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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 September 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 September
30, 2003.
1
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 September 30, 2003
(unaudited) and December 31, 2002
2. Unaudited Condensed Consolidated Statements of Operations -
Three and Nine Month Periods Ended September 30, 2003 and
September 30, 2002
3. Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2003 and September 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 September 30, 2003, net sales were
$8,429,000, compared to net sales of $10,873,000 for the three months ended
September 30, 2002, a decline of 22.5%. For the quarter, (i) net sales of
laminated and printed films declined from $ 5,828,000 in the third quarter of
2002 to $5,033,000 in the third quarter of 2003, (ii) net sales of metalized
balloons declined from $ 3,621,000 in the third quarter of 2002 to $ 2,574,000
in the third quarter of 2003 and (iii) net sales of latex balloons decreased
from $1,283,000 in the third quarter of 2002 to $511,000 in the third quarter of
2003. In the quarter, other net sales of approximately $311,000 included sales
of helium and artwork and films. During the quarter ended September 30, 2003,
sales of laminated and printed films represented 59.7% of total sales, metalized
balloons 30.5% of total sales and latex balloons 6.1% of total sales. For the
same period of the prior year, laminated and printed films represented 53.6% of
total sales, metalized balloons 33.3% and latex balloons 11.8%. The decrease in
sales for the third quarter is attributable principally to (i) a decline in
sales to a principal customer for completed film products from $2,496,000 in the
third quarter of 2002 to $1,878,000 in the third
2
quarter of 2003 and (ii) a decline in sales to a principal customer for
laminated film from $1,465,000 in the third quarter 2002 to $1,240,000 in the
third quarter 2003 and (iii) a decline in sales to a principal customer of
metalized balloons from $642,000 in the third quarter 2002 to $253,000 in the
third quarter 2003.
For the nine months ended September 30, 2003, net sales were $27,253,000
compared to net sales of $31,517,000 for the nine months ended September 30,
2002, a decline of 13.5%. For the nine months, (i) net sales of laminated and
printed films declined from $16,309,000 in the nine months ended September 30,
2002 to $13,535,000 in the nine months ended September 30, 2003, (ii) net sales
of metalized balloons decreased from $10,464,000 in the nine months ended
September, 2002 to $9,852,000 in the nine months ended September 30, 2003 and
(iii) net sales of latex balloons decreased from $3,908,000 in the nine months
ended September 30, 2002 to $2,705,000 in the nine months ended September 30,
2003. Other sales during the quarters ended September 30, 2003 and 2002
(principally helium, accessories and artwork and films) were approximately
$1,161,000 and $836,000, respectively. During the nine month period ended
September 30, 2003, sales of laminated and printed films represented 49.7% of
total sales, metalized balloons 36.1% of total sales and latex balloons 9.9% of
total sales. For the same period of the prior year, laminated and printed films
represented 51.8% of total sales, metalized balloons 33.2% and latex balloons
12.4%.
The decrease in sales over the nine month period is attributable
principally to (i) a decline in sales to a customer for a completed film product
from $10,306,000 for the nine months ended September 30, 2002, to $7,922,000 for
the nine months ended September 30, 2003, and (ii) a decline in sales to a
customer for laminated film from $5,799,000 in the first nine months of 2002 to
$4,105,000 in the first nine months of 2003.
During the first nine 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 $3,244,000,
or 11.9% of total sales for the nine month period and (ii) a customer for a
completed film product whose purchases totaled $7,922,000, or 29.1% of total
Company sales for the nine month period. For the same period last year, these
customers represented 18.4% and 32.7%, respectively.
Cost of Sales. For the fiscal quarter ended September 30, 2003, cost of
sales increased to 78.9% of net sales as compared to 75.3% of net sales in the
three month period ended September 30, 2002. For the nine month period ended
September 30, 2003, costs of sales increased to 79.4% compared to 75.1% 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 September 30, 2003,
administrative expenses were $749,000, or 8.9% of net sales as compared to
$1,169,000, or 10.7% of net sales for the three month period ended September 30,
2002. For the first nine months of 2003, administrative expenses were
$2,971,000, or 10.9% of net sales for the period as compared to $3,253,000, or
10.3% of net sales for the same period in 2002. The decrease is attributable to
a reduction in personnel, consulting and audit expenses.
Selling. For the fiscal quarter ended September 30, 2003, selling expenses
were $414,000, or 4.9% of net sales, as compared to $408,000, or 3.8% of net
sales, for the three month period ended September 30, 2002. For the first nine
months of 2003, selling expenses were 1,033,000, or 3.8% of net sales for the
period, compared to $1,158,000 or 3.7% of net sales for the same period in 2002.
There has been no significant change in selling expenses over these periods.
3
Advertising and Marketing. For the quarter ended September 30, 2003,
advertising and marketing expenses were $391,000, or 4.6% of net sales as
compared to $459,000, or 4.2% of net sales in the three month period ended
September 30, 2002. For the nine months ended September 30, 2003, advertising
and marketing expenses were 1,640,000 or 6% of net sales for the period,
compared to $1,293,000 or 4.1% of net sales for the same period in 2002. The
increase, which primarily occurred in the 1st and 2nd quarters of 2003, 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 $301,000 for the
quarter ended September 30, 2003, as compared to $220,000 for the quarter ended
September 30, 2002. For the nine months ended September 30, 2003, interest
expense was $777,000 compared to $605,000 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 September 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, in the amount of $14,000, compared to a loss for the same period of
2002 of $52,000. For the nine months ended September 30, 2003, the gain from
currency fluctuation was $2,000 compared to a loss in the same period of 2002 of
$266,000.
Net Income or Loss. For the fiscal quarter ended September 30, 2003, the
Company had a net loss before taxes and minority interest of $97,000 as compared
to net income before taxes and minority interest of $415,000 for the second
quarter of 2002. Income tax benefit for the third quarter of fiscal 2003 was
$226,000, resulting in net income of $129,000. The income tax expense for the
three month period ended September 30, 2002 was $27,000, resulting in net income
after minority interest of $388,000.
For the nine months ended September 30, 2003, the Company had a net loss
before provision for income taxes or minority interest of $749,000, compared to
net income in the same period of 2002 of $1,211,000. Income tax benefit for the
nine months ended September 30, 2003, was $322,000, resulting in a net loss for
the period of $428,000. For the nine months ended September 30, 2002, income tax
expense was $325,000, and net income for the period was $886,000.
The change in net income for the nine months ended September 30, 2003
compared to the same period of 2002 is attributable to several principal
factors: (i) a reduction in net sales of almost $4.3 million from the level of
net sales for the same period of 2002, (ii) the Company experienced lower
margins overall in sales with the result that gross profit on sales was reduced
by $2,228,000 to $5,618,000 for the nine months ended September 30, 2003, from
$7,846,000 for the same period in 2002; (iii) 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 (iv) production and sales in Mexico were reduced
in March and April, 2003 as a result 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.
During the second and third quarters of 2003, management has acted to
reduce production overhead and administration expenses and plans to further
reduce these expenses to improve margins.
4
Liquidity and Capital Resources
Cash Flow Items. Cash flow generated from operations during the nine
months ended September 30, 2003 was $2,755,000, compared to cash flow generated
in operations for the same period of 2002 of $1,531,000. Cash flow was affected
positively by a reduction in accounts payable over the nine months of $1,809,000
and an increase in inventory and certain other assets of $143,000. Cash flow was
affected positively by a decrease in receivables during the period of $377,000.
In the third quarter, the Company, in agreement with select vendors,
converted $3,571,000 of accounts payable to notes payable with terms up to 24
months and a weighted average interest rate of 7.5%.
Investment Activities. Cash used in investing activities during the nine
months ended September 30, 2003 was $1,503,000 compared to $1,095,000 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.
Liquidity
During the nine months ended September 30, 2003, the Company incurred net losses
and utilized cash in its operating activities. As of September 30, 2003, the
Company has a working capital deficiency of $2,968,000. The Company depends on
its line of credit, including a term loan and revolving line of credit, with its
principal lender for liquidity. This line of credit expires on January 12, 2004.
For the year ending December 31, 2004, management anticipates improvement in
cash flows from operating activities and is working to obtain alternative
financing to replace its existing line of credit. However, there is no assurance
that losses will not continue or that alternative financing will be obtained. If
such anticipated events do not materialize, the Company may have to seek
additional debt or equity financing to enable the Company to continue operations
in their present form and to execute the Company's business plan.
Financing Activities.
During the nine months ended September 30, 2003, cash generated from
financing activities was $2,361,000 compared to cash used in financing
activities for the same period in 2002 of $333,000.
In February, 2003, two officers of the Company loaned an aggregate of
$1,630,000 to the Company in exchange for (i) two year 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 and third quarters 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. During the third quarter, an officer
of the Company loaned to Flexo the sum of $100,000 under a promissory note
providing for an interest rate of 8% per annum and payments at the rate of
$5,000 per week.
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 September 30, 2003, the Company had a
cash balance of $191,000. The Company employs a cash management strategy of
maintaining minimal cash balances and utilizing its revolving line of credit for
liquidity.
5
As of September 30, 2003, the Company had a working capital deficiency of
$2,968,000, compared to a deficit working capital of $2,907,000 as of 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 12, 2004. The effect
of reclassification of this debt was partially offset by the issuance of the
previously described $1,630,000 of two year promissory notes.
Under the terms of the loan agreement with the Company's primary lender,
the loan facility expires on January 12, 2004, and the lender has given notice
to the Company that the loan facility will terminate on that date. While the
lender has advised the Company that it may grant limited extensions of the loan
after January 12, 2004, if the Company is unable to obtain alternative
financing, the Company may be unable to pay the balance which will then be due
to the lender and its ability to continue operations may be adversely affected.
Management of the Company is engaged in efforts to obtain alternative
financing. The Company has received a commitment from one lending institution
for a five-year term loan in the principal amount of $3 million and has also
received a non-binding proposal from another lending institution for a line of
credit, including a term loan and revolving loan, in the aggregate amount of $11
million. There can be no assurance that the Company will be able to complete a
transaction for new financing which will provide adequate funds for the
continued operation on terms acceptable to the Company, or at all.
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-K filed with the
Securities and Exchange Commission. There have been no changes to such policies
during the nine month period ending September 30, 2003.
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
6
(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 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.
7
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 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.
On September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against the Company for claimed
breach of contract in the Circuit Court of Lake County, Illinois claiming as
damages the aggregate amount of $162,242. The Company has filed an answer
denying the material claims of the complaint, affirmative defenses and a
counterclaim. In the action, these plaintiffs claim that the Company owes to
them certain sums for (i) helium sold and delivered, (ii) rental with respect to
helium tanks and (iii) replacement charges for tanks claimed to have been lost.
The Company intends vigorously to defend this action and to pursue its
counterclaim.
On June 3, 2003, Spectra Color Corporation filed an action against the
Company for breach of contract in the Circuit Court of Lake County, Illinois,
claiming as damages the amount of $87,447 for goods and services sold and
delivered. The Company has filed an answer to the complaint in this action
denying the material claims of the complaint.
In addition, the Company, and one or more of its subsidiaries, 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.
8
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
At our Annual Meeting of Shareholders on September 5, 2003, the following
actions were submitted and approved by vote of the shareholders:
(1) Election of six directors, and
(2) Ratification of the Board's election of Eisner, LLP as our
independent certified public accountants.
A total of 1,541,029 shares (approximately 80%) of the issued and outstanding
shares of the Company were represented by proxy or in person at the meeting.
These shares were voted on the matters described above as follows:
1. For the directors as follows:
Number of Shares
Name Number of Shares For Abstaining/Withheld
Michael P. Avramovich 1,541,029 0
Stanley M. Brown 1,538,054 2,975
Stephen M. Merrick 1,533,293 7,736
Howard W. Schwan 1,533,293 7,736
John H. Schwan 1,533,293 7,736
Bret Tayne 1,538,054 2,975
2. For the ratification of the Board's selection of Eisner, LLP as the
independent certified public accountants of the Company as follows:
9
Number of Shares
Number of Shares For Number of Shares Against Abstaining/Withheld
1,541,029 0 0
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
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.
(c) On August 20, 2003, the Company filed a report on Form 8-K regarding
its financial results for the Second Fiscal Quarter of 2003.
*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.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 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
11
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 190,783 $ 160,493
Accounts receivable, (less allowance
for doubtful accounts of $237
and $222,220 respectively) 4,962,966 5,384,839
Inventories 10,042,058 10,033,593
Deferred tax assets 414,957 247,780
Prepaid expenses and other current assets 778,154 310,995
------------ ------------
Total current assets 16,388,918 16,137,700
Property and equipment:
Machinery and equipment 18,400,604 16,221,259
Building 2,677,107 2,636,595
Office furniture and equipment 1,839,441 1,746,480
Land 250,000 250,000
Leasehold improvements 735,293 388,655
Fixtures and equipment at customer locations 2,232,285 2,306,807
Projects under construction 497,100 2,331,981
------------ ------------
26,631,830 25,881,777
Less : accumulated depreciation (14,401,198) (14,166,764)
------------ ------------
Total property and equipment, net 12,230,632 11,715,013
Other assets:
Deferred financing costs, net 49,240 51,747
Goodwill 1,113,108 1,113,108
Deferred tax assets 768,359 441,592
Other assets 270,575 812,698
------------ ------------
Total other assets 2,201,283 2,419,145
------------ ------------
TOTAL ASSETS 30,820,832 30,271,858
============ ============
See accompanying notes to condensed consolidated unaudited statements
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of bank balance 195,462 113,460
Accounts payable 6,852,110 9,580,823
Line of credit 3,441,973 5,642,649
Notes payable - current portion 5,314,041 1,742,658
Notes payable - officers 920,000 0
Accrued liabilities 2,833,904 1,965,561
------------ ------------
Total current liabilities 19,557,491 19,045,151
Long-term liabilities:
Other liabilities 1,070,589 710,257
Notes payable 3,082,492 5,016,109
Notes payable - officers 1,630,000 0
------------ ------------
Total long-term liabilities 5,783,081 5,726,366
Minority interest 10,046 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 1,910,080
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 595,174 135,462
Accumulated deficit (3,390,687) (2,962,816)
Accumulated other comprehensive earnings (113,511) (6,002)
Less:
Treasury stock - 231,796 shares (939,114) (939,114)
Notes receivable from stockholders 0 (56,456)
------------ ------------
Total stockholders' equity 5,470,214 5,474,476
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 30,820,832 $ 30,271,858
============ ============
See accompanying notes to condensed consolidated unaudited statements
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter ended September 30, Year to Date September 30,
2003 2002 09/30/03 09/30/02
(as restated) (as restated)
---------- ----------- ----------- -----------
Net Sales $8,428,784 $10,873,147 $27,253,217 $31,516,993
Cost of Sales 6,653,397 8,187,960 21,634,749 23,671,322
---------- ----------- ----------- -----------
Gross profit on sales 1,775,387 2,685,187 5,618,469 7,845,671
Operating expenses:
Administrative 749,014 1,168,651 2,970,514 3,252,729
Litigation settlements expense -- -- -- 105,000
Selling 414,031 408,221 1,033,402 1,158,387
Advertising and marketing 390,750 458,704 1,640,281 1,292,915
---------- ----------- ----------- -----------
Total operating expenses 1,553,795 2,035,576 5,644,197 5,809,031
---------- ----------- ----------- -----------
Income from operations 221,592 649,611 (25,729) 2,036,640
Other income (expense):
Interest expense (301,323) (220,446) (776,766) (604,690)
Interest income 1,393 830 3,001 1,475
Gain (loss) on sale of assets 464 (980) 15,488 (31,743)
Foreign currency gain (loss) 13,792 (51,813) 2,084 (265,685)
Other (32,897) 37,575 32,584 74,792
---------- ----------- ----------- -----------
Total other income (expense) (318,572) (234,834) (723,609) (825,851)
---------- ----------- ----------- -----------
(Loss) Income before income taxes
and minority interest (96,981) 414,777 (749,337) 1,210,789
Income tax (benefit) expense (226,341) 26,639 (321,766) 324,849
---------- ----------- ----------- -----------
Income (loss) before minority interest 129,361 388,138 (427,571) 885,940
Minority interest in income (loss)
of subsidiary 621 1,180 300 (4,975)
---------- ----------- ----------- -----------
Net income (loss) $ 128,740 $ 386,958 $ (427,871) $ 890,915
========== =========== =========== ===========
Income (loss) applicable to common shares $ 128,740 $ 386,958 $ (427,871) $ 890,915
========== =========== =========== ===========
Basic income (loss) per common share $ 0.07 $ 0.25 $ (0.22) $ 0.68
========== =========== =========== ===========
Diluted income (loss) per common share $ 0.06 $ 0.22 $ (0.22) $ 0.60
========== =========== =========== ===========
Weighted average number of shares and
equivalent shares of common stock
outstanding:
Basic 1,918,420 1,557,010 1,918,206 1,319,620
========== =========== =========== ===========
Diluted 1,996,734 1,742,259 1,918,206 1,473,679
========== =========== =========== ===========
See accompanying notes to condensed consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Month Period Ended
September 30, 2003 September 30, 2002
(as restated)
--------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (427,871) $ 890,915
Adjustment to reconcile net (loss) income to cash
(used in) provided by operating activities:
Depreciation and amortization 1,160,823 1,105,700
Deferred gain on sale/leaseback (17,527) (22,534)
Amortization of Debt Discount 119,606 20,625
Minority interest in loss of subsidiary 300 (4,975)
Provision for losses on accounts receivable & inventory 180,000 225,000
Deferred income taxes (303,501) 283,754
Change in assets and liabilities:
Accounts receivable 376,876 (754,179)
Inventory (143,467) (2,198,461)
Other assets 231 (602,972)
Accounts payable and accrued expenses 1,809,262 2,588,529
--------------------------------------------------
Net cash (used in) provided by operating activities 2,754,732 1,531,402
Cash flows from investing activities:
Purchases of property plant and equipment (1,502,848) (1,094,850)
--------------------------------------------------
Net cash (used in) investing activities (1,502,848) (1,094,850)
Cash flows from financing activities:
Checks written in excess of bank balance 82,002 555,875
Net change in revolving line of credit (1,771,182) (580,400)
Proceeds from issuance of long-term debt 2,801,813 0
Proceeds from issuance of notes due to officers 2,550,000 0
Repayment of long-term debt (4,870,919) (308,320)
Collection of Stockholder Note 56,456 0
Proceeds from debt to equity swap 15,750 0
Cash paid for deferred finance fees (73,931) 0
--------------------------------------------------
Net cash provided by (used in) financing activities 1,210,011 (332,845)
Effect of exchange rate changes on cash (11,583) 29,482
--------------------------------------------------
Net increase in cash 30,290 133,189
Cash and Equivalents at Beginning of Period 160,493 110,488
--------------------------------------------------
Cash and Equivalents at End of Period $ 190,783 $ 243,677
==================================================
Supplemental non-cash investing and financing activities:
Issuance of stock for subordinated debt $ -- $ 715,000
Long-term debt incurred for the purchase of equipment $ -- 1,840,819
Note payable incurred to purchase 21.8% of minority
interest in CTI Mexico S.A. de C.V. $ -- 150,000
Accounts payable converted to notes payable $ 3,571,000 $ --
See accompanying notes to condensed consolidated unaudited statements
September 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
accounting principles generally accepted in the United States of America 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 nine months ended September 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 subsidiaries 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.
Note 2 - Liquidity
During the nine months ended September 30, 2003, the Company incurred net losses
and utilized cash in its operating activities. As of September 30, 2003, the
Company has a working capital deficiency of $2,968,000. The Company depends on
its line of credit, including a term loan and revolving line of credit, with its
principal lender for liquidity. This line of credit expires on January 12, 2004.
For the year ending December 31, 2004, management anticipates improvement in
cash flows from operating activities and is working to obtain alternative
financing to replace its existing line of credit. However, there is no assurance
that losses will not continue or that alternative financing will be obtained. If
such anticipated events do not materialize, the Company may have to seek
additional debt or equity financing to enable the Company to continue operations
in their present form and to execute the Company's business plan.
Note 3 - Restatement
The Unaudited Condensed Consolidated Statement of Operations for the Three and
Nine Month Periods ended September 30, 2002 incorporate a restatement of the
results of operations for such periods. The restatement for those periods
relates to the amortization of the discount on notes payable resulting from the
value assigned to warrants to purchase common stock that were issued during 1999
and 2001 that had not previously been reflected.
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 September 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 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 nine months ended
September 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 nine months ended
September 30, 2002 have been reclassified to be consistent with the presentation
shown for the three and nine months ended September 30, 2003, involving the
reclassification of customer service expenses from selling expense to
advertising and marketing expense.
Note 4 - 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.
On September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against the Company for claimed
breach of contract in the Circuit Court of Lake County, Illinois claiming as
damages the aggregate amount of $162,242. The Company has filed an answer
denying the material claims of the complaint, affirmative defenses and a
counterclaim. In the action, these plaintiffs claim that the Company owes to
them certain sums for (i) helium sold and delivered, (ii) rental with respect to
helium tanks and (iii) replacement charges for tanks claimed to have been lost.
The Company intends vigorously to defend this action and to pursue its
counterclaim.
On June 3, 2003, Spectra Color Corporation filed an action against the
Company for breach of contract in the Circuit Court of Lake County, Illinois,
claiming as damages the amount of $87,447 for goods and services sold and
delivered. The Company has filed an answer to the complaint in this action
denying the material claims of the complaint.
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 5 - Comprehensive Income
Total Comprehensive Income (loss) was (235,000) for the three months ended
September 30, 2003 and was $416,000 for the three months ended September 30,
2002.
Note 6 - Inventories
September 30, 2003
(unaudited) December 31,2002
------------------ ----------------
Raw material and work in process 2,259,877 $4,001,374
Finished goods 8,206,716 6,386,719
---------- ----------
Inventory, Gross 10,466,593 10,388,093
Less: Inventory Reserves (424,535) (354,500)
---------- ----------
Inventories 10,042,058 $10,033,593
========== ===========
Note 7 - 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 Nine Months Ended
September 30,
September 30 December 31
------------ -----------
2003 2002 2003 2002
---- ---- ---- ----
United States $23,590,000 $28,857,000 $27,080,000 $26,311,000
Mexico 1,833,000 1,991,000 5,518,000 4,983,000
United Kingdom 1,830,000 669,000 1,514,000 980,000
Eliminations (3,590,000) (2,002,000)
----------- ----------- ----------- -----------
$27,253,000 $31,517,000 $30,821,000 $30,272,000
=========== =========== =========== ===========
Note 8 - Concentration of Credit Risk
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 9 months ended September 30,
2003, the Company had two customers that accounted for approximately $
7,922,000, 29.1% and 3,244,000, 11.9%, respectively, of consolidated net sales.
Note 9 - 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 10 - 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 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 and third 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.
During the third quarter of 2003, an officer of the Company loaned to Flexo
Universal the sum of $100,000 under a promissory note providing for interest at
a rate of 8% per annum and payments at the rate of $5,000 per week.
CTI Industries Corporation and Subsidiaries
Consolidated Earnings per Share
(Unaudited)
Quarter ended September 30 Year to Date September 30
2003 2002 2003 2002
---------- ----------- ----------- -----------
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,918,420 1,557,010 1,918,206 1,319,620
========= ========= ========== ==========
Net income (Loss):
Net income (loss) $ 128,740 $ 386,958 $ (427,871) $ 890,915
========= ========= ========== ==========
Amount for per share computation $ 128,740 $ 386,958 $ (427,871) $ 890,915
========= ========= ========== ==========
Per share amount $ 0.07 $ 0.25 $ (0.22) $ 0.68
========= ========= ========== ==========
Diluted
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,918,420 1,557,010 1,918,206 1,319,620
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock(1) 78,314 185,249 154,059
--------- --------- ---------- ----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 1,996,734 1,742,259 1,918,206 1,473,679
========= ========= ========== ==========
Net income:
Net income (loss) $ 128,740 $ 386,958 $ (427,871) $ 890,915
========= ========= ========== ==========
Amount for per share computation $ 128,740 $ 386,958 $ (427,871) $ 890,915
========= ========= ========== ==========
Per share amount $ 0.06 $ 0.22 $ (0.22) $ 0.60
========= ========= ========== ==========
See accompanying notes to condensed consolidated unaudited statements
(1) For the nine months ended September 30, 2003, potential additional shares,
in the amount of 239,567 shares were excluded from the calculation of
diluted earnings per share because it would have been anti-dilutive.