SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number
000-23115
CTI INDUSTRIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2848943
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
22160 North Pepper Road
Barrington, Illinois 60010
(Address of principal executive offices) (Zip Code)
(847) 382-1000
Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
Common Stock, $.195 par value NASDAQ SmallCap Market
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [_] No
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-KSB or any amendment to the Form 10-KSB.
The Registrant's revenues for the fiscal year ended December 31, 2000, were
$22,978,000.
Based upon the closing price of $2.125 per share of Registrant's Common
Stock as reported on NASDAQ SmallCap Market at March 30, 2001, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
then approximately $1,657,236 (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose).
The number of shares of the Registrant's Common Stock outstanding as of
March 30, 2001 was 841,644 (excluding treasury shares) and the number of shares
of Class B Common Stock outstanding as of that date was 366,300.
Transitional Small Business Disclosure Format (check one): [_] Yes [X] No
THIS FORM 10-KSB/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND RESTATING
PARTS OF 10-KSB/A TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE PERIODS ENDED DECEMBER 31, 1999 AND 2000. THESE
REVISIONS RELATE TO SUBORDINATED DEBT ROLLFORWARDS AND THE RECALCULATION OF
EXPENSES ASSOCIATED WITH CERTAIN WARRANTS ISSUED BY THE COMPANY. ALL PORTIONS OF
THE 10-KSB/A THAT ARE AFFECTED BY THESE REVISIONS HAVE BEEN ADJUSTED
ACCORDINGLY. ALL INFORMATION IN THIS 10-KSB/A IS AS OF DECEMBER 31, 2000, AND
DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THE
RESTATEMENT.
PART I
Item No. 1 Description of Business
THIS FORM 10-KSB/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND RESTATING
PARTS OF 10-KSB/A TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE PERIODS ENDED DECEMBER 31, 1999 AND 2000. THESE
REVISIONS RELATE TO SUBORDINATED DEBT ROLLFORWARDS AND THE RECALCULATION OF
EXPENSES ASSOCIATED WITH CERTAIN WARRANTS ISSUED BY THE COMPANY. ALL PORTIONS OF
THE 10-KSB/A THAT ARE AFFECTED BY THESE REVISIONS HAVE BEEN ADJUSTED
ACCORDINGLY. ALL INFORMATION IN THIS 10-KSB/A IS AS OF DECEMBER 31, 2000, AND
DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THE
RESTATEMENT.
Business Overview
CTI Industries Corporation is engaged in the development, manufacture, sale
and distribution of two principal lines of products:
o Novelty products, principally balloons, including "mylar" balloons,
latex balloons, punch balls and other inflatable toy items.
o Specialty and printed films, for food packaging, specialized consumer
uses and various commercial applications.
The Company was organized in 1976 and initially was principally engaged in
the business of manufacturing bag-in-box plastic packaging systems. In 1978, the
Company began manufacturing metalized ("mylar") balloons, a balloon made of
nylon based material with vacuum deposited aluminum and polyethylene coatings.
These balloons remain buoyant when filled with helium for much longer periods
than latex balloons and permit the printing of graphic designs on the surface.
They grew in popularity quickly and the Company's sales of mylar balloons
expanded rapidly during the 1980's.
In 1985, the Company began marketing latex balloons and began manufacturing
latex balloons in 1988. In 1994, the Company sold its latex balloon
manufacturing equipment to a company in Mexico and entered into an arrangement
with that company to manufacture latex balloons for the Company. The Company
since has acquired majority ownership of the Mexican latex manufacturing
company.
The Company's mylar and latex balloon and toy products are sold throughout
the United States and in 30 foreign countries through a wide variety of retail
outlets including general merchandise and drugstore chains, grocery chains, card
and gift shops, and party goods stores, as well as through florists and balloon
decorators.
Most mylar balloons contain printed characters, designs and social
expression messages. The Company maintains licenses on numerous characters and
designs, including, for example, Peanuts(R) characters, Garfield(R), Precious
Moments(R) and Hallmark.
In order to meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
applications. The Company's expertise in multi-color printing using water-based
inks, in particular, has enabled the Company to expand its business to include
the production of film for packaging of consumables. The Company produces,
laminates and prints films for food packaging companies and provides custom film
products for other commercial uses.
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These uses include a consumer storage system with a patented zip-lock closure,
packaging systems and other commercial applications.
Background.
CTI Industries Corporation (the "Company") was incorporated as Container
Merger Company, Inc. under the laws of the State of Delaware on October 14,
1983, and changed its name to CTI Industries Corporation on August 2, 1985. A
predecessor company, Creative Technology, Inc., was organized as an Illinois
corporation on December 9, 1975 and was merged into the Company in February,
1984. CTI Balloons Ltd. ("CTI Balloons"), the Company's wholly-owned subsidiary,
was organized as a corporation under the laws of the United Kingdom on October
2, 1996. On October 24, 1996, the Company entered into an agreement with CTI
Balloons pursuant to which all of the assets and liabilities of the Company in
its branch operation in the United Kingdom were sold and transferred to CTI
Balloons and all of the capital stock of CTI Balloons was issued and delivered
to the Company. Unless otherwise specified, all references to the Company refer
to the Company, its predecessor Creative Technology, Inc. its wholly-owned
subsidiaries, CTI Balloons, CTF International, S.A. de C.V., and its
majority-owned subsidiary, CTI Mexico, S.A. de C.V.
In March and May of 1996, a group of investors made an equity investment of
$1,000,000 in the Company in return for 366,300 shares of Preferred Stock, $.91
par value. Each share of Preferred Stock was entitled to an annual cumulative
dividend of 13% of the purchase price, and was convertible into one share of
Common Stock. The shares of Preferred Stock, voting separately as a class, were
entitled to elect four of the Company's directors. Members of such investment
group included Howard W. Schwan, John H. Schwan and Stephen M. Merrick, current
members of management.
In July, 1997, the Company effected a recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock, approved a 1 for 2.6 reverse stock split on both the Common Stock and
Preferred Stock, and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 366,300 shares of
Class B Common Stock. The conversion was effective upon the closing of an
initial public offering of 575,000 shares of the Company's Common Stock on
November 5, 1997. The shares of Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, vote on all other matters, including the election of the remaining
directors. The recapitalization, initial public offering and related
transactions were approved by written consent of the shareholders.
On October 15, 1999, the Company's Board of Directors approved a 1 for 3
reverse split of the Company's Common Stock and Class B Common Stock. The 1 for
3 reverse stock split became effective at the close of business on November 4,
1999, upon the approval and consent of a majority of Common and Class B Common
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Stockholders voting together as a single class. As a result of the reverse stock
split, every three shares of the Company's Common Stock were reclassified and
changed into one share of the Company's Common Stock with a new par value of
$.195 per share, and every three shares of the Company's Class B Common Stock
were reclassified and changed into one share of the Company's Class B Common
Stock, with a new par value of $2.73 per share. Except as otherwise indicated,
share figures in this document have been restated to reflect the stock splits
described above.
CTI Mexico. The Company's latex balloons are manufactured for it by CTI
Mexico S.A. de C.V. ("CTI Mexico"), formerly known as Pulidos y Terminados Finos
S.A. de C.V., a Guadalajara, Mexico company engaged principally in the
manufacture of latex balloons. In 1995, the Company entered into an agreement
with CTI Mexico under which (i) the Company sold to CTI Mexico all of its latex
balloon manufacturing equipment (for the manufacture of decorator balloons) and
(ii) CTI Mexico agreed for a period of 10 years to supply balloons exclusively
to the Company for sale in the United States and Canada manufactured on such
equipment and (iii) for such 10 year period, CTI Mexico agreed to supply to the
Company, exclusively in the United States except as to two other companies, all
balloons manufactured by CTI Mexico. Commencing in 1996, CTI Mexico began
manufacturing latex balloons for the Company.
In January, 1998, the Company and CTI Mexico entered into an agreement
whereby (i) the Company subscribed for 45% of the outstanding capital stock of
CTI Mexico for $800,000, (ii) the Company loaned to CTI Mexico $850,000, which
loan was collateralized by certain latex balloon manufacturing equipment, and
(iii) the 1995 equipment purchase agreement between the parties was cancelled
with respect to two pieces of latex balloon manufacturing equipment, which
equipment was owned by CTI and leased to CTI Mexico. The purchase of the capital
stock was consummated in February, 1998, and the purchase price for the capital
stock was paid by (i) applying $400,000 of advances made to CTI Mexico prior to
closing and (ii) a cash payment for the balance. The $400,000 debt owing to the
Company from the 1995 acquisition was extinguished as a result of the
cancellation of the sale of the two pieces of equipment to CTI Mexico.
In November, 1999, the Company acquired additional shares of capital stock
of CTI Mexico, resulting in the Company's ownership of approximately 72% of CTI
Mexico's total outstanding capital stock. The November, 1999 acquisition was
concluded through an agreement with a principal shareholder of CTI Mexico and
the approval of the requisite number of CTI Mexico shareholders at a
shareholders' meeting held on November 12, 1999. In the November, 1999
acquisition transaction, the Company allowed CTI Mexico to capitalize certain of
CTI Mexico's outstanding indebtedness to the Company, amounting to approximately
$989,000, and contributed certain equipment with a total value of approximately
$855,000, in exchange for capital stock of CTI Mexico. In addition, in May of
2000, the Company purchased additional shares of stock from certain of CTI
Mexico's shareholders, resulting in the Company's ownership of approximately 76%
of CTI Mexico's total outstanding capital stock. The Company also
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has the right to acquire substantially all of the remaining outstanding capital
stock of CTI Mexico from another shareholder.
Through CTI Mexico, the Company maintains two manufacturing facilities in
Guadalajara, Mexico totaling approximately 60,000 square feet of manufacturing,
office and warehouse space and operates seven latex balloon machines.
CTF International. In September, 1996, the Company and CTI Mexico entered
into a joint venture agreement to organize and operate CTF International, a
Mexican corporation ("CTF"). The joint venture was initially owned in equal
measure by the Company and CTI Mexico. CTF engaged in the packaging of balloons
for the Company and CTI Mexico and in the printing of latex balloons. In July,
1999, the Company purchased CTI Mexico's stock in CTF for $40,000 in cash, and
the assignment to CTI Mexico of three of the Company's manual latex silk
screening machines. The functions of CTF have now been incorporated into the
business of CTI Mexico.
Products
Mylar Balloons. The "mylar" balloon is actually composed of a base nylon
material which is coated on one side with a vacuum deposited aluminum coating
and on the other with polyethylene. Typically, the balloon film is printed with
graphic designs and messages.
The Company manufactures over 450 balloon designs, in different shapes and
sizes, including the following:
o Superloons(R) are 18" balloons in round or heart shape, generally made
to be filled with helium and remain buoyant for long periods. This is
the predominant mylar balloon size.
o Ultraloons(R) are 34" balloons made to be filled with helium and
remain buoyant.
o Miniloons(R) are 9" balloons made to be air-filled and sold on
holder-sticks or for use in decorations.
o Card-B-Loons(R) (4 1/2") and Pixiloons(TM) (2 1/2") are air-filled
balloons, often sold on a stick, used in floral arrangements or with a
container of candy.
o Shape-A-Loons(R) are shaped balloons made to be filled with helium.
o Minishapes are small shaped balloons designed to be air filled and
sold on sticks as toys or inflated characters.
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o Walk-abouts(R) are helium filled shaped balloons with attached arms
and legs.
o Smackers(R)are helium filled red lip-shaped balloons.
o You Name It(R) are balloons to which lettering can be attached for a
personalized message.
In addition to size and shape, a principal element of the Company's mylar
balloon products is the printed design or message contained on the balloon.
These designs include figures and licensed characters many of which are
well-known licensed characters. The Company maintains licenses for Peanuts(R),
Garfield(R), Precious Moments(R), Hallmark, Shoebox(R), Card Captors(R), Max
Steel(R) Elephantz(R), Paddington(R), Postman Pat(R), Betty Boop(R), Monster
Trucks(R) and several others. See "Patent, Trademarks and Copyrights" below.
Latex Balloons. The Company sells a high end line of latex balloons under
the product line name Hi-Tex(R) and a standard line of latex balloons marketed
under the name Partyloons(R). The Company also manufactures toy balloon products
including punch balls and water bombs.
Packaging Films. The Company fabricates and prints films for use in food
packaging. The Company has developed sophisticated methods for the printing of
films, including the use of water-based ink. These techniques have proven
desirable for companies engaged in packaging food products, particularly candy
and snack items, with the result that the Company now provides printed packaging
films for several food packaging companies.
Custom Film Products. In addition to printed films for food packaging, the
Company fabricates custom film products for various commercial and industrial
purposes. These now include "dunnage" bags (inflatable film products) used in
the packaging of goods and bags for the storage of clothing and personal items.
The Industries
Mylar Balloons
The "mylar" balloon came into existence in the late 1970s. During the
1980s, the market for mylar balloons grew rapidly. Initially, the product was
sold principally to individual vendors, small retail outlets and at fairs,
amusement parks, shopping centers and other outdoor facilities and functions.
Mylar balloons remain buoyant when filled with helium for extended periods of
time and they permit the printing and display of graphics and messages. As a
result, the product has significant appeal as a novelty and message item. Mylar
balloons became part of the "social expression" industry, carrying graphics
designs, characters and messages like greeting cards. In the mid-1980s, the
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Company and other participants in the market began licensing character and
cartoon images for printing on the balloons and directed marketing of the
balloons to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators. These outlets now represent the principal means for the sale of
mylar balloons throughout the United States and in a number of other countries.
Mylar balloons are sold in the United States and in Europe, several
countries in the Far East, Canada and to an increasing extent in Latin America.
The United States, however, is by far the largest market for these products.
There are presently at least seven manufacturers of mylar balloons whose
products are sold in the United States. Six of these companies maintain their
own production facilities in the United States. Several companies market and
sell mylar balloons designed by them and manufactured by others for them.
Mylar balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. Often the
sale of mylar balloons by the wholesalers/distributors is accompanied by related
products including latex balloons, floral supplies, candy containers, mugs,
plush toys, baskets and a variety of party goods. Although the latex balloon
market overlaps the mylar balloon market, the latex balloon market has been in
existence for a longer period than mylar balloons and extends to more customers
and market categories than mylar balloons.
Latex Balloons
There are several latex balloon product lines: (i) high quality decorator
balloons, (ii) standard novelty balloons; (iii) printed balloons and (iv) toy
categories. The high quality decorator balloons are generally sold to and
through balloon decorators and are generally of higher quality and price than
the standard line of balloons. The standard line of balloons is sold widely in
retail stores including many of the same outlets as mylar balloons. Printed
latex balloons are sold both in retail outlets and for balloon decoration
purposes including floral designs. "Toy" balloons include novelty balloons sold
in toy departments or stores, punch balls, water bombs and other specialty
designs.
Latex balloons are sold through many of the same outlets as mylar balloons
including grocery, general merchandise and drug store chains, card and gift
shops, party goods stores, florists and balloon decorators. Latex balloons are
sold in retail stores in packaged form as well as inflated. Also, certain latex
items are sold in retail stores, generally in packaged form, as toy items.
There are at least seven manufacturers of latex balloons whose products are
sold in the United States.
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Printed and Specialty Films
The industry and market for printed and specialty films is highly
fragmented and includes many participants. There are literally hundreds of
manufacturers of printed and specialty film products in the United States and in
other markets. In many cases, companies produce films and film packages for the
packaging of products manufactured and sold by those companies. Many of these
film products are utilized for packaging of a variety of goods, including foods.
Films are utilized for a wide variety of specialized uses - including for
medical applications, "dunnage" in packages and containers for consumer and
other uses.
The total volume of products manufactured and sold in this industry is
estimated to be well in excess of $1 billion.
Marketing, Sales and Distribution
The Company markets and sells its mylar balloon, latex balloon and related
novelty products throughout the United States and in over 30 foreign countries.
The Company maintains a marketing, sales staff and support staff of 21
individuals and a customer service department of 13 individuals. European sales
are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. CTI Mexico conducts sales and marketing activities for the sale of
balloon products in Mexico, Latin America, and certain other markets. Sales in
other foreign countries are made generally to distributors in those countries
and are managed at the Company's principal offices.
The Company sells and distributes its products principally through a
network of approximately 750 distributors and wholesalers situated throughout
the United States and in a number of foreign countries. These distributors and
wholesalers are engaged principally in the sale of balloons and related products
(including such items as plush toys, mugs, containers, floral supplies and other
items). These distributors and wholesalers, in turn, sell balloons and related
products to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators. Most sales are on an individual order basis.
The Company also sells balloons and related products to certain retail
outlets including some chain stores. The Company's largest chain store customer
is Eckerd Drug Stores. During the 2000 fiscal year, Eckerd Drug Stores accounted
for approximately 8% of the Company's total sales revenues.
The Company has established independent sales representatives for the sale
of its toy/novelty line which include the standard quality latex balloon, punch
balls and water bombs. These products constitute a separate product class
requiring a different distribution network.
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The Company engages in a variety of advertising and promotional activities
to promote the sale of its balloon products. Each year, the Company produces a
complete catalog of its balloon products, and also prepares various flyers and
brochures for special or seasonal products, which are disseminated to thousands
of customers, potential customers and others. The Company participates in
numerous trade shows for the gift, novelty, balloon and other industries and
advertises in a number of trade and other publications. The Company also attends
licensing shows for the purpose of seeking out additional design licenses.
The Company markets and sells its printed and laminated films directly and
through independent sales representatives. The Company markets these products to
companies which package their products in plastic wrapping, in particular food
products such as candies and coffee.
The Company markets its custom film products, including its "dunnage" bags
(inflatable film products) directly. During the 2000 fiscal year, a single
customer of the Company's custom film product business accounted for
approximately 19.8% of the Company's total sales revenues.
Manufacturing
Production and Operations.
At the Barrington, Illinois headquarters, the Company owns and operates a
modern facility. The facility includes converting machines of the Company's own
design and construction which fabricate mylar balloons and packaging bags. These
production systems include a patented system for the production and insertion of
valves in balloons. These machines have the capacity to manufacture
approximately 55 million 18" balloons annually.
The Company owns and operates graphic machinery at its facility in
Barrington, Illinois that is used for the printing of films for mylar balloons
and for packaging films. The Company's use of water-based ink makes its printed
films attractive to food processors for the packaging of their products. At the
Barrington facility, the Company also owns and operates laminating machines.
The Company owns and operates two extrusion coating and lamination machines
to produce films for use in mylar balloons, packaging films and specialty film
products. A new extrusion coating and laminating machine was acquired in 1999
which significantly increased the Company's production capacity and
capabilities.
The Company maintains a graphic arts and development department which
designs its balloon products and graphics. The Creative Department operates a
networked, computerized graphic arts system for the production of these designs
and of printed materials including catalogues, advertisements and other
promotional materials.
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The Barrington facility also includes a computerized customer service
department which receives and fulfills over 61,000 orders annually.
The Company maintains a finished goods inventory of all balloon products at
the Barrington facility and provides fulfillment for orders throughout the
United States and in a number of foreign countries.
CTI Mexico. Through CTI Mexico, the Company operates several facilities in
Guadalajara, Mexico, comprising approximately 95,000 square feet of production,
warehouse and office space. At these locations, the Company produces all of its
latex balloon products and also prints and packages latex balloons. CTI Mexico
owns and operates, or leases, seven latex balloon manufacturing machines, two
high-speed latex printing machines and several other latex printing machines.
Balloon products are warehoused at this facility and order fulfillment is
provided for Mexico and Latin America, as well as to the United States and
United Kingdom facilities of the Company. CTI Mexico also conducts sales and
marketing activities for the sale of balloon products in Mexico, Latin America
and certain other markets.
CTI Balloons Ltd. Through its wholly-owned subsidiary, CTI Balloons Ltd,
the Company conducts a warehouse, fulfillment and sales operation in Rugby,
United Kingdom. Sales and fulfillment for all of the United Kingdom, Europe and
the Middle East are conducted from this facility.
Competition
The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven principal manufacturers of mylar balloons
whose products are sold in the United States including Anagram International,
Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic
Balloon and Betallic. Several companies, including American Greetings, Amscan
and Flowers, Inc., market and sell mylar balloons designed by them and
manufactured by others for them. In 1998, Anagram International, Inc. was
acquired by Amscan and in 2000 M&D Balloons was acquired by American Greetings.
There are at least seven manufacturers of latex balloons whose products are
sold in the United States. The market for film packaging and custom products is
fragmented, and competition in this area is difficult to gauge. However, there
are numerous participants in this market and the Company can expect to
experience intense quality and price competition.
Many of these Companies offer products and services which are the same or
similar to those offered by the Company and the Company's ability to compete
depends on many factors within and outside its control. There are a number of
well-established competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical resources
and established, extensive, direct and indirect channels of distribution for
their products and services. As a result, such competitors may be able to
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respond more quickly to new developments and changes in customer requirements,
or devote greater resources to the development, promotion and sale of their
products and services than the Company. Competitive pressures include, among
other things, price competition, new designs and product development and
copyright licensing.
Patents, Trademarks and Copyrights
In connection principally with its mylar balloon business, the Company has
developed or acquired a number of intellectual property rights which are
significant to its business.
Copyright Licenses. The most significant of these rights are licenses on a
number of popular characters. The Company presently maintains approximately 14
licenses and produces balloon designs utilizing the characters covered by the
licenses. Licenses are generally maintained for a one or two year term, although
the Company has maintained long term relationships with a number of its
licensors and has been able to obtain renewal of its license agreements with
them.
Trademarks. The Company is the owner of 14 registered trademarks in the
United States relating to its products. Many of these trademarks are registered
in foreign countries, principally in the European Community.
Patent Rights. The Company is the owner of, or licensee under, several
patents. These include (i) ownership of two patents, and a license under a
third, relating to self-sealing valves for mylar balloons and methods of making
balloons with such valves, (ii) a patent on a combination of a greeting card and
balloon connected by a ribbon contained in single package and (iii) a patent on
a method of inserting and affixing a zipper-closure system in a bag.
Research and Development
The Company maintains a product development and research department of six
individuals for the development or identification of new balloons and related
products, product components and sources of supply. Research and development
includes (i) creative product development, (ii) creative marketing, and (iii)
engineering development. During the fiscal years ended October 31, 1999 and
December 31, 2000, the Company estimates that the total amount spent on research
and development activities was approximately $257,000 and $291,000,
respectively.
Employees
As of December 31, 2000, the Company had 137 full-time employees in the
United States, of whom 9 are executive or supervisory, 21 are in sales, 98 are
in manufacturing and 9 are clerical. As of that same date, the Company had 7
full-time employees in England, of whom one is executive or supervisory, 2 are
in sales, 2 are in warehousing and 2 are clerical. In Mexico, as of
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December 31, 2000, the Company had 350 full-time employees, of whom 6 are
executive or supervisory, 3 are in sales, 323 are in manufacturing and 18 are
clerical. The Company is not a party to any collective bargaining agreement, has
not experienced any work stoppages and believes that its relationship with its
employees is satisfactory.
Regulatory Matters
The Company's manufacturing operations are subject to the U.S. Occupational
Safety and Health Act ("OSHA"). The Company believes it is in material
compliance with OSHA. The Environmental Protection Agency regulates the handling
and disposal of hazardous materials. As the Company's printing operations
utilize only water-based ink, the waste generated by the Company's production
process is not deemed hazardous. The Company believes it is in material
compliance with applicable environmental rules and regulations. Several states
have enacted laws limiting or restricting the release of helium filled mylar
balloons. The Company does not believe such legislation will have any material
effect on its operations.
Item No. 2 Description of Property
The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space.
In August, 1998, the Company purchased a building that is adjacent to its
principal plant and offices. This facility includes approximately 29,000 square
feet of combined office and warehouse space. In November, 1999, the Company sold
this building to a related party, and entered into a 10 year lease for the
building at a monthly rental cost of $17,404. The Company is presently
subleasing approximately 50% of the total square feet of this office and
warehouse space to two separate subtenants. One sublease expires in March, 2002,
and has a monthly rent of $3,605; the other sublease expires in May, 2002, and
has a monthly rent of $7,570. All rents due under these subleases are paid
directly to the Company.
The Company also leases approximately 15,000 square feet of office and
warehouse space in Rugby, England at an annual lease cost of $51,700, expiring
2013. This facility is utilized for product packaging operations and to manage
and service the Company's operations in England and Europe.
Through CTI Mexico, the Company leases four buildings with approximately
95,000 total square feet of production, warehouse and office space in
Guadalajara, Mexico. One plant, consisting of three buildings, has a one-year
lease at a monthly lease rate of $5,500, and the other plant, consisting of one
building, has a three-year lease at a monthly lease rate of $4,500.
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Item No. 3 Legal Proceedings
Not Applicable.
Item No. 4 Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item No. 5 Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. The Company's Common Stock was admitted to trading on
the NASDAQ SmallCap Market under the symbol CTIB on November 5, 1997. Prior to
that time, there was no established public trading market for the Company's
Common Stock. There is no public market for the Company's Class B Common Stock,
which is convertible into Common Stock on a share per share basis.
The high and low sales prices for the last eight fiscal quarters
(retroactively adjusted to reflect post-reverse split share values), according
to the NASDAQ Stock Market's Stock Price History Report, were:
High Low
----- -----
January 1, 1999 to March 31, 1999 8.625 3.469
April 1, 1999 to June 30, 1999 4.875 2.156
July 1, 1999 to September 30, 1999 3.750 1.219
High Low
----- -----
October 1, 1999 to December 31, 1999 2.625 1.406
January 1, 2000 to March 31, 2000 3.750 1.375
April 1, 2000 to June 30, 2000 3.313 1.688
July 1, 2000 to September 30, 2000 2.000 1.250
October 1, 2000 to December 31, 2000 2.125 .875
As of March 30, 2001, there were approximately 42 holders of record of the
Company's Common Stock and two holders of record of Class B Common Stock.
The Company has never paid any dividends on its Common Stock and does not
currently intend to pay dividends on its Common Stock in the foreseeable future.
The Company currently intends to retain all its earnings to finance the
development and expansion of its business. Under the terms of its current loan
agreement, the Company is restricted from declaring any dividends or other
distributions on its shares unless certain minimum financial performance levels
12
are maintained. The Company expects it to be likely that it will be required to
agree to restrictions on the payment of dividends or other distributions in
connection with future financings, if any.
Recent Sales of Unregistered Securities. In March and May of 1996, a group
of investors made an equity investment of $1,000,000 in the Company in return
for 1,098,901 shares of Preferred Stock, $.91 par value. CTI Investors, L.L.C.,
an Illinois limited liability company, invested $900,000 in the shares of
Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John
H. Schwan and Stephen M. Merrick, members of management, and one other
accredited investor. One other accredited investor invested the remaining
$100,000. The sale was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") as a transaction not
involving a public offering as sales were made to a small number of accredited
investors, including members of management, who were sophisticated and had
access to information about the Company. The shares of Preferred Stock were
subsequently converted into 1,098,901 shares of Class B Common Stock. These
shares of Class B Common Stock were reverse-split on a 1-for-3 basis along with
the Company's Common Stock on November 4, 1999, resulting in a total of 366,300
shares of Class B Common Stock being presently outstanding.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick,
members of management, were each issued warrants to purchase up to 25,641 shares
of the Company's Common Stock at an exercise price of $2.73 per share in
consideration of their facilitating and guaranteeing a bank loan to the Company
in the amount of $6.3 million. The issuance was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.
In July, 1998, John H. Schwan and Stephen M. Merrick exercised a total of
6,465 of their warrants to purchase shares of the Company's Common Stock at an
exercise price of $2.73 per share (5,000 and 1,465 warrants, respectively).
In June, 1997, the Company issued, in a private placement, notes in the
principal amount of $865,000, together with warrants to purchase up to 92,415
shares of the Company's Common Stock at an exercise price of $9.36 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and warrants. The offering was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.
In June, 1999, Mr. Davis' June, 1997, $150,000 note was cancelled and
reissued in the same principal amount with a new maturity date of February 28,
2001. Mr. Davis' June, 1997, warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $9.36 per share was cancelled in
September, 1999, and a new warrant to purchase up to 16,026 shares of the
13
Company's Common Stock at an exercise price of $1.688 per share, with an
expiration date of June 30, 2003, was issued in its place. Mr. Davis' June,
1999, Note was paid in full by the Company in February, 2001.
In June, 1999, the June, 1997, $50,000, $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively, came due. On November 9,
1999, new notes in the same principal amounts were issued to Messrs. H. Schwan,
J. Schwan and Merrick, in payment and replacement of the prior notes with
maturity dates for each of November 9, 2001. In November, 1999, the June, 1997
warrants of Messrs. H. Schwan, J. Schwan and Merrick to purchase up to
(respectively) 5,342, 37,393 and 33,653 shares of the Company's Common Stock at
an exercise price of $9.36 per share were cancelled. At that time, new warrants
to purchase up to 29,621, 207,346 and 186,612 shares of the Company's Common
Stock at an exercise price of $1.688 per share were issued to Messrs. H. Schwan,
J. Schwan and Merrick, respectively. These warrants expire on November 9, 2004.
The 1999 notes and 1999 warrants issued to Messrs. Davis, H. Schwan, J.
Schwan and Merrick were issued in a private offering 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 were
sophisticated investors who had access to information about the Company.
14
Item No. 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. We are restating our statements of
operations, cash flows, and stockholders' equity for the year ended December 31,
2000, for the two months ended December 31, 1999 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, 2000 and 1999.
We have determined that in 1999 and 2000, 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 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 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 $351,978 and was to be recorded over
the period from November, 1999 through September 30, 2002. From November 1999
through December 31, 2000 no amounts were recorded as amortization expense.
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
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.
General
The following table sets forth selected financial data of the Company for
the years ended October 31, 1998 and 1999, the two months ended December 31,
1999, and the year ended December 31, 2000 (in thousands, except per share
data):
Two months
Year ended Year ended ended Year ended
October 31, October 31, December 31, December 31,
1998 1999 1999 2000
As Restated As Restated
-------------------------------------------------------------------
Consolidated Statement of Operations Data:
Net sales $ 19,953 $ 18,717 $ 3,906 $ 22,978
Cost of sales 12,707 13,781 2,676 16,375
------------------------------------------------------------------
Gross profit 7,246 4,936 1,230 6,603
Operating Expenses:
General and administrative 2,353 2,350 645 3,584
Selling 2,587 2,448 343 1,840
Advertising 1,805 1,504 225 966
------------------------------------------------------------------
Total operating expenses 6,745 6,302 1,213 6,390
------------------------------------------------------------------
Operating income (loss) 501 (1,366) 17 213
Other income (expense) (319) (796) (234) (1,252)
------------------------------------------------------------------
Income (loss) before income taxes and minority interest 182 (2,162) (217) (1,039)
Income tax benefit (expense) (60) 380 (5) (107)
------------------------------------------------------------------
Income (loss) before minority interest 122 (1,782) (222) (1,146)
Minority interest in profit (loss) of subsidiary -- -- (11) (87)
------------------------------------------------------------------
Net income (loss) $ 122 $ (1,782) $ (211) $ (1,059)
==================================================================
Net income (loss) applicable to common shares $ 122 $ (1,782) $ (211) $ (1,059)
==================================================================
Net income (loss) per share:
Basic $ 0.10 $ (1.40) $ (0.17) $ (0.88)
==================================================================
Diluted $ 0.09 $ (1.40) $ (0.17) $ (0.88)
==================================================================
Weighted average number of common and common equivalent shares outstanding:
Basic 1,266,003 1,269,984 1,222,549 1,207,944
==================================================================
Diluted 1,373,789 1,269,984 1,222,549 1,207,944
==================================================================
15
The discussion of operations and liquidity and capital resources includes
comparisons of the year ended December 31, 2000 ("fiscal 2000") with the year
ended October 31, 1999 ("fiscal 1999"), and the two month transition period
ended December 31, 1999 with the two month period ended December 31, 1998. As
previously reported, the Company changed its fiscal year from October 31 to
December 31, and the Company filed a Transition Report on Form 10-QSB for the
two month period ended December 31, 1999.
Year ended December 31, 2000 compared to year ended October 31, 1999
Results of Operations
Net Sales. For the fiscal year ended December 31, 2000, net sales increased
to $22,978,000 from $18,717,000 for the fiscal year ended October 31, 1999, an
increase of approximately 22.8%. The increase in net sales is the net result of
a increase in the sales of latex balloons and laminated and printed films,
partially offset by a decrease in mylar balloon sales. Latex balloons sales also
increased due to the acquisition of a majority equity interest in, and resulting
consolidation of, CTI Mexico Corporation, S.A. de C.V. ("CTI Mexico"), a
manufacturer of latex balloons. For fiscal 2000, international sales were
$4,872,000, or 21.2% of net sales, as compared to $2,436,000, or 13.0% of net
sales for the fiscal year ended October 31, 1999.
During fiscal 2000, mylar balloons represented 50% of sales, latex balloons
25% of sales, and laminated and printed films 25% of sales. For the fiscal year
ended October 31, 1999, mylar balloons represented 67% of sales, latex balloons
12% of sales, and laminated and printed films 21% of sales. The Company
anticipates that the percentage of sales represented by latex balloons and
laminated and printed films will increase during fiscal 2001. For fiscal 2000,
profit margins on mylar balloons, latex balloons, and laminated and printed
materials were 30.2%, 15.4%, and 28.9%, respectively.
Cost of Sales. For fiscal 2000, cost of sales decreased to 71.3% of net
sales as compared to 73.6% of net sales in the fiscal year ended October 31,
1999. The decrease was a result of higher units of production, and increased
gross margins in domestic operations.
Administrative. For fiscal 2000, administrative expenses were $3,585,000,
or 15.6% of net sales, as compared to $2,350,000 or 12.6% of net sales for the
fiscal year ended October 31, 1999. The primary increase in administrative
expenses came from the acquisition of CTI Mexico and the subsequent
consolidation of administrative expenses. Domestically, administrative expenses
increased due to costs associated with the November, 1999 reverse stock split,
and consulting fees incurred in a corporate wide project to improve cost
accounting procedures.
16
Selling. For fiscal 2000, selling expenses were $1,840,000, or 8.0% of net
sales, as compared to $2,448,000, or 13.1% of net sales for the fiscal year
ended October 31, 1999. The decline in selling expense dollars is primarily
related to the re-negotiation of certain licensing agreements, reducing royalty
expenses.
Advertising and Marketing. For fiscal 2000, advertising and marketing
expenses were $966,000, or 4.2% of net sales, as compared to $1,504,000. or 8.0%
of sales for fiscal year ended October 31, 1999. The decrease in advertising and
marketing expense dollars came from several items, mainly reduced servicing
costs on several national account programs, and reduced expenditures related to
the Company's attendance at fewer trade shows.
Other Income and Expense. Interest income for fiscal 2000 was $14,000,
compared to $92,000 in the fiscal year ended October 31, 1999. The decrease was
due to a smaller amount of funds held for investment purposes. For fiscal 2000,
interest expense was $1,281,000, as compared to $942,000 for the fiscal year
ended October 31, 1999. The increase was primarily due to the consolidation of
CTI Mexico, whose interest expense totaled $130,000 for the year ended December
31, 2000 and the amortization of debt discount of $182,000.
Net Income or Loss. For the fiscal year ended December 31, 2000, the
Company had a loss before taxes and minority interest of $1,039,000, as compared
to a loss before taxes of $2,162,000 for the fiscal year ended October 31, 1999.
The net loss for fiscal 2000 was $1,059,000, as compared to a net loss of
$1,782,000 for the year ended October 31, 1999.
Contracts with foreign suppliers are stated in U.S. dollars and the Company
is not subject to currency rate fluctuations on these transactions. The effect
of currency rate fluctuations on intercompany transactions with the Company's
England subsidiary and Mexico subsidiary has been immaterial. As a result, the
Company has determined not to provide any hedge against currency rate
fluctuations.
Liquidity and Capital Resources
Cash flow provided by operations for the fiscal year ended December 31,
2000, was $1,447,000. This resulted primarily from non-cash depreciation and
amortization expenses of $1,751,000. During the fiscal year ended October 31,
1999, the Company's cash flow provided by operations was $2,192,000, the result
of a $2,199,000 reduction in inventory and non-cash depreciation and
amortization expenses of $1,382,000.
During fiscal 2000, the Company invested $637,000 in machinery and
equipment, and in the year ending October 31, 1999, the Company invested
$2,053,000 in machinery and equipment.
Cash flow used in financing activities for the fiscal year ended December
31, 2000, was $410,000. The primary use was to paydown existing long-term and
short-term debt. In the year ended October 31, 1999, cash flow provided
17
by financing activities was $94,000. This resulted from the issuance of
long-term and short-term debt.
In January, 2001, the Company entered into a Loan and Security Agreement
with a new bank under which the bank 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 includes a term
loan of $1,426,000, at an interest rate of prime plus 0.75% per annum, which is
based upon the appraised value of the equipment of the Company, and a revolving
line of credit at an interest rate of prime plus 0.5% per annum, the amount of
which is based on advances of up to 85% of eligible receivables and 50% of the
value of the Company's inventory. The term loan and revolving line of credit are
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 bank 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. This loan is secured by the
aforementioned building and property, and has been made in the form of two
notes: one note is in the principal amount of $2,700,000, bears interest of
9.75% per annum, and has a term of five years with a 25 year amortization, and
the second note is in the principal amount of $173,000, bears interest at 10%
per annum, and has a term of three years.
Approximately $7,500,000 in proceeds from the foregoing January, 2001, loan
transactions was used to pay off outstanding loans and a line of credit of the
Company.
At December 31, 2000, the Company maintained a cash balance of $393,000.
The Company's current cash management strategy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. At December
31, 1999, the Company had cash and cash equivalents of $130,000. Working capital
at December 31, 2000, was ($3,862,000), compared to working capital of
($1,217,000) at December 31, 1999.
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.
Two months ended December 31, 1999 compared to two months ended December 31,
1999
Results of Operations
Net Sales. For the two months ended December 31, 1999, net sales were
$3,906,000, as compared to sales of $3,151,000 for the two months ended December
31, 1998, an increase of 24.0%. Sales increased over all product lines - mylar
balloons, latex balloons and laminated and printed films. Net sales grew over
$700,000 in the laminations and printed films product line, and latex balloon
sales increased through the acquisition of CTI Mexico.
18
Cost of Sales. For the two months ended December 31, 1999, cost of sales
increased to 68.5% of net sales as compared to 62.1% of net sales for the same
period in 1998. The increase was primarily the result of consolidating the
results of CTI Mexico's operations which currently operate with a higher cost of
goods sold percentage than domestic operations.
Administrative. For the two months ended December 31, 1999, administrative
expenses were $646,000 or 16.5% of sales as compared to $353,000, or 11.2% of
sales for the same period in 1998. The primary increase in administrative
expenses came from the acquisition and subsequent consolidation of CTI Mexico.
Domestically, administrative expenses increased due to costs associated with the
reverse stock split, and consulting fees incurred in a corporate wide project to
improve cost accounting procedures.
Selling. For the two months ended December 31, 1999, selling expenses were
$343,000 or 8.8% of sales, as compared to $426,0000, or 13.5% of net sales for
the same period in 1998. The decline in selling expense dollars is primarily
related to the re-negotiation of certain licensing agreements, reducing royalty
expenses in the current year.
Advertising and Marketing. For the two months ended December 31, 1999,
advertising and marketing expenses were $225,000 or 5.8% of net sales as
compared to $325,000 or 10.3% of net sales in the same period 1998. The decrease
in advertising and marketing expense dollars came from several items, mainly
reduced servicing costs on several national account programs, and reduced
expenditures related to the Company's attendance at fewer trade shows.
Other Income or Expense. Interest expense increased to $273,000 for the two
months ended December 31, 1999, as compared to $148,000 for the two months ended
December 31, 1998. The increase was primarily due to the consolidation of CTI
Mexico, whose interest expense totalled $80,000 for the two month period in
1999. During the two months ended December 31, 1999, the Company sold its
building located next to its headquarters in Barrington, Illinois, and entered
into an agreement to lease back the facility. The building is owned by an entity
in which officers/shareholders of the Company have a controlling interest. The
gain realized on the sale was deferred and is being recognized into income over
the 10 year lease term.
Net Income or Loss. For the two months ended December 31, 1999, the Company
had a loss before taxes and minority interest of $218,000, as compared to a loss
before taxes of $30,000 for the same two month period in 1998. The provision for
income taxes for the two month period ended December 31, 1999 was $5,000,
resulting in a net loss of $211,000. The tax benefit for the two month period
ended December 31, 1998 was $18,000, resulting in a net loss of $12,000.
19
Financial Condition
Liquidity and Capital Resources. Cash flow used in operations during the
two months ended December 31, 1999 was $352,000, which was due to increasing
accounts receivable and inventory levels driven by increasing sales volume.
During the two months ended December 31, 1998, cash flows provided by operations
was $163,000, mainly as a result of non-cash depreciation expense and lower
inventory levels.
Investment Activities. During the two months ended December 31, 1999 cash
flow provided by investing activities was $1,763,000. The cash inflow was
provided by the proceeds from the sale of the building located next to the
Company's headquarters. Investments in machinery and equipment were $133,000 for
the two months ended December 31, 1999. In the two months ended December 31,
1998, $910,000 was used in investing activities, primarily for the purchase of
machinery and equipment.
Financing Activities. For the two months ended December 31, 1999, the
Company used $1,589,000 in financing activities, primarily to pay off the
long-term mortgage loan that existed on the building which was sold. Cash flow
provided by financing activities for the two months ended December 31, 1998 was
$776,000, resulting from the proceeds of long-term debt and use of the
short-term revolving line of credit.
Seasonality
In the mylar product line, sales have historically been seasonal with
approximately 20% to 30% of annual sales of mylar being generated in December
and January, and 11% to 13% of annual mylar sales being generated in June and
July in recent years. The sale of latex balloons and laminated film products
have not historically been seasonal, and as sales in these products lines
increase as a percentage of total sales, the seasonality of the Company's total
net sales should decrease.
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 1 (Description of
Business) and Item 6 (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 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.
20
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 2000 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 competition from, among others, national and
regional balloon, packaging and custom film product manufacturers and sellers
that have greater financial, technical and marketing resources and distribution
capabilities than the Company, the availability of sufficient capital, the
maturation and success of the Company's strategy to develop, market and sell its
products, risks inherent in conducting international business, risks associated
with securing licenses, changes in the Company's product mix and pricing, the
effectiveness of the Company's efforts to control operating expenses, general
economic and business conditions affecting the Company and its customers in the
United States and other countries in which the Company sells and anticipates
selling its products and services and the Company's ability to (i) adjust to
changes in technology, customer preferences, enhanced competition and new
competitors; (ii) protect its intellectual property rights from infringement or
misappropriation; (iii) maintain or enhance its relationships with other
businesses and vendors; and (iv) attract and retain key employees. There can be
no assurance that the Company will be able to identify, develop, market, sell or
support new products successfully, that any such new products will gain market
acceptance, or that the Company will be able to respond effectively to changes
in customer preferences. There can be no assurance that the Company will not
encounter technical or other difficulties that could delay introduction of new
or updated products in the future. If the Company is unable to introduce new
products and respond to industry changes or customer preferences on a timely
basis, its business could be materially adversely affected. The Company is not
obligated to update or revise these forward-looking statements to reflect new
events or circumstances.
Item No. 7 Financial Statements
Reference is made to the Consolidated Financial Statements attached hereto.
Item No. 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective July 27, 1999, the Company engaged Grant Thornton LLP as the
Company's principal accountants to audit the Company's financial statements for
the year ending October 31, 1999. Grant Thornton LLP replaced
PricewaterhouseCoopers LLP ("PwC") who had previously been engaged for the same
purpose, and whose dismissal was effective July 27, 1999. The decisions to
change the Company's principal accountants was approved by the Company's Board
of Directors on July 23, 1999.
21
The reports of PwC on the Company's financial statements for the two fiscal
years ended October 31, 1997, and October 31, 1998 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Company's two fiscal years ended October 31, 1997, and October
31, 1998, and in the subsequent interim periods through July 27, 1999, there
were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PwC, would have caused it
to make reference to the subject matter of the disagreements in connection with
its reports on the financial statements for such periods.
PwC did not inform the Company of any reportable events during the
Company's two fiscal years ended October 31, 1997, and October 31, 1998, and in
subsequent interim periods through July 27, 1999.
PART III
Item No. 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
The Company's current directors and executive officers and their ages, as
of March 23, 2001, are as follows:
Name Age Position with the Company
John H. Schwan 56 Chairman and Director
Stephen M. Merrick 59 Executive Vice President, Secretary
Howard W. Schwan 46 President and Director
Sharon Konny 42 Manager of Finance and Administration
Brent Anderson 34 Vice President of Manufacturing
Stanley M. Brown 54 Director
Bret Tayne 42 Director
22
All directors hold office until the annual meeting of stockholders next
following their election and/or until their successors are elected and
qualified. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. Information with respect to the business experience
and affiliation of the directors and the executive officers of the Company is
set forth below.
John H. Schwan, Chairman. Mr. Schwan has been an officer and director of
the Company since January, 1996. Mr. Schwan has been the President and principal
executive officer of Packaging Systems, Inc. and affiliated companies for over
the last 13 years. Mr. Schwan has over 20 years of general management
experience, including manufacturing, marketing and sales. Mr. Schwan served in
the U.S. Army Infantry in Vietnam from 1966 to 1969, where he attained the rank
of First Lieutenant.
Stephen M. Merrick, Executive Vice President and Secretary. Mr. Merrick was
President of the Company from January, 1996 to June, 1997 when he became Chief
Executive Officer of the Company. In October, 1999, Mr. Merrick became Executive
Vice President. Mr. Merrick is a principal of the law firm of Merrick & Klimek,
P.C. of Chicago, Illinois and has been engaged in the practice of law for more
than 30 years. He is also Senior Vice President, Director and a member of the
Management Committee of Reliv International, Inc. (NASDAQ), a manufacturer and
direct marketer of nutritional supplements and food products.
Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 20 years principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, was appointed as a director in
January, 1996, and was appointed as President in June, 1997. Mr. Schwan manages
administration, production and engineering functions as well as the sales
function for latex balloons and custom and created films.
Sharon Konny, Manager of Finance and Administration. Ms. Konny has been
Manager of Finance and Administration at the Company since October, 1996. From
November of 1992 to 1996, she was an Assistant Vice President of First Chicago
Corporation, initially as Loan Servicing Manager of the Mortgage Services
Division and in December, 1994, achieving the position of Manager of Financial
Administration for the First Card Division. She became a Certified Public
Accountant in 1992.
Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been
employed by the Company since January, 1989, and has held a number of
engineering positions with the Company including Plant Engineer and Plant
Manager. In such capacities Mr. Anderson was responsible for the design and
manufacture of much of the Company's manufacturing equipment. Mr. Anderson was
appointed Vice President of Manufacturing in June, 1997.
Stanley M. Brown, Director. Mr. Brown was appointed as a director of the
Company in January, 1996. Mr. Brown has been President of Inn-Room Systems,
Inc., a manufacturer and lessor of in-room vending systems for hotels
23
since March, 1996. From 1968 to 1989, Mr. Brown was with the United States Navy
as a naval aviator, achieving the rank of Captain.
Bret Tayne, Director. Mr. Tayne was appointed as a director of the Company
in December, 1997. Mr. Tayne has been President of Everede Tool Company, a
manufacturer of industrial cutting tools, since January, 1992. Prior to that, Mr
Tayne was Executive Vice President of Unifin, a commercial finance company,
since 1986. Mr. Tayne received a Bachelor of Science Degree from Tufts
University and an MBA from Northwestern University.
John H. Schwan and Howard W. Schwan are brothers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the NASDAQ SmallCap Stock Market. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on a review of such forms furnished to the Company, or written
representations that no Form 5's were required, the Company believes that during
calendar year 2000, all Section 16(a) filing requirements applicable to the
officers, directors and ten-percent beneficial shareholders were complied with;
except that Mr. John Schwan failed to timely report three transactions on Form 4
for May, 2000 (which transactions were reported on Form 4 in July, 2000).
Item No. 10 Executive Compensation
Executive Compensation
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company to its President, Chief Executive
Officer and any other officer who received compensation in excess of $100,000
("Named Executive Officers").
24
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------------------------------------- ------------
Name and Other Securities All Other
Principal Salary Annual Underlying Compensation
Position Year ($) Compensation Options ($)
--------- ---- -------- ---------- -------- ----------
Howard W. Schwan 2000 $135,000 $ 9,719(1) 20,000(2) $ 1,650(6)
President 1999 $129,900 $ 13,675(1) -- $ 1,650(6)
1998 $135,000 $ 6,145(1) 13,333(3) $ 1,115(6)
Stephen M. Merrick 2000 $ 75,000 -- 20,000(4) --
Executive 1999 $ 53,750 -- -- --
Vice-President 1998 $ 75,000 -- 13,333(5) --
----------
(1) Perquisites include country club membership of $5,000 in 1998, $7,360 in
1999 and $3,950 in 2000.
(2) Stock options to purchase up to 20,000 shares of the Company's Common Stock
at $2.25 per share.
(3) Stock options to purchase up to 13,333 shares of the Company's Common Stock
at $7.50 per share.
(4) Stock options to purchase up to 20,000 shares of the Company's Common Stock
at $2.475 per share.
(5) Stock options to purchase up to 13,333 shares of the Company's Common Stock
at $8.25 per share.
(6) Company contribution to the Company 401(k) Plan as pre-tax salary deferral.
Certain Named Executive Officers have received warrants to purchase Common
Stock of the Company in connection with their guarantee of certain bank loans
secured by the Company and in connection with their participation in a private
offering of notes and warrants conducted by the Company. See Item 12. In
connection with their employment in the fiscal year ending December 31, 2000,
the following executive officers were granted incentive stock options on March
6, 2000:
25
Option Grants in Last Fiscal Year
Individual Grants
Number of
Securities % of Total Options
Underlying Granted to Employees Exercise Price
Name Options Granted in Fiscal Year ($/share) Expiration Date
---- --------------- -------------- --------- ---------------
Stephen M. Merrick 20,000 20.3% $2.475 3/6/2005
Howard W. Schwan 20,000 20.3% $2.25 3/6/2010
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities
Underlying Value of Unexercised In-
Shares Value Unexercised Options at the-Money Options
Acquired on Realized Year End (#) at Fiscal Year End ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ --- ------------------------- -------------------------
Stephen M. Merrick 0 0 33,333/0 $0/0(1)
Howard W. Schwan 0 0 33,333/0 $0/0(1)
----------
(1) The value of unexercised in-the-money options is based on the difference
between the exercise price and the fair market value of the Company's
Common Stock on December 31, 2000.
Employment Agreements
In April, 1996, the Company entered into an employment agreement with John
C. Davis as Executive Vice President-Sales, which provided for an annual salary
of $150,000. The term of the agreement was through January 31, 1998. On June 27,
1997, the agreement was amended to extend the term through January 31, 2000, and
to provide for an annual salary of $120,000 per year. Effective February 1,
1999, Mr. Davis retired from his position as Executive Vice President-Sales with
the Company.
In June, 1997, the Company entered into an Employment Agreement with Howard
W. Schwan as President, which provides for an annual salary of not less than
$135,000. The term of the Agreement is through June 30, 2002. The Agreement
contains covenants of Mr. Schwan with respect to the use of the Company's
confidential information, establishes the Company's right to inventions created
by Mr. Schwan during the term of his employment, and includes a covenant
26
of Mr. Schwan not to compete with the Company for a period of three years after
the date of termination of the Agreement.
Director Compensation
John Schwan was compensated in the amount of $44,000 in fiscal 2000 for his
services as Chairman of the Board of Directors. Except for John Schwan,
directors received no cash compensation for their services as directors. In
connection with their services as directors, Stanley M. Brown and Bret Tayne
were each compensated with options to purchase up to 3,000 shares of the
Company's Common Stock at an exercise price of $2.25 per share, expiring in
March, 2010, and in connection with his services as Chairman of the Company's
Board of Directors, John Schwan was compensated with options to purchase up to
20,000 shares of the Company's Common Stock at an exercise price of $2.475 per
share, expiring in March, 2005. All options issued to Messrs. Brown, Tayne and
John Schwan in fiscal year 2000 were issued under the Company's 1999 Stock
Option Plan.
Item No. 11 Security Ownership of Certain Beneficial Owners and Management
Principal Stockholders
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of March 30, 2001 by (i)
each stockholder who is known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock or Class B Common Stock, (ii) each
director and executive officer of the Company who owns any shares of Common
Stock or Class B Common Stock, and (iii) all executive officers and directors as
a group. Except as otherwise indicated, the Company believes that the beneficial
owners of the shares listed below have sole investment and voting power with
respect to such shares.
27
Shares of Shares of
Class B Common
Common Stock Stock
Beneficially Beneficially Percent of
Name and Address Owned(2)(3) Owned(2) Common Stock(4)
---------------- ----------- -------- ---------------
John H. Schwan 109,890 302,688(4) 34.02(5)
Stephen M. Merrick 73,260 296,095(6) 31.87(5)
Howard W. Schwan 54,945 91,463(7) 14.86(5)
Sharon Konny -- 11,000(8) 1.31
Brent Anderson -- 11,400(8) 1.35
Stanley M. Brown -- 6,952(9) *
747 Glenn Avenue
Wheeling, IL 60010
Bret Tayne -- 5,837(10) *
6834 N. Kostner Avenue
Lincolnwood, IL 60712
Michael Schrimmer -- 102,000 12.12
1161 Lake Cook Road
Suite B
Deerfield, IL 60015
Frances Ann Rohlen 91,575 51,170 15.30(5)
c/o Cheshire Partners
1504 N. Wells Street
Chicago, IL 60610
Philip W. Colburn 36,630 39,422(11) 8.66(5)
All directors and executive 238,095 725,435 56.45(5)
officers as a group (7
persons)
----------
*less than one percent
(1) Except as otherwise indicated, the address of each stockholder listed above
is c/o CTI Industries Corporation, 22160 North Pepper Road, Barrington,
Illinois 60010.
(footnotes continued on next page)
28
(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60
days are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options, warrants or rights, but are
not deemed outstanding for purposes of computing the percentage
(3) Figures below represent all Class B Common Stock outstanding. Beneficial
ownership of shares of Class B Common Stock for Messrs. Merrick, John
Schwan, Howard Schwan and Ms. Rohlen include indirect ownership of such
shares through CTI Investors, L.L.C. See "Certain Transactions."
(4) Includes warrants to purchase up to 20,641 shares of Common Stock at $2.73
per share, warrants to purchase up to 207,346 shares of Common Stock at
$1.688 per share, options to purchase up to 13,333 shares of Common Stock
at $8.25 per share granted under the Company's 1997 Stock Option Plan and
options to purchase up to 20,000 shares of Common Stock at $2.475 per share
granted under the Company's 1999 Stock Option Plan.
(5) Assumes conversion of all shares of Class B Common Stock owned by the named
person or collective into shares of Common Stock.
(6) Includes warrants to purchase up to 24,176 shares of Common Stock at $2.73
per share, warrants to purchase up to 186,612 shares of Common Stock at
$1.688 per share, options to purchase up to 13,333 shares of Common Stock
at $8.25 per share granted under the Company's 1997 Stock Option Plan and
options to purchase up to 20,000 shares of Common Stock at $2.475 per share
granted under the Company's 1999 Stock Option Plan.
(7) Includes warrants to purchase up to 25,641 shares of Common Stock at $2.73
per share, warrants to purchase up to 29,621 shares of Common Stock at
$1.688 per share, options to purchase up to 13,333 shares of Common Stock
at $7.50 per share granted under the Company's 1997 Stock Option Plan and
options to purchase up to 20,000 shares of Common Stock at $2.25 per share
granted under the Company's 1999 Stock Option Plan.
(8) Includes options to purchase up to 4,000 shares of Common Stock at $7.50
per share granted under the Company's 1997 Stock Option Plan and options to
purchase up to 7,000 shares of Common Stock at $2.25 per share granted
under the Company's 1999 Stock Option Plan.
(footnotes continued on next page)
29
(9) Includes options to purchase up to 1,667 shares of Common Stock at $7.50
per share, options to purchase up to 1,667 shares of Common Stock at $12.00
per share, both granted under the Company's 1997 Stock Option Plan and
options to purchase up to 3,000 shares of Common Stock at $2.25 per share
granted under the Company's 1999 Stock Option Plan.
(10) Includes options to purchase up to 1,667 shares of Common Stock at $7.50
per share granted under the Company's 1997 Stock Option Plan and options to
purchase up to 3,000 shares of Common Stock at $2.25 per share granted
under the Company's 1999 Stock Option Plan.
(11) Includes shares held by immediate family members.
Item No. 12 Certain Relationships and Related Transactions
Certain Transactions
In March 1996, the Company entered into a Stock Redemption Agreement with
John C. Davis which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement the Company was obligated to redeem 34,188 shares of
Common Stock and has the right, but not the obligation, to redeem up to an
additional 76,923 shares of Common Stock owned by Mr. Davis at the price of
$5.85 per share at any time through January 31, 1998. Commencing March 1, 1998
through February 28, 2000, the Company was obligated to pay to Mr. Davis, for
the redemption of shares at $5.85 per share (i) an amount equal to 2% of the
Company's pretax profits each fiscal quarter (beginning with the fiscal quarter
ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed
$8,000) of the amount by which latex and mylar balloon revenues exceed $1.3
million in any month. The Company's obligations terminated once a total of
111,111 shares of Common Stock have been redeemed under the Stock Redemption
Agreement. The Company also had the right to redeem additional shares of Common
Stock from Mr. Davis during this period at $5.85 per share, provided that the
total number of shares subject to redemption under the Stock Redemption
Agreement did not exceed 111,111. As of February 28, 2000, 40,444 shares of
Common Stock were redeemed pursuant to the Stock Redemption Agreement.
In March and May of 1996, a group of investors made an equity investment of
$1,000,000 in the Company in return for 366,300 shares of Preferred Stock, $2.73
par value. Each share of Preferred Stock was entitled to an annual cumulative
dividend of 13% of the purchase price, and was convertible into one share of
Common Stock. The shares of Preferred Stock, voting separately as a class, were
entitled to elect four of the Company's directors. CTI Investors, L.L.C., an
Illinois limited liability company, invested $900,000 in the shares of Preferred
Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan
and Stephen M. Merrick, members of management, and Frances Ann Rohlen.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick
were each issued warrants to purchase 25,641 shares of the Company's Common
30
Stock at an exercise price of $2.73 per share in consideration of their
facilitating and guaranteeing a bank loan to the Company in the amount of $6.3
million. The warrants have a term of six years. In July, 1998, John H. Schwan
and Stephen M. Merrick exercised 5,000 and 1,465 of these warrants,
respectively.
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 92,415
shares of the Company's Common Stock at an exercise price of $9.36 per share.
The warrants had a term of five years. Howard W. Schwan, John H. Schwan, Stephen
M. Merrick and John C. Davis, members of management, purchased $50,000, $350,000
and $315,000 and $150,000, respectively, of the notes and warrants. Mr. John
Schwan and Mr. Merrick applied advances of $200,000 each, made to the Company in
January, 1997, toward the purchase of the notes and warrants.
In June, 1999, Mr. Davis' June, 1997, $150,000 Note was cancelled, and
reissued in the same principal amount with a new maturity date of February 28,
2001. Mr. Davis' June, 1997, warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $9.36 per share was cancelled in
September, 1999, and a new warrant to purchase up to 16,026 shares of the
Company's Common Stock at an exercise price of $1.688 per share, with an
expiration date of June 30, 2003 was issued in its place. Mr. Davis' June, 1999,
note was paid in full by the Company in February, 2001.
In June, 1999, the June, 1997, $50,000 $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively came due. On November 9,
1999, new notes in the same principal amounts were issued to these persons, in
payment and replacement of the prior notes, with maturity dates for each of
November 9, 2001. In November, 1999, the June, 1997, warrants of Messrs. H.
Schwan, J. Schwan and Merrick to purchase up to (respectively) 5,342, 37,393 and
33,653 shares of the Company's Common Stock at an exercise price of $9.36 per
share were cancelled. At that time, new warrants to purchase up to 29,621,
207,346, and 186,612 shares of the Company's Common Stock at an exercise price
of $1.688 per share were issued to Messrs. H. Schwan, J. Schwan and Merrick,
respectively. These warrants expire on November 9, 2004.
Stephen M. Merrick, Executive Vice President of the Company, is a principal
of the law firm of Merrick & Klimek, P.C., which serves as general counsel of
the Company. Mr. Merrick was a principal in the law firm of Fishman, Merrick,
Miller, Genelly, Springer, Klimek & Anderson, P.C., which served as general
counsel to the Company until December 1, 1998. In addition, Mr. Merrick is a
principal stockholder of the Company. (See Item No. 11). Other principals of the
firm of Merrick & Klimek, P.C. own less than 1% of the Company's outstanding
Common Stock. Legal fees paid to the firm of Fishman, Merrick, Miller, Genelly,
Springer, Klimek & Anderson, P.C. were $10,380 and $-0- for the fiscal years
ended October 31, 1999, and December 31, 2000. Legal fees incurred from the firm
of Merrick & Klimek, P.C. for the fiscal years ended October 31, 1999, and
December 31, 2000 were $90,634 and $124,308, respectively. Mr. Merrick is also
an officer and director of Reliv International, Inc. (NASDAQ-RELV).
31
John H. Schwan is President of Packaging Systems and affiliated companies.
The Company made purchases of packaging materials from these entities in the
amount of $251,203 and $235,299 during each of the years ended October 31, 1999,
and December 31, 2000, respectively.
The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into, on
terms as fair as those obtainable from independent third parties. All related
party transactions, including loans and forgiveness of debt, must be approved by
a majority of disinterested directors.
Item No. 13 Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Description
------ -----------
* 3.1 Third Restated Certificate of Incorporation of CTI Industries
Corporation
** 3.2 By-laws of CTI Industries Corporation
** 4.1 Form of Certificate for Common Stock of CTI Industries
Corporation
***10.1 CTI Industries Corporation Stock Option Plan
**10.2 Employment Agreement dated April 29, 1996 between CTI Industries
Corporation and John C. Davis
**10.3 Stock Redemption Agreement dated March 1, 1996 between CTI
Industries Corporation and John C. Davis
**10.4 Agreement dated June 27, 1997 between CTI Industries Corporation
and John C. Davis
**10.6 Form of Warrant dated December 3, 1996 to purchase shares of
Common Stock
**10.7 Form of Subscription Agreement dated March, 1996, for purchase of
Preferred Stock
**10.8 Form of Subscription Agreement dated June 20, 1997 for promissory
notes and warrants to purchase shares of Common Stock
**10.9 Employment Agreement dated June 30, 1997, between CTI Industries
Corporation and Howard W. Schwan
**10.10 Joint Venture Agreement dated September 16, 1996, between CTI
Industries Corporation and Pulidos & Terminados Finos S.A. de
C.V.
**10.11 Agreement for purchase of assets dated September 8, 1995, between
CTI Industries Corporation and Pulidos & Terminados Finos S.A. de
C.V.
**10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets
between CTI Industries Corporation and Pulidos & Terminados Finos
S.A. de C.V.
****10.13 Form of Agreement dated July 14, 1997 between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
10.14 Loan and Security Agreement dated January 12, 2001, between the
Company and Congress Financial Corporation (Central)
32
10.15 Term Note in the sum of $1,426,000 dated January 12, 2001 made by
CTI Industries Corporation to Congress Financial Corporation
(Central)
10.16 Mortgage dated January 12, 2001 for the benefit of Banco Popular,
N.A.
10.17 Secured Promissory Note in the sum of $2,700,000 dated December
15, 2000 made by CTI Industries Corporation to Banco Popular,
N.A.
10.18 Secured Promissory Note in the sum of $173,000 dated December 15,
2000, made by CTI Industries Corporation to Banco Popular, N.A.
10.19 Guaranties dated January 12, 2001, by Stephen M. Merrick and John
H. Schwan for benefit of Congress Financial Corporation (Central)
10.20 Guaranties dated January 12, 2001, by John H. Schwan, Stephen M.
Merrick and Howard W. Schwan for the benefit of Banco Popular,
N.A.
**10.21 Form of Financial Advisory and Consulting Agreement
*****10.22 Subscription and Loan Agreement dated January 26, 1998, between
CTI Industries Corporation and Pulidos & Terminados Finos S.A. de
C.V.
11.1 Computation of Earnings Per Share - Annual
21 Subsidiaries (incorporate description in Form 10-KSB under Item
No. 1)
27 Financial Data Schedule
* 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 the Commission on October 25, 1999.
** Incorporated by reference to Exhibits, contained in Registrant's Form SB-2
Registration Statement (File No. 333-31969) effective November 5, 1997.
*** Incorporated by reference to Exhibit contained in Registrant's
Schedule 14A Definitive Proxy Statement, as filed with the Commission on
March 26, 1999.
**** Incorporated by reference to Exhibits contained in Registrant's Form 10KSB
Annual Report, for the fiscal year ended October 31, 1998.
***** Incorporated by reference to Exhibit contained in Registrant's Form 10 KSB
Annual Report, for year ended October 31, 1997.
Reports on Form 8-K
The Company did not file a report on Form 8-K during the last quarter
of fiscal 2000.
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on April 30, 2003.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
-----------------------------------
Howard W. Schwan, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant in the capacities and on the
dates indicated.
Signatures Title Date
/s/ Howard W. Schwan President and Director April 30, 2003
------------------------
Howard W. Schwan
/s/ John H. Schwan Chairman and Director April 30, 2003
------------------------
John H. Schwan
/s/ Stephen M. Merrick Executive Vice President, April 30, 2003
------------------------ Secretary, Chief Financial
Stephen M. Merrick Officer and Director
/s/ Stanley M. Brown Director April 30, 2003
------------------------
Stanley M. Brown
/s/ Bret Tayne Director April 30, 2003
------------------------
Bret Tayne
34
CERTIFICATIONS
I, Howard W. Schwan, Chief Executive Officer of CTI Industries
Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB of CTI Industries
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
---------------------------------
Howard W. Schwan, Chief Executive
Officer
CERTIFICATIONS
I, Stephen M. Merrick, Chief Financial Officer of CTI Industries
Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of CTI Industries
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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
CTI INDUSTRIES CORPORATION
By: /s/ Stephen M. Merrick
-----------------------------------
Stephen M. Merrick, Chief Financial
Officer
SARBANES-OXLEY ACT
SECTION 906 CERTIFICATION
I certify that the periodic report on Form 10-KSB/A containing the
financial statements fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)) and that
information contained in the periodic report on Form 10-KSB fairly presents, in
all material respects, the financial condition and results of operations of the
issuer.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
-------------------------------
Howard W. Schwan,
Chief Executive Officer
SARBANES-OXLEY ACT
SECTION 906 CERTIFICATION
I certify that the periodic report on Form 10-KSB/A containing the
financial statements fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)) and that
information contained in the periodic report on Form 10-KSB fairly presents, in
all material respects, the financial condition and results of operations of the
issuer.
CTI INDUSTRIES CORPORATION
By: /s/ Stephen M. Merrick
-------------------------------------------
Stephen M. Merrick, Chief Financial Officer
CTI Industries Corporation and Subsidiaries
Table of Contents
Page(s)
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December
31, 1999 and 2000 F-2 F-3
Consolidated Statements of Operations for
the year ended October 31, 1999, the two
months ended December 31, 1999, and the
year ended December 31, 2000 F-4
Consolidated Statements of Stockholders'
Equity for the year ended October 31,
1999, the two months ended December 31,
1999, and the year ended December 31,
2000 F-5
Consolidated Statements of Cash Flows for
the year ended October 31, 1999, the two
months ended December 31, 1999, and the
year ended December 31, 2000 F-6
Notes to Consolidated Financial Statements F-7 F-20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and
Board of Directors
CTI Industries Corporation
We have audited the accompanying balance sheets of CTI Industries Corporation
and Subsidiaries as of December 31, 1999 and 2000 and the related statements of
operations, stockholders' equity, and cash flows for the two months ended
December 31, 1999 and the year ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CTI Industries Corporation and
Subsidiaries as of December 31, 1999 and 2000 and the results of their
operations and their cash flows for the two months ended December 31, 1999 and
the year ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
As indicated in Note 3 to these accompanying consolidated financial statements,
the Company has restated its consolidated financial statements for the two
months ended December 31, 1999 and for the year ended December 31, 2000.
GRANT THORNTON LLP
March 2, 2001, except as to Note 3,
which is as of April 15, 2003.
F-1
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
----------------------------
1999 2000
As Restated As Restated
See Note 3 See Note 3
------------ ------------
ASSETS
Current assets:
Cash $ 130,103 $ 392,534
Accounts receivable (less allowance for doubtful accounts of
$336,078 and $312,572 at December 31, 1999 and 2000, respectively) 4,179,265 2,573,577
Inventories 6,521,488 7,060,996
Deferred tax assets 208,926 65,700
Other 682,187 659,371
------------ ------------
Total current assets 11,721,969 10,752,178
Property and equipment:
Machinery and equipment 12,862,936 13,472,187
Building 2,363,744 2,370,644
Office furniture and equipment 1,650,737 1,652,823
Land 250,000 250,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 2,031,919 2,202,743
Projects under construction 557,892 405,748
------------ ------------
19,879,113 20,516,030
Less : accumulated depreciation (9,698,350) (11,342,792)
------------ ------------
Total property and equipment, net 10,180,763 9,173,238
Other assets:
Deferred financing costs, net 26,629 11,412
Goodwill associated with acquisition of CTI Mexico, net 1,203,185 1,199,771
Deferred tax assets 691,298 812,591
Other assets 283,682 269,600
------------ ------------
Total other assets 2,204,794 2,293,374
------------ ------------
TOTAL ASSETS $ 24,107,526 $ 22,218,790
============ ============
See accompanying notes
F-2
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
----------------------------
1999 2000
As Restated As Restated
See Note 3 See Note 3
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,957,791 $ 5,045,773
Line of credit 3,849,203 3,609,541
Notes payable - current portion 1,327,056 4,176,934
Accrued liabilities 2,805,113 1,781,985
------------ ------------
Total current liabilities 12,939,163 14,614,233
Long-term liabilities:
Other liabilities 327,961 802,596
Notes payable 4,206,366 1,301,022
Subordinated debt 530,578 597,670
------------ ------------
Total long-term liabilities 5,064,905 2,701,288
Redeemable common stock 413,406 --
Minority interest 351,926 238,787
Stockholders' equity:
Common stock - $.195 par value, 5,000,000 shares authorized,
966,327 shares issued, 841,644 shares outstanding 188,434 188,434
Class B Common stock - $2.73 par value, 500,000 shares
authorized, 366,300 shares issued and outstanding 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Warrants issued in connection with subordinated debt 351,978 351,978
Accumulated deficit (692,425) (1,751,478)
Accumulated other comprehensive earnings (14,247) (42,244)
Less:
Treasury stock-124,683 shares (575,384) (575,384)
Redeemable common stock (413,406) --
Stock subscription receivable (4,700) (4,702)
Notes receivable from stockholders (56,456) (56,456)
------------ ------------
Total stockholders' equity 5,338,126 4,664,482
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 24,107,526 $ 22,218,790
============ ============
See accompanying notes
F-3
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
Two months
Year Ended Ended Year Ended
October 31 December 31 December 31
1999 1999 2000
As Restated As Restated
See Note 3 See Note 3
------------ ----------- ------------
Net Sales $ 18,717,119 $ 3,905,896 $ 22,978,117
Cost of Sales 13,781,107 2,676,110 16,374,720
------------ ----------- ------------
Gross profit on sales 4,936,012 1,229,786 6,603,397
Operating expenses:
Administrative 2,349,531 645,592 3,584,516
Selling 2,448,276 342,957 1,839,906
Advertising and marketing 1,503,819 224,663 965,981
------------ ----------- ------------
Total operating expenses 6,301,626 1,213,212 6,390,403
------------ ----------- ------------
Income (loss) from operations (1,365,614) 16,574 212,994
Other income (expense):
Interest expense (942,301) (273,161) (1,281,287)
Interest income 91,899 5,448 14,238
Gain on sale of assets 366 5,008 30,046
Other 54,129 28,466 (14,977)
------------ ----------- ------------
Total other income (expense) (795,907) (234,239) (1,251,980)
------------ ----------- ------------
Loss before income taxes and minority interest (2,161,521) (217,665) (1,038,986)
Income tax expense (benefit) (379,251) 5,383 106,910
------------ ----------- ------------
Loss before minority interest (1,782,270) (223,048) (1,145,896)
Minority interest in profit (loss) of subsidiary -- (11,759) (86,843)
------------ ----------- ------------
Net loss $ (1,782,270) $ (211,289) $ (1,059,053)
============ =========== ============
Income (loss) applicable to common shares $ (1,782,270) $ (211,289) $ (1,059,053)
============ =========== ============
Basic income (loss) per common and common equivalent shares $ (1.40) $ (0.17) $ (0.88)
============ =========== ============
Diluted income (loss) per common and common equivalent shares $ (1.40) $ (0.17) $ (0.88)
============ =========== ============
Weighted average number of shares and equivalent shares of common stock
outstanding:
Basic 1,269,984 1,222,549 1,207,944
============ =========== ============
Diluted 1,269,984 1,222,549 1,207,944
============ =========== ============
See accompanying notes
F-4
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Warrants
issued in
Common Stock Class B Common Stock connection with
----------------------- ----------------------- Paid-in subordinated Retained
Shares Amount Shares Amount Capital debt Deficit
As Restated As Restated
------- ----------- ------- ----------- ----------- ------------- -----------
Balance, October 31, 1998 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ -- $ 1,301,134
Acquisition of treasury
stock on open market
Net loss (1,782,270)
Other comprehensive income
Foreign currency translation
Total comprehensive loss
----------------------------------------------------------------------------------------------------
Balance, October 31, 1999 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ -- $ (481,136)
Acquisition of treasury
stock on open market
Warrants Issued in connection
with subordinated debt $ 351,978
Net loss $ (211,289)
Other comprehensive income
Foreign currency translation
Total comprehensive loss
----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ 351,978 $ (692,425)
Expiration of stock
redemption period
Net loss $(1,059,053)
Other comprehensive income
Foreign currency translation
Total comprehensive loss
----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ 351,978 $(1,751,478)
====================================================================================================
Less
Accumulated -------------------------------------------------------------------
Other Treasury Stock
Comprehensive --------------------- Redeemable Stock Notes Recvble
Earnings Shares Amount Common Stock Sub Recvble Shareholders TOTAL
----------- ------ ----------- ----------- ----------- ------------ -----------
Balance, October 31, 1998 $ 26,377 54,383 $ (407,294) $ (413,406) $ (4,700) $ (56,456) $ 7,188,421
Acquisition of treasury
stock on open market 41,000 (105,827) $ (105,827)
Net loss $(1,782,270)
Other comprehensive income
Foreign currency translation (11,829) $ (11,829)
-----------
Total comprehensive loss $(1,794,099)
----------------------------------------------------------------------------------------------------
Balance, October 31, 1999 $ 14,548 95,383 $ (513,121) $ (413,406) $ (4,700) $ (56,456) $ 5,288,495
Acquisition of treasury
stock on open market 29,300 $ (62,263) $ (62,263)
Warrants Issued in Connection
with Subordinated Debt $ 351,978
Net loss $ (211,289)
Other comprehensive income
Foreign currency translation $ (28,795) $ (28,795)
-----------
Total comprehensive loss $ (240,084)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (14,247) 124,683 $ (575,384) $ (413,406) $ (4,700) $ (56,456) $ 5,338,126
Expiration of stock
redemption period $ 413,406 $ 413,406
Net loss $(1,059,053)
Other comprehensive income
Foreign currency translation $ (27,997) $ (27,997)
-----------
Total comprehensive loss $(1,087,050)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ (42,244) 124,683 $ (575,384) $ -- $ (4,700) $ (56,456) $ 4,664,482
===================================================================================================-
See accompanying notes
F-5
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Two months
Year Ended Ended Year Ended
October 31 December 31 December 31
1999 1999 2000
As Restated As Restated
See Note 3 See Note 3
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,782,270) $ (211,289) $(1,059,053)
Adjustment to reconcile net loss to cash (used in)
provided by operating activities:
Depreciation and amortization 1,381,663 264,616 1,751,318
Amortization of Debt Discount -- 42,556 182,093
Equity in loss of subsidiary and joint venture 115,360 --
Minority interest in loss of subsidiary -- (11,759) (86,843)
Gain on sale of fixed assets -- (5,008) (30,046)
Provision for losses on accounts receivable & inventory 332,988 32,760 317,856
Deferred income taxes (407,000) -- 21,933
Change in assets and liabilities:
Accounts receivable (114,240) (319,898) 1,455,886
Inventory 2,199,461 (732,686) (707,564)
Other assets 403,418 (577,567) 31,906
Accounts payable and accrued expenses 62,630 1,166,550 (430,466)
----------- ----------- -----------
Net cash provided by (used in) operating activities 2,192,010 (351,725) 1,447,020
Cash flows from investing activities:
Proceeds from sale of property and equipment -- 1,841,984 --
Purchases of property and equipment (2,052,777) (133,490) (636,917)
Investment in and advances to CTI Mexico (45,515) -- --
Acquisition of CTF International (74,024) -- --
Cash acquired in acquisition of CTI Mexico -- 54,029 --
Purchase additional interest in CTI Mexico -- -- (109,547)
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,172,316) 1,762,523 (746,464)
Cash flows from financing activities:
Net change in revolving line of credit (604,223) 275,180 (239,662)
Proceeds from issuance of long-term debt 1,202,281 -- --
Proceeds from issuance of short-term debt 570,000 -- 1,470,000
Repayment of long-term debt (778,597) (1,396,649) (970,493)
Repayment of short-term debt (190,000) (380,000) (554,973)
Repayment of subordinated debt -- (25,000) (115,000)
Purchase of treasury stock (105,827) (62,263) --
----------- ----------- -----------
Net cash provided by (used in) financing activities 93,634 (1,588,732) (410,128)
Effect of exchange rate changes on cash (11,829) (28,795) (27,997)
----------- ----------- -----------
Net increase (decrease) in cash 101,499 (206,729) 262,431
Cash and Equivalents at Beginning of Period 235,333 336,832 130,103
----------- ----------- -----------
Cash and Equivalents at End of Period $ 336,832 $ 130,103 $ 392,534
=========== =========== ===========
Supplemental disclosures:
Cash paid for interest $ 905,218 $ 184,377 $ 1,079,548
Cash paid for income taxes $ -- $ -- $ --
Noncash investing activities:
Acquisition of additional equity interest in CTI Mexico in exchange for
indebtedness of CTI Mexico to CTI Industries Corporation in the amount of
$989,400,
and equipment valued at $855,600. $ -- $ 1,845,000 $ --
See accompanying notes
F-6
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
1. Nature of Operations
CTI Industries Corporation (the "Company"), its United Kingdom subsidiary (CTI
Balloons Limited), and Mexican subsidiaries (CTI Mexico Corporation, S.A. de
C.V. and CTF International S.A. de C.V.) design, manufacture and distribute
balloon products throughout the world. The Company also operates systems for the
production, lamination and printing of films used for food packaging and other
commercial uses.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CTI Industries
Corporation, its wholly owned subsidiaries CTI Balloons Limited and CTF
International S.A. de C.V., and its majority owned subsidiary CTI Mexico
Corporation, S.A. de C.V. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
Foreign Currency Translation
The financial statements of foreign operations are translated into U.S. dollars
in accordance with Statement of Financial Accounting Standards (SFAS) No. 52.
Accordingly, all assets and liabilities are translated at current rates of
exchange, and operating transactions are translated at weighted average rates
during the year. The translation gains and losses, to the extent material, are
accumulated as a separate component of stockholders' equity.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
standard costs which approximates costing determined on a first-in, first-out
basis.
Property and Equipment
Property and equipment is stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation is computed using
the straight-line and declining-balance methods over estimated useful lives of
the related assets. The estimated useful lives range as follows:
Building 25 - 30 years
Machinery and equipment 3 - 15 years
Office furniture and equipment 5 - 8 years
Leasehold improvements 5 - 8 years
Furniture & equipment at customer locations 2 - 3 years
Depreciation expense was $1,366,446 for the year ended October 31, 1999,
$248,561 for the two months ended December 31, 1999, and $1,649,437 for the year
ended December 31, 2000.
F-7
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
2. Summary of Significant Accounting Policies, continued
Deferred Financing Costs
Deferred financing costs consist of unamortized financing costs incurred in
connection with the refinancing of long-term debt during fiscal 1996. These
costs are being amortized on a straight-line basis over the term of the loans.
Amortization expense was $15,217 for the year ended October 31, 1999, $2,536 for
the two months ended December 31, 1999, and $15,217 for the year ended December
31, 2000.
Income Taxes
Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting for
Income Taxes. Under the asset and liability method of Statement No. 109, the
Company recognizes the amount of income taxes currently payable and deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years these temporary differences are expected to be
recovered or settled.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise
from non-stockholder transactions impacting stockholders' equity which are not
included in the statement of income and are reported as a separate component of
equity. For all periods presented, other comprehensive income includes only one
component, which is the change in the foreign currency translation adjustment.
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting when title
transfers upon shipment.
Shipping and Handling Fees and Costs
In September 2000, the Emerging Issues Task Force ("EITF") released Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs". The Issue requires
that shipping and handling costs be classified as costs of goods sold, and
shipping and handling fees billed to customers be classified as revenues.
Previously, the Company had netted its revenues from shipping and handling fees
billed to customers against the related costs, and included the net amount as a
component of cost of goods sold.
Effective December 31, 2000, the Company has reclassified all shipping and
handling fees billed to customers from cost of goods sold to net sales for all
periods presented. This reclassification had the effect of increasing net sales
and cost of goods sold from the October 31, 1999 amounts previously reported
with no effect on gross margins.
F-8
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
2. Summary of Significant Accounting Policies, continued
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 uncollectible. Such losses have historically been
within management's expectations. For the year ended December 31, 2000, the
Company had two customers that accounted for approximately 19.7% and 7.8%,
respectively, of consolidated net sales. Corresponding percentages of
consolidated net sales generated by these customers for the year ended October
31, 1999, were approximately 14.3% and 16.2%, respectively, and for the two
months ended December 31, 1999 were 15.5% and 6.5%, respectively. At December
31, 2000, the outstanding accounts receivable balances due from these two
customers were $1,045,965 and $219,243, respectively.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
Effective for the fiscal year ending October 31, 1997, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation". The pronouncement
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on new fair value accounting rules. The Company did not adopt the new fair
value accounting, but instead chose to comply with the disclosure requirements
of SFAS No. 123. Accordingly, the adoption of SFAS No. 123 did not have a
material impact on the Company's financial statements.
Impairment of Long-Lived Assets and Goodwill
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company assesses the impairment of its long-lived
assets, including goodwill and property, plant and equipment, whenever economic
events or changes in circumstances indicate that the carrying amounts of the
assets may not be recoverable. Long-lived assets are considered to be impaired
when the sum of the expected future cash flows, undiscounted and without
interest charges, is less than the carrying amounts of the related assets.
Goodwill is amortized over a fifteen year period. Accumulated amortization of
goodwill at December 31, 1999 and 2000 was $13,519 and $100,183, respectively.
F-9
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
3. Restatement
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. We are restating our statements of
operations, cash flows, and stockholders' equity for the year ended December 31,
2000, and for the two months ended December 31, 1999 for the interim periods
ended March 31, June 30 and September 30 of 2000 and the balance sheets as of
December 31, 2000 and 1999.
We have determined that in 1999 and 2000, 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 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 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 $351,978 and was to be recorded over
the period from November, 1999 through September 30, 2002. From November 1999
through December 31, 2000, no amounts were recorded as amortization expense.
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
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.
CTI Industries Corporation and Subsidiaries
Restated Balance Sheet @ 12/31/99
Unadjusted Restated
Year Ended Year Ended
December 31, 1999 Adjustments December 31, 1999
----------------- ----------- -----------------
ASSETS
Current assets:
Cash $ 130,103 130,103
Accounts receivable 4,179,265 4,179,265
Inventories 6,521,488 6,521,488
Deferred tax assets 208,926 208,926
Other 682,187 682,187
------------ -----------
Total current assets 11,721,969 11,721,969
Property and equipment:
Machinery and equipment 12,862,936 12,862,936
Building 2,363,744 2,363,744
Office furniture and equipment 1,650,737 1,650,737
Land 250,000 250,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 2,031,919 2,031,919
Projects under construction 557,892 557,892
------------ -----------
19,879,113 19,879,113
Less: accumulated depreciation (9,698,350) (9,698,350)
------------ -----------
Total property and equipment, net 10,180,763 10,180,763
Other assets:
Deferred financing costs, net 26,629 26,629
Goodwill associated with acquisition of CTI Mexico, net 1,203,185 1,203,185
Deferred tax assets 691,298 691,298
Other assets 283,682 283,682
------------ -----------
Total other assets 2,204,794 2,204,794
------------ -----------
TOTAL ASSETS $ 24,107,526 24,107,526
============ ===========
See accompanying notes
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,957,791 4,957,791
Line of credit 3,849,203 3,849,203
Notes payable - current portion 1,327,056 1,327,056
Accrued liabilities 2,805,113 2,805,114
------------ -----------
Total current liabilities 12,939,163 12,939,164
Long-term liabilities:
Other liabilities 327,961 327,961
Notes payable 4,206,366 4,206,366
Subordinated debt 840,000 (309,422) 530,578
------------ -----------
Total long-term liabilities 5,374,327 5,064,905
Redeemable common stock 413,406 413,406
Minority interest 351,926 351,926
Stockholders' equity:
Common stock - $.195 par value, 5,000,000 shares authorized,
966,327 shares issued, 841,644 shares outstanding 188,434 188,434
Class B Common stock - $2.73 par value, 500,000 shares
authorized, 366,300 shares issued and outstanding 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Warrants issued in connection with subordinated debt -- 351,978 351,978
Accumulated deficit (649,869) (42,556) (692,425)
Accumulated other comprehensive earnings (14,247) (14,247)
Less:
Treasury stock - 124,683 shares (575,384) (575,384)
Redeemable common stock (413,406) (413,406)
Stock subscription receivable (4,700) (4,700)
Notes receivable from stockholders (56,456) (56,456)
------------ -----------
Total stockholders' equity 5,028,704 5,338,126
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 24,107,526 24,107,526
============ ===========
See accompanying notes
CTI Industries Corporation and Subsidiaries
Restated Income Statement @ 12/31/99
Two Months Ended Restated
December 31, 1999 Adjustments December 31, 1999
----------------- ----------- -----------------
Net Sales $ 3,905,896 3,905,896
Cost of Sales 2,676,110 2,676,110
----------- ----------
Gross profit on sales 1,229,786 1,229,786
Operating expenses:
Administrative 645,592 645,592
Selling 342,957 342,957
Advertising and marketing 224,663 224,663
----------- ----------
Total operating expenses 1,213,212 1,213,212
----------- ----------
Income (loss) from operations 16,574 16,574
Other income (expense):
Interest expense (230,605) (42,556) (273,161)
Interest income 5,448 5,448
Gain on sale of assets 5,008 5,008
Other 28,466 28,466
----------- ----------
Total other income (expense) (191,683) (234,239)
----------- ----------
Loss before income taxes and minority interest (175,109) (217,665)
Income tax expense (benefit) 5,383 5,383
----------- ----------
Loss before minority interest (180,492) (223,048)
Minority interest in profit (loss) of subsidiary (11,759) (11,759)
----------- ----------
Net loss $ (168,733) (211,289)
=========== ==========
Income (loss) applicable to common shares $ (168,733) (211,289)
=========== ==========
Basic income (loss) per common and common equivalent shares $ (0.14) (0.17)
=========== ==========
Diluted income (loss) per common and common equivalent shares $ (0.14) (0.17)
=========== ==========
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,222,549 1,222,549
=========== ==========
Diluted 1,222,549 1,222,549
=========== ==========
See accompanying notes
CTI Industries Corporation and Subsidiaries
Restated Balance Sheet @ 12/31/00
Unadjusted Restated
Year Ended Year Ended
December 31, 2000 Adjustments 2000
----------------- ----------- ----------
ASSETS
Current assets:
Cash $ 392,534 392,534
Accounts receivable 2,573,577 2,573,577
Inventories 7,060,996 7,060,996
Deferred tax assets 65,700 65,700
Other 659,371 659,371
------------ -----------
Total current assets 10,752,178 10,752,178
Property and equipment:
Machinery and equipment 13,472,187 13,472,187
Building 2,370,644 2,370,644
Office furniture and equipment 1,652,823 1,652,823
Land 250,000 250,000
Leasehold improvements 161,885 161,885
Fixtures and equipment at customer locations 2,202,743 2,202,743
Projects under construction 405,748 405,748
------------ -----------
20,516,030 20,516,030
Less: accumulated depreciation (11,342,792) (11,342,792)
------------ -----------
Total property and equipment, net 9,173,238 9,173,238
Other assets:
Deferred financing costs, net 11,412 11,412
Goodwill associated with acquisition of CTI Mexico, net 1,199,771 1,199,771
Deferred tax assets 812,591 812,591
Other assets 269,600 269,600
------------ -----------
Total other assets 2,293,374 2,293,374
------------ -----------
TOTAL ASSETS $ 22,218,790 22,218,790
============ ===========
See accompanying notes
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,045,773 5,045,773
Line of credit 3,609,541 3,609,541
Notes payable - current portion 4,176,934 4,176,934
Accrued liabilities 1,781,984 1,781,984
------------ -----------
Total current liabilities 14,614,232 14,614,232
Long-term liabilities:
Other liabilities 802,596 802,596
Notes payable 1,301,022 1,301,022
Subordinated debt 496,640 101,030 597,670
------------ -----------
Total long-term liabilities 2,600,258 2,701,288
Redeemable common stock --
Minority interest 238,787 238,787
Stockholders' equity:
Common stock - $.195 par value, 5,000,000 shares authorized,
966,327 shares issued, 841,644 shares outstanding 188,434 188,434
Class B Common stock - $2.73 par value, 500,000 shares
authorized, 366,300 shares issued and outstanding 1,000,000 1,000,000
Paid-in-capital 5,554,332 5,554,332
Warrants issued in connection with subordinated debt 228,360 123,618 351,978
Accumulated deficit (1,526,829) (224,649) (1,751,478)
Accumulated other comprehensive earnings (42,244) (42,244)
Less:
Treasury stock - 124,683 shares (575,384) (575,384)
Redeemable common stock -- 0
Stock subscription receivable (4,700) (4,700)
Notes receivable from stockholders (56,456) (56,456)
------------ -----------
Total stockholders' equity 4,765,513 4,664,482
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 22,218,790 22,218,790
============ ===========
See accompanying notes
CTI Industries Corporation and Subsidiaries
Restated Income Statement @ 12/31/00
Year Ended Restated
December 31, 2000 Adjustments December 31, 2000
----------------- ----------- -----------------
Net Sales $ 22,978,117 22,978,117
Cost of Sales 16,374,720 16,374,720
------------ -----------
Gross profit on sales 6,603,397 6,603,397
Operating expenses:
Administrative 3,584,516 3,584,516
Selling 1,839,906 1,839,906
Advertising and marketing 965,981 965,981
------------ -----------
Total operating expenses 6,390,403 6,390,403
------------ -----------
Income (loss) from operations 212,994 212,994
Other income (expense):
Interest expense (1,099,194) (182,093) (1,281,287)
Interest income 14,238 14,238
Gain on sale of assets 30,046 30,046
Other (14,977) (14,977)
------------ -----------
Total other income (expense) (1,069,887) (1,251,980)
------------ -----------
Loss before income taxes and minority interest (856,893) (1,038,986)
Income tax expense (benefit) 106,910 106,910
------------ -----------
Loss before minority interest (963,803) (1,145,896)
Minority interest in profit (loss) of subsidiary (86,843) (86,843)
------------ -----------
Net loss $ (876,960) (1,059,053)
============ ===========
Income (loss) applicable to common shares $ (876,960) (1,059,053)
============ ===========
Basic income (loss) per common and common equivalent shares $ (0.73) (0.88)
============ ===========
Diluted income (loss) per common and common equivalent shares $ (0.73) (0.88)
============ ===========
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,207,944 1,207,944
============ ===========
Diluted 1,207,944 1,207,944
============ ===========
See accompanying notes
4. Inventory
Inventory is comprised of the following:
December 31, 1999 December 31, 2000
----------------- -----------------
Raw materials $ 744,281 $ 693,166
Work in process 1,099,763 975,360
Finished goods 4,677,444 5,392,470
------------- -------------
Total inventory $ 6,521,488 $ 7,060,996
============= =============
5. Line of Credit
The Company has a bank line of credit, due May 1, 2001, which provides for a
maximum borrowing limit of $5,000,000, of which $245,823 and $16,986 was
available at December 31, 1999 and 2000, respectively. Advances under the line
of credit are subject to a borrowing base, as defined in the line of credit
agreement. Interest is payable monthly at prime plus .5% (prime was 8.5% and
9.5% at December 31, 1999 and 2000, respectively). The line of credit is
collateralized by all assets of the Company. The line of credit agreement
contains, among other provisions, certain financial convenants relating to the
maintenance of tangible net worth and the ratio of debt to equity. (See note 5)
6. Notes Payable
Long-term debt at December 31, 2000 consists of:
Term Loan, payable in monthly installments of $43,979
including interest at 8.25% due May, 2002
Collateralized by all assets of the Company. * $ 702,837
Term Loan, payable in monthly installments of $19,617
including interest at 8.25% due September, 2001
Collateralized by all assets of the Company. * 1,959,525
Term Loan, payable in monthly installments of $46,195
including interest at 8.25% due February, 2004
Collateralized by all assets of the Company. * 1,482,291
Single payment note due January 31, 2001
Interest rate at Prime. Unsecured. * 250,000
Single payment notes payable to an officer/shareholder
Interest at 9%, payable on demand. Unsecured. * 350,000
Single payment notes payable to an officer/shareholder
Interest at 9%, payable on demand. Unsecured. * 370,000
Installment Loan, payable in monthly installments of $3,633
including interest at 8.25% due May, 2001
Collateralized by equipment. * 11,137
Single payment note due September, 2000
Interest at 26%. Unsecured 51,071
Note payable on demand. Interest at 48%. Unsecured
Interest payable monthly 83,440
F-10
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
6. Notes Payable, continued
Note payable on demand. Interest at 48%. Unsecured.
Interest payable monthly. 125,160
Term Loan, payable in monthly installments of $3,854 plus
interest at 4% over the CTP rate(20.25% at Dec. 31, 2000),
due December, 2002. Unsecured. 92,495
-----------
Total $ 5,477,956
Less current portion (4,176,934)
-----------
Total long-term debt $ 1,301,022
===========
*Paid off with new financing
Future Minimum principal payments for amounts outstanding under these long-term
debt agreements are as follows for the years ended December 31:
2001 $ 4,176,934
2002 747,467
2003 527,943
2004 25,612
-----------
$ 5,477,956
===========
The loan agreements contain, among other provisions, certain financial
convenants relating to the maintenance of tangible net worth and the ratio of
debt to equity. The agreements impose limitations on the Company with respect to
dividends and also contain a clause allowing for the subjective acceleration of
amounts due under the loan agreements in the event of material adverse changes.
At December 31, 2000, the Company was in violation of certain of these financial
covenants.
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 includes 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 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.
F-11
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
7. Stock Redemption
In March 1996, the Company entered into a Stock Redemption agreement with a
shareholder which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement, the Company has the right but not the obligation to
redeem up to 111,111 shares of Common Stock owned by the shareholder at the
price of $5.85 per share at any time through January 31, 1998. Commencing March
1, 1998 through February 28, 2000, the Company is obligated to redeem shares at
$5.85 per share. The number of shares required to be redeemed quarterly is based
on the sum of (i) an amount equal to 2% of the Company's pretax profits each
fiscal quarter (beginning with the quarter ended February 28, 1998) and (ii) an
amount equal to 2% (but not to exceed $3,000) of the amount that latex and mylar
balloon revenues exceed $1.3 million in any month. The company also has the
right to redeem additional shares of Common Stock from the shareholder during
this period at $5.85 per share, provided total number of shares subject to
redemption under the Stock Redemption Agreement does not exceed 111,111.
Redeemable Common Stock has been reflected as a liability with a contra equity
account on the balance sheet. As of the date of this report, the obligation to
redeem shares had expired, and 40,444 shares of Common Stock were redeemed under
the Stock Redemption Agreement.
8. Income Taxes
The income tax provisions (benefits) are comprised of the following:
Oct. 31, Dec. 31, Dec. 31,
1999 1999 2000
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign 27,749 5,383 84,917
----------------------------------------
27,749 5,383 84,917
Deferred:
Federal (354,800) -- --
State (52,200) -- --
Foreign -- -- 21,993
----------------------------------------
(407,700) -- --
----------------------------------------
Total income tax provision (benefit) $(379,251) $ 5,383 $ 106,910
========================================
The components of the net deferred tax asset(liability)at December 31 are as
follows:
1999 2000
Deferred tax assets:
Allowance for doubtful accounts $ 130,000 $ 112,400
Inventory valuation 123,200 142,600
Accrued liabilities 155,100 167,900
Cash basis of foreign inventory purchases (276,200) (357,200)
Net operating loss carryforwards 1,611,400 1,910,300
Alternative minimum tax credit carryforwards 371,600 381,300
----------- -----------
Total deferred tax assets 2,115,100 2,357,300
F-12
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
8. Income Taxes, continued
Deferred tax liabilities:
Book over tax basis of capital assets 718,476 767,709
----------- -----------
1,396,624 1,589,591
Less: Valuation allowance (496,400) (711,300)
----------- -----------
Net deferred tax asset $ 900,224 $ 878,291
=========== ===========
The Company maintains a valuation allowance with respect to deferred tax assets
as a result of the uncertainty of ultimate realization. At December 31, 2000,
the Company has net operating loss carryforwards of approximately $4,500,000,
expiring in various years through 2020. In addition, the Company has
approximately $372,000 and $381,000 of alternative minimum tax credits as of
December 31, 1999 and 2000, respectively, which have no expiration date.
Unremitted earnings of foreign subsidiaries have been indefinitely reinvested.
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
October 31, December 31, December 31,
1999 1999 2000
Taxes at statutory rate $(734,900) $ (74,000) $(353,000)
State income taxes (104,100) (10,400) (50,000)
Increase in deferred tax
Valuation allowance 400,000 96,400 214,900
Foreign tax on assets -- -- 42,700
Foreign taxes and other 59,749 (6,617) 252,310
---------------------------------------
Income tax provision (benefit) $(379,251) $ 5,383 $ 106,910
=======================================
9. Research and Development
The Company conducts product development and research activities which includes
(i) creative product development, (ii) creative marketing, and (iii) engineering
development. During the year ended October 31, 1999, the two months ended
December 31, 1999, and the year ended December 31, 2000, the Company estimates
that the total amount spent on research and development activities was
approximately, $257,000, $45,000, and $291,000, respectively.
10. Employee Benefit Plan
Effective January 1, 1993, the Company established a defined contribution plan
for substantially all employees. The plan provides for the Company matching
contributions on the first $300 of employee contributions with an additional
bonus match of 1% of compensation for all participants who are employees on the
last date of the plan year. Profit sharing contributions may also be made at the
discretion of the Board of Directors. Employer contributions to the plan totaled
$62,506 for the year ended October 31, 1999, $8,535 for the two months ended
December 31, 1999, and $54,012 for the year ended December 31, 2000.
F-13
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
11. Related Party Transactions
The Company obtains legal services from law firms in which several shareholders
of the law firms are also shareholders of the Company, and in which one
shareholder of the law firms is both a director and a shareholder of the
Company. Legal fees incurred with these firms were $101,014 for the year ended
October 31, 1999, $26,798 for the two months ended December 31, 1999, and
$124,308 for the year ended December 31, 2000.
The Company purchases packaging materials from entities in which shareholders of
the Company maintained an ownership interest. Purchases from these affiliates
were $251,203 for the year ended October 31, 1999, $43,847 for the two months
ended December 31, 1999, and $235,299 for the year ended December 31, 2000.
In 1998, the Company advanced funds totaling $81,352 to officers of the Company.
$56,456 of these funds were used to purchase common stock of the Company and is
reflected as a contra equity account at December 31, 1999 and 2000.
In November 1999, the Company sold one of its buildings to a related party. See
Note 14.
12. Joint Venture
Effective September 16, 1996, the Company entered into a joint venture agreement
with a manufacturer in Mexico. The joint venture, CTF International, was formed
to engage in the production and packaging of balloons. Under the agreement, both
entities held a 50% interest in the joint venture. As of October 31, 1998, the
Company had made a total capital investment in the joint venture of $77,975 and
accounted for its proportionate share of income or loss using the equity method.
In July 1999, the Company acquired the remaining 50% of CTF International for
$40,000.
13. Investment in Subsidiary
On January 26, 1998, the Company and CTI Mexico Corporation S.A. de C.V. ("CTI
Mexico") entered into an agreement under which (i) the Company subscribed for
45% of the outstanding capital stock of CTI Mexico for $800,000, (ii) the
Company loaned to CTI Mexico $850,000 collateralized by certain latex balloon
manufacturing equipment, and (iii) the 1995 equipment purchase agreement between
the parties was cancelled with respect to 2 pieces of latex balloon
manufacturing equipment, which is now owned by CTI and leased to CTI Mexico. The
purchase of the capital stock was effective February 1, 1998. The Company
accounted for the investment using the equity method.
On November 12, 1999, the Company entered into an agreement to acquire
additional shares of CTI Mexico, bringing the Company's Common Stock ownership
to approximately 74%. The Company contributed to the capital of CTI Mexico
certain outstanding indebtedness of CTI Mexico to the Company in the amount of
$989,400, and certain equipment valued at $855,600, in exchange for capital
stock of CTI Mexico. The acquisition resulted in the recording of goodwill in
the amount of $1,216,704, which is being amortized over a period of 15 years. On
March 8, 2000, the Company acquired an additional 2% interest in CTI Mexico. The
new shares were purchased for $109,547, resulting in $83,250 of additional
goodwill.
F-14
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
13. Investment in Subsidiary, continued
Amortization of goodwill for the two months ended December 31, 1999 was $13,519,
and for the year ended December 31, 2000 was $86,664.
14. Commitments and Contingencies
Operating Leases
The Company entered into a 10-year lease agreement for office and warehouse
facilities in November 1999. Approximately 50% of the facility is subleased
through March 2002. The Company's United Kingdom subsidiary also maintains a
lease for office and warehouse space which expires in 2019.
The Company leases office equipment under operating leases which expire on
various dates between February 2002 and April 2004.
The net lease expense was $109,056 for the year ended October 31, 1999, $46,468
for the two months ended December 31, 1999, and $338,213 for the year ended
December 31, 2000.
The future aggregate minimum net lease payments under existing agreements as of
December 31, as follows:
Lease payments Sublease Income Net
2001 $ 410,126 $ 135,374 $ 274,752
2002 360,398 49,800 310,598
2003 335,157 -- 335,157
2004 269,610 -- 269,610
2005 260,544 -- 260,544
Thereafter 1,524,368 -- 1,524,368
Licenses
The Company has certain merchandising license agreements that require royalty
payments based upon the Company's net sales of the respective products. The
agreements call for guaranteed minimum commitments that are determined on a
calendar year basis. Future guaranteed commitments due, as computed on a pro
rata basis, as of December 31, are as follows:
2001 $549,500
2002 308,250
2003 172,500
15. Sale/Leaseback of Building
In November, 1999, the Company sold its building located next to its
headquarters in Barrington, Illinois for a gain of $300,467, and entered into an
agreement to lease back the facility. The building is owned by an entity in
which officers/shareholders of the Company have a controlling interest. The gain
realized on the sale was deferred and is being recognized into income over the
10 year lease term.
The gain as previously reported in the 10-QSBT filed for the two month
transition period ended December 31, 1999 has been adjusted to reflect the
deferral of the gain over the life of the lease.
F-15
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
16. Stock Options
On March 19, 1999, the Board of Directors approved for adoption, effective May
6, 1999, the 1999 Stock Option Plan ("Plan"). The Plan authorizes the grant of
options to purchase up to an aggregate of 133,333 shares of the Company's Common
Stock. As of December 31, 2000, 132,500 options had been granted under the 1999
Stock Option Plan. The options are exercisable immediately upon grant, and have
a term of ten years.
Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total of
100,000 shares of Common Stock are reserved for issuance under the Stock Option
Plan. Options to purchase 99,667 shares of Common Stock have been granted as of
October 31, 1998, and remain outstanding at December 31, 2000. The options are
exercisable immediately upon grant and have a term of ten years. The Plan
provides for the award of options, which may either be incentive stock options
("ISOs") within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code") or non-qualified options ("NQOs") which are not
subject to special tax treatment under the Code. The Plan is administered by the
Board or a committee appointed by the Board (the "Administrator"). Officers,
directors, and employees of, and consultants to, the Company or any parent or
subsidiary corporation selected by the Administrator are eligible to receive
options under the Plan. Subject to certain restrictions, the Administrator is
authorized to designate the number of shares to be covered by each award, the
terms of the award, the date on which and the rates at which options or other
awards may be exercised, the method of payment and other terms.
The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market value in
the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an option to
the extent it was exercisable on the date of termination for a period of time
after termination.
In September, 1998 the Company issued an option to purchase 10,000 shares of the
Company's Common Stock at an exercise price of $7.50 per share to Thornhill
Capital LLC in consideration for services. The option has a term of 10 years.
In December, 1996, certain members of company management were issued warrants to
purchase 76,923 shares of the Company's Common Stock at an exercise price of
$2.73 per share in consideration of their facilitating and guaranteeing a bank
loan to the Company in the amount of $6.3 million. The warrants have a term of
six years.
In June, 1997, the Company issued in a private placement notes in the principal
amount of $865,000, together with warrants to purchase up to 92,415 shares of
the Company's Common Stock at an exercise price of $9.36 per share. The warrants
had a term of five years.
F-16
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
16. Stock Options, continued
In September, 1999, warrants to purchase 16,026 shares of the Company's Common
Stock at an exercise price of $9.36 per share were cancelled and reissued at an
exercise price of $1.69 per share.
In November 1999, warrants issued in 1997 to purchase up to 76,389 shares of the
Company's Common Stock for $9.36 were cancelled. New warrants to purchase up to
423,579 shares of the Company's Common Stock at $1.688 were issued. The new
warrants expire on November 9, 2004.
The following is a summary of the activity in the Company's stock option plans
and other options issued for the periods ended October 31, 1999, December 31,
1999, and December 31, 2000.
Oct. 31, 1999 Dec. 31, 1999 Dec. 31, 2000
Outstanding, beginning of period 272,539 271,205 610,729
Granted 16,026 423,579 132,500
Exercised -- -- --
Cancelled (17,360) (84,055) --
--------------------------------------------
Outstanding at the end of period 271,205 610,729 743,229
============================================
Weighted average exercise price per share $ 6.54 $ 2.81 $ 2.72
============================================
Exercisable at end of period 271,205 610,729 743,229
============================================
At December 31, 2000, available options to grant were 1,166.
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", for its employee stock-based
compensation programs. Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Although expense recognition for employee stock based compensation is not
mandatory, SFAS No. 123 requires companies that choose not to adopt the new fair
value accounting to disclose pro-forma net income and earnings per share under
the new method.
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, thus no compensation charges is required to be
recognized.
As allowed by SFAS No. 123, the Company will continue to apply the provisions of
APB No. 25 in accounting for its stock-based employee compensation arrangements
and will disclose pro forma net income and earnings per share information in its
footnotes as if the fair value method suggested in SFAS No. 123 had been
applied.
F-17
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
16. Stock Options, continued
If compensation cost based on fair value method of the options had been used,
the Company's net income and earnings per common share (EPS) would have been as
follows for the year ended December 31, 2000:
2000
Net income (loss) As reported $ (1,059)
Pro Forma (1,351)
EPS As reported $ (0.88)
Pro Forma $ (1.12)
The pro forma effect of compensation cost based on the fair value method of the
warrants issued in 1999 and 2000 was not significant.
The fair value of each option was estimated as of the date of the grant using
the Black-Scholes option pricing model based on the following assumptions:
1999 2000
Expected life (years) 3.0 10
Volatility 141% 117%
Risk-free interest rate 5.9% 4.8%
Dividend yield -- --
The weighted average fair value of options granted during the years ending
October 31, 1999 and December 31, 2000 was $0.44 and $1.12 per share,
respectively.
Significant option and warrant groups outstanding at December 31, 2000 and
related weighted average price and remaining life information are as follows:
Remaining
Life
Grant Date Outstanding Exercisable Exercise Price (Years)
March 2000 132,500 132,500 $2.32 9
September 1998 65,667 65,667 $7.80 8
September 1997 35,000 35,000 $7.71 7
September 1999 16,026 16,026 $1.69 4
November 1999 423,579 423,579 $1.69 4
December 1996 70,457 70,457 $2.73 2
17. Stock Split
On November 4, 1999, a one-for-three reverse stock split became effective. As a
result of the reverse stock split, every three shares of the Company's Common
Stock were reclassified and changed into one share of the Company's Common Stock
with a new par value of $.195 per share, and every three shares of the Company's
Class B Common Stock were reclassified and changed into one share of the
Company's Class B Common Stock, with a new par value of $2.73 per share. The
information presented in these financial statements has been restated to reflect
the effect of the reverse split.
F-18
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
18. Earnings Per Share
Basic earnings per share is computed by dividing the income available to common
shareholders, net earnings, less redeemable preferred stock dividends and
redeemable common stock accretion, by the weighted average number of shares of
common stock outstanding during each period.
Diluted earnings per share is computed by dividing the net earnings 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.
Earnings per share for the periods ended October 31, 1999, December 31, 1999,
and December 31, 2000 was computed as follows:
Year Ended Two months ended Year Ended
October 31, 1999 December 31, 1999 December 31, 2000
As Restated As Restated
BASIC Average shares outstanding:
Weighted average shares
Outstanding during period 1,269,984 1,222,549 1,207,944
=========== =========== ===========
Earnings:
Net income (loss) $(1,782,270) $ (211,289) $(1,059,053)
=========== =========== ===========
Amount for per share
Computation $(1,782,270) $ (211,289) $(1,059,053)
=========== =========== ===========
Net earnings applicable to
Common shares $ (1.40) $ (0.17) $ (0.88)
=========== =========== ===========
DILUTED Average shares outstanding:
Weighted average shares
Outstanding 1,269,984 1,222,549 1,207,944
Common stock equivalents
(options/warrants) -- -- --
----------- ----------- -----------
Weighted average shares
Outstanding during period 1,269,984 1,222,549 1,207,944
=========== =========== ===========
Earnings:
Net income $(1,782,270) $ (211,289) $(1,059,053)
=========== =========== ===========
Amount for per share
Computation $(1,782,270) $ (211,289) $(1,059,053)
=========== =========== ===========
Net earnings applicable to
Common shares $ (1.40) $ (0.17) $ (0.88)
=========== =========== ===========
F-19
CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
19. Geographic Segment Data
The Company's operations consist of a business segment which designs,
manufactures, and distributes balloon products. Transfers between geographic
areas were primarily at cost. The Company's subsidiaries have assets consisting
primarily of trade accounts receivable, inventory and machinery and equipment.
Sales and selected financial information by geographic area for the periods
ended October 31, 1999, December 31, 1999, and December 31, 2000 are as follows:
United States United Kingdom Mexico Eliminations Consolidated
Year ended 10/31/99
Revenues $ 17,388,540 $ 1,826,874 $ 437,410 $ (1,046,410) $ 18,606,414
Operating income (1,481,723) 130,829 (14,720) (1,365,614)
Net income (1,874,456) 108,622 (16,436) (1,782,270)
Total Assets $ 20,677,206 $ 839,891 $ 412,262 $ (490,372) $ 21,438,987
2 months ended 12/31/99
As restated
Revenues $ 3,219,118 $ 321,296 $ 876,401 $ (510,919) $ 3,905,896
Operating income 4,640 44,633 (3,234) (29,465) 16,574
Net income (171,370) 39,250 (61,464) (17,705) (211,289)
Total Assets $ 19,957,219 $ 779,182 $ 5,317,292 $ (1,946,167) $ 24,107,526
Year ended 12/31/00
As restated
Revenues $ 19,132,267 $ 2,030,685 $ 5,162,131 $ (3,525,423) $ 22,799,660
Operating income 326,986 177,340 (310,019) 18,687 212,994
Net income (728,285) 144,898 (380,170) (95,496) (1,059,053)
Total Assets $ 18,881,026 $ 723,178 $ 4,849,095 $ (2,234,509) $ 22,218,790
F-20