FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 000-23115
CTI INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
Illinois 36-2848943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22160 North Pepper Road, Barrington, Illinois 60010
(Address of principal executive offices) (Zip Code)
(847) 382-1000
(Registrant's telephone number, including area code)
Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK, no par value, 1,918,420 outstanding Shares, as of June
30, 2003.
FORM 10-Q
CTI INDUSTRIES CORPORATION
PART I. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 1. Financial Statements
The following financial statements of the Registrant are attached to this
Form 10-Q:
1. Consolidated Balance Sheets as at June 30, 2003 (unaudited) and
December 31, 2002
2. Unaudited Condensed Consolidated Statements of Operations - Three and
Six Month Periods Ended June 30, 2003 and June 30, 2002
3. Unaudited Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and June 30, 2002
The Financial Statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the periods
presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations
Net Sales. For the fiscal quarter ended June 30, 2003, net sales were
$8,662,000, compared to net sales of $10,906,000 for the three months ended June
30, 2002, a decrease of 20.6%. For the quarter, (i) net sales of laminated and
printed films declined from $5,344,000 in the second quarter of 2002 to
$4,315,000 in the second quarter of 2003, (ii) net sales of metalized balloons
declined from $3,381,000 in the second quarter of 2002 to $2,241,000 in the
second quarter of 2003 and (iii) net sales of latex balloons increased from
$1,134,000 in the second quarter of 2002 to $1,552,000 in the second quarter of
2003. In the quarter, other net sales of approximately $554,000 included sales
of helium and artwork and films. During the quarter ended June 30, 2003, sales
of laminated and printed films represented 49.8% of total sales, metalized
balloons 25.9% of total sales and latex balloons 17.9% of total sales. For the
same period of the prior year, laminated and printed films represented 49% of
total sales, metalized balloons 31% and latex balloons 10.4%.
2
For the six months ended June 30, 2003, net sales were $18,824,000 compared
to net sales of $20,644,000 for the six months ended June 30, 2002, a decline of
9%. For the six months, (i) net sales of laminated and printed films declined
from $10,242,000 in the six months ended June 30, 2002 to $8,502,000 in the six
months ended June 30, 2003, (ii) net sales of metalized balloons increased from
$5,904,000 in the six months ended June 30, 2002 to $6,953,000 in the six months
ended June 30, 2003 and (iii) net sales of latex balloons increased from
$2,477,000 in the six months ended June 30, 2002 to $2,544,000 in the six months
ended June 30, 2003. Other sales during the period (principally helium,
accessories and artwork and films) were approximately $825,000. During the six
month period ended June 30, 2003, sales of laminated and printed films
represented 45% of total sales, metalized balloons 36.9% of total sales and
latex balloons 13.5% of total sales. For the same period of the prior year,
laminated and printed films represented 49.6% of total sales, metalized balloons
28.6% and latex balloons 12%.
During the first six months of 2003, there were two customers whose
purchases represented more than 10% of the Company's sales during the period,
(i) one customer of laminated film products whose purchases totaled $2,445,000,
or 13% of total sales for the six month period and (ii) a customer for a
completed film product whose purchases totaled $5,125,000, or 27% of total
Company sales for the six month period.
Cost of Sales. For the fiscal quarter ended June 30, 2003, cost of sales
increased to 78.0% of net sales as compared to 76.1% of net sales in the three
month period ended June 30, 2002. For the six month period ended June 30, 2003,
costs of sales increased to 79.6% compared to 75% for the same period in 2002.
This increase was the result principally of increased production overhead
expenses during the period, resulting in increased unit costs over prior
periods, as well as lower margin sales to a significant customer for foil
balloons and lower pricing in the sale of foil balloons to other customers.
Administrative. For the fiscal quarter ended June 30, 2003, administrative
expenses were $1,051,000, or 12.1% of net sales as compared to $1,127,000, or
10.3% of net sales for the three month period ended June 30, 2002. For the first
six months of 2003, administrative expenses were $2,222,000, or 11.8% of net
sales for the period as compared to $2,084,000, or 10.1% of net sales for the
same period in 2002. The increase is attributable to increases in audit expense
and salary expense.
Selling. For the fiscal quarter ended June 30, 2003, selling expenses were
$217,000, or 2.5% of net sales, as compared to $375,000, or 3.4% of net sales,
for the three month period ended June 30, 2002. For the first six months of
2003, selling expenses were 619,000, or 3.3% of net sales for the period,
compared to $750,000 or 3.6% of net sales for the same period in 2002. The
decline selling expense is attributable principally to a decline in royalties
and commissions and the reclassification of customer service expenses from this
category to advertising and marketing.
Advertising and Marketing. For the quarter ended June, 2003, advertising
and marketing expenses were $661,000, or 7.6% of net sales as compared to
$441,000, or 4% of net sales in the three month period ended June 30, 2002. For
the six months ended June 30, 2003, advertising and marketing expenses were
1,250,000 or 6.6% of net sales for the period, compared to $834,000 or 4%
3
of net sales for the same period in 2002. The increase is attributable
principally to (i) increases in artwork and film expenses, (ii) increases in
salaries, trade show expense and catalogue expense and (iii) reclassification of
customer service expenses to this category from selling expense.
Other Income or Expense. Interest expense increased to $274,000 for the
quarter ended June 30, 2003, as compared to $204,000 for the three month period
ended June 30, 2002. For the six months ended June 30, 2003, interest expense
was $475,000 compared to $394,000 for the same period in 2002. The increase in
interest expense is attributable to the increase in total borrowings by the
Company during the period.
During the three month period ended June 30, 2003, subsidiaries of the
Company, principally the Mexico subsidiaries, Flexo Universal, S.A. de C.V. and
CTI Mexico S.A. de C.V. experienced gain with respect to currency fluctuation,
related to dollar denominated obligations, in the amount of $97,000, compared to
a loss for the same period of 2002 of $251,000. For the six months ended June
30, 2003, the loss from currency fluctuation was $12,000 compared to a loss in
the same period of 2002 of $214,000.
During the quarter ended June 30, 2003, the Company recognized other income
of $197,000 relating principally to income arising from the settlement of
certain vendor claims, compared to other income of $26,000 for the second
quarter of 2002.
Net Income or Loss. For the fiscal quarter ended June 30, 2003, the Company
had a net income before taxes and minority interest of $6,000 as compared to net
income before taxes and minority interest of $155,000 for the second quarter of
2002. Income tax expense (benefit) for the second quarter of fiscal 2003 was
($130,000) resulting in net income of $133,000 after minority interest of
$2,000. The income tax expense for the three month period ended June 30, 2002
was $51,000, resulting in net income after minority interest of $134,000.
For the six months ended June 30, 2003, the Company had a net loss before
provision for income taxes or minority interest of $652,000, compared to net
income in the same period of 2002 of $746,000. The income tax benefit for the
period was $95,000 resulting in a net loss of $556,000 for the period. For the
six months ended June 30, 2002, the income tax expense was $298,000 and net
income for the period was $504,000, after minority interest of $6,000.
The change in net income for the six months ended June 30, 2003 from the
same period of 2002 is attributable to several factors: (i) the Company
experienced lower margins overall in sales with the result that gross profit on
sales was reduced to $3,843,000 for the six months ended June 30, 2003 from
$5,160,000 for the same period in 2002, a differential of about $1,317,000; (ii)
the lower gross margin rate was attributable to increased production overhead
expenses incurred particularly during the first quarter, as well as sales of
metalized balloons at lower pricing to a major customer and (iii) production and
sales in Mexico were reduced in March and April, 2003 by reason of the move of
equipment and operations to a new facility, and additional costs were incurred
in that move. Also, during the first quarter of 2003, the Company continued to
experience costs associated with (i) the installation and set-up of new
equipment and (ii) the development and implementation of a foil balloon program
for a significant customer.
4
Liquidity and Capital Resources
Cash Flow Items. Cash flow generated from operations during the six months
ended June 30, 2003 was $1,143,000 compared to $1,546,000 for the same period of
$2002.
Investment Activities. Cash used in investing activities during the six
months ended June 30, 2003 was $1,324,000 compared to $1,489,000 for the same
period in 2002. The cash used in investing activities is attributable
principally to the acquisition of property and equipment, much of which had
previously been in the process of acquisition or completion and accounted for as
projects under construction.
Financing Activities.
During the six months ended June 30, 2003, cash generated from financing
activities was $313,000 compared to $522,000 for the same period in 2002.
In February, 2003, two officers of the Company loaned an aggregate of
$1,630,000 to the Company in exchange for (i) two year promissory notes bearing
interest at 9% per annum and (ii) five year warrants to purchase up to 163,000
shares of Common Stock of the Company at $4.87 per share, the market price of
the Common Stock on the date of the issuance of the Warrants. The proceeds of
these loans were to (i) re-finance the bank loan in the amount of $880,000 to
CTI Mexico, S.A. de C.V., the 98% owned Mexico subsidiary of the Company and
(ii) to provide financing for CTI Mexico and Flexo Universal, S.A de C.V., also
a Mexico subsidiary of the Company.
In the second quarter of 2003, an officer of the Company loaned to the
Company an aggregate amount of $820,000. Such amount is due on demand and bears
interest at the rate of 8% per annum.
On April 24, 2003, the Company entered into a Secured Promissory Note in
the principal amount of $2,912,000 and a First Modification to Mortgage with a
Bank, under which the Secured Promissory Note is secured by the principal
property of the Corporation in Barrington, Illinois. Under the Secured
Promissory Note (i) the principal amount of the loan bears interest at the rate
of 6.25% per annum and (ii) the Company is obligated to make payments 59 monthly
payments of $19,209 each and to pay the balance then due on May 5, 2008.
This Secured Promissory Note paid and superseded mortgage notes of the
Company dated January, 2001 which had an initial principal balance of $2,873,000
and a balance as of April 24, 2003 of $2,638,000. After payment of the principal
balance of those notes, prepayment penalties and loan expenses, the Company
received net proceeds under the Secured Promissory Note of $231,000.
Liquidity and Capital Resources. At June 30, 2003, the Company had a cash
balance of $187,000. The Company employs a cash management strategy of
maintaining minimal cash balances and utilizing its revolving line of credit for
liquidity. As June 30, 2003, the Company had a deficit working capital of
($2,352,000) compared to a deficit working capital of ($2,907,000) at December
31, 2002. During the first quarter of 2003, $2,300,000 of term debt with the
Company's primary lender was reclassified from long-term debt to short-term
debt, as the term of the loan facility expires on January 31, 2004. The effect
of reclassification of this debt was partially offset by the issuance of the
previously mentioned $1,630,000 of two year promissory notes. Under the terms of
the loan agreement, the facility is automatically extended for another year from
January 31, 2004 unless terminated by either party at the expiration of the
initial term. As of June 30, 2003, there was $170,000 available under the
revolving line of credit with this lender.
The Company has no commitments for capital expenditures during the third
and fourth quarters of 2003.
The Company believes that existing capital resources and cash generated
from operations will be sufficient to meet the Company's requirements for at
least twelve months.
Seasonality. In the metalized balloon product line, sales have historically
been seasonal, with approximately 22% to 25% of annual sales of metalized
balloons being generated in December and January and 11% to 13% of annual
metalized sales being generated in September and July in recent years. The sale
of latex balloons and laminated film products have not historically been
seasonal. As
5
sales of latex balloons and laminated film products have increased in relation
to sales of metalized balloons, the effect of this seasonality has been reduced
Critical Accounting Policies
A summary of our critical accounting policies and estimates is presented on
pages 19 and 20 of our 2002 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements.
The Company operates in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The market for metalized and latex balloon
products is generally characterized by intense competition, frequent new product
introductions and changes in customer tastes which can render existing products
unmarketable. The statements contained in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operation) that are not
historical facts may be forward-looking statements (as such term is defined in
the rules promulgated pursuant to the Securities Exchange Act of 1934) that are
subject to a variety of risks and uncertainties more fully described in the
Company's filings with the Securities and Exchange Commission including, without
limitation, those described under "Risk Factors" in the Company's Form SB-2
Registration Statement (File No. 333-31969) effective November 5, 1997. The
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by, and information currently available to the
Company's management. Accordingly, these statements are subject to significant
risks, uncertainties and contingencies which could cause the Company's actual
growth, results, performance and business prospects and opportunities in 2003
and beyond to differ materially from those expressed in, or implied by, any such
forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying such statements. These risks, uncertainties and contingencies
include, but are not limited to, the Company's limited operating history on
which expectations regarding its future performance can be based, competition
from, among others, national and regional balloon, packaging and custom film
product manufacturers and sellers that have greater financial, technical and
marketing resources and distribution capabilities than the Company, the
availability of sufficient capital, the maturation and success of the Company's
strategy to develop, market and sell its products, risks inherent in conducting
international business, risks associated with securing licenses, changes in the
Company's product mix and pricing, the effectiveness of the Company's efforts to
control operating expenses, general economic and business conditions affecting
the Company and its customers in the United States and other countries in which
the Company sells and anticipates selling its products and services and the
Company's ability to (i) adjust to changes in technology, customer preferences,
enhanced competition and new competitors; (ii) protect its intellectual property
rights from infringement or misappropriation; (iii) maintain or enhance its
relationships with other businesses and vendors; and (iv) attract and retain key
employees. There can be no assurance that the Company will be able to identify,
develop, market, sell or support new products successfully, that any such new
products will gain market acceptance, or that the Company will be able to
respond effectively to changes in customer preferences. There can be no
assurance that the Company will not encounter technical or
6
other difficulties that could delay introduction of new or updated products in
the future. If the Company is unable to introduce new products and respond to
industry changes or customer preferences on a timely basis, its business could
be materially adversely affected. The Company is not obligate to update or
revise these forward-looking statements to reflect new events or circumstances.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company does not have long term obligations bearing interest at
variable rates which would create any material market risk for the Company.
The Company, or subsidiaries of the Company, may from time to time have
outstanding obligations denominated in a currency other than that of the
principal office of the Company or such subsidiary. However, the amount of
market risk arising from such obligations is not material.
The Company and its subsidiaries are exposed to market risk in changes of
commodity prices in some of the raw materials they purchase for their
manufacturing needs , particularly nylon film, resin and latex. However, the
risk involved would not have a material effect on the Company's results of
operations or financial condition.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date
within ninety days before the filing date of this report, have
concluded that, as of such date our disclosure controls and procedures
were adequate and effective to ensure that material information
relating to the Company would be made known to them by others within
the Company.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the
date of their evaluation, nor were there any significant deficiencies
or material weaknesses in the Company's internal controls. As a
result, no corrective actions were required or undertaken.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 5, 2002, Byrne Sales Associates, Inc. filed an action against
the Company for breach of contract in the Circuit Court of Jefferson County,
Wisconsin claiming as damages the
7
amount of $150,805. In the action, the plaintiff alleged that certain products
manufactured by the Company to the plaintiff were defective. The action was
dismissed in May, 2003.
In addition, the Company, and one or more of its subsidiaries, is also a
party to certain lawsuits or claims arising in the normal course of business.
The ultimate outcome of these matters is unknown but, in the opinion of
management, the settlement of these matters is not expected to have a
significant effect on the future financial position or results of operations of
the Company.
Item 2. Changes in Securities
During February and March, 2003, two officers of the Company loaned an
aggregate of $1,630,000 to the Company in exchange for (i) two year promissory
notes bearing interest at 9% per annum and (ii) five year warrants to purchase
up to 163,000 shares of Common Stock of the Company at $4.87 per share, the
market price of the Common Stock of the Company on the date of the Warrants.
These Warrants were issued to the two officers of the Company in a private
placement which was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving a public
offering as all participants are sophisticated investors who have full access to
information about the Company and have purchased the Warrants for investment and
not with a view to the sale or distribution thereof.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
The Certifications of the Chief Executive Officer and the Chief Financial
Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
are attached as Exhibits to this Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-k
(a) Exhibits*
Exhibit No. Description
----------- -----------
11 Statement re: Computation of Per Share Earnings
31.1 Sarbanes-Oxley Act Section 302 Certifications for
Howard W. Schwan
8
Exhibit No. Description
----------- -----------
31.2 Sarbanes-Oxley Act Section 302
Certifications for Stephen M. Merrick
32.1 Sarbanes-Oxley Act Section 906
Certification for Stephen M. Merrick, Chief
Financial Officer
32.2 Sarbanes-Oxley Act Section 906
Certification for Howard W. Schwan, Chief
Executive Officer
(b) On July 29, 2003, the Company filed a report on Form 8-K
disclosing that the Company had terminated its auditors and
has retained new auditors.
*Also incorporated by reference the Exhibits filed
as part of the SB-2 Registration Statement of the
Registrant, effective November 5, 1997, and
subsequent periodic filings.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 19, 2003 CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
--------------------------------
Howard W. Schwan, President
By: /s/ Stephen M. Merrick
--------------------------------
Stephen M. Merrick
Executive Vice President and
Chief Financial Officer
10
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 December 31, 2002
--------------- -------------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 187,249 $ 160,493
Accounts receivable, (less allowance for doubtful accounts of $237,737 4,730,045 5,384,839
and $222,220 respectively)
Inventories 10,196,054 10,033,593
Deferred tax assets 360,742 247,780
Prepaid expenses and other current assets 815,253 310,995
------------ -------------
Total current assets 16,289,343 16,137,700
Property and equipment:
Machinery and equipment 18,452,903 16,221,259
Building 2,670,358 2,636,595
Office furniture and equipment 1,836,437 1,746,480
Land 250,000 250,000
Leasehold improvements 698,643 388,655
Fixtures and equipment at customer locations 2,232,285 2,306,807
Projects under construction 301,232 2,331,981
------------ -------------
26,441,858 25,881,777
Less: accumulated depreciation (14,050,187) (14,166,764)
------------ -------------
Total property and equipment, net 12,391,671 11,715,013
Other assets:
Deferred financing costs, net 48,787 51,747
Goodwill 1,113,108 1,113,108
Deferred tax assets 530,160 441,592
Other assets 93,063 812,698
------------ -------------
Total other assets 1,785,118 2,419,145
------------ -------------
TOTAL ASSETS $ 30,466,132 $ 30,271,858
============ =============
See accompanying notes to consolidated unaudited statements
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,741,271 9,694,283
Line of credit 3,812,639 5,642,649
Notes payable - current portion 2,863,142 1,742,658
Accrued liabilities 3,224,695 1,966,361
------------ ------------
Total current liabilities 18,641,747 19,045,951
Long-term liabilities:
Other liabilities 971,449 710,257
Notes payable 5,267,523 5,016,109
Suboridinated Debt 0 0
------------ -------------
Total long-term liabilities 6,238,972 5,726,366
Minority interest 9,425 25,865
Stockholders' equity:
Common stock - no par value, 5,000,000 shares authorized,
2,150,216 and 2,141,882 shares issued, 1,918,420 and
1,910,086 shares outstanding, respectively 3,764,020 3,748,270
Class B Common stock - no par value, 500,000 shares authorized,
0 shares issued and outstanding 0 0
Paid-in-capital 5,554,332 5,554,332
Warrants issued in connection with subordinated debt and bank debt 595,174 135,462
Accumulated deficit (3,519,427) (2,962,816)
Accumulated other comprehensive earnings 121,003 (6,002)
Less:
Treasury stock - 231,796 shares (939,114) (939,114)
Stock subscription receivable 0 0
Notes receivable from stockholders 0 (56,456)
------------ -------------
Total stockholders' equity 5,575,988 5,473,676
------------ -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 30,466,132 $ 30,271,858
============ =============
See accompanying notes to consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Quarter ended June 30, Year to Date June 30,
2003 2002 6/31/03 6/31/02
(as restated)
------------ ------------- ------------- -------------
Net Sales $ 8,661,939 $ 10,905,748 $ 18,824,434 $20,643,846
Cost of Sales 6,755,910 8,299,517 14,981,352 15,483,362
------------ ------------- ------------- -------------
Gross profit on sales 1,906,029 2,606,231 3,843,082 5,160,484
Operating expenses:
Administrative 1,051,114 1,127,178 2,221,500 2,084,078
Litigation settlements expense 0 60,000 0 105,000
Selling 217,008 374,890 619,371 750,167
Advertising and marketing 660,637 440,988 1,249,531 834,210
------------ ------------- ------------- -------------
Total operating expenses 1,928,759 2,003,056 4,090,402 3,773,455
------------ ------------- ------------- -------------
Income from operations (22,730) 603,175 (247,320) 1,387,029
Other income (expense):
Interest expense (273,691) (204,254) (475,443) (384,244)
Interest income 1,220 420 1,608 647
Gain (loss) on sale of assets 7,512 (20,069) 15,024 (30,763)
Foreign currency (loss) gain 96,798 (251,030) (11,708) (213,872)
Other 196,495 26,339 65,482 37,216
------------ ------------- ------------- -------------
Total other income (expense) 28,334 (448,594) (405,037) (591,016)
------------ ------------- ------------- -------------
Income (loss) before income taxes and minority interest 5,604 154,581 (652,357) 796,013
Income tax expense (benefit) (129,671) 50,917 (95,425) 298,210
------------ ------------- ------------- -------------
Income (loss) before minority interest 135,275 103,664 (556,932) 497,803
Minority interest in income (loss) of subsidiary 2,097 (29,863) (321) (6,155)
------------ ------------- ------------- -------------
Net income (loss) $ 133,178 $ 133,527 $ (556,611) $ 503,958
============ ============= ============= =============
Basic income (loss) per common share $ 0.07 $ 0.11 $ (0.29) $ 0.42
============ ============= ============= =============
Diluted income (loss) per common share $ 0.06 $ 0.09 $ (0.29) $ 0.38
============ ============= ============= =============
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,918,420 1,263,763 1,918,098 1,198,597
============ ============= ============= =============
Diluted 2,139,754 1,479,644 1,918,098 1,332,610
============ ============= ============= =============
See accompanying notes to consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Month Period Ended
June 30, 2003 June 30, 2002
(as restated)
---------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (556,611) $ 503,957
Adjustment to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 710,934 718,925
Deferred gain on sale/leaseback 15,024 0
Amortization of Debt Discount 55,051 13,750
Minority interest in loss of subsidiary (321) (6,155)
Gain on sale of fixed assets 0 0
Provision for losses on accounts receivable & inventory 120,000 150,000
Deferred income taxes (189,289) 199,370
Change in assets and liabilities:
Accounts receivable 368,085 (918,711)
Inventory (269,938) (1,160,947)
Other assets (2,475) (522,633)
Accounts payable and accrued expenses 892,374 2,568,619
---------------------------------------------
Net cash provided by (used in) operating activities 1,142,834 1,546,175
Cash flows from investing activities:
Proceeds from sale of property and equipment 0
Cash acquired in acquisition of CTI Mexico (5,000)
Proceeds from sale of property and equipment 0 0
Purchases of property and equipment (1,318,971) (1,489,446)
---------------------------------------------
Net cash (used in) investing activities (1,323,971) (1,489,446)
Cash flows from financing activities:
Checks written in excess of bank balance 366,193 0
Net change in revolving line of credit (2,085,057) 193,688
Proceeds from issuance of long-term debt 4,675,665 490,880
Proceeds from issuance of notes due to officer 820,000 0
Proceeds from the issuance of short-term debt 900,000
Repayment of long-term debt (3,247,329) (134,916)
Repayment of short-term debt (1,116,736) (27,949)
Proceeds from debt to equity swap 15,750 0
Purchase of treasury stock (15,226) 0
---------------------------------------------
Net cash provided by (used in) financing activities 313,260 521,703
Effect of exchange rate changes on cash (105,368) 17,212
---------------------------------------------
Net increase (decrease) in cash 26,755 595,644
Cash and Equivalents at Beginning of Period 160,493 110,488
---------------------------------------------
Cash and Equivalents at End of Period $ 187,248 $ 706,132
=============================================
See accompanying notes to consolidated unaudited statements
June 30, 2003
CTI Industries Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered to present fairly the financial position and the
results of operations and cash flow for the periods presented in conformity with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
Operating results for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended December 31, 2002.
Principles of consolidation and nature of operations:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, CTI Balloons Limited and CTF International S.A.
de C.V., as well as its majority owned subsidiary CTI Mexico S.A. de C.V., and
Flexo Universal, S.A. de C.V. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Company (i) designs,
manufactures and distributes balloon products throughout the world and (ii)
operates systems for the production, lamination, coating and printing of films
used for food packaging and other commercial uses and for conversion of films to
flexible packaging containers and other products.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Actual results may differ from those estimates.
Stock-Based Compensation
At June 30, 2003, the Company had four stock-based compensation plans. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations. The Company recognizes compensation cost for
stock-based compensation awards equal to the difference between the quoted
market price of the stock at the date of grant or award and the price to be paid
by the employee upon exercise in accordance with the provisions of APB No. 25.
Based upon the terms of Company's current stock option plans, the stock price on
the date of grant and price paid upon exercise are the
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same. Accordingly, no stock-based employee compensation cost has been
recognized, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. No
stock options were granted during the six months ended June 30, 2003.
Historically, the Company's option awards have vested at date of grant.
Accordingly, had the Company applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-based Compensation," there is no pro forma
effect on net income to disclose in periods with no option awards.
Reclassification
Certain items in the financial statements for the three and six months ended
June 30, 2002 have been reclassified to be consistent with the presentation
shown for the three and six months ended June 30, 2003, involving the
reclassification of customer service expenses from selling expense to
advertising and marketing expense.
Note 2 - Legal Proceedings
On September 5, 2002, Byrne Sales Associates, Inc. filed an action against the
Company for breach of contract in the Circuit Court of Jefferson County,
Wisconsin claiming as damages the amount of $150,805. The action was dismissed
in May, 2003.
In addition, the Company and its subsidiaries are party to certain lawsuits
arising in the normal course of business. The ultimate outcome of these matters
is unknown but, in the opinion of management, the settlement of these matters is
not expected to have a significant effect on the future financial position or
results of operations of the Company.
Note 3 - Comprehensive Income
Total Comprehensive Income (loss) was $290,328 for the three months ended
June 30, 2003 and was $105,000 for the three months ended June 30, 2002.
Note 4 - Inventories, net
June 30, 2003 December 31, 2002
------------ -----------------
Raw material and work in process 2,875,028 $ 4,001,374
Finished goods 7,715,560 6,386,719
------------ ------------
Inventory, Gross 10,590,588 10,388,093
Less: Inventory Reserves (394,535) (354,500)
------------ ------------
Inventories, net 10,196,053 $ 10,033,593
============ ============
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Note 5 - Geographic Segment Data
The Company has determined that it operates primarily in one business segment
which designs, manufactures, and distributes film products for use in packaging
and novelty balloon products. The Company operates in foreign and domestic
regions. Information about the Company's operations by geographic areas is as
follows.
Net Sales to External Customers Total Assets at
For the Six Months Ended June 30,
June 30 December 31
2003 2002 2003 2002
---- ---- ---- ----
United States $ 17,003,000 $ 18,428,000 $ 27,372,981 $ 26,311,194
Mexico 1,070,000 1,237,000 5,866,062 4,982,751
United Kingdom 751,000 979,000 1,366,674 979,959
Eliminations (4,139,584) (2,002,046)
------------ ------------ ------------ ------------
$ 18,824,000 $ 20,644,000 $ 30,466,133 $ 30,271,858
============ ============ ============ ============
Note 6 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally limited due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be un-collectable. Such losses have historically been
within management's expectations. For the six months ended June 30, 2003, the
Company had two customers that accounted for approximately $5,125,000, (27%) and
$2,445,000, (12.9%), respectively, of consolidated net sales.
Note 7 - CTI Mexico Transactions
Effective February 23, 2003, the Company's 98% owned subsidiary, CTI Mexico,
effected a spin-off under Mexican law under which certain of its assets,
liabilities and equity were transferred to a newly formed corporation, Calidad
Empresarial Mexicana, S.A. de C.V. ("Calidad"), having the same shareholders as
CTI Mexico. Effective on April 10, 2003, Calidad was merged into Flexo
Universal, S.A. de C.V. ("Flexo"), then a wholly-owned subsidiary of the Company
(which had not previously engaged in any operations). In the merger, all of the
assets and certain liabilities of Calidad were acquired by Flexo. As a result of
the merger, the Company now owns 98% of the capital stock of Flexo.
Note 8 - Warrants and Shareholder Debt
In February, 2003, two officers of the Company loaned an aggregate of $1,630,000
to the Company in exchange for (i) two year promissory notes bearing interest at
9% per annum and (ii) five year warrants to purchase up to 163,000 shares of
Common Stock of the Company at $4.87
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per share, the market price of the Common Stock on the date of the issuance of
the Warrants. As a result of valuing the warrants and allocating a portion of
the proceeds to the warrants, the Company recorded additional paid-in capital
attributable to the warrants of $459,712 and a related discount on the
promissory notes of the same amount. The note is recorded at March 31, 2003, net
of unamortized discount of $454,335. The proceeds of these loans were to (i)
refinance the bank loan in the amount of $880,000 to CTI Mexico, S.A. de C.V.,
the 98% owned Mexican subsidiary of the Company and (ii) to provide financing
for CTI Mexico and Flexo Universal, S.A. de C.V., also a Mexico subsidiary of
the Company.
During the second quarter of 2003, an officer of the Company loaned to the
Company an aggregate amount of $820,000. Such amount is due on demand and bears
interest at the rate of 8% per annum.
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