, 2001, selling expenses were $445,000, or 6.5% of net sales, as compared to $555,000, or 10.2% of net sales for the three month period ended June 30, 2000. For the first six months of fiscal 2001, selling expenses were $871,000, or 6.7% of net sales as compared to $1,078,000, or 8.5% of net sales for the three month period ended June 30, 2000. The decline in selling expense dollars is primarily related to a decrease in personnel in Mexico. Advertising and Marketing. For the fiscal quarter ended June 30, 2001, advertising and marketing expenses were $307,000, or 4.5% of net sales as compared to $310,000, or 5.7% of net sales in the three month period ended June 30, 2000. For the first six months of fiscal 2001, advertising and marketing expenses were $578,000, or 4.5% of sales as compared to $625,000, or 4.9% of net sales for the six month period ended June 30, 2000. Other Income or Expense. Interest expense increased to $243,000 for the quarter ended June 30, 2001, as compared to $181,000 for the three month period ended June 30, 2000. Interest expense increased to $542,000 for the six months ended June 30, 2001, as compared to $466,000 for the three month period ended June 30, 2000. The increase in interest expense was due to the Company's increased level of borrowings. Net Income or Loss. For the fiscal quarter ended June 30 2001, the Company had income before taxes and minority interest of $86,000 as compared to a loss before taxes and minority interest of $318,000 for the three month period ended June 30, 2000. Income tax expense for the second quarter of fiscal 2001 was $4,000, resulting in net income of $60,000. The income tax expense for the three month period ended June 30, 2000 was $23,000, resulting in a net loss of $311,000. For the six months ended June 30, 2001, net loss was $73,000, as compared to a net loss of $134,000 for the six month period ended June 30, 2000. Financial Condition Liquidity and Capital Resources. Cash flow used in operations during the six months ended June 30, 2001 was $1,046,000, which was affected by an increase in accounts receivable resulting from increased sales volume and an increase in inventory. During the six month period ended June 30, 2000, cash flows provided by operations were $1,503,000, primarily the result of a disposition of assets. Investment Activities. During the six months ended June 30, 2001, cash flow used in investing activities for the purchase of machinery and equipment was $408,000. In the six month period ended June 30, 2000, $1,287,000 was used in investing activities, primarily for the purchase of an interest in CTI Mexico. Financing Activities. For the six months ended June 30, 2001, cash flow provided by financing activities was $1,104,000. The primary source of this cash flow was the net proceeds from new long-term indebtedness (less the payment of prior indebtedness). Cash flow provided by financing activities for the six month period ending June 30, 2000 was $44,000, resulting from the use of the short-term revolving line of credit. 3 At June 30, 2001, the Company had a cash balance of $30,000. 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 June 30, 2001, the Company had working capital of ($1,100,000), 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 metallized ballooon product line, sales have historically been seasonal, with approximately 20% to 27% of annual sales of metallized balloons 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. As sales of latex balloons and laminated film products have increased in relation to sales of metallized balloons, the effect of this seasonality has been reduced. 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 2001 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 4 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 obligate to update or revise these forward-looking statements to reflect new events or circumstances. Part II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. 5 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: August 16, 2001 CTI INDUSTRIES CORPORATION By: /s/ Howard W. Schwan ---------------------------------- Howard W. Schwan, President 7 CTI Industries Corporation and Subsidiaries Consolidated Balance Sheets
June 30, 2001 December 31, 2000 (Unaudited) (Audited) ------------ ------------ ASSETS Current assets: Cash $ 30,217 $ 392,534 Accounts receivable (less allowance for doubtful accounts of $341,093 and $312,572 at June 30, 2001 and December 31,2000, respectively) 4,351,847 2,573,577 Inventories 7,210,175 7,060,996 Deferred tax assets 208,926 65,700 Other 575,172 659,371 ------------ ------------ Total current assets 12,376,336 10,752,178 Property and equipment: Machinery and equipment 13,787,339 13,472,187 Building 2,388,229 2,370,644 Office furniture and equipment 1,723,338 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 442,010 405,748 ------------ ------------ 20,955,543 20,516,030 Less : accumulated depreciation (12,040,620) (11,342,792) ------------ ------------ Total property and equipment, net 8,914,923 9,173,238 Other assets: Deferred financing costs, net 107,965 11,412 Goodwill associated with acquisition of CTI Mexico, net 1,178,105 1,199,771 Deferred tax assets 668,473 812,591 Other assets 352,442 269,600 ------------ ------------ Total other assets 2,306,986 2,293,374 ------------ ------------ TOTAL ASSETS $ 23,598,246 $ 22,218,790 ============ ============
See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Balance Sheets
June 30, 2001 December 31, 2000 (Unaudited) (Audited) ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,123,395 $ 5,045,773 Line of credit 4,931,115 3,609,541 Notes payable - current portion 1,465,879 4,176,934 Accrued liabilities 1,956,032 1,781,984 ------------ ------------ Total current liabilities 13,476,421 14,614,232 Long-term liabilities: Other liabilities 802,374 802,596 Notes payable 3,953,635 1,301,022 Subordinated debt 472,367 496,640 ------------ ------------ Total long-term liabilities 5,228,376 2,600,258 Minority interest 237,766 238,787 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 242,633 228,360 Accumulated deficit (1,600,216) (1,526,829) Accumulated other comprehensive earnings (92,959) (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 4,655,684 4,765,513 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 23,598,246 $ 22,218,790 ============ ============
See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Statements of Operations
Quarter Ended June 30 Year to Date June 30 2001 2000 2001 2000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ------------ ------------ Net Sales $ 6,876,201 $ 5,433,937 $ 12,956,775 $ 12,596,262 Cost of Sales 5,068,423 3,592,727 9,526,201 8,541,055 ------------ ------------ ------------ ------------ Gross profit on sales 1,807,777 1,841,211 3,430,573 4,055,208 Operating expenses: Administrative 818,264 857,584 1,565,189 1,715,106 Selling 445,270 555,178 870,851 1,077,952 Advertising and marketing 307,111 310,395 578,310 624,621 ------------ ------------ ------------ ------------ Total operating expenses 1,570,646 1,723,157 3,014,351 3,417,679 ------------ ------------ ------------ ------------ Income from operations 237,132 118,054 416,223 637,529 Other income (expense): Interest expense (242,380) (180,633) (542,285) (466,044) Interest income -- 1,755 742 11,335 Gain on sale of assets 7,510 -- 15,022 7,512 Other 84,067 (257,660) 48,994 (246,068) ------------ ------------ ------------ ------------ Total other income (expense) (150,803) (436,538) (477,527) (693,265) ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interest 86,328 (318,484) (61,305) (55,736) Income tax expense 3,987 22,958 13,110 80,209 ------------ ------------ ------------ ------------ Income (loss) before minority interest 82,342 (341,442) (74,415) (135,946) Minority interest in profit (loss) of subsidiary 22,466 (30,821) (1,021) (1,534) ------------ ------------ ------------ ------------ Net income (loss) $ 59,876 $ (310,621) $ (73,394) $ (134,412) ============ ============ ============ ============ Income (loss) applicable to common shares $ 59,876 $ (310,621) $ (73,394) $ (134,412) ============ ============ ============ ============ Basic income (loss) per common and common equivalent shares $ 0.05 $ (0.26) $ (0.06) $ (0.11) ============ ============ ============ ============ Diluted income (loss) per common and common equivalent shares $ 0.05 $ (0.26) $ (0.06) $ (0.11) ============ ============ ============ ============ Weighted average number of shares and equivalent shares of common stock outstanding: Basic 1,207,944 1,207,944 1,207,944 1,207,944 ============ ============ ============ ============ Diluted 1,207,944 1,207,944 1,207,944 1,207,944 ============ ============ ============ ============
See accompanying notes CTI Industries Corporation and Subsidiaries Consolidated Statements of Cash Flows
For the six months ended June 30 2001 2000 (Unaudited) (Unaudited) ------------- ------------- Cash flows from operating activities: Net (loss) $ (73,394) $ (134,411) Adjustment to reconcile net loss to cash (used in) provided by operating activities: Depreciation and amortization 719,986 637,577 Minority interest in (loss) of subsidiary (1,021) (1,534) Gain on sale of fixed assets (15,022) (7,512) Provision for losses on accounts receivable & inventory 50,000 50,000 Change in assets and liabilities: Accounts receivable (1,541,659) 52,096 Inventory (571,063) (78,056) Other assets 382,180 1,021,878 Accounts payable and accrued expenses 3,818 (36,940) ------------- ------------- Net cash (used in) provided by operating activities (1,046,175) 1,503,098 Cash flows from investing activities: Proceeds from sale of proprty and equipment 289,202 Purchases of property and equipment (408,243) (25,216) Purchase additional interest in CTI Mexico -- (1,550,510) ------------- ------------- Net cash used in investing activities (408,243) (1,286,524) Cash flows from financing activities: Net change in revolving line of credit 1,321,574 541,292 Proceeds from issuance of long-term debt 5,808,548 -- Repayment of long-term debt (5,086,276) (442,224) Repayment of short-term debt (930,000) -- Repayment of subordinated debt (10,000) (55,000) ------------- ------------- Net cash provided by financing activities 1,103,846 44,068 Effect of exchange rate changes on cash (11,745) 10,105 ------------- ------------- Net (decrease) increase in cash (362,317) 270,747 Cash and Equivalents at Beginning of Period 392,534 130,103 ------------- ------------- Cash and Equivalents at End of Period $ 30,217 $ 400,850 ============= =============
June 30, 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 six month period ended June 30, 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 June 30, 2001 and 2000 was computed as follows: Note 4 - Recent Accounting Pronouncements SFAS NO. 141 "BUSINESS COMBINATIONS", AND SFAS 142, "GOODWILL AND INTANGIBLE ASSETS" On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Although it is still reviewing the provisions of these Statements, management's preliminary assessment is that these Statements will not have a material impact on the Company's financial position or results of operations