FORM 10-QSB/A
Amendment No. 1
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, 2002
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.
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK, no par value, 1,190,710 outstanding Shares and CLASS B
COMMON STOCK, no par value, 329,670 outstanding Shares, as of June 30, 2002.
THIS FORM 10-QSB/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND
RESTATING PARTS OF FORM 10-QSB TO REFLECT THE RESTATEMENT OF OUR CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED JUNE 30, 2001
AND 2002. THESE REVISIONS HAVE BEEN MADE REGARDING SUBORDINATED DEBT
ROLLFORWARDS, THE RECALCULATION OF EXPENSES ASSOCIATED WITH CERTAIN WARRANTS
ISSUED BY THE COMPANY AND THE RECOGNITION OF CERTAIN EXPENSES ASSOCIATED WITH
CERTAIN LITIGATION. ALL PORTIONS OF THE FORM 10-QSB THAT ARE EFFECTED BY THESE
REVISIONS HAVE BEEN ADJUSTED ACCORDINGLY. ALL INFORMATION IN THIS FORM 10-QSB/A
IS AS OF JUNE 30, 2002 AND DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS
OTHER THAN THE RESTATEMENT.
FORM 10-QSB
CTI INDUSTRIES CORPORATION
PART I. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 1. Financial Statements
THIS FORM 10-QSB/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND
RESTATING PARTS OF FORM 10-QSB TO REFLECT THE RESTATEMENT OF OUR CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED JUNE 30, 2001
AND 2002. THESE REVISIONS HAVE BEEN MADE REGARDING SUBORDINATED DEBT
ROLLFORWARDS, THE RECALCULATION OF EXPENSES ASSOCIATED WITH CERTAIN WARRANTS
ISSUED BY THE COMPANY AND THE RECOGNITION OF CERTAIN EXPENSES ASSOCIATED WITH
CERTAIN LITIGATION. ALL PORTIONS OF THE FORM 10-QSB THAT ARE EFFECTED BY THESE
REVISIONS HAVE BEEN ADJUSTED ACCORDINGLY. ALL INFORMATION IN THIS FORM 10-QSB/A
IS AS OF JUNE 30, 2002 AND DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS
OTHER THAN THE RESTATEMENT.
The following financial statements of the Registrant are attached to this Form
10-QSB:
1. Unaudited Condensed Consolidated Balance Sheet as at June 30,
2002
2. Unaudited Condensed Consolidated Statements of Operations -
Three and Six Month Periods Ended June 30, 2002 and June 30,
2001
3. Unaudited Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and June 30, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
On August 19, 2002, we reported that we had discovered accounting
inaccuracies in certain prior period financial statements requiring restatement
of the financial statements for those periods. This statement involved
inaccuracies related to the recording of expenses associated with the issuance
of certain warrants by the Company. Thereafter, we received comment letters from
the SEC relating to the calculation of expenses associated with the issuance of
these warrants and, also, related to the timing of the recording of certain
litigation settlement expense. After a review of these matters, we are restating
our statements of operations, cash flows, and stockholders' equity for the years
ended December 31, 2001 and 2000 and for the interim periods ended March 31,
June 30 and September 30 of 2001 and 2002, and the balance sheets as of December
31, 2001 and 2000.
We have determined that in 2000 and 2001, the Company did not record the
proper amount of expense associated with the issuance of warrants by the Company
in connection with the issuance of certain subordinated debt and certain senior
debt by the Company. Based upon the fair value of the warrants at the time of
issuance, a debt discount was to be recorded in the amount of such warrant value
with respect to the subordinated and senior debt with which the warrants were
associated. This discount was to be amortized and expensed over the term of the
debt. The total amount of this debt discount related to the warrants was
$386,353 and was to be recorded over the period from November, 1999 through
September 30, 2002. During that time, the total amount actually recorded was
$14,273, which was recorded for the quarter ended December 31, 2001.
We have determined that the amount of such expense should have been
recorded in the following periods for the following amounts:
Two Months Ended December 31, 1999 $42,556
Quarter Ended March 31, 2000 $45,523
Quarter Ended June 30, 2000 $45,523
Quarter Ended September 30, 2000 $45,523
Quarter Ended December 31, 2000 $45,523
Quarter Ended March 31, 2001 $42,471
Quarter Ended June 30, 2001 $36,368
Quarter Ended September 30, 2001 $43,243
Quarter Ended December 31, 2001 $18,998
Quarter Ended March 31, 2002 $ 6,875
Quarter Ended June 30, 2002 $ 6,875
Quarter Ended September 30, 2002 $ 6,875
In April, 2002, the Company entered into an agreement with a former
shareholder under which the Company agreed to purchase 74,513 shares of the
Company's common stock from the shareholder and two of the shareholder's
children at the price of $3.31 per share and to settle certain pending
litigation among the shareholder and the Company without other payment or
consideration. Of the total purchase price for the shares, $75,000 was allocated
as expense related to this settlement, and the remaining $171,000 was recorded
as a retirement of shares, thereby increasing the amount reported as treasury
stock. This $75,000 expense was recorded for the period ended June 30, 2002.
Management has determined that this expense should have been recorded as an
expense in the period ending December 31, 2001.
The restated financial statements in this Report incorporate the proper
entries for these expenses and all necessary adjustments have been made to the
statement of operations, cash flows, stockholders' equity and balance sheet in
the financial statements.
Results of Operations
Net Sales. For the fiscal quarter ended June 30, 2002, net sales were
$10,906,000, compared to net sales of $6,876,000 for the three months ended June
30, 2001, an increase of 58.6%. During the quarter ended June 30, 2002, sales of
laminated and printed films represented 49% of total sales, metalized balloons
31% of total sales and latex balloons 10.4% of total sales. For the same period
of the prior year, laminated and printed films represented 37.7% of total sales,
metalized balloons 31.9% and latex balloons 24.5%. Net sales for the first six
months of fiscal 2002 increased 59.3% to $20,644,000, compared to net sales of
$12,957,000 for the six months ended June 30, 2001. For the six month period,
sales of laminated, specialty and printed films increased from $4,299,000 to
$10,242,000, an increase of 138% for the period. This increase resulted from an
increase in sales principally to two customers, one of which represented 32% of
the Company's total sales revenue for the six month period and the other
represented 20% of total sales revenue for that same period. During the six
month period, sales of metalized balloons also increased by 31% over the same
period in the prior year and sales of latex balloons declined by 25% compared to
the same period in the prior year. For the six month period ended June 30, 2002,
sales of laminated and printed films represented 49.6% of total sales, metalized
balloons represented 28.6% of total sales and latex balloons represented 12% of
total sales. For the same period in the prior year, laminated and printed films
represented 33.2% of sales, metalized balloons 34.7% of sales and latex balloons
25.2% of sales.
2
Cost of Sales. For the fiscal quarter ended June 30, 2002, cost of sales
increased to 76.1% of net sales as compared to 73.7% of net sales in the three
month period ended June 30, 2001. This increase was the result principally of
lower than expected margins in the production and sales of latex balloons. Cost
of goods sold was 75.0% of net sales for the first six months of fiscal 2002,
compared to 73.5% for the six-month period ended June 30, 2001.
Administrative. For the fiscal quarter ended June 30, 2002, administrative
expenses were $1,127,000, or 10.3% of net sales as compared to $818,000, or
11.9% of net sales for the three month period ended June 30, 2001. For the first
six months of fiscal 2002, administrative expenses were $2,084,000, or 10.1% of
net sales as compared to $1,565,000, or 12.1% of net sales for the six month
period ended June 30, 2001. The increase in administrative expenses is
attributable principally to an increase in personnel needed to support the
increase in sales volume.
Litigation settlements. In April, 2002, the Company entered into an
agreement with a former shareholder under which the Company agreed to purchase
74,513 shares of the Company's common stock from the shareholder and two of the
shareholder's children at the price of $3.31 per share and to settle certain
pending litigation among the shareholder and the Company without other payment
or consideration. Of the total purchase price for the shares, $75,000 has been
allocated as expense related to this settlement, and the remaining $171,000 has
been recorded as a retirement of shares, thereby increasing the amount reported
as treasury stock. These allocations have been deemed a subsequent event to year
end 2001 and have previously been reflected in the financial statements to the
Company's Report on Form 10-KSB/A for the period ending December 31, 2001, as
restated.
On June 28, 2002, the Company entered into a settlement agreement with
respect to pending litigation among the Company, Real Fresh, Inc., Packaging
Systems, LLC and Honeywell International, Inc. (See Part II, Item 1 - Legal
Proceedings). The total amount of expense incurred by the Company during the six
month period ended June 30, 2002 in connection with this matter was $105,000.
Selling. For the fiscal quarter ended June 30, 2002, selling expenses were
$375,000, or 3.4% of net sales, as compared to $445,000, or 6.5% of net sales
for the three month period ended June 30, 2001. For the first six months of
fiscal 2002, selling expenses were $750,000, or 3.6% of net sales as compared to
$871,000, or 6.7% of net sales for the three month period ended June 30, 2001.
The decline in selling expense dollars is primarily related to a decrease in
commissions and royalty expense, both in total amount and as a percentage of net
sales. This decline is the result principally of the relative increase in sales
of printed and laminated films for which very little in commissions and no
royalties are paid.
Advertising and Marketing. For the fiscal quarter ended June 30, 2002,
advertising and marketing expenses were $441,000, or 4.0% of net sales as
compared to $307,000, or 4.5% of net sales in the three month period ended June
30, 2001. For the first six months of fiscal 2002, advertising and marketing
expenses were $834,000, or 4.0% of sales as compared to $578,000, or 4.5% of net
sales for the six month period ended June 30, 2001.
Other Income or Expense. Interest expense decreased to $204,000 for the
quarter ended June 30, 2002, as compared to $279,000 for the three month period
ended June 30, 2001. Interest expense decreased to $384,000 for the six months
ended June 30, 2002, as compared to $621,000 for the six month period ended June
30, 2001. The decrease in interest expense for the six months
3
was due to the Company's refinancing of its debt in the first quarter of 2001,
and the applicable floating rate of interest on outstanding borrowings.
During the six month period ended June 30, 2002, CTI Mexico incurred
expense with respect to currency fluctuation, related to dollar denominated
obligations, in the amount of $214,000. This expense is reflected in the
consolidated statement of operations.
Net Income or Loss. For the fiscal quarter ended June 30, 2002, the
Company had income before taxes and minority interest of $155,000 as compared to
income before taxes and minority interest of $50,000 for the three month period
ended June 30, 2001. Income tax expense for the second quarter of fiscal 2002
was $51,000, resulting in net income of $134,000 after minority interest of
$30,000. The income tax expense for the three month period ended June 30, 2001
was $4,000, resulting in a net income of $24,000 after minority interest of
($22,000). For the six months ended June 30, 2002, net income was $504,000, as
compared to a net loss of $152,000 for the six month period ended June 30, 2001.
Financial Condition
Cash Flow Items. Cash flow provided by operations during the six months
ended June 30, 2002 was $1,546,000, which was affected by an increase in
accounts payable resulting from increased sales volume and an increase in
inventory. During the six month period ended June 30, 2001, cash flows used in
operations were $1,046,000, which was affected by an increase in accounts
receivable resulting from increased sales volume and an increase in inventory.
Investment Activities. During the six months ended June 30, 2002, cash
flow used in investing activities for the purchase of machinery and equipment
was $1,489,000. In the six month period ended June 30, 2001, $408,000 was used
in investing activities, primarily for the purchase of machinery and equipment.
Financing Activities. For the six months ended June 30, 2002, cash flow
provided by financing activities was $522,000. The primary source of this cash
flow was an increase in the balance of the companies revolving line of credit.
Cash flow provided by financing activities for the six month period ending June
30, 2001 was $1,104,000, resulting from the net proceeds from new long-term
indebtedness (less the payment of prior indebtedness).
Liquidity and Financial Resources. At June 30, 2002, the Company had a
cash balance of $706,000. The Company's current cash management strategy
includes maintaining minimal cash balances and utilizing the revolving line of
credit for liquidity. At June 30, 2002, the Company had working capital of
$656,000.
Litigation. During April, 2002, the Company entered into an agreement to
repurchase 74,513 shares of its common stock from a shareholder and two of his
children at the price of $3.31 per share. The total purchase price of $246,638
is payable in eight quarterly installments of $27,705 plus an initial payment
totaling $25,000. At June 30, 2002 $80,410 has been paid. The full effect of the
liability was allowed for in December of 2001, and this is reflected in the
Company's Form 10-KSB/A for the period ending December 31, 2001, as restated.
The Company believes that existing capital resources and cash generated
from operations will be sufficient to meet the Company's requirements for at
least 12 months.
4
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 June 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.
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 mylar 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 2002 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
5
could be materially adversely affected. The Company is not obligate to update or
revise these forward-looking statements to reflect new events or circumstances.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 12, 2001 the Company was served as a third-party defendant in a
pending action filed by RealFresh, Inc., a California corporation, ("RealFresh")
against Packaging Systems, LLC, an Illinois limited liability company ("PSI") in
United States District Court for the Eastern District of California, Fresno
Branch. In the action, RealFresh sought damages from PSI for losses it claims it
incurred by reason of PSI supplying defective packaging materials. The Company
was a supplier to PSI of certain laminated films utilized by PSI in these
packaging materials. PSI initiated a third-party claim against the Company for
indemnity, contribution and breach of contract. The Company filed an answer to
the third-party complaint denying the claim and asserting a number of defenses.
On July 27, 2001, the Company cross-claimed against the supplier of the base
film, Honeywell International, Inc. ("Honeywell"), for indemnity, contribution
and breach of contract. On August 20, 2001, Honeywell filed a counterclaim
against the Company for the cost of film, which the Company has refused to pay.
On June 28, 2002, this action was settled among all parties and has been
dismissed. As part of the settlement, the Company acknowledged and paid to
Honeywell an amount related to the supply of film by Honeywell to the Company,
which has been reflected in the financial statements of the Company for the six
month period ended June 30, 2002.
Item 2. Changes in Securities
Not applicable.
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-QSB.
6
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits* No.
Statement re: Computation of Per Share Earnings 11
(b) The Company has not filed a Current Report on Form 8-K during the
quarter covered by this report.
* Also incorporated by reference the Exhibits
filed as part of the SB-2 Registration Statement
of the Registrant, effective November 5, 1997,
and subsequent periodic filings.
7
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: April 30, 2003 CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
------------------------------------
Howard W. Schwan, President
By: /s/ Stephen M. Merrick
-----------------------------------
Stephen M. Merrick, Executive
Vice President
8
CERTIFICATIONS
I, Howard W. Schwan, Chief Executive Officer of CTI Industries
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of CTI
Industries Corporation.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ Howard W. Schwan
----------------------------------------
Howard W. Schwan
Chief Executive Officer
CERTIFICATIONS
I, Stephen M. Merrick, Executive Vice President and Chief Financial
Officer of CTI Industries Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of CTI
Industries Corporation.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ Stephen M. Merrick
----------------------------------------
Stephen M. Merrick
Executive Vice President and
Chief Financial Officer
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30, 2002
-------------
ASSETS
Current assets:
Cash $ 706,132
Accounts receivable, net 5,776,202
Inventories 9,423,430
Deferred tax assets 5,303
Prepaid espenses and other current assets 1,032,641
------------
Total current assets 16,943,708
Property and equipment:
Machinery and equipment 14,708,131
Building 2,541,662
Office furniture and equipment 1,740,730
Land 250,000
Leasehold improvements 161,885
Fixtures and equipment at customer locations 2,232,285
Projects under construction 1,200,236
------------
22,834,929
Less : accumulated depreciation (13,450,957)
------------
Total property and equipment, net 9,383,972
Other assets:
Deferred financing costs, net 75,252
Goodwill associated with acquisition of CTI Mexico, net 1,113,108
Deferred tax assets 457,887
Other assets 456,180
------------
Total other assets 2,102,427
------------
TOTAL ASSETS 28,430,107
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 8,134,058
Line of credit 5,868,496
Notes payable - current portion 318,443
Accrued liabilities 1,966,825
------------
Total current liabilities 16,287,822
Long-term liabilities:
Other liabilities 1,299,765
Notes payable 5,007,372
------------
Total long-term liabilities 6,307,137
Minority interest 174,676
Stockholders' equity:
Common stock - no par value, 5,000,000 shares authorized,
1,389,906 shares issued, 1,190,710 shares outstanding 188,434
Class B Common stock - no par value, 500,000 shares authorized,
329,670 shares issued and outstanding 1,000,000
Paid-in-capital 6,621,310
Warrants issued in connection with bank debt 135,462
Accumulated deficit (1,479,813)
Accumulated other comprehensive earnings (1,701)
Less:
Treasury stock - 199,196 shares (746,764)
Notes receivable from stockholders (56,456)
------------
Total stockholders' equity 5,660,472
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 28,430,107
============
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
2002 2001 2002 2001
(as restated) (as restated)
------------ ------------- ------------ -------------
Net Sales $ 10,905,748 $ 6,876,201 $ 20,643,846 $ 12,956,775
Cost of Sales 8,299,517 5,068,423 15,483,362 9,526,201
------------ ----------- ------------ ------------
Gross profit on sales 2,606,231 1,807,778 5,160,484 3,430,574
Operating expenses:
Administrative 1,127,178 818,264 2,084,078 1,565,189
Litigation settlements expense 60,000 0 105,000 0
Selling 374,890 445,270 750,167 870,851
Advertising and marketing 440,989 307,111 834,211 578,310
------------ ----------- ------------ ------------
Total operating expenses 2,003,056 1,570,645 3,773,456 3,014,350
------------ ----------- ------------ ------------
Income from operations 603,175 237,133 1,387,028 416,224
Other income (expense):
Interest expense (204,254) (278,748) (384,244) (621,124)
Interest income 420 -- 647 742
Gain (loss) on sale of assets (20,069) 7,510 (30,763) 15,022
Foreign currency (loss) gain (251,030) 84,067 (213,872) 48,994
Other 26,338 -- 37,216 --
------------ ----------- ------------ ------------
Total other income (expense) (448,594) (187,171) (591,016) (556,366)
------------ ----------- ------------ ------------
Income (loss) before income taxes and minority interest 154,581 49,961 796,012 (140,142)
Income tax expense 50,917 3,987 298,210 13,110
------------ ----------- ------------ ------------
Income (loss) before minority interest 103,664 45,974 497,802 (153,252)
Minority interest in income (loss) of subsidiary (29,863) 22,466 (6,155) (1,021)
------------ ----------- ------------ ------------
Net income (loss) $ 133,526 $ 23,508 $ 503,957 $ (152,231)
============ =========== ============ ============
Basic income (loss) per common share $ 0.11 $ 0.02 $ 0.42 $ (0.13)
============ =========== ============ ============
Diluted income (loss) per common share $ 0.09 $ 0.02 $ 0.38 $ (0.13)
============ =========== ============ ============
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,263,763 1,207,944 1,198,957 1,207,944
============ =========== ============ ============
Diluted 1,479,644 1,207,944 1,332,610 1,207,944
============ =========== ============ ============
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, 2002 June 30, 2001
(as restated)
------------------------------
Cash flows from operating activities:
Net income (loss) $ 503,957 $ (152,231)
Adjustment to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 718,925 719,986
Amortization of Debt Discount 13,750 78,839
Minority interest in loss of subsidiary (6,155) (1,021)
Gain on sale of fixed assets 0 (15,022)
Provision for losses on accounts receivable & inventory 150,000 50,000
Deferred income taxes 199,370 0
Change in assets and liabilities:
Accounts receivable (918,711) (1,541,659)
Inventory (1,160,947) (571,063)
Other assets (522,633) 382,180
Accounts payable and accrued expenses 2,568,619 3,816
-----------------------------
Net cash provided by (used in) operating activities 1,546,175 (1,046,175)
Cash flows from investing activities:
Purchases of property and equipment (1,489,446) (408,243)
-----------------------------
Net cash (used in) investing activities (1,489,446) (408,243)
Cash flows from financing activities:
Net change in revolving line of credit 193,688 1,321,574
Proceeds from issuance of long-term debt 490,880 5,808,548
Repayment of long-term debt (134,916) (5,086,276)
Repayment of short-term debt (27,949) (930,000)
Repayment of subordinated debt 0 (10,000)
-----------------------------
Net cash provided by financing activities 521,703 1,103,846
Effect of exchange rate changes on cash 17,212 (11,745)
-----------------------------
Net increase (decrease) in cash 595,644 (362,317)
Cash and Equivalents at Beginning of Period 110,488 392,534
-----------------------------
Cash and Equivalents at End of Period $ 706,132 $ 30,217
=============================
Schedule of non-cash financing activities:
Issuance of stock for subordinated debt $ 715,000 $ --
See accompanying notes to consolidated unaudited statements
June 30, 2002
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-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
Operating results for the three and six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2002. 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, 2001. As further
explained in note 5, the company has restated previously reported results for
the three and six month periods ended June 30, 2001.
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., and its majority owned subsidiary CTI Mexico S.A. de C.V. All
significant intercompany transactions and accounts have been eliminated in
consolidation. The Company (i) designs, manufactures and distributes balloon
products throughout the world and (ii) operates systems for the production,
lamination, coating and printing of films used for food packaging and other
commercial uses and for conversion of films to flexible packaging containers and
other products.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect certain reported amounts and disclosures. Actual results may differ
from those estimates.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments considered necessary for a fair presentation, have been
included. The results of operations for the three months and six months ended
June 30, 2002 are not necessarily indicative of the results to be expected for
the full year or for any future periods. The accompanying unaudited, condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements contained in the Company's Annual Report on
Form 10-KSB/A filed with the Securities and Exchange Commission on December 31,
2001. The balance sheet at June 30, 2002 has been derived from the audited
financial statement as of and for the year ended December 31, 2001 but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
Note 2 - Restatement
The Company restated its balance sheet as of December 31, 2001. The restatement
is further discussed in Note 3 of the Notes to the Consolidated Financial
Statements on Form 10-KSB/A for the year ended December 31, 2001.
Note 3 - Line of Credit and Notes Payable
In January 2001, the Company entered into a Loan and Security Agreement with a
new lender under which the lender has provided the Company with a credit
facility in the amount of $9,500,000, secured by equipment, inventory,
receivables, and other assets of the Company. The credit facility included a
term loan of $1,426,000, at an interest rate of prime plus 0.75%, and a
revolving line of credit at an interest rate of prime plus 0.50%, the amount of
which is based on advances of up to 85% of eligible receivables and 50% of the
value of the Company's eligible inventory. The credit facility is secured by
substantially all assets of the Company. The term of this credit facility is for
a period of three years, which may be extended by either party for an additional
year.
Also in January 2001, another lender loaned to the Company the sum of $2,873,000
in a refinance of the Company's principal office building and property situated
in Barrington, Illinois. The loan is secured by the aforementioned building and
property, and has been made in the form of two notes. The first note is in the
principal amount of $2,700,000,
bears interest at the rate of 9.75%, and has a term of five years with an
amortization period of 25 years. The second note is in the principal amount of
$173,000 with an interest rate of 10%, and has a term of three years.
On or about May 22, 2002, the Company entered into an Amendment to the Loan and
Security Agreement pursuant to which additional advances of approximately
$491,000 were made to the Company, increasing the balance under the term loan
portion of the facility to $1,578,000.
In May, 2002, the Company entered into a Third Amendment to the Loan and
Security Agreement pursuant to which (i) the aggregate amount of the credit
facility was increased to $11,500,000 and (ii) the Company was granted a CapEx
Line of Credit in the amount of $2,000,000. Under the CapEx Line of Credit, the
Company is entitled to receive advances in connection with the purchase of
capital equipment at the rate of 70% of the invoice amount of the equipment
purchased. The Company has partially utilized the CapEx Line of Credit and
intends to use all or substantially all of the CapEx Line of Credit in
connection with the purchase of capital equipment during the balance of 2002.
Outstanding balances under the CapEx Line of Credit will bear interest at the
rate of One Percent in excess of the prime rate.
Note 4 - Legal Proceedings
On March 12, 2001 the Company was served as a third-party defendant in a pending
action filed by RealFresh, Inc., a California corporation, ("RealFresh") against
Packaging Systems, LLC, an Illinois limited liability company ("PSI") in United
States District Court for the Eastern District of California, Fresno Branch. In
the action, RealFresh sought damages from PSI for losses it claims it incurred
by reason of PSI supplying defective packaging materials. The Company was a
supplier to PSI of certain laminated films utilized by PSI in these packaging
materials. PSI initiated a third-party claim against the Company for indemnity,
contribution and breach of contract. The Company filed an answer to the
third-party complaint denying the claim and asserting a number of defenses. On
July 27, 2001, the Company cross-claimed against the supplier of the base film,
Honeywell International, Inc. ("Honeywell"), for indemnity, contribution and
breach of contract. On August 20, 2001, Honeywell filed a counterclaim against
the Company for the cost of film, which the Company has refused to pay. On June
28, 2002, this action was settled among all parties and has been dismissed. As
part of the settlement, the Company acknowledged and paid to Honeywell an amount
related to the supply of film by Honeywell to the Company, which has been
reflected in the financial statements of the Company for the six month period
ended June 30, 2002.
In April, 2002, the Company entered into an agreement with a former shareholder
under which the Company agreed to purchase 74,513 shares of the Company's common
stock from the shareholder and two of the shareholder's children at the price of
$3.31 per share and to settle certain pending litigation among the shareholder
and the Company without other payment or consideration. Of the total purchase
price for the shares, $75,000 has been allocated as expense related to this
settlement, and the remaining $171,000 has been recorded as a retirement of
shares, thereby increasing the amount reported as treasury stock. These
allocations have been deemed a subsequent event to year end 2001 and have
previously been reflected in the financial statements to the Company's Report on
Form 10-KSB/A for the period ending December 31, 2001, as restated.
Note 5 - Comprehensive Income
Total Comprehensive Income was $105,000 and $554,000 for the three and six
months ended June 30, 2002 and was $15,000 and ($151,000) for the three and six
months ended June 30, 2001.
Note 6 - Inventories
Raw material and work in process $ 2,297,120
Finished goods 7,732,084
Inventory, Gross 10,029,204
Less: Inventory Reserves (605,774)
------------
Inventory, net $ 9,423,430
============
Note 7 - Adoption of Statement 142
On January 1, 2002, the Company implemented Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Under the provisions of
SFAS 142, goodwill is no longer subject to amortization over its estimated
useful life, but instead will be subject to at least annual assessments for
impairment by applying a fair-value based test. SFAS 142 also requires that an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the asset can be sold, licensed, rented or exchanged, regardless of the
acquirer's intent to do so. The Company has no acquired intangible assets other
than goodwill. The Company determined that no transitional impairment loss was
required at January 1, 2002.
The gross carrying amount of goodwill as of June 30, 2002 is $1,113,108.
Three months ended June 30 Year to Date June 30
2002 2001 2002 2001
(as restated) (as restated)
Reported net income (loss) $ 133,526 $23,508 $ 503,957 $ (152,231)
Add back: Goodwill amortization -- 1,388 -- 21,666
----------- ------- ----------- -----------
Adjusted net income (loss) $ 133,526 $24,896 $ 503,957 $ (130,565)
=========== ======= =========== ===========
Basic earnings per share
Reported net income (loss) $ 0.11 $ 0.02 $ 0.42 $ (0.13)
Add back Goodwill amortization -- 0 -- 0.02
----------- ------- ----------- -----------
Adjusted net income (loss) $ 0.11 $ 0.02 $ 0.42 $ (0.11)
=========== ======= =========== ===========
Fully diluted earnings per share:
Reported net income (loss) $ 0.09 $ 0.02 $ 0.38 $ (0.13)
Add back: Goodwill amortization -- 0 0.02
----------- ------- ----------- -----------
Adjusted net income (loss) $ 0.09 $ 0.02 $ 0.38 $ (0.11)
=========== ======= =========== ===========
Note 8 - Recent Accounting Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period it is incurred if a reasonable estimate
of fair value can be made. The associated retirement costs are capitalized as a
component of the carrying amount of the long-lived asset and allocated to
expense over the useful life of the asset. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Management does not believe the adoption of the statement will have a material
impact on the Company's consolidated financial statements.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
establishes accounting and reporting standards for the impairment or disposal of
long-lived assets. This statement supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed. SFAS
No. 144 provides one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held for use or newly acquired and
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted the statement as of January 1, 2002 and the implementation of
this standard did not have a material impact on the Company's consolidated
financial statements.
Note 9 - Property, Plant and Equipment Agreements
At June 30, 2002, the Company had outstanding purchase agreements for equipment
with an aggregate purchase price of $2,911,000, of which approximately
$1,018,000 is being currently reflected as projects under construction on the
balance sheet. The purchase of the equipment is being funded principally by the
CapEx Line of Credit extended by the Company's principal lender.
Note 10 - Geographic Segment Data
The Company's operate primarily in one business segment which designs,
manufactures, and distributes balloon products. The Company's operate in foreign
and domestic regions. Information about the Company's operations by geographic
areas is as follows.
Net Sales to External Customers Long Term Assets
For the Six Months Ended June 30, at June 30,
2002 2001 2002 2001
United States $18,428,000 $10,796,000 $6,735,000 $5,942,000
Mexico 1,237,000 1,118,000 2,638,000 2,955,000
United Kingdom * * 11,000 18,000
Other 979,000 1,043,000 -- --
---------------------------------------------------------------------
$20,644,000 $12,957,000 $9,384,000 $8,915,000
=====================================================================
Note 11 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally limited due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be un-collectible. Such losses have historically been
within management's expectations. For the six months ended June 30, 2002, the
Company had two customers that accounted for approximately 32% and 20%,
respectively, of consolidated net sales.
CTI Industries Corporation and Subsidiaries
Consolidated Earnings per Share
(Unaudited)
Quarter Ended June 30 Year to Date June 30
2002 2001 2002 2001
(as restated) (as restated)
--------- ------------- --------- --------------
Basic
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,263,763 1,207,944 1,198,957 1,207,944
========= ========= ========= ===========
Net income:
Net income (loss) $ 133,526 $ 23,508 $ 503,957 $ (152,231)
Amount for per share computation $ 133,526 $ 23,508 $ 503,957 $ (152,231)
========= ========= ========= ===========
Per share amount $ 0.11 $ 0.02 $ 0.42 $ (0.13)
========= ========= ========= ===========
Diluted
Average shares outstanding:
Weighted average number of shares of
common stock outstanding during the
period 1,479,644 1,207,944 1,198,957 1,207,944
Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury
stock 215,881 -- 133,653 --
--------- --------- --------- -----------
Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 1,488,651 1,207,944 1,374,189 1,207,944
========= ========= ========= ===========
Net income:
Net income (loss) $ 133,526 $ 23,508 $ 503,957 $ (152,331)
Amount for per share computation $ 133,526 $ 23,508 $ 503,957 $ (152,331)
========= ========= ========= ===========
Per share amount $ 0.09 $ 0.02 $ 0.38 $ (0.13)
========= ========= ========= ===========
See accompanying notes to consolidated unaudited statements
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CTI Industries Corporation (the
"Company") on Form 10-QSB/A for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Howard W. Schwan, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Howard W. Schwan
------------------------
Howard W. Schwan
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CTI Industries Corporation (the
"Company") on Form 10-QSB/A for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Stephen M. Merrick, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Stephen M. Merrick
-----------------------
Stephen M. Merrick
Chief Financial Officer