10-Q 1 d10q.txt FORM 10-Q FORM 10-Q 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, 2003 Commission File No. 000-23115 CTI INDUSTRIES CORPORATION (Exact name of registrant as specified in its charter) Illinois 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. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X APPLICABLE ONLY TO CORPORATE ISSUERS: COMMON STOCK, no par value, 1,918,420 outstanding Shares, as of June 30, 2003. FORM 10-Q CTI INDUSTRIES CORPORATION PART I. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS Item 1. Financial Statements The following financial statements of the Registrant are attached to this Form 10-Q: 1. Consolidated Balance Sheets as at June 30, 2003 (unaudited) and December 31, 2002 2. Unaudited Condensed Consolidated Statements of Operations - Three and Six Month Periods Ended June 30, 2003 and June 30, 2002 3. Unaudited Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and June 30, 2002 The Financial Statements reflect all adjustments which are, in the opinion of management, necessary for 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, 2003, net sales were $8,662,000, compared to net sales of $10,906,000 for the three months ended June 30, 2002, a decrease of 20.6%. For the quarter, (i) net sales of laminated and printed films declined from $5,344,000 in the second quarter of 2002 to $4,315,000 in the second quarter of 2003, (ii) net sales of metalized balloons declined from $3,381,000 in the second quarter of 2002 to $2,241,000 in the second quarter of 2003 and (iii) net sales of latex balloons increased from $1,134,000 in the second quarter of 2002 to $1,552,000 in the second quarter of 2003. In the quarter, other net sales of approximately $554,000 included sales of helium and artwork and films. During the quarter ended June 30, 2003, sales of laminated and printed films represented 49.8% of total sales, metalized balloons 25.9% of total sales and latex balloons 17.9% of total sales. For the same period of the prior year, laminated and printed films represented 49% of total sales, metalized balloons 31% and latex balloons 10.4%. 2 For the six months ended June 30, 2003, net sales were $18,824,000 compared to net sales of $20,644,000 for the six months ended June 30, 2002, a decline of 9%. For the six months, (i) net sales of laminated and printed films declined from $10,242,000 in the six months ended June 30, 2002 to $8,502,000 in the six months ended June 30, 2003, (ii) net sales of metalized balloons increased from $5,904,000 in the six months ended June 30, 2002 to $6,953,000 in the six months ended June 30, 2003 and (iii) net sales of latex balloons increased from $2,477,000 in the six months ended June 30, 2002 to $2,544,000 in the six months ended June 30, 2003. Other sales during the period (principally helium, accessories and artwork and films) were approximately $825,000. During the six month period ended June 30, 2003, sales of laminated and printed films represented 45% of total sales, metalized balloons 36.9% of total sales and latex balloons 13.5% of total sales. For the same period of the prior year, laminated and printed films represented 49.6% of total sales, metalized balloons 28.6% and latex balloons 12%. During the first six months of 2003, there were two customers whose purchases represented more than 10% of the Company's sales during the period, (i) one customer of laminated film products whose purchases totaled $2,445,000, or 13% of total sales for the six month period and (ii) a customer for a completed film product whose purchases totaled $5,125,000, or 27% of total Company sales for the six month period. Cost of Sales. For the fiscal quarter ended June 30, 2003, cost of sales increased to 78.0% of net sales as compared to 76.1% of net sales in the three month period ended June 30, 2002. For the six month period ended June 30, 2003, costs of sales increased to 79.6% compared to 75% for the same period in 2002. This increase was the result principally of increased production overhead expenses during the period, resulting in increased unit costs over prior periods, as well as lower margin sales to a significant customer for foil balloons and lower pricing in the sale of foil balloons to other customers. Administrative. For the fiscal quarter ended June 30, 2003, administrative expenses were $1,051,000, or 12.1% of net sales as compared to $1,127,000, or 10.3% of net sales for the three month period ended June 30, 2002. For the first six months of 2003, administrative expenses were $2,222,000, or 11.8% of net sales for the period as compared to $2,084,000, or 10.1% of net sales for the same period in 2002. The increase is attributable to increases in audit expense and salary expense. Selling. For the fiscal quarter ended June 30, 2003, selling expenses were $217,000, or 2.5% of net sales, as compared to $375,000, or 3.4% of net sales, for the three month period ended June 30, 2002. For the first six months of 2003, selling expenses were 619,000, or 3.3% of net sales for the period, compared to $750,000 or 3.6% of net sales for the same period in 2002. The decline selling expense is attributable principally to a decline in royalties and commissions and the reclassification of customer service expenses from this category to advertising and marketing. Advertising and Marketing. For the quarter ended June, 2003, advertising and marketing expenses were $661,000, or 7.6% of net sales as compared to $441,000, or 4% of net sales in the three month period ended June 30, 2002. For the six months ended June 30, 2003, advertising and marketing expenses were 1,250,000 or 6.6% of net sales for the period, compared to $834,000 or 4% 3 of net sales for the same period in 2002. The increase is attributable principally to (i) increases in artwork and film expenses, (ii) increases in salaries, trade show expense and catalogue expense and (iii) reclassification of customer service expenses to this category from selling expense. Other Income or Expense. Interest expense increased to $274,000 for the quarter ended June 30, 2003, as compared to $204,000 for the three month period ended June 30, 2002. For the six months ended June 30, 2003, interest expense was $475,000 compared to $394,000 for the same period in 2002. The increase in interest expense is attributable to the increase in total borrowings by the Company during the period. During the three month period ended June 30, 2003, subsidiaries of the Company, principally the Mexico subsidiaries, Flexo Universal, S.A. de C.V. and CTI Mexico S.A. de C.V. experienced gain with respect to currency fluctuation, related to dollar denominated obligations, in the amount of $97,000, compared to a loss for the same period of 2002 of $251,000. For the six months ended June 30, 2003, the loss from currency fluctuation was $12,000 compared to a loss in the same period of 2002 of $214,000. During the quarter ended June 30, 2003, the Company recognized other income of $197,000 relating principally to income arising from the settlement of certain vendor claims, compared to other income of $26,000 for the second quarter of 2002. Net Income or Loss. For the fiscal quarter ended June 30, 2003, the Company had a net income before taxes and minority interest of $6,000 as compared to net income before taxes and minority interest of $155,000 for the second quarter of 2002. Income tax expense (benefit) for the second quarter of fiscal 2003 was ($130,000) resulting in net income of $133,000 after minority interest of $2,000. The income tax expense for the three month period ended June 30, 2002 was $51,000, resulting in net income after minority interest of $134,000. For the six months ended June 30, 2003, the Company had a net loss before provision for income taxes or minority interest of $652,000, compared to net income in the same period of 2002 of $746,000. The income tax benefit for the period was $95,000 resulting in a net loss of $556,000 for the period. For the six months ended June 30, 2002, the income tax expense was $298,000 and net income for the period was $504,000, after minority interest of $6,000. The change in net income for the six months ended June 30, 2003 from the same period of 2002 is attributable to several factors: (i) the Company experienced lower margins overall in sales with the result that gross profit on sales was reduced to $3,843,000 for the six months ended June 30, 2003 from $5,160,000 for the same period in 2002, a differential of about $1,317,000; (ii) the lower gross margin rate was attributable to increased production overhead expenses incurred particularly during the first quarter, as well as sales of metalized balloons at lower pricing to a major customer and (iii) production and sales in Mexico were reduced in March and April, 2003 by reason of the move of equipment and operations to a new facility, and additional costs were incurred in that move. Also, during the first quarter of 2003, the Company continued to experience costs associated with (i) the installation and set-up of new equipment and (ii) the development and implementation of a foil balloon program for a significant customer. 4 Liquidity and Capital Resources Cash Flow Items. Cash flow generated from operations during the six months ended June 30, 2003 was $1,143,000 compared to $1,546,000 for the same period of $2002. Investment Activities. Cash used in investing activities during the six months ended June 30, 2003 was $1,324,000 compared to $1,489,000 for the same period in 2002. The cash used in investing activities is attributable principally to the acquisition of property and equipment, much of which had previously been in the process of acquisition or completion and accounted for as projects under construction. Financing Activities. During the six months ended June 30, 2003, cash generated from financing activities was $313,000 compared to $522,000 for the same period in 2002. In February, 2003, two officers of the Company loaned an aggregate of $1,630,000 to the Company in exchange for (i) two year promissory notes bearing interest at 9% per annum and (ii) five year warrants to purchase up to 163,000 shares of Common Stock of the Company at $4.87 per share, the market price of the Common Stock on the date of the issuance of the Warrants. The proceeds of these loans were to (i) re-finance the bank loan in the amount of $880,000 to CTI Mexico, S.A. de C.V., the 98% owned Mexico subsidiary of the Company and (ii) to provide financing for CTI Mexico and Flexo Universal, S.A de C.V., also a Mexico subsidiary of the Company. In the second quarter of 2003, an officer of the Company loaned to the Company an aggregate amount of $820,000. Such amount is due on demand and bears interest at the rate of 8% per annum. On April 24, 2003, the Company entered into a Secured Promissory Note in the principal amount of $2,912,000 and a First Modification to Mortgage with a Bank, under which the Secured Promissory Note is secured by the principal property of the Corporation in Barrington, Illinois. Under the Secured Promissory Note (i) the principal amount of the loan bears interest at the rate of 6.25% per annum and (ii) the Company is obligated to make payments 59 monthly payments of $19,209 each and to pay the balance then due on May 5, 2008. This Secured Promissory Note paid and superseded mortgage notes of the Company dated January, 2001 which had an initial principal balance of $2,873,000 and a balance as of April 24, 2003 of $2,638,000. After payment of the principal balance of those notes, prepayment penalties and loan expenses, the Company received net proceeds under the Secured Promissory Note of $231,000. Liquidity and Capital Resources. At June 30, 2003, the Company had a cash balance of $187,000. The Company employs a cash management strategy of maintaining minimal cash balances and utilizing its revolving line of credit for liquidity. As June 30, 2003, the Company had a deficit working capital of ($2,352,000) compared to a deficit working capital of ($2,907,000) at December 31, 2002. During the first quarter of 2003, $2,300,000 of term debt with the Company's primary lender was reclassified from long-term debt to short-term debt, as the term of the loan facility expires on January 31, 2004. The effect of reclassification of this debt was partially offset by the issuance of the previously mentioned $1,630,000 of two year promissory notes. Under the terms of the loan agreement, the facility is automatically extended for another year from January 31, 2004 unless terminated by either party at the expiration of the initial term. As of June 30, 2003, there was $170,000 available under the revolving line of credit with this lender. The Company has no commitments for capital expenditures during the third and fourth quarters of 2003. The Company believes that existing capital resources and cash generated from operations will be sufficient to meet the Company's requirements for at least twelve months. Seasonality. In the metalized balloon product line, sales have historically been seasonal, with approximately 22% to 25% of annual sales of metalized balloons being generated in December and January and 11% to 13% of annual metalized sales being generated in September and July in recent years. The sale of latex balloons and laminated film products have not historically been seasonal. As 5 sales of latex balloons and laminated film products have increased in relation to sales of metalized balloons, the effect of this seasonality has been reduced Critical Accounting Policies A summary of our critical accounting policies and estimates is presented on pages 19 and 20 of our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 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 metalized 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 2003 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 6 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. Item 3. Quantitative and Qualitative Disclosures of Market Risk The Company does not have long term obligations bearing interest at variable rates which would create any material market risk for the Company. The Company, or subsidiaries of the Company, may from time to time have outstanding obligations denominated in a currency other than that of the principal office of the Company or such subsidiary. However, the amount of market risk arising from such obligations is not material. The Company and its subsidiaries are exposed to market risk in changes of commodity prices in some of the raw materials they purchase for their manufacturing needs , particularly nylon film, resin and latex. However, the risk involved would not have a material effect on the Company's results of operations or financial condition. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of this report, have concluded that, as of such date our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company. (b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken. Part II. OTHER INFORMATION Item 1. Legal Proceedings On September 5, 2002, Byrne Sales Associates, Inc. filed an action against the Company for breach of contract in the Circuit Court of Jefferson County, Wisconsin claiming as damages the 7 amount of $150,805. In the action, the plaintiff alleged that certain products manufactured by the Company to the plaintiff were defective. The action was dismissed in May, 2003. In addition, the Company, and one or more of its subsidiaries, is also a party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the settlement of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company. Item 2. Changes in Securities During February and March, 2003, two officers of the Company loaned an aggregate of $1,630,000 to the Company in exchange for (i) two year promissory notes bearing interest at 9% per annum and (ii) five year warrants to purchase up to 163,000 shares of Common Stock of the Company at $4.87 per share, the market price of the Common Stock of the Company on the date of the Warrants. These Warrants were issued to the two officers of the Company in a private placement 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 are sophisticated investors who have full access to information about the Company and have purchased the Warrants for investment and not with a view to the sale or distribution thereof. 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 The Certifications of the Chief Executive Officer and the Chief Financial Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-k (a) Exhibits* Exhibit No. Description ----------- ----------- 11 Statement re: Computation of Per Share Earnings 31.1 Sarbanes-Oxley Act Section 302 Certifications for Howard W. Schwan 8 Exhibit No. Description ----------- ----------- 31.2 Sarbanes-Oxley Act Section 302 Certifications for Stephen M. Merrick 32.1 Sarbanes-Oxley Act Section 906 Certification for Stephen M. Merrick, Chief Financial Officer 32.2 Sarbanes-Oxley Act Section 906 Certification for Howard W. Schwan, Chief Executive Officer (b) On July 29, 2003, the Company filed a report on Form 8-K disclosing that the Company had terminated its auditors and has retained new auditors. *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. 9 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 19, 2003 CTI INDUSTRIES CORPORATION By: /s/ Howard W. Schwan -------------------------------- Howard W. Schwan, President By: /s/ Stephen M. Merrick -------------------------------- Stephen M. Merrick Executive Vice President and Chief Financial Officer 10 CTI Industries Corporation and Subsidiaries Consolidated Balance Sheets
June 30, 2003 December 31, 2002 --------------- ------------------- ASSETS (Unaudited) (Audited) Current assets: Cash $ 187,249 $ 160,493 Accounts receivable, (less allowance for doubtful accounts of $237,737 4,730,045 5,384,839 and $222,220 respectively) Inventories 10,196,054 10,033,593 Deferred tax assets 360,742 247,780 Prepaid expenses and other current assets 815,253 310,995 ------------ ------------- Total current assets 16,289,343 16,137,700 Property and equipment: Machinery and equipment 18,452,903 16,221,259 Building 2,670,358 2,636,595 Office furniture and equipment 1,836,437 1,746,480 Land 250,000 250,000 Leasehold improvements 698,643 388,655 Fixtures and equipment at customer locations 2,232,285 2,306,807 Projects under construction 301,232 2,331,981 ------------ ------------- 26,441,858 25,881,777 Less: accumulated depreciation (14,050,187) (14,166,764) ------------ ------------- Total property and equipment, net 12,391,671 11,715,013 Other assets: Deferred financing costs, net 48,787 51,747 Goodwill 1,113,108 1,113,108 Deferred tax assets 530,160 441,592 Other assets 93,063 812,698 ------------ ------------- Total other assets 1,785,118 2,419,145 ------------ ------------- TOTAL ASSETS $ 30,466,132 $ 30,271,858 ============ =============
See accompanying notes to consolidated unaudited statements LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,741,271 9,694,283 Line of credit 3,812,639 5,642,649 Notes payable - current portion 2,863,142 1,742,658 Accrued liabilities 3,224,695 1,966,361 ------------ ------------ Total current liabilities 18,641,747 19,045,951 Long-term liabilities: Other liabilities 971,449 710,257 Notes payable 5,267,523 5,016,109 Suboridinated Debt 0 0 ------------ ------------- Total long-term liabilities 6,238,972 5,726,366 Minority interest 9,425 25,865 Stockholders' equity: Common stock - no par value, 5,000,000 shares authorized, 2,150,216 and 2,141,882 shares issued, 1,918,420 and 1,910,086 shares outstanding, respectively 3,764,020 3,748,270 Class B Common stock - no par value, 500,000 shares authorized, 0 shares issued and outstanding 0 0 Paid-in-capital 5,554,332 5,554,332 Warrants issued in connection with subordinated debt and bank debt 595,174 135,462 Accumulated deficit (3,519,427) (2,962,816) Accumulated other comprehensive earnings 121,003 (6,002) Less: Treasury stock - 231,796 shares (939,114) (939,114) Stock subscription receivable 0 0 Notes receivable from stockholders 0 (56,456) ------------ ------------- Total stockholders' equity 5,575,988 5,473,676 ------------ ------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 30,466,132 $ 30,271,858 ============ =============
See accompanying notes to consolidated unaudited statements CTI Industries Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited)
Quarter ended June 30, Year to Date June 30, 2003 2002 6/31/03 6/31/02 (as restated) ------------ ------------- ------------- ------------- Net Sales $ 8,661,939 $ 10,905,748 $ 18,824,434 $20,643,846 Cost of Sales 6,755,910 8,299,517 14,981,352 15,483,362 ------------ ------------- ------------- ------------- Gross profit on sales 1,906,029 2,606,231 3,843,082 5,160,484 Operating expenses: Administrative 1,051,114 1,127,178 2,221,500 2,084,078 Litigation settlements expense 0 60,000 0 105,000 Selling 217,008 374,890 619,371 750,167 Advertising and marketing 660,637 440,988 1,249,531 834,210 ------------ ------------- ------------- ------------- Total operating expenses 1,928,759 2,003,056 4,090,402 3,773,455 ------------ ------------- ------------- ------------- Income from operations (22,730) 603,175 (247,320) 1,387,029 Other income (expense): Interest expense (273,691) (204,254) (475,443) (384,244) Interest income 1,220 420 1,608 647 Gain (loss) on sale of assets 7,512 (20,069) 15,024 (30,763) Foreign currency (loss) gain 96,798 (251,030) (11,708) (213,872) Other 196,495 26,339 65,482 37,216 ------------ ------------- ------------- ------------- Total other income (expense) 28,334 (448,594) (405,037) (591,016) ------------ ------------- ------------- ------------- Income (loss) before income taxes and minority interest 5,604 154,581 (652,357) 796,013 Income tax expense (benefit) (129,671) 50,917 (95,425) 298,210 ------------ ------------- ------------- ------------- Income (loss) before minority interest 135,275 103,664 (556,932) 497,803 Minority interest in income (loss) of subsidiary 2,097 (29,863) (321) (6,155) ------------ ------------- ------------- ------------- Net income (loss) $ 133,178 $ 133,527 $ (556,611) $ 503,958 ============ ============= ============= ============= Basic income (loss) per common share $ 0.07 $ 0.11 $ (0.29) $ 0.42 ============ ============= ============= ============= Diluted income (loss) per common share $ 0.06 $ 0.09 $ (0.29) $ 0.38 ============ ============= ============= ============= Weighted average number of shares and equivalent shares of common stock outstanding: Basic 1,918,420 1,263,763 1,918,098 1,198,597 ============ ============= ============= ============= Diluted 2,139,754 1,479,644 1,918,098 1,332,610 ============ ============= ============= =============
See accompanying notes to consolidated unaudited statements CTI Industries Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
For the Six Month Period Ended June 30, 2003 June 30, 2002 (as restated) --------------------------------------------- Cash flows from operating activities: Net income (loss) $ (556,611) $ 503,957 Adjustment to reconcile net loss to cash provided by operating activities: Depreciation and amortization 710,934 718,925 Deferred gain on sale/leaseback 15,024 0 Amortization of Debt Discount 55,051 13,750 Minority interest in loss of subsidiary (321) (6,155) Gain on sale of fixed assets 0 0 Provision for losses on accounts receivable & inventory 120,000 150,000 Deferred income taxes (189,289) 199,370 Change in assets and liabilities: Accounts receivable 368,085 (918,711) Inventory (269,938) (1,160,947) Other assets (2,475) (522,633) Accounts payable and accrued expenses 892,374 2,568,619 --------------------------------------------- Net cash provided by (used in) operating activities 1,142,834 1,546,175 Cash flows from investing activities: Proceeds from sale of property and equipment 0 Cash acquired in acquisition of CTI Mexico (5,000) Proceeds from sale of property and equipment 0 0 Purchases of property and equipment (1,318,971) (1,489,446) --------------------------------------------- Net cash (used in) investing activities (1,323,971) (1,489,446) Cash flows from financing activities: Checks written in excess of bank balance 366,193 0 Net change in revolving line of credit (2,085,057) 193,688 Proceeds from issuance of long-term debt 4,675,665 490,880 Proceeds from issuance of notes due to officer 820,000 0 Proceeds from the issuance of short-term debt 900,000 Repayment of long-term debt (3,247,329) (134,916) Repayment of short-term debt (1,116,736) (27,949) Proceeds from debt to equity swap 15,750 0 Purchase of treasury stock (15,226) 0 --------------------------------------------- Net cash provided by (used in) financing activities 313,260 521,703 Effect of exchange rate changes on cash (105,368) 17,212 --------------------------------------------- Net increase (decrease) in cash 26,755 595,644 Cash and Equivalents at Beginning of Period 160,493 110,488 --------------------------------------------- Cash and Equivalents at End of Period $ 187,248 $ 706,132 =============================================
See accompanying notes to consolidated unaudited statements June 30, 2003 CTI Industries Corporation and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered to present fairly the financial position and the results of operations and cash flow for the periods presented in conformity with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the fiscal year ended December 31, 2002. Principles of consolidation and nature of operations: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CTI Balloons Limited and CTF International S.A. de C.V., as well as its majority owned subsidiary CTI Mexico S.A. de C.V., and Flexo Universal, S.A. de C.V. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon products throughout the world and (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and use assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates. Stock-Based Compensation At June 30, 2003, the Company had four stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. 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 F-5 same. Accordingly, no stock-based employee compensation cost has been recognized, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. No stock options were granted during the six months ended June 30, 2003. Historically, the Company's option awards have vested at date of grant. Accordingly, had the Company applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-based Compensation," there is no pro forma effect on net income to disclose in periods with no option awards. Reclassification Certain items in the financial statements for the three and six months ended June 30, 2002 have been reclassified to be consistent with the presentation shown for the three and six months ended June 30, 2003, involving the reclassification of customer service expenses from selling expense to advertising and marketing expense. Note 2 - Legal Proceedings On September 5, 2002, Byrne Sales Associates, Inc. filed an action against the Company for breach of contract in the Circuit Court of Jefferson County, Wisconsin claiming as damages the amount of $150,805. The action was dismissed in May, 2003. In addition, the Company and its subsidiaries are party to certain lawsuits arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the settlement of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company. Note 3 - Comprehensive Income Total Comprehensive Income (loss) was $290,328 for the three months ended June 30, 2003 and was $105,000 for the three months ended June 30, 2002. Note 4 - Inventories, net June 30, 2003 December 31, 2002 ------------ ----------------- Raw material and work in process 2,875,028 $ 4,001,374 Finished goods 7,715,560 6,386,719 ------------ ------------ Inventory, Gross 10,590,588 10,388,093 Less: Inventory Reserves (394,535) (354,500) ------------ ------------ Inventories, net 10,196,053 $ 10,033,593 ============ ============ F-6 Note 5 - Geographic Segment Data The Company has determined that it operates primarily in one business segment which designs, manufactures, and distributes film products for use in packaging and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's operations by geographic areas is as follows. Net Sales to External Customers Total Assets at For the Six Months Ended June 30, June 30 December 31 2003 2002 2003 2002 ---- ---- ---- ---- United States $ 17,003,000 $ 18,428,000 $ 27,372,981 $ 26,311,194 Mexico 1,070,000 1,237,000 5,866,062 4,982,751 United Kingdom 751,000 979,000 1,366,674 979,959 Eliminations (4,139,584) (2,002,046) ------------ ------------ ------------ ------------ $ 18,824,000 $ 20,644,000 $ 30,466,133 $ 30,271,858 ============ ============ ============ ============ Note 6 - 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 un-collectable. Such losses have historically been within management's expectations. For the six months ended June 30, 2003, the Company had two customers that accounted for approximately $5,125,000, (27%) and $2,445,000, (12.9%), respectively, of consolidated net sales. Note 7 - CTI Mexico Transactions Effective February 23, 2003, the Company's 98% owned subsidiary, CTI Mexico, effected a spin-off under Mexican law under which certain of its assets, liabilities and equity were transferred to a newly formed corporation, Calidad Empresarial Mexicana, S.A. de C.V. ("Calidad"), having the same shareholders as CTI Mexico. Effective on April 10, 2003, Calidad was merged into Flexo Universal, S.A. de C.V. ("Flexo"), then a wholly-owned subsidiary of the Company (which had not previously engaged in any operations). In the merger, all of the assets and certain liabilities of Calidad were acquired by Flexo. As a result of the merger, the Company now owns 98% of the capital stock of Flexo. Note 8 - Warrants and Shareholder Debt In February, 2003, two officers of the Company loaned an aggregate of $1,630,000 to the Company in exchange for (i) two year promissory notes bearing interest at 9% per annum and (ii) five year warrants to purchase up to 163,000 shares of Common Stock of the Company at $4.87 F-7 per share, the market price of the Common Stock on the date of the issuance of the Warrants. As a result of valuing the warrants and allocating a portion of the proceeds to the warrants, the Company recorded additional paid-in capital attributable to the warrants of $459,712 and a related discount on the promissory notes of the same amount. The note is recorded at March 31, 2003, net of unamortized discount of $454,335. The proceeds of these loans were to (i) refinance the bank loan in the amount of $880,000 to CTI Mexico, S.A. de C.V., the 98% owned Mexican subsidiary of the Company and (ii) to provide financing for CTI Mexico and Flexo Universal, S.A. de C.V., also a Mexico subsidiary of the Company. During the second quarter of 2003, an officer of the Company loaned to the Company an aggregate amount of $820,000. Such amount is due on demand and bears interest at the rate of 8% per annum. F-8