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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, 2004
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, 1,954,100 outstanding Shares, as of September
30, 2004.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements of the Registrant are attached
to this Form 10-Q:
1. Interim Balance Sheet as at September 30, 2004 (unaudited) and
December 31, 2003;
2. Interim Statements of Operations (unaudited) for the three months
ended September 30, 2004, and 2003 and the nine months ended
September 30, 2004, and 2003;
3. Notes to Consolidated Financial Statements
The Financial Statements reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the periods
presented.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income (Loss). For the three months ended September 30, 2004, the
Company incurred a net loss of ($150,370), or ($0.08) per share (basic and
diluted), compared to net income for the same period of 2003 of $128,740, or
$0.07 per share basic and $0.06 per share diluted. For the quarter, the Company
incurred a loss before taxes and minority interest of ($241,344), compared to a
loss before taxes and minority interest for the same period of 2003 of
($96,981).
For the nine months ended September 30, 2004, the Company had net income
of $85,850, or $0.04 (basic and diluted), compared to a net loss of ($427,871)
or ($0.22) per share (basic and diluted) for the nine months ended September 30,
2003. For the nine months ended September 30, 2004 the Company had income before
taxes and minority interest of $171,192, compared to a loss of ($749,337) for
the same period in 2003. Included in the first nine months of 2004, are income
items (described more fully below) totaling $619,000, much of which occurred
during the first quarter of 2004 and are not expected to recur in the future.
Net Sales. For the three months ended September 30, 2004, net sales were
$8,126,000 compared to net sales of $8,429,000 for the same period of 2003, a
decrease of 3.6%. Net sales by product categories are as follows for each period
respectively:
2
For the three month period ended
Sep. 30, 2004 Sep. 30,2003
------------- ------------
Laminated and Printed Films $ 3,194,000 $ 5,033,000
Metalized Balloons 3,318,000 2,574,000
Latex Balloons 1,183,000 511,000
Other 431,000 311,000
----------- -----------
$ 8,126,000 $ 8,429,000
During the three months ended September 30, 2004, sales of laminated and
printed films represented 39.3% of sales, metalized balloons 40.8% of sales and
latex balloons 14.6% of sales. During the same period of 2003, sales of
laminated and printed films represented 59.7% of total sales, metalized balloons
30.5% and latex balloons 6.1%. Other sales consists primarily of helium, for
which the company acts as a broker for select customers.
For the nine months ended September 30, 2004, net sales were $28,611,000
compared to net sales of $27,253,000 for the same period of 2003, an increase of
5.0%. For the nine months ended September 30, 2004 and 2003, sales by product
category were as follows:
For the nine month period ended
Sep. 30, 2004 Sep. 30, 2003
------------- -------------
Laminated and Printed Films $10,366,000 $13,535,000
Metalized Balloons 12,627,000 9,852,000
Latex Balloons 4,100,000 2,705,000
Other 1,518,000 1,161,000
----------- -----------
$28,611,000 $27,253,000
During the nine months ended September 30, 2004, sales of laminated and
printed films represented 36% of total sales, metalized balloons 44% of sales
and latex balloons 14% of sales. During the same period of 2003, sales of
laminated and printed films represented 50% of total sales, metalized balloons
36% of total sales and latex balloons 10% of total sales.
The decline in sales of laminated and printed films during the third
quarter and the nine months ended September 30, 2004 is attributable principally
to a decline in sales to ITW Spacebag. Sales to ITW Spacebag during the first
nine months of 2003 were $7,922,000 and during the first nine months of 2004
were $3,694,000. In part, the decline in sales to the customer during the first
nine months of 2004 is attributable to the facts that (i) the customer has
engaged in pouch production internally and (ii) the Company has not supplied a
component of the pouches which it supplied during 2003. During the same periods,
sales to Rapak, LLC, another principal customer, increased from $4,105,000 in
the first nine months of 2003 to $5,478,000 during the first nine months of
2004.
The increase in sales of metalized balloons during the third quarter and
the nine months ended September 30, 2004, compared to the same periods in the
prior year, is the result,
3
principally, of sales to a new customer. Sales to this customer were $2,838,000
for the first nine months. We anticipate an increase in overall metalized
balloon sales for 2004 compared to 2003. However, sales to another principal
customer for balloons, Hallmark Cards, have declined during 2004 compared to
2003. Sales to that customer for the first nine months of 2004 were $2,377,000
compared to $2,750,000 for the same period of 2003. The supply agreement and
license agreement among the Company and Hallmark expire in March, 2005 and
Hallmark has advised the Company that these agreements will not be extended
after the expiration date. In addition, Hallmark has notified the Company that
the distribution agreement among the Company and Hallmark with respect to
Hallmark licensed products will also terminate in March, 2005. While Hallmark
may continue to purchase some balloons from the Company after that date, the
Company anticipates that Hallmark purchases from the Company will substantially
decline during 2005 compared to 2003 and 2004. While the relationship with
Hallmark for new product production will end in March, 2005, the Company will be
able to sell remaining Hallmark licensed products through March, 2006 and we do
not anticipate a material reduction in value of such inventory.
The increase in sales of latex balloons during the nine months ended
September 30, 2004 compared to the same period for 2003 is attributable
principally to (i) increased production capacity and production at the Company's
Mexico facility during 2004 compared to 2003, (ii) sales of latex balloons to
several new customers in the United States and (iii) increased domestic sales in
Mexico to distributors and retail customers.
During the three months ended September 30, 2004, there were two customers
whose purchases represented more than 10% of the Company's sales for that
period, one representing sales of $1,532,000 or 18.6% and one representing
$1,271,000 or 15.6%. During the same period of 2003, there were two customers
who represented more than 10% of the Company's sales for the period, one
representing $2,797,000 or 33.2%, and one representing $1,749,000 or 20.7%.
During the first nine months of 2004, there were three customers whose
purchases represented more than 10% of the Company's sales for that period, one
representing sales of $5,478,000 or 19.0%, one of $3,694,000 or 12.9%, and the
other of $3,060,000 or 10.7%. For the first nine months of 2003, there were
three customers who represented more than 10% of the Company's sales for the
period, one representing $7,922,000 or 29.1%, one representing $4,105,000 or
15.1%, and one representing $2,750,000 or 10.1%.
Cost of Sales. During the three months ended September 30, 2004, cost of
sales increased to 79.4% of net sales compared to 78.9% of net sales for the
same period in 2003. For the nine month period ended September 30, 2004, the
cost of sales was 79.6%, as compared to 79.4% for the nine month period in
2003.
Administrative Expenses. For the three months ended September 30, 2004,
administrative expenses were $1,078,000, or 13.3% of net sales, compared to
$749,000, or 8.9% of net sales for the same period in 2003. For the nine months
ended September 30, 2004, administrative expenses were $3,241,000, or 11.3% of
net sales, compared to $2,971,000, or 10.9% of net sales, for the same period in
2003. Administrative expenses during the first nine months of 2004 were more
than for the same period in 2003 due principally to increased bad debt and
public company expense. Also, during 2004, salaries were reclassified from
factory overhead to administrative expense. We do not anticipate a significant
change in administrative expenses for the remainder of the year.
Selling Expenses. For the three months ended September 30, 2004, selling
expenses were $380,000, or 4.7% of net sales for the quarter, compared to
$414,000 or 4.9% of net sales for the third quarter of 2003. For the nine months
ended September 30, 2004, selling expenses were $1,128,000 or 3.9% of net sales
for the period, compared to $1,033,000 or 3.8% of net sales for the same period
in 2003. The increase in selling expense during the nine month period is
attributable to a change in department structure in which the supervision of
customer service and an administrative assistant salary are now charged to
selling expense. The other item relating to
4
this increase is an increase in commission expenses. We do not anticipate a
significant change in selling expenses for the remainder of the year.
Advertising and Marketing Expense. For the three months ended September
30, 2004, advertising and marketing expenses were $242,000, or 3% of net sales
for the period, compared to $391,000 or 4.6% of net sales for the same period of
2003. For the nine months ended September 30, 2004, advertising and marketing
expenses were $918,000, or 3.2% of net sales for the period, compared to
$1,640,000, or 6% of net sales for the same period in 2003. The decline in
advertising and marketing expense is attributable to reduction in personnel,
decreases in spending in tradeshows and catalog expense and a reduction in the
cost of artwork and films. We do not anticipate a significant change in
advertising and marketing expense for the remainder of the year.
Other Income and Expense. During the three months ended September 30,
2004, the Company incurred interest expense and loan fees of $340,000, compared
to interest and loan fees of $301,000 during the same period of 2003.
During the nine months ended September 30, 2004, the Company incurred
interest expense and loan fees of $1,010,000 compared to interest and loan fees
of $777,000 during the same period for 2003. The increase in this expense is due
to higher levels of borrowing as a result of increased borrowing capacity,
higher interest rates due to cost of capital funding being higher under our new
credit facility and loan fees incurred during these periods.
Also, during the nine months ended September 30, 2004, the Company had net
other income items totaling $619,000. Gains included (i) $126,000 related to
transactions involving the valuation of foreign currency, the amount of which
will vary from period to period and (ii) $123,000 in gains from the sale of
assets, most of which were recognized in the third quarter of 2004. Other items
of gain included: (i) gains related to a review and determination that various
accrued items on the books of the Mexican subsidiaries of the Company, CTI
Mexico, S.A. de C.V. and Flexo Universal, S.A. de C.V., are not due or payable;
the items included (a) accrued amounts for profit sharing or seniority benefits
determined on the basis of a legal review not to be due, totaling $97,950, (b)
accrued amounts related to an asset tax determined not to be due or beyond the
statute of limitations, in the amount approximately of $49,400, (c) accrued
amounts with respect to various accounts settled or determined not to be due or
payable, in the aggregate amount of approximately $190,000; (ii) gains related
to the settlement of an account with a tax authority in the amount of $38,750
based on payment of an amount less than the amount accrued on the books of CTI
Mexico and Flexo Universal and (iii) gains totaling $70,000 based on the
settlement of various accounts in consideration of payment of an amount less
than the amount accrued. Most of these other gains are attributable to the first
quarter of 2004 and related to the restructuring of CTI Mexico which commenced
in February, 2003 when CTI Mexico effected a spin-off under Mexican law in which
a portion of assets, liabilities and capital were transferred to Flexo Universal
and Flexo Universal became the primary subsidiary of the Company in Mexico.
These other gains are not recurring.
Income Taxes
5
During the third quarter of 2004, the Company recorded an income tax
benefit of $91,000, arising from the operating loss in the quarter, compared to
an income tax benefit recorded for the third quarter of 2003 in the amount of
$226,000.
For the first nine months of 2004, the Company recorded income tax expense
of $84,000 compared to an income tax benefit received for the same period of
2003 in the amount of $322,000.
Financial Condition
During the nine months ended September 30, 2004, the Company used cash in
operations of $332,000, compared to cash provided by operations during the first
nine months of 2003 in the amount of $2,755,000. The difference in the amount of
cash provided by operations in the nine month periods of 2003 and 2004 is
attributable in significant part by the fact that, during the first nine months
of 2004, the Company reduced accounts payable by $566,000 and increased
receivables by $761,000, whereas in the same period of 2003, the Company
increased accounts payable by $1,408,000 and decreased receivables by $377,000.
For the most part, the use of cash in operations arose from (i) an
increase in receivables during the period of $611,000, net of $150,000 increase
to bad debt reserve, (ii) an increase in inventory of $560,000, net of $160,000
provision for losses on inventory, and (iii) a reduction in accounts payable and
accrued expenses, combined, by $393,000. During the nine month period cash from
operations was affected positively by depreciation of $1,288,000; depreciation
is expected to continue at approximately the same rate over the balance of 2004.
The Company increased its inventory levels during the third quarter of
2004 in anticipation of seasonal sales during the fourth quarter of 2004 and
January, 2005.
The increase in the Company's receivables during the nine months ended
September 30, 2004 is attributable principally to (i) increased sales to a new
customer for metalized balloons and (ii) receivables relating to increased sales
of latex balloons in Mexico. The receivable from the new customer for metalized
balloons outstanding on September 30, 2004 has been paid in full. All
receivables for sales in Mexico are current. The Company has a receivable from a
distributor which as of September 30, 2004, has a gross outstanding amount of
$307,000, which includes a note from the distributor with a remaining balance of
$95,000. During the third quarter of 2004, the Company received payments of
$105,000 and $26,000 or an aggregate of $131,000. The Company has established a
reserve of $102,000 with respect to this account, resulting in a net receivable
of $205,000. In valuing this account, management has considered that the
customer has made substantial payments against this balance during the nine
months ended September 30, 2004, and that the current cash receipts are in
excess of current sales activity, and the distributor continues, actively, to
purchase and sell the Company's products.
During the nine months ended September 30, 2004, the Company used cash in
investing activities, principally the purchase of equipment, in the amount of
$161,000, compared to equipment purchases during the first nine months of 2003
of $1,503,000. The Company does
6
not plan, and is not committed to, significant capital expenditures during the
remainder of 2004, or in 2005, except that the Company does anticipate an
upgrade and partial replacement of its computer systems and software during 2005
at cost estimated not to exceed $200,000.
During the nine months ended September 30, 2004, cash provided by
financing activities was $453,000, compared to net cash used in financing
activities in the same period of 2003 of $1,210,000. The source of cash provided
in the first nine months of 2004 was, principally, net advances on the Company's
revolving line of credit in the amount of $2,213,000. Under the terms of the
Company's revolving line of credit, the bank advances up to 85% of eligible
receivables and 50% of eligible inventory. The amount of the net advances on the
line of credit reflect (i) increased sales during the first nine months of 2004
and (ii) an increase in inventory during the period in the amount of
approximately $720,000. Financing cash outflows consisted of $2,188,000,
principally relating to a $467,000 reduction to a term loan and $1,539,000
repayment of vendor notes.
Liquidity and Capital Resources. As of September 30, 2004, the Company's
cash balance was $407,000 and there was approximately $ 71,000 available under
the Company's line of credit with its bank. As of Novemeber 16, 2004, there was
approximately $340,000 available under the Company's line of credit with its
bank. As of September 30, 2004, the Company had a deficit working capital of
$403,000 compared to a working capital deficit of $706,000 as of December 31,
2003.
The Company maintains relatively small cash balances and reserves and
relies on its revolving credit facility for liquidity.
As of September 30, 2004, the Company was not in compliance with a
financial covenant with its bank relating to the relationship of EBITDA to fixed
charges, but was in compliance with all other covenants of the loan agreement.
The bank has issued a waiver of this non-compliance. Based on our financial
projections, the Company believes it will comply with all financial and other
covenants of the loan agreement with its bank for the remainder of 2004 and
beyond. Certain officers of the Company have expressed a willingness to
supplement cash flows to the extent that it will insure compliance with the
Company's fixed cost coverage covenant with its bank.
The Company believes that its existing capital resources and cash
generated from operations will be sufficient to meet the Company's requirements
for at least twelve months.
On July 1, 2004, the Company entered into a Standby Equity Distribution
Agreement ("SEDA") with Cornell Capital under which Cornell agreed to provide up
to $5 million to the Company in connection with the purchase of common stock of
the Company over a two year term. Under the terms of the agreement, the Company
has the option to sell shares of its common stock to Cornell at the market price
for the stock at the time of the sale. The Company may request advances,
representing purchases of its stock, of up to $100,000 in any week, up to a
maximum amount of $400,000 in any month, subject to registration of the stock
prior to sale. The Company has not, as yet taken action to register shares to be
sold under the SEDA and the Board of Directors of the Company is reviewing the
arrangement to make a determination as to whether and when to proceed under it.
On August 5, 2004, the Company issued 14,162 shares of its common stock to
Cornell and 3,500 shares of its common stock to Newbridge Securities, Cornell's
stock placement agent for underwriting services as partial consideration under
the terms of the SEDA.
7
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.
With the inclusion of a new major customer in metalized balloons with sales that
are from our recurring product line we expect this seasonality effect to be
reduced. In addition, the sale of latex balloons and laminated film products
have not historically been seasonal.
Critical Accounting Policies
A summary of our critical accounting policies and estimates is presented
on pages 18 and 19 of our 2003 Annual Report on Form 10-K/A, Amendment No. 2, as
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 Operations) 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.
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 2004 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
8
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 has not identified any material changes in risk factors
identified in its Form 10-K/A Amendment No. 2 for the fiscal year ended December
31, 2003, which would create any material market risk for the Company.
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, some of which may
be affected by changes in the prices of natural gas and crude oil. 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 the end
of the period covered by 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, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against CTI Industries
Corporation for claimed breach of
9
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, the plaintiffs claim that CTI Industries Corporation owes them
certain sums for (i) helium sold and delivered, (ii) rental charges with respect
to helium tanks and (iii) replacement charges for tanks claimed to have been
lost. On November 2, 2004, this matter was settled. The amount agreed to be paid
by the Company totalled $100,000. The first payment of $50,000 was paid on
November 15, 2004. There will be five subsequent payments of $10,000 each.
On June 4, 2004, Spar Group, Inc. initiated an arbitration proceeding in
New York City against the Company. In the proceeding, Spar Group claims that
there is due from the Company to Spar Group for services rendered in the amount
of $180,043, plus interest. Spar Group claims to have rendered services to the
Company in various Eckerd stores with respect to the display and ordering of
metalized and latex balloons for sale in those stores. The Company has filed an
answer denying liability with respect to the claim and asserting a counterclaim
for damages against Spar Group for breach of its agreement to provide such
services. The Company believes it has made adequate provision for any settlement
of this matter based upon discussions with counsel.
In addition, the Company is also 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, we do not believe any of these proceedings will
have, individually or in the aggregate, a material adverse effect upon our
financial condition or future results of operation.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
On August 5, 2004, the Company issued an aggregate of 17,662 shares of its
common stock to Cornell Capital Partners and Newbridge Securities in
consideration for stock placement and underwrting services relating to the
Company's SEDA.
On September 13, 2004, the Company issued 18,018 shares of its common
stock to Thornhill Capital, LLC in return for consulting services.
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.
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
Exhibit No. Description
----------- -----------
3.1 Third Restated Certificate of Incorporation of
CTI Industries Corporation (incorporated by
reference to Exhibit A contained in
Registrant's Schedule 14A Definitive Proxy
Statement for solicitation of written consent
of shareholders, as filed with Commission on
October 25, 1999)
3.2 By-laws of CTI Industries Corporation
(incorporated by reference to Exhibits,
contained in Registrant's Form SB-2
Registration Statement (File No. 333-31969)
effective November 5, 1997)
11 Statement: Computation of Per Share Earnings
31.1 Sarbanes-Oxley Act Section 302 Certifications
for Howard W. Schwan
31.2 Sarbanes-Oxley Act Section 302 Certification
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
* 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.
11
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, 2004 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
12
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 2004 December 31, 2003
------------------ -----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 407,479 $ 329,742
Accounts receivable, (less allowance for doubtful accounts of $406,239 5,231,106 4,620,276
and $223,220 respectively)
Inventories 9,823,642 9,263,160
Deferred tax assets 361,751 361,751
Prepaid expenses and other current assets 1,318,025 859,635
------------ ------------
Total current assets 17,142,003 15,434,564
Property and equipment:
Machinery and equipment 18,371,173 18,939,535
Building 2,614,271 2,678,581
Office furniture and equipment 1,923,236 1,931,831
Land 250,000 250,000
Leasehold improvements 565,324 582,052
Fixtures and equipment at customer locations 2,286,814 2,232,285
Projects under construction 98,701 408,961
------------ ------------
26,109,519 27,023,245
Less: accumulated depreciation (15,193,782) (14,815,596)
------------ ------------
Total property and equipment, net 10,915,737 12,207,649
Other assets:
Deferred financing costs, net 155,813 222,696
Goodwill 1,113,108 1,113,108
Deferred Income tax asset 943,718 1,012,365
Other assets 98,655 279,800
------------ ------------
Total other assets 2,311,295 2,627,969
------------ ------------
TOTAL ASSETS 30,369,034 30,270,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Checks written in excess of bank balance 707,293 341,108
Accounts payable 6,207,983 6,799,490
Line of credit 5,785,001 3,694,241
Notes payable - current portion 2,528,708 2,998,496
Accrued liabilities 2,253,860 2,306,745
------------ ------------
Total current liabilities 17,482,844 16,140,080
Long-term liabilities:
Other liabilities 881,600 1,079,041
Notes payable 4,189,209 5,766,091
Notes payable - officers 2,330,024 2,064,126
------------ ------------
Total long-term liabilities 7,400,833 8,909,258
Minority interest 10,230 9,263
Stockholders' equity:
Common stock - no par value, 5,000,000 shares authorized,
2,150,216 and 2,141,882 shares issued, 1,954,100 and
1,918,420 shares outstanding, respectively 3,764,020 3,764,020
Class B Common stock - no par value, 500,000 shares authorized,
0 shares issued and outstanding 0 0
Paid-in-capital 5,615,411 5,554,332
Warrants issued in connection with subordinated debt and bank debt 595,174 595,174
Accumulated deficit (3,442,213) (3,528,063)
Accumulated other comprehensive earnings (118,152) (234,768)
Less:
Treasury stock - 231,796 shares (939,114) (939,114)
------------ ------------
Total stockholders' equity 5,475,126 5,211,581
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 30,369,034 $ 30,270,182
============ ============
See accompanying notes to condensed consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Quarter Ended September 30, Year to Date September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Sales $ 8,125,521 $ 8,428,784 $ 28,611,290 $ 27,253,217
Cost of Sales 6,455,743 6,653,397 22,762,114 21,634,749
------------ ------------ ------------ ------------
Gross profit on sales 1,669,778 1,775,387 5,849,176 5,618,469
Operating expenses:
Administrative 1,077,502 749,014 3,241,292 2,970,514
Selling 380,300 414,031 1,127,586 1,033,402
Advertising and marketing 242,491 390,750 917,980 1,640,281
------------ ------------ ------------ ------------
Total operating expenses 1,700,293 1,553,795 5,286,858 5,644,197
------------ ------------ ------------ ------------
Income from operations (30,515) 221,592 562,318 (25,729)
Other income (expense):
Interest expense (339,953) (301,323) (1,009,917) (776,766)
Interest income -- 1,393 -- 3,001
Gain on sale of assets 107,475 464 122,499 15,488
Foreign currency (loss) gain 62,202 13,792 126,044 2,084
Other (40,553) (32,897) 370,249 32,584
------------ ------------ ------------ ------------
Total other income (expense) (210,829) (318,572) (391,125) (723,609)
------------ ------------ ------------ ------------
(Loss) income before income taxes and minority interest (241,344) (96,981) 171,192 (749,337)
Income tax (benefit) expense (90,850) (226,341) 84,279 (321,766)
------------ ------------ ------------ ------------
Income (loss) before minority interest (150,494) 129,361 86,914 (427,571)
Minority interest in income (loss) of subsidiary (123) 621 1,064 300
------------ ------------ ------------ ------------
Net income (loss) $ (150,370) $ 128,740 $ 85,850 $ (427,871)
============ ============ ============ ============
Income (loss) applicable to common shares $ (150,370) $ 128,740 $ 85,850 $ (427,871)
============ ============ ============ ============
Basic income (loss) per common share $ (0.08) $ 0.07 $ 0.04 $ (0.22)
============ ============ ============ ============
Diluted income (loss) per common share $ (0.08) $ 0.06 $ 0.04 $ (0.22)
============ ============ ============ ============
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,932,692 1,918,420 1,923,212 1,918,206
============ ============ ============ ============
Diluted 1,932,692 1,996,734 1,991,766 1,918,206
============ ============ ============ ============
See accompanying notes to condensed consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Month Period Ended
September 30, 2004 September 30, 2003
-------------------------------------------
Cash flows from operating activities:
Net (loss) income $ 85,850 $ (427,871)
Adjustment to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation and amortization 1,288,416 1,160,823
Deferred gain on sale/leaseback (175,273) (17,527)
Amortization of Debt Discount 188,619 119,606
Minority interest in loss of subsidiary 967 300
Provision for losses on accounts receivable 150,000 45,000
Provision for losses on inventory 160,000 135,000
Deferred income taxes 84,298 (303,501)
Change in assets and liabilities:
Accounts receivable (760,830) 376,876
Inventory (720,482) (143,467)
Other assets (241,391) 231
Accounts payable and accrued expenses (393,130) 1,809,262
----------------------------------
Net cash (used in) provided by operating activities (332,956) 2,754,732
Cash flows from investing activities:
Purchases of property, plant and equipment (160,614) (1,502,848)
Proceeds from sale of property and equipment 2,185
----------------------------------
Net cash (used in) investing activities (158,429) (1,502,848)
Cash flows from financing activities:
Checks written in excess of bank balance 366,185 82,002
Net change in revolving line of credit 2,213,039 (1,771,182)
Proceeds from issuance of long-term debt 74,224 2,801,813
Proceeds from issuance of notes due to officer 2,550,000
Repayment of long-term debt (2,188,062) (4,870,919)
Proceeds from debt to equity swap 15,750
Collecion of Stockholder Note 56,456
Cash paid for deferred financing fees (12,880) (73,931)
----------------------------------
Net cash provided by (used in) financing activities 452,506 (1,210,011)
Effect of exchange rate changes on cash 116,616 (11,583)
----------------------------------
Net increase (decrease) in cash 77,737 30,290
Cash and Equivalents at Beginning of Period 329,742 160,493
----------------------------------
Cash and Equivalents at End of Period $ 407,479 $ 190,783
==================================
Supplemental non-cash investing and financing activities:
Settlement of liability with third party via ownership transfer
of long-term asset 241,268 0
Accounts Payable converted to notes payable 0 3,571,000
Stock issued for investment banking services at fair value 61,079 0
See accompanying notes to condensed consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Earnings per Share
Quarter Ended September 30, Year to Date September 30,
2004 2003 2004 2003
----------------------------- ----------------------------
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,932,692 1,918,420 1,923,212 1,918,206
=========== =========== =========== ===========
Net income (loss):
Net income (loss) $ (150,370) $ 128,740 $ 85,850 $ (427,871)
Amount for per share computation $ (150,370) $ 128,740 $ 85,850 $ (427,871)
=========== =========== =========== ===========
Per share amount $ (0.08) $ 0.07 $ 0.04 $ (0.22)
=========== =========== =========== ===========
Diluted
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,932,692 1,918,420 1,923,212 1,918,206
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock -- 78,314 68,554 --
----------- ----------- ----------- -----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 1,932,692 1,996,734 1,991,766 1,918,206
=========== =========== =========== ===========
Net income:
Net income (loss) $ (150,370) $ 128,740 $ 85,850 $ (427,871)
Amount for per share computation $ (150,370) $ 128,740 $ 85,850 $ (427,871)
=========== =========== =========== ===========
Per share amount $ (0.08) $ 0.06 $ 0.04 $ (0.22)
=========== =========== =========== ===========
See accompanying notes to consolidated unaudited statements
September 30, 2004
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 necessary to present fairly the financial position
and the results of operations and cash flows 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
U.S. generally accepted accounting principles for complete financial statements.
Operating results for the nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K/A Amendment No. 2 for the fiscal year ended December 31,
2003.
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.
Use of estimates
The preparation of financial statements in conformity with U.S. 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
As of September 30, 2004, 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
three months ended September 30, 2004.
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.
Note 2 - Legal Proceedings
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 case was settled November 2, 2004,
for $100,000. The first payment of $50,000 under the settlement agreement was
paid on November 15, 2004. There will be five subsequent payments of $10,000
each.
On June 4, 2004, Spar Group, Inc. initiated an arbitration proceeding in
New York City against the Company. In the proceeding, Spar Group claims that
there is due from the Company to Spar Group for services rendered in the amount
of $180,043, plus interest. Spar Group claims to have rendered services to the
Company in various Eckerd stores with respect to the display and ordering of
metalized and latex balloons for sale in those stores. The Company has filed an
answer denying liability with respect to the claim and asserting a counterclaim
for damages against Spar Group for breach of its agreement to provide such
services. The Company believes it has made adequate provision for any settlement
of this matter based on discussions with counsel.
In addition, the Company and its subsidiaries are party to certain
lawsuits arising in the normal course of business. The ultimate outcome of these
matters is unknown but, in the opinion of management, the settlement of these
matters is not expected to have a significant effect on the future financial
position or results of operations of the Company.
Note 3 - Comprehensive (Loss) Income
Comprehensive loss was ($11,982) for the three months ended September 30, 2004
and comprehensive loss of ($235,000) for the three months ended September 30,
2003. Comprehensive income was $116,616 for the nine months ending September 30,
2004 and comprehensive loss was ($107,509) for the nine months ending September
30, 2003.
2
Note 4 - Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing the net income
(loss) available to common shareholders by the weighted average number of shares
of common stock outstanding during each period.
Diluted earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock and common stock equivalents
(redeemable common stock, stock options and warrants), unless anti-dilutive,
during each period.
3
Potential dilutive securities include 405, 420 options and 282,050 warrants.
Note 4 - Inventories, net
September 30, 2004 December 31, 2003
------------------ -----------------
(Unaudited) (Audited)
Raw material and work in process $ 1,567,702 $ 2,231,428
Finished goods 8,755,118 7,523,889
------------ ------------
Inventory, Gross 10,322,820 9,755,317
Less: Inventory Reserves (499,178) (492,157)
------------ ------------
Inventories, net 9,823,642 9,263,160
============ ============
Note 5 - Geographic Segment Data
The Company has determined that it operates primarily in one business segment
which designs, manufactures, and distributes film products for use in packaging
and novelty balloon products. The Company operates in foreign and domestic
regions. Information about the Company's operations by geographic areas is as
follows.
Net Sales to External Customers
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
2004 2003 2004 2003
---- ---- ---- ----
United States $ 6,835,000 $ 6,587,000 $24,508,000 $23,590,000
Mexico 638,000 763,000 2,049,000 1,833,000
United Kingdom 653,000 1,079,000 2,054,000 1,830,000
----------- ----------- ----------- -----------
$ 8,126,000 $ 8,429,000 $28,611,000 $27,253,000
=========== =========== =========== ===========
Total Assets at
September 30, December 31,
2004 2003
---- ----
(Unaudited) (Audited)
United States $ 26,999,000 $ 27,603,000
Mexico 4,953,000 5,476,000
United Kingdom 1,910,000 1,412,000
Eliminations (3,492,000) (4,221,000)
------------ ------------
$ 30,370,000 $ 30,270,000
============ ============
4
Note 6 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable beyond
our significant customers noted below 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 uncollectible. Such
losses have historically been within management's expectations. For the three
months ended September 30, 2004, the Company has 2 customers that accounted for
$1,532,000 or 18.6% and $1,271,000 or 15.6% of sales. As compared to the same
period of 2003, the two customers represented $2,797,000 or 33.2% and $1,749,000
or 20.7% of sales. For the nine months ended September 30, 2004, the Company had
3 customers that accounted for approximately $5,478,000 or 19.0%, $3,694,000 or
12.9%, and $3,060,000 or 10.7%, respectively, of consolidated net sales. For the
nine months ended September 30, 2003, the company had 3 customers who
represented $7,922,000 or 29.1%, $4,105,000 or 15.1% and $1,749,000 or 20.7% of
consolidated net sales.
Note 7 -Standby Equity Distribution Agreement
On July 1, 2004, the Company entered into a Standby Equity Distribution
Agreement ("SEDA") with an investment firm. Under the SEDA, the investment firm
has committed to provide up to $5 million of funding to be drawn down at the
Company's discretion by the purchase of the Company's common stock. The Company
may request up to $100,000 in any seven-day period in exchange for issuing
shares of its common stock to the investment firm. The facility may be used in
whole or in part entirely at the Company's discretion, subject to an effective
registration of the related shares. As of September 30, 2004, no shares have
been issued or funds received by the Company under this agreement.
Note 8 - Related Party Transaction
During the quarter, Merrick and Klimek, P.C., the Company's law firm, provided
legal services to the Company. Stephen M. Merrick, who is Chief Financial
Officer, Secretary and a director of the Company is also a principal of Merrick
& Klimek, P.C. The Company paid invoices to the firm of $22,000 in the three
months ending September 30, 2004 and $ 113,000 for the nine months ending
September 30, 2004
During the quarter there were transactions with Packaging Systems, Inc. ("PSI")
a supplier of corrugated and miscellaneous shipping material. John H. Schwan,
Chairman of the Company is also a principle of PSI. Purchases by the Company
from PSI for the three months ending September 30, 2004 were $110,000, and
purchases for the nine months ending September 30, 2004 were $240,000.
The company also made payments to two of the principles of the Company in the
amount of $37,000 and $14,000 for the three months ending September 30, 2004 and
$117,000 and $53,000 for the nine months ending September 30, 2004. These
payments represent interest payments for loans made to the Company.
5