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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Transition Period from ____________ to ____________.
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)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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:
Indicate the number of Shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 1,918,419 Shares of the
Company's no par value Common Stock and none of the Company's Class B Common
Stock were outstanding, as of April 30, 2003.
FORM 10-Q
CTI INDUSTRIES CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements of the Registrant are attached to this
Form 10-Q:
1. Unaudited Condensed Consolidated Balance Sheet as at March 31, 2003
2. Unaudited Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 2003 and March 31, 2002
3. Unaudited Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2003 and March 31, 2002
4. Notes to Condensed Consolidated Financial Statements
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 quarter ended March 31, 2003, net sales were
$10,162,000, compared to net sales of $9,738,000 for the quarter ended March 31,
2002, an increase of 4.4%. For the quarters ended March 31, 2003 and 2002, net
revenues by product category were as follows:
For the three month period ended
March 31, 2003 March 31, 2002
-------------- --------------
Laminated and Printed Films 4,187,000 5,004,000
Metalized Balloons 4,712,000 2,697,000
Latex Balloons 992,000 1,438,000
Other 271,000 599,000
During the quarter ended March 31, 2003, sales of laminated and printed
films represented 41.2% of total sales, metalized balloons 46.4% of total sales
and latex balloons 9.8% of total sales. For the same period of the prior year,
laminated and printed films represented 51.4% of total sales, metalized balloons
27.7% and latex balloons 14.8%.
The increase in sales of metalized balloons in the first quarter of 2003
is the result principally of an increase in sales to a significant customer.
Sales to such customer for the first quarter of 2003 were $1,288,000 (or 12.7%
of total sales for the quarter) compared to sales to such customer of $331,000
during the first quarter of 2002. During the first quarter of 2003, there were
two other customers whose purchases represented more than 10% of the Company's
sales during the quarter,
2
(i) one customer of laminated film products whose purchases totaled $1,302,000,
or 12.8% of total sales for the quarter and (ii) a customer for pouches whose
purchases totaled $2,602,000, or 25.6% of total Company sales for the quarter.
Cost of Sales. For the fiscal quarter ended March 31, 2003, cost of sales
increased to 80.9% of net sales as compared to 73.8% of net sales in the three
month period ended March 31, 2002. This increase was primarily due to 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 March 31, 2003,
administrative expenses were $1,259,000, or 12.4% of net sales as compared to
$1,002,000, or 10.3% of net sales for the three month period ended March 31,
2002. The increase is attributable to increases in audit expense and salary
expense.
Selling. For the fiscal quarter ended March 31, 2003, selling expenses
were $402,000, or 4% of net sales, as compared to $375,000, or 3.9% of net sales
for the three month period ended March 31, 2002. There was no significant change
in the amount or nature of selling expenses in the first quarter of 2003 related
to the first quarter of 2002.
Advertising and Marketing. For the fiscal quarter ended March 31, 2003,
advertising and marketing expenses were $589,000, or 5.8% of net sales as
compared to $456,000, or 4.7% of net sales in the three month period ended March
31, 2002. The increase is attributable principally to (i) increases in artwork
and film expenses and (ii) increases in salaries, trade show expense and
catalogue expense.
Other Income (Expense) - Foreign Currency (Loss) Gain. During the three
month period ended March 31, 2003, CTI Mexico S.A. de C.V., ("CTI Mexico"), the
Company's 98% owned subsidiary in Mexico, incurred expense with respect to
currency fluctuation, related to dollar denominated obligations, in the amount
of $109,000. This expense is reflected in the consolidated statement of
operations. For the three month period ended March 31, 2002, CTI Mexico
recognized a gain with respect to currency fluctuation of $37,000.
Net Income or Loss. For the fiscal quarter ended March 31, 2003, the
Company had a net loss before taxes and minority interest of ($658,000) as
compared to net income before taxes and minority interest of $641,000 for the
first quarter of 2002. Income tax expense for the first quarter of fiscal 2003
was $34,000, resulting in net (loss) of ($690,000) after minority interest of
($2,000). The income tax expense for the three month period ended March 31, 2002
was $247,000, resulting in net income of $370,000 after minority interest of
$24,000.
The change in net income (loss) before income taxes and minority interest
for the first quarter of 2003 from the first quarter 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 $1,937,000 for the quarter
ended March 31, 2003 from $2,554,000 for the quarter ended March 31, 2002, a
differential of about $617,000; (ii) the Company incurred currency valuation
losses of $109,000 in the first quarter of 2003 compared to currency valuation
gains of $37,000 in 2002, a change of over $146,000 and (iii) production and
sales
3
in Mexico were reduced in March, 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 the development and implementation of a foil balloon
program for a significant customer.
Liquidity and Capital Resources
Cash Flow From Operating Activities. Cash flow used in operations during
the three months ended March 31, 2003 was $588,000. Cash flow in the first
quarter was affected by increases in receivables of $882,000 and inventory of
$431,000, which was particularly offset by an increase in accounts payable of
$835,000. During the first quarter of 2002, cash flow provided by operations was
$22,000.
Investment Activities. During the three months ended March 31, 2003, cash
flow used in investing activities for the purchase of machinery and equipment
was $295,000. In the first quarter of 2002, cash used in investing activities
was $319,000.
Financing Activities. For the three months ended March 31, 2003, cash flow
generated from financing activities was $1,476,000. Cash flow provided by
financing activities during the first quarter of 2002 was $273,000.
In February, 2003, two officers of the Company loaned an aggregate of
$1,630,000 to the Company in exchange for (i) two year promissary 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. 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 promisory 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 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 March and April, 2003, an officer of the Company loaned to the Company
an aggregate amount of $690,000, $395,000 of which was received by March 31,
2003. Such amount is due on demand and bears interest at the rate of 9% per
annum.
Together, the aforementioned loans, along with increased borrowing on the
line of credit of $539,000, reduced by $1,088,000 of repayments on long-term
debt, primarily account for net cash provided by financing activities.
Liquidity and Capital Resources. At March 31, 2003, the Company had a cash
balance of $718,000. The Company's current cash management strategy includes
maintaining minimal cash
4
balances and utilizing the revolving line of credit for liquidity. At March 31,
2003, the Company had deficit working capital of ($3,588,000) 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 the reclassification of this
debt was in part 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 time of expiration of the initial term. As of
March 31, 2003, there was $286,000 available under the revolving line of credit
with this lender.
The Company has no commitments for capital expenditures over the second
quarter 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 12 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 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-KSB 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
5
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 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 rate 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 March
31, 2003, determined that there were deficiencies in the design or
operation of internal controls during the fourth quarter of 2002 and
the first quarter of 2003. These deficiencies resulted from a lack
of timely reconciliation of accounts, maintenance of inventory
costing standards, inadequate supervision and review resulting from
an understaffing of the corporate accounting department, as well as
turnover within the accounting department. There were material
adjustments in the fourth quarter financial statements in order to
correct intercompany account balances, accrued expenses and
inventory balances.
(b) Changes in internal controls. Management has undertaken a program to
eliminate these deficiencies and to establish an effective system of
internal controls. Three persons have been added to the accounting
staff at the Company and an additional employee, with costing
training and experience is being sought. The organization and
responsibilities of all members of the staff are being clarified and
defined. A program has been established to identify all
reconciliations and internal reviews to be prepared on a periodic
basis and to provide for review of all reconciliations, accruals and
other reports by supervisory personnel not involved in the
preparation of the reconciliations, accruals and other reports.
Management plans a computer software and hardware upgrade to enhance
the accounting and costing systems during the second quarter of
2003. Management is also in the process of determining what
additional changes need to occur in order to further strengthen
internal controls.
6
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 amount of $150,805. In the action, the
plaintiff alleges that certain products manufactured by the Company to the
plaintiff were defective. The Company has filed a responsive pleading in this
action denying the allegations of the Complaint. Management of the Company
believes the claims in the action are without merit in fact or law and intends
vigorously to defend the action.
In addition, the Company is also a 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.
Item 2. Changes in Securities and Use of Proceeds
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.
7
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.
8
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 27, 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
9
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CTI Industries Corporation (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen
M. Merrick, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Stephen M. Merrick
- -----------------------
Stephen M. Merrick
Chief Financial Officer
10
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CTI Industries Corporation (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Howard
W. Schwan, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(3) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Howard W. Schwan
- ------------------------
Howard W. Schwan
Chief Executive Officer
11
CERTIFICATIONS
I, Howard W. Schwan, President of CTI Industries Corporation, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of CTI Industries
Corporation.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that
12
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 27, 2003
/s/ Howard W. Schwan
--------------------
Howard W. Schwan
President
13
CERTIFICATIONS
I, Stephen M. Merrick, Executive Vice President and Chief Financial
Officer of CTI Industries Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CTI Industries
Corporation.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
14
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 27, 2003
/s/ Stephen M. Merrick
----------------------------
Stephen M. Merrick
Executive Vice President and
Chief Financial Officer
15
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2003 December 31, 2002
-------------- -----------------
(unaudited) (audited)
ASSETS
Current assets:
Cash $ 718,198 $ 160,493
Accounts receivable, (less allowance for doubtful
accounts, $223,220 and $237,737, respectively) 6,216,617 5,384,839
Inventories 10,350,737 10,033,593
Deferred tax assets 479,670 247,780
Prepaid expenses and other current assets 740,961 310,995
------------ ------------
Total current assets 18,506,183 16,137,700
Property and equipment:
Machinery and equipment 16,175,833 16,221,259
Building 2,670,358 2,636,595
Office furniture and equipment 1,846,273 1,746,480
Land 250,000 250,000
Leasehold improvements 494,234 388,655
Fixtures and equipment at customer locations 2,232,285 2,306,807
Projects under construction 2,375,305 2,331,981
------------ ------------
26,044,288 25,881,777
Less : accumulated depreciation (14,414,728) (14,166,764)
------------ ------------
Total property and equipment, net 11,629,560 11,715,013
Other assets:
Deferred financing costs, net 36,153 51,747
Goodwill associated with acquisition of CTI Mexico, net 1,113,108 1,113,108
Deferred tax assets 258,978 441,592
Other assets 258,206 812,698
------------ ------------
Total other assets 1,666,445 2,419,145
------------ ------------
TOTAL ASSETS 31,802,188 30,271,858
============ ============
See accompanying notes to consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2003 December 31, 2002
-------------- -----------------
(unaudited) (audited)
Current liabilities:
Accounts payable 10,223,253 9,694,283
Line of credit 6,181,888 5,642,649
Notes payable - current portion 3,013,723 1,742,658
Deferred tax liabilities 49,276 --
Due to officer 395,000 --
Accrued liabilities 2,230,598 1,965,561
------------ ------------
Total current liabilities 22,093,738 19,045,151
Long-term liabilities:
Other liabilities 670,807 710,257
Notes payable 3,784,191 5,016,109
------------ ------------
Total long-term liabilities 4,454,998 5,726,366
Minority interest 23,447 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 at March 31, 2003 and December 31, 2002,
respectively 3,764,020 3,748,270
Class B Common stock - no par value, 500,000 shares authorized,
0 shares issued and outstanding -- --
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 (3,651,804) (2,962,016)
Accumulated other comprehensive earnings (36,147) (6,002)
Less:
Treasury stock - 199,196 shares (939,114) (939,114)
Notes receivable from stockholders (56,456) (56,456)
------------ ------------
Total stockholders' equity 5,230,005 5,474,476
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 31,802,188 $ 30,271,858
============ ============
See accompanying notes to consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Quarter ended March 31,
2003 2002
------------ -----------
Net Sales $ 10,162,495 $ 9,738,097
Cost of Sales 8,225,442 7,183,845
------------ -----------
Gross profit on sales 1,937,053 2,554,252
Operating expenses:
Administrative 1,259,004 1,001,900
Selling 402,363 375,277
Advertising and marketing 588,894 393,222
------------ -----------
Total operating expenses 2,250,261 1,770,399
------------ -----------
Income from operations (313,208) 783,853
Other income (expense):
Interest expense (201,752) (179,990)
Interest income 389 227
Gain (loss) on sale of assets -- (10,694)
Foreign currency (loss) gain (108,506) 37,158
Other (34,884) 10,877
------------ -----------
Total other income (expense) (344,753) (142,422)
------------ -----------
Income (loss) before income taxes and minority interest (657,961) 641,431
Income tax expense 34,245 247,293
------------ -----------
Income (loss) before minority interest (692,206) 394,138
Minority interest in income (loss) of subsidiary (2,418) 23,707
------------ -----------
Net income (loss) $ (689,788) $ 370,431
============ ===========
Basic income (loss) per common share $ (0.36) $ 0.33
============ ===========
Diluted income (loss) per common share $ (0.36) $ 0.30
============ ===========
Weighted average number of shares and equivalent shares of common stock
outstanding:
Basic 1,917,772 1,133,431
============ ===========
Diluted 1,917,772 1,221,351
============ ===========
See accompanying notes to consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Month Period Ended
March 31, 2003 March 31, 2002
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (689,788) $ 370,431
Adjustment to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 347,709 345,484
Amortization of deferred gain on sale/leaseback 7,512 0
Amortization of debt discount 9,072 6,875
Minority interest in loss of subsidiary (2,418) 23,707
Provision for losses on accounts receivable & inventory 60,000 75,000
Deferred income taxes 2,885 154,153
Change in assets and liabilities:
Accounts receivable (882,019) (1,497,995)
Inventory (430,922) (684,652)
Other assets (131,125) (137,437)
Accounts payable and accrued expenses 835,161 1,365,995
----------- -----------
Net cash (used in) provided by operating activities (588,405) 21,561
Cash flows from investing activities:
Purchases of property and equipment (295,031) (319,296)
Expenditures on other assets (37,726)
----------- -----------
Net cash (used in) investing activities (332,757) (319,296)
Cash flows from financing activities:
Net change in revolving line of credit 539,239 393,100
Proceeds from issuance of long-term debt 1,630,000 0
Repayment of long-term debt (1,088,448) (59,415)
Repayment of short-term debt 0 (61,122)
Proceeds from issuance of notes due to officer 395,000 0
Proceeds from exercise of options 15,750 0
Payments of deferred financing fees (15,226)
----------- -----------
Net cash provided by financing activities 1,476,315 272,563
Effect of exchange rate changes on cash 2,552 (18)
----------- -----------
Net increase (decrease) in cash 557,705 (25,190)
Cash and Equivalents at Beginning of Period 160,493 110,488
----------- -----------
Cash and Equivalents at End of Period $ 718,198 $ 85,298
=========== ===========
See accompanying notes to consolidated unaudited statements
March 31, 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 generally
accepted accounting principles for complete financial statements.
Operating results for the three months ended March 31, 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, CTF International S.A. de
C.V. and Flexo Universal, S.A. de C.V. as well as its majority owned
subsidiaries CTI Mexico S.A. de C.V, and Calidad Empresarial Mexicana, 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 generally accepted
accounting principles 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 March 31, 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 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 first quarter of 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 months ended March 31,
2002 have been reclassified to be consistent with the presentation shown for the
three months ended March 31, 2003.
F-7
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. In the action, the
plaintiff alleges that certain products manufactured by the Company to the
plaintiff were defective. The Company has filed a responsive pleading in this
action denying the allegations of the Complaint. Management of the Company
believes the claims in the action are without merit in fact or law and intends
vigorously to defend the action.
In addition, the Company is also a 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 $(666,202) for the three months ended March
31, 2003 and was $442,541 for the three months ended March 31, 2002.
Note 4 - Inventories, net
Raw material and work in process $ 4,035,555
Finished goods 6,764,794
------------
Inventory, Gross 10,800,349
Less: Inventory Reserves (447,866)
------------
Inventories, net $ 10,352,483
============
F-8
Note 5 - Geographic Segment Data
The Company 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 Long Term Assets
For the Three Months Ended March 31, at March 31
2003 2002 2003 2002
---- ---- ---- ----
United States $ 8,857,552 $ 8,472,193 $ 9,078,404 $5,945,907
Mexico 527,190 651,618 2,532,157 2,817,835
United Kingdom 551,812 518,253 18,999 13,404
Other 225,941 96,033
----------- ----------- ----------- ----------
$10,162,495 $ 9,738,597 $11,629,560 $8,777,146
=========== =========== =========== ==========
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-collectible. Such losses have historically been
within management's expectations. For the three months ended March 31, 2003, the
Company had three customers that accounted for approximately 25.6% ($2,602,000),
12.8% ($1,302,000) and 12.7% ($1,288,000), 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.
During the first quarter of 2003, CTI Mexico entered into an agreement with a
vendor/creditor in which, among other things, CTI Mexico granted to a security
interest in one item of equipment owned by CTI Mexico in respect of an
obligation of CTI Mexico to such vendor/creditor in the amount of $397,000.
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 promissary 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. 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 promisory 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 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 March and April, 2003, an officer of the Company loaned to the Company an
aggregate amount of $690,000, $395,000 of which was received by March 31, 2003.
Such amount is due on demand and bears interest at the rate of 9% per annum.
F-9
Calidad were acquired by Flexo. As a result of the merger, the Company now owns
98% of the capital stock of Flexo.
Note 9 - Subsequent Events
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.
F-10