SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED
Illinois
|
CTI
INDUSTRIES CORPORATION
|
36-2848943
|
(State
or Other Jurisdiction of
|
(Name
of Registrant
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
in
Our Charter)
|
Identification
No.)
|
|
|
Stephen
M. Merrick
|
22160
North Pepper Road
|
|
22160
North Pepper Road
|
Barrington,
Illinois 60010
|
|
Barrington,
Illinois 60010
|
(847)
382-1000
|
3069
|
(847)
382-1000
|
(Address
and telephone
|
(Primary
Standard
|
(Name,
address and
|
number
of Principal
|
Industrial
|
telephone
number of
|
Executive
Offices and
|
Classification
|
agent
for service)
|
Principal
Place of Business)
|
Code
Number)
|
|
|
|
|
With
copies to:
Clayton
E. Parker, Esq.
|
Matthew
Ogurick, Esq.
|
Kirkpatrick
& Lockhart Nicholson Graham LLP
|
Kirkpatrick
& Lockhart Nicholson Graham LLP
|
201
S. Biscayne Boulevard, Suite 2000
|
201
S. Biscayne Boulevard, Suite 2000
|
Miami,
Florida 33131
|
Miami,
Florida 33131
|
Telephone: (305)
539-3300
|
Telephone: (305)
539-3300
|
Telecopier: (305)
358-7095
|
Telecopier: (305)
358-7095
|
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the “Securities Act”) check the following box. o
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act Registration
Statement number of the earlier effective Registration Statement for
the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act Registration
Statement number of the earlier effective Registration Statement for
the same offering. o
Title
Of Each Class Of Securities To Be Registered
|
|
Amount
To Be Registered
|
|
Proposed
Maximum Offering Price Per Share(1)
|
|
Proposed
Maximum Aggregate Offering Price(1)
|
|
Amount
Of Registration Fee(2)
|
|
Common
Stock, no par value
|
|
|
403,500
shares
|
(3)
|
$
|
4.59
|
|
$
|
1,852,065
|
|
$
|
198.17
|
|
TOTAL
|
|
|
403,500
shares
|
(3)
|
$
|
4.59
|
|
$
|
1,852,065
|
|
$
|
198.17
|
|
(1)
|
Estimated
solely for the purpose of calculating the registration fee pursuant
to
Rule 457(c) under the Securities Act of 1933, as amended. For the
purposes
of this table, we have used the last reported sale price at November
27,
2006. (Above calculations are not net of
fees.)
|
(2)
|
400,000
of these shares are being registered pursuant to the Standby Equity
Distribution Agreement (the “SEDA”) with Cornell Capital Partners, LP and
3,500 of these shares are being registered pursuant to a Placement
Agent
Agreement in connection with the
SEDA.
|
The
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file
a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this Registration
Statement shall become effective on such date as the SEC, acting pursuant
to said Section 8(a), may determine.
PROSPECTUS
Subject
to completion, dated January
18, 2007
CTI
INDUSTRIES CORPORATION
403,500
shares of Common Stock
This
prospectus (this “Prospectus”) relates to the sale of up to 403,500 shares
of common stock of CTI Industries Corporation (“CTI” or the “Company”)
by certain persons who are shareholders of the Company, including (a) Cornell
Capital Partners, LP (“Cornell Capital”), a shareholder who intends to sell
up to 400,000 shares of common stock pursuant to a Standby Equity Distribution
Agreement (also referred to herein as the “SEDA”), dated June 6, 2006, by
and between the Company and Cornell Capital and (b) Newbridge Securities
Corporation (“Newbridge”), a shareholder who intends to sell 3,500 shares of
common stock which have been issued by the Company to Newbridge pursuant to
a
Placement Agent Agreement in connection with the SEDA. Please refer to “Selling
Shareholders” beginning on page 26. All costs associated with this registration
will be borne by the Company.
The
shares of common stock are being offered for sale by the selling shareholders
at
prices established on the NASDAQ Capital Market (NASDAQ-CM) during the term
of
this offering. On November 27, 2006, the last reported sale price of our common
stock was $4.59 per share. Our common stock is quoted on the NASDAQ-CM under
the
symbol “CTIB”. These prices will fluctuate based on the demand for the shares of
common stock.
Cornell
Capital is an “underwriter” within the meaning of the Securities Act of 1933, as
amended (the “Securities Act”), in connection with the sale of common stock
under the Standby Equity Distribution Agreement.
Brokers
or dealers effecting transactions in these shares should confirm that the shares
are registered under the applicable state law or that an exemption from
registration is available.
These
securities are speculative and involve a high degree of risk.
Please
refer to “Risk Factors” beginning on page 9.
With
the
exception of Cornell Capital, which is an “underwriter” within the meaning of
the Securities Act, no other underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering. This offering
will terminate twenty-four (24) months after the accompanying Registration
Statement is declared effective by the U.S. Securities and Exchange
Commission (the “SEC”). None of the proceeds from the sale of stock by the
selling shareholders will be placed in escrow, trust or any similar
account.
The
SEC
and state securities regulators have not approved or disapproved of these
securities, or determined if this Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The
information in this Prospectus is not complete and may be changed. Neither
the
selling shareholder nor we may sell these securities until the Registration
Statement filed with the SEC is effective. This Prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The
date
of this Prospectus is January
18, 2007.
PROSPECTUS
SUMMARY
|
|
|
1
|
|
THE
OFFERING
|
|
|
3
|
|
SELECTED
FINANCIAL INFORMATION
|
|
|
6
|
|
SUPPLEMENTARY
FINANCIAL INFORMATION
|
|
|
7
|
|
FORWARD-LOOKING
STATEMENTS
|
|
|
8
|
|
RISK
FACTORS
|
|
|
9
|
|
DESCRIPTION
OF BUSINESS
|
|
|
16
|
|
SELLING
SHAREHOLDERS
|
|
|
25
|
|
STANDBY
EQUITY DISTRIBUTION AGREEMENT
|
|
|
27
|
|
USE
OF PROCEEDS
|
|
|
30
|
|
DILUTION
|
|
|
31
|
|
PLAN
OF DISTRIBUTION
|
|
|
32
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
34
|
|
MANAGEMENT
|
|
|
49
|
|
PRINCIPAL
SHAREHOLDERS
|
|
|
59
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
|
61
|
|
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
|
|
|
62
|
|
DESCRIPTION
OF SECURITIES
|
|
|
63
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
|
65
|
|
EXPERTS
|
|
|
66
|
|
LEGAL
MATTERS
|
|
|
66
|
|
HOW
TO GET MORE INFORMATION
|
|
|
66
|
|
INDEX
TO FINANCIAL STATEMENTS
|
|
|
F-i
|
|
PART
II
|
|
|
II-1
|
|
SIGNATURES
|
|
|
II-7
|
|
Introduction
This
offering relates to the sale of common stock by certain persons who are
shareholders of the Company, including (a) Cornell Capital, who intends to
sell
up to 400,000 shares of the Company’s common stock under the Standby Equity
Distribution Agreement, dated as of June 6, 2006, by and between the
Company and Cornell Capital and (b) Newbridge, who intends to sell 3,500
shares of common stock which have been issued by the Company to Newbridge
pursuant to a Placement Agent Agreement in connection with the SEDA. The shares
of common stock are being offered for sale by the selling shareholders at prices
established on the NASDAQ Capital Market during the term of this
offering.
Overview
The
Company produces film products for novelty, packaging and container
applications. These products include metalized balloons, latex balloons and
related latex toy products, films for packaging applications, and flexible
containers for packaging and storage applications. We produce all of our film
products for packaging and container applications at our plant in Barrington,
Illinois. We produce all of our latex balloons and latex products at our
facility in Guadalajara, Mexico. Substantially all of our film products for
packaging applications and flexible containers for packaging and storage are
sold to customers in the United States. We market and sell our novelty items
-
principally metalized balloons and latex balloons - in the United States,
Mexico, the United Kingdom and a number of additional countries.
We
supply
coated, laminated and printed films to a number of companies who generally
convert these films into containers for the packaging of food and other items.
We supply flexible containers to companies who (i) use them for packaging of
food or other items or (ii) market them to consumers who use them for the
storage of personal items. We also market containers to and through retail
outlets for use by consumers with sealing devices to store food items in their
homes. In March 2006, we announced that we are completing the development
of, and will produce, market and sell a line of pouches for use by consumers
to
store food items. The pouches include a resealable closure system and a valve
permitting the evacuation of air from the pouch by a small pump device which
we
will also supply.
We
were
organized in 1976 and, initially, engaged in the business of manufacturing
“bag-in-box” plastic packaging systems. We sold our assets related to bag-in-box
packaging systems in 1985. In 1978, we began manufacturing metalized balloons
(sometimes referred to as “foil” balloons), which are balloons made of a base
material (usually nylon or polyester) having 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.
In
1985,
we began marketing latex balloons and, in 1988, we began manufacturing latex
balloons. In 1994, we sold our latex balloon manufacturing equipment to a
company in Mexico and entered into an arrangement for that company to
manufacture latex balloons for us. Since 1997, we have manufactured latex
balloons in Mexico through a majority-owned subsidiary.
We
market
and sell our metalized and latex balloons and related novelty items directly
to
retail stores and chains and through distributors, who in turn sell to retail
stores and chains. Our balloon and novelty products are sold to consumers
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
of
our metalized balloons contain printed characters, designs and social expression
messages, such as “Happy Birthday”, “Get Well Soon” and similar items. In a
number of cases, we obtain licenses for well-known characters and print those
characters and messages on our balloons. Currently, we maintain licenses for
Garfield®,
Face
Offs-Tudes®,
Miss
Spider and Sunny Patch Friends® and Andrea Mistretta. In the United Kingdom, we
maintain licenses on Postman Pat®,
The
Crazy Frog® and Dream Fairies®.
Balloons
and novelty items accounted for fifty-seven percent (57%) of our revenues in
2005. For the nine months ending September 30, 2006 balloon and novelty items
accounted for 63% of our sales. The remaining revenues are generated from the
sale of laminated film products, generally intended for use in the packaging
of
foods, liquids and other materials. We provide laminated films, often printed
film, to a number of customers who utilize the film to produce bags or pouches
for the packaging of food, liquids and other items. We also produce finished
products - pouches and bags - which are used for a variety of applications,
including (i) as vacuumable consumer storage devices for clothing and other
household items, (ii) as vacuumable pouches for household use in storage of
food
items and (iii) as “dunnage” items which, when inflated, cushion products in a
package or container. In 2005, our revenues from these products represented
approximately forty percent (40%) of our net revenues.
About
Us
Our
principal executive offices are located at 22160 North Pepper Road, Barrington,
Illinois 60010. Our telephone number is (847) 382-1000. The address
of our website is www.ctiindustries.com.
Information on our website is not part of this Prospectus.
THE
OFFERING
This
offering relates to the sale of common stock by certain persons who are
shareholders of the Company, including (a) Cornell Capital, who intends to
sell
up to 400,000 shares of common stock pursuant to the Standby Equity Distribution
Agreement, dated June 6, 2006, by and between the Company and Cornell
Capital (also referred to herein as the “SEDA”) and (b) Newbridge, who
intends to sell 3,500 shares of common stock which have been issued pursuant
to
a Placement Agent Agreement in connection with the SEDA.
On
June 6, 2006 (the “Closing Date”), the Company entered into the Standby
Equity Distribution Agreement with Cornell Capital pursuant to which the Company
may, at its discretion, periodically sell to Cornell Capital shares of its
common stock, no par value per share, for a total purchase price of up to Five
Million Dollars ($5,000,000). For each share of common stock purchased
under the SEDA, Cornell Capital will pay to the Company one hundred percent
(100%) of the lowest volume weighted average price (as quoted by Bloomberg,
LP)
of the Company’s common stock on the principal market (whichever is at such time
the principal trading exchange or market for the common stock) during the five
(5) consecutive trading days after the Advance Notice Date (as such term is
defined in the SEDA). However, the Company and Cornell Capital have agreed
that
the Company will not sell to Cornell Capital in excess of 400,000 shares unless
and until the Company shall have obtained shareholder approval for such
sales.
Cornell
Capital will retain five percent (5%) of each advance under the SEDA as an
underwriting discount. The Company has paid to Yorkville Advisors, LLC
(“Yorkville”) a structuring fee equal to Fifteen Thousand Dollars ($15,000) on
the Closing Date and shall pay Five Hundred Dollars ($500) to Yorkville on
each
Advance Date directly out of the gross proceeds of each Advance (as such terms
are defined in the SEDA). The Company also entered into that certain Placement
Agent Agreement (hereinafter the “PAA”), dated as of the Closing Date, by and
among the Company, Cornell Capital and Newbridge pursuant to which the Company
engaged Newbridge to act as it exclusive placement agent in connection with
the
SEDA. Upon the execution of the PAA, the Company issued to Newbridge Three
Thousand Five Hundred (3,500) shares (the “Newbridge Shares”) of the Company’s
common stock. Newbridge is entitled to “piggy-back” registration rights with
respect to the Newbridge Shares and such Newbridge Shares are being registered
in this offering.
At
an
assumed offering price of $4.59 per share (the last reported sale price on
November 27, 2006), as determined under the Standby Equity Distribution
Agreement, CTI will be able to receive up to $1,836,000 in gross proceeds,
assuming the sale of the entire 400,000 shares being registered in this
Registration Statement pursuant to the SEDA. The Company would be required
to
register 689,325 additional shares to obtain the balance of $5 million available
under the SEDA at an assumed offering price of $4.59. Based on the limited
number of available authorized shares of common stock, CTI may need to obtain
shareholder approval to increase the authorized shares of common stock to access
additional amounts under the SEDA. If CTI drew down on the entire $5 million
available under the Standby Equity Distribution Agreement, Cornell Capital
would
receive an aggregate underwriting discount equal to $250,000.
There
are
substantial risks to investors as a result of the issuance of shares of common
stock under the SEDA. These risks include dilution of shareholders, significant
decline in CTI’s stock price and our inability to draw sufficient funds when
needed.
Cornell
Capital will periodically purchase shares of common stock under the SEDA and
will, in turn, sell such shares to investors in the market at the market price.
This may cause our stock price to decline, which will require CTI to issue
increasing numbers of shares to Cornell Capital to raise the same amount of
funds, as our stock price declines. This inverse relationship is demonstrated
by
the following tables, which show the net cash to be received by CTI and the
number of shares to be issued under the SEDA at an assumed offering price of
$4.59 per share and twenty-five percent (25%), fifty percent (50%) and
seventy-five percent (75%) discounts to the assumed offering
prices.
|
|
Assumed
Offering
Price
|
|
75%
of Assumed Offering Price
|
|
50%
of Assumed Offering Price
|
|
25%
of Assumed Offering Price
|
|
Purchase
Price:
|
|
$
|
4.59
|
|
$
|
3.44
|
|
$
|
2.30
|
|
$
|
1.15
|
|
No. of
Shares(1):
|
|
|
400,000
|
|
|
400,000
|
|
|
400,000
|
|
|
400,000
|
|
Total
Outstanding(2):
|
|
|
2,542,097
|
|
|
2,542,097
|
|
|
2,542,097
|
|
|
2,542,097
|
|
Percent
Outstanding(3):
|
|
|
15.74
|
%
|
|
15.74
|
%
|
|
15.74
|
%
|
|
15.74
|
%
|
Gross
Cash to CTI:
|
|
$
|
1,836,000
|
|
$
|
1,376,000
|
|
$
|
920,000
|
|
$
|
460,000
|
|
Net
Cash to CTI(4):
|
|
$
|
1,659,200
|
|
$
|
1,222,200
|
|
$
|
789,000
|
|
$
|
352,000
|
|
(1)
|
Represents
the number of shares of common stock registered in the accompanying
Registration Statement, which may be issued to Cornell Capital under
the
SEDA at the prices set forth in the table. Does
not represent the 3500 shares issued to Newbridge Securities pursuant
to
the Placement Agent Agreement in connection with the
SEDA.
|
(2)
|
Represents
the total number of shares of common stock outstanding at December
11,
2006 after the issuance of the shares to Cornell Capital under the
SEDA.
|
(3)
|
Represents
the shares of common stock to be issued as a percentage of the total
number of shares outstanding at December 11,
2006.
|
(4)
|
Net
cash equals the gross proceeds minus the five percent (5%)
underwriting discount and minus $85,000 in offering expenses.
|
|
|
Assumed
Offering Price
|
|
75%
of Assumed Offering Price
|
|
50%
of Assumed Offering Price
|
|
25%
of Assumed Offering Price
|
|
Purchase
Price:
|
|
$
|
4.59
|
|
$
|
3.44
|
|
$
|
2.30
|
|
$
|
1.15
|
|
No. of
Shares(1):
|
|
|
1,089,325
|
|
|
1,453,488
|
(5)
|
|
2,173,914
|
|
|
4,347,827
|
|
Total
Outstanding(4):
|
|
|
3,231,422
|
(2)(5)
|
|
3,595,585
|
(2)(5)
|
|
4,316,011
|
(2)(5)
|
|
6,489,924
|
(2)(3)
|
Percent
Outstanding(6):
|
|
|
33.71
|
%
|
|
40.42
|
%
|
|
50.37
|
%
|
|
66.99
|
%
|
Gross
Proceeds to CTI(7):
|
|
|
5,000,000
|
|
|
5,000,000
|
|
|
5,000,000
|
|
|
5,000,000
|
|
Net
Cash to CTI(8):
|
|
$
|
4,665,000
|
|
$
|
4,665,000
|
|
$
|
4,665,000
|
|
$
|
4,665,000
|
|
(1)
|
Represents
that total number of shares of common stock which would need to be
issued
at the stated purchase price. We are only registering 400,000 shares
of
common stock under this Prospectus pursuant to the SEDA. We will
need to
register additional shares of common stock to obtain the entire $5
million
available under the SEDA at these stated purchase
prices.
|
(2)
|
The
Company and Cornell Capital have agreed that the Company will not
sell to
Cornell Capital in excess of 400,000 shares unless the Company shall
have
obtained shareholder approval for such
shares.
|
(3)
|
At
the stated purchase price and based on the limited number of available
authorized shares of common stock, CTI would need to obtain shareholder
approval to increase the authorized shares of common stock to obtain
the
entire $5 million available under the
SEDA.
|
(4)
|
Represents
the total number of shares of common stock outstanding at December
11,
2006 after the issuance of the shares to Cornell Capital under the
SEDA.
|
(5)
|
CTI’s
Certificate of Incorporation authorizes the issuance of 5,000,000
shares
of common stock.
|
(6)
|
Represents
the shares of common stock to be issued as a percentage of the total
number shares outstanding at December 11,
2006.
|
(7)
|
If
CTI drew down on the entire $5 million available under the SEDA,
Cornell
Capital would receive an aggregate underwriting discount equal to
$250,000.
|
(8)
|
Net
cash equals the gross proceeds minus the five percent (5%)
underwriting discount and minus $85,000 in offering expenses.
|
Common
Stock Offered
|
403,500
shares by selling shareholders
|
|
|
Offering
Price
|
Market
price
|
|
|
Common
Stock Outstanding Before the Offering(1)
|
2,142,097
shares as of December 11, 2006
|
|
|
Use
of Proceeds
|
We
will not receive any proceeds of the shares offered by the selling
shareholders. Any proceeds we receive from the sale of common stock
under
the Standby Equity Distribution Agreement will be used for general
working
capital purposes at the discretion of CTI. See “Use of
Proceeds”.
|
|
|
Risk
Factors
|
The
securities offered hereby involve a high degree of risk and immediate
substantial dilution. See “Risk Factors” and
“Dilution”.
|
|
|
NASDAQ
Capital Market Symbol
|
CTIB
|
(1)
|
Excludes
up to 400,000 shares of common stock to be issued pursuant to the
Standby
Equity Distribution Agreement.
|
Nine
Months Ended September 30, 2006
SELECTED
FINANCIAL INFORMATION
The
following selected financial data are derived from the consolidated financial
statements of the Company. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein.
|
|
|
|
Year
Ended December 31, (IN THOUSANDS)
|
|
|
|
Nine
months ending September 30,
2006
|
|
Restated
2005
|
|
Restated
2004
|
|
Restated
2003
|
|
2002
|
|
2001
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
$
|
25,756
|
|
$
|
29,190
|
|
$
|
37,193
|
|
$
|
36,260
|
|
$
|
41,236
|
|
$
|
27,446
|
|
Costs
of Sales
|
|
19,353
|
|
|
22,726
|
|
|
30,841
|
|
|
29,627
|
|
|
32,344
|
|
|
19,835
|
|
Gross
Profit
|
|
6,403
|
|
|
6,464
|
|
|
6,352
|
|
|
6,633
|
|
|
8,892
|
|
|
7,611
|
|
Operating
expenses
|
|
4,478
|
|
|
5,812
|
|
|
6,402
|
|
|
6,856
|
|
|
7,447
|
|
|
6,595
|
|
Income
(loss) income from operations
|
|
1,926
|
|
|
652
|
|
|
(50
|
)
|
|
(223
|
)
|
|
1,445
|
|
|
1,016
|
|
Interest
expense
|
|
1,277
|
|
|
1,231
|
|
|
1,350
|
|
|
1,103
|
|
|
832
|
|
|
1,030
|
|
Other
(income) expense
|
|
(154
|
)
|
|
(45
|
)
|
|
(208
|
)
|
|
23
|
|
|
278
|
|
|
|
|
Income
(loss) income before taxes and minority interest
|
|
803
|
|
|
(534
|
)
|
|
(1,192
|
)
|
|
(1,349
|
)
|
|
335
|
|
|
(14
|
)
|
Income
tax expense (benefit)
|
|
59
|
|
|
(200
|
)
|
|
1,286
|
|
|
(782
|
)
|
|
39
|
|
|
276
|
|
Minority
interest
|
|
3
|
|
|
0
|
|
|
1
|
|
|
0
|
|
|
6
|
|
|
58
|
|
Net
(loss) income
|
|
741
|
|
|
(333
|
)
|
|
(2,479
|
)
|
|
(566
|
)
|
|
302
|
|
|
(232
|
)
|
(Loss)
earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
(0.17
|
)
|
|
(1.28
|
)
|
|
(0.30
|
)
|
|
0.18
|
|
|
(0.15
|
)
|
Diluted
|
|
.34
|
|
|
(0.17
|
)
|
|
(1.28
|
)
|
|
(0.30
|
)
|
|
0.16
|
|
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin percentage
|
|
24.9
|
|
|
22.14
|
%
|
|
17.08
|
%
|
|
18.29
|
%
|
|
21.56
|
%
|
|
27.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenses
|
$
|
357
|
|
$
|
551
|
|
$
|
281
|
|
$
|
2,165
|
|
$
|
2,478
|
|
$
|
1,002
|
|
Depreciation
& Amortization
|
|
1,075
|
|
|
1,480
|
|
|
1,640
|
|
|
1,628
|
|
|
1,588
|
|
|
1,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (Deficit)
|
$
|
858
|
|
$
|
(2,426
|
)
|
$
|
(2,790
|
)
|
$
|
(706
|
)
|
$
|
(2,907
|
)
|
$
|
(278
|
)
|
Total
assets
|
|
24,919
|
|
|
23,536
|
|
|
27,888
|
|
|
30,270
|
|
|
30,272
|
|
|
24,664
|
|
Short-term
obligations (1)
|
|
8,837
|
|
|
8,618
|
|
|
9,962
|
|
|
6,692
|
|
|
7,385
|
|
|
7,074
|
|
Long-term
obligations
|
|
7,228
|
|
|
6,039
|
|
|
6,491
|
|
|
8,909
|
|
|
5,726
|
|
|
5,737
|
|
Stockholders’
Equity
|
|
3,975
|
|
|
2,726
|
|
|
2,951
|
|
|
5,212
|
|
|
5,474
|
|
|
4,325
|
|
(1)
|
Short
term obligations consist of primarily of borrowings under bank line
of
credit and current portion of long-term
debt.
|
SUPPLEMENTARY
FINANCIAL INFORMATION
The
following table presents the Company’s condensed operating results for each of
the ten (10) fiscal quarters through the period ended September 30,
2006. The information for each of these quarters is unaudited. In the opinion
of
management, all necessary adjustments, which consist only of normal and
recurring accruals, have been included to fairly present the unaudited quarterly
results. This data should be read together with the Company’s consolidated
financial statements and the notes thereto, the Independent Auditors Reports
and
Management’s Discussions and Analysis of Financial Condition and Results of
Operations.
|
|
THREE
(3) MONTHS ENDED
|
|
|
|
Sep
30
|
|
June
30
|
|
Mar
31
|
|
Dec
31
|
|
Sep
30
|
|
Jun
30
|
|
Mar
31
|
|
Dec
31
|
|
Sep
30
|
|
Jun
30
|
|
|
|
2006
|
|
2006
|
|
2006
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
2004
|
|
2004
|
|
2004
|
|
Revenues
|
|
$
|
8,602,733
|
|
$
|
8,996,935
|
|
$
|
8,156,223
|
|
$
|
6,480,019
|
|
$
|
6,033,831
|
|
$
|
7,572,626
|
|
$
|
9,103,327
|
|
$
|
8,581,819
|
|
$
|
8,125,521
|
|
$
|
9,591,785
|
|
Net
Income (loss)
|
|
$
|
315,464
|
|
$
|
205,699
|
|
$
|
219,768
|
|
$
|
52,186
|
|
$
|
(416,267
|
)
|
$
|
(53,616
|
)
|
$
|
84,486
|
|
$
|
(2,565,223
|
)
|
$
|
(150,370
|
)
|
$
|
(135,681
|
)
|
Net
Income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.10
|
|
$
|
0.11
|
|
$
|
0.03
|
|
$
|
(0.21
|
)
|
$
|
(0.03
|
)
|
$
|
0.04
|
|
$
|
(1.31
|
)
|
$
|
(0.08
|
)
|
$
|
(0.07
|
)
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.10
|
|
$
|
0.10
|
|
$
|
0.02
|
|
$
|
(0.21
|
)
|
$
|
(0.03
|
)
|
$
|
0.04
|
|
$
|
(1.31
|
)
|
$
|
(0.08
|
)
|
$
|
(0.07
|
)
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.055,553
|
|
|
2,053,311
|
|
|
2,036,474
|
|
|
1,977,235
|
|
|
1,963,615
|
|
|
1,954,100
|
|
|
1,954,100
|
|
|
1,930,976
|
|
|
1,932,692
|
|
|
1,918,420
|
|
Diluted
|
|
|
2,129,658
|
|
|
2,124,708
|
|
|
2,166,892
|
|
|
1,977,235
|
|
|
1,963,615
|
|
|
1,954,100
|
|
|
1,970,360
|
|
|
1,930,976
|
|
|
1,932,692
|
|
|
1,918,420
|
|
This
Prospectus contains certain forward-looking statements regarding management’s
plans and objectives for future operations including plans and objectives
relating to our planned marketing efforts and future economic performance.
The
forward-looking statements and associated risks set forth in this Prospectus
include or relate to, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our ability to obtain and retain sufficient capital for future
operations, and (e) our anticipated needs for working capital. These statements
may be found under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Business”, as well as in this Prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under “Risk Factors” and matters described in
this Prospectus generally. In light of these risks and uncertainties, there
can
be no assurance that the forward-looking statements contained in this Prospectus
will in fact occur.
The
forward-looking statements herein are based on current expectations that involve
a number of risks and uncertainties. Such forward-looking statements are based
on assumptions that there will be no material adverse competitive or
technological change in conditions in our business, that demand for our products
and services will significantly increase, that our President will remain
employed as such, that our forecasts accurately anticipate market demand, and
that there will be no material adverse change in our operations or business
or
in governmental regulations affecting us or our manufacturers and/or suppliers.
The foregoing assumptions are based on judgments with respect to, among other
things, future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Accordingly, although we believe that
the
assumptions underlying the forward-looking statements are reasonable, any such
assumption could prove to be inaccurate and therefore there can be no assurance
that the results contemplated in forward-looking statements will be realized.
In
addition, as disclosed elsewhere in the “Risk Factors” section of this
Prospectus, there are a number of other risks inherent in our business and
operations which could cause our operating results to vary markedly and
adversely from prior results or the results contemplated by the forward-looking
statements. Growth in absolute and relative amounts of cost of goods sold and
selling, general and administrative expenses or the occurrence of extraordinary
events could cause actual results to vary materially from the results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which
may
cause us to alter marketing, capital investment and other expenditures, which
may also materially adversely affect our results of operations. In light of
significant uncertainties inherent in the forward-looking information included
in this Prospectus, the inclusion of such information should not be regarded
as
a representation by us or any other person that our objectives or plans will
be
achieved.
Some
of
the information in this Prospectus contains forward-looking statements that
involve substantial risks and uncertainties. Any statement in this Prospectus
and in the documents incorporated by reference into this Prospectus that is
not
a statement of an historical fact constitutes a “forward-looking statement”.
Further, when we use the words “may”, “expect”, “anticipate”, “plan”, “believe”,
“seek”, “estimate”, “internal” and similar words, we intend to identify
statements and expressions that may be forward-looking statements. We believe
it
is important to communicate certain of our expectations to our investors.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions that could cause our future results
to differ materially from those expressed in any forward-looking statements.
Many factors are beyond our ability to control or predict. You are accordingly
cautioned not to place undue reliance on such forward-looking statements.
Important factors that may cause our actual results to differ from such
forward-looking statements include, but are not limited to, the risk factors
discussed below. Before you invest in our common stock, you should be aware
that
the occurrence of any of the events described under “Risk Factors” below or
elsewhere in this Prospectus could have a material adverse effect on our
business, financial condition and results of operation. In such a case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
RISK
FACTORS
We
are
subject to various risks that may materially harm our business, financial
condition and results of operations. You should carefully consider the risks
and
uncertainties described below and the other information in this filing before
deciding to purchase our common stock. If any of these risks or uncertainties
actually occurs, our business, financial condition or operating results could
be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
RISKS
RELATED
TO
OUR
BUSINESS
Industry
Risks
We
Engage In Businesses Which Are Intensely Competitive And Which Involve Strong
Price Competition And Relatively Low Margins
The
businesses in which we engage - the supply of films for flexible packaging,
supply of pouches for flexible packaging and supply of novelty balloon items
-
are highly competitive. We face intense competition from a number of competitors
in each of these product categories, several of which have extensive production
facilities, well-developed sales and marketing staffs and greater financial
resources than we do. Some of these competitors maintain international
production facilities enabling them to produce at low costs and to offer
products at highly competitive prices. We compete on the basis of price,
quality, service, delivery and differentiation of products. Most of our
competitors seek to engage in product development and may develop products
that
have superior performance characteristics to our products. This intense
competition can limit or reduce our sales or market share for the sale of our
products as well as our margins. There can be no assurance that we will be
able
to compete successfully in the markets for our products or that we will be
able
to generate sufficient margins from the sale of our products to become or remain
profitable.
Our
Business Is Dependent On The Price And Availability Of Raw
Materials
The
cost
of the raw materials we purchase represents approximately forty-one percent
(41%) of our revenues. During
the nine months ended September 30, 2006, the cost of these raw materials
increased to 45% of our net revenues. The principal raw materials we
purchase are: nylon sheeting, polyester sheeting, polyethylene sheeting,
polyethylene resin and latex. Much of these materials are derived from petroleum
and natural gas. Prices for these materials fluctuate substantially as a result
of the change in petroleum and natural gas prices, demand and the capacity
of
companies who produce these products to meet market needs. Instability in the
world markets for petroleum and natural gas has, and may, adversely affect
the
prices of these raw materials and their general availability. The price of
latex
has also fluctuated significantly over the past year. Our ability to achieve
and
maintain profitability is partially dependent upon our ability to pass through
to our customers the amount of increases in raw materials cost. If prices of
these materials increase and we are not able to fully pass on the increases
to
our customers, our results of operations and our financial condition will be
adversely affected.
The
Loss Of A Key Supplier Or Suppliers Could Lead To Increased Costs And Lower
Margins As Well As To Other Adverse Results
We
rely
on six (6) principal suppliers for our petroleum, natural gas and latex-based
raw materials supplies. We do not maintain supply agreements with any of our
suppliers for these materials. The loss of any of these suppliers would force
us
to purchase these materials from other suppliers or on the open market, which
may require us to pay higher prices for raw materials than we do now, with
the
result that our margins on the sale of our products would be adversely affected.
In addition, the loss of the supply of an important raw material from one (1)
of
our present suppliers may not be replaceable through open market purchases
or
through a supply arrangement with another supplier. If we were unable to obtain
a raw material from another supplier in such event, we would be unable to
continue to manufacture certain of our products.
Company
Risks
We
Have A History Of Losses And Have Experienced Fluctuations Of Operating Income,
Which May Cause Our Stock Price To Fluctuate
We
have
had a history of losses and of fluctuating income from operations over the
past
five (5) years. We have reported net income in only one (1) of the past five
(5)
years. Our income (loss) from operations during that time has ranged from a
profit of $1,445,000 to a loss of $223,000 and has been subject to significant
quarterly and annual fluctuations. These fluctuations can be caused
by:
|
·
|
Production
efficiencies
|
|
·
|
Variability
in raw materials prices
|
These
fluctuations make it more difficult for investors to compare our operating
results to corresponding prior year periods. These fluctuations also cause
our
stock price to fluctuate. You should not rely on our results of operations
for
any particular quarter or year as being indicative of our results for a full
year or any other period.
We
Have Limited Financial Resources That May Adversely Affect Our Ability To
Invest In Productive Assets, Marketing, New Products And New
Developments
Our
working capital is limited. As of September 30, 2006, our current assets
exceeded our current liabilities by $858,000. Further, under our loan agreement
with our principal lender, we are required to maintain a designated ratio of
earnings before interest, taxes and depreciation (EBITDA) and fixed charges.
This covenant restricts the amount of funded capital expenditures we can make.
As a result, we may be unable to fund capital investments, working capital
needs, marketing and sales programs, research and development, patent or
copyright licenses or other items which we would like to acquire or pursue
in
accordance with our business strategies. The inability to pursue any of these
items may adversely affect our competitive position, our business, financial
condition or prospects.
A
High Percentage Of Our Sales Are To A Limited Number Of Customers And The Loss
Of Any One Or More Of Those Customers Could Adversely Affect Our Results Of
Operation, Cash Flow And Financial Condition
For
the
year ended December 31, 2005, our sales to our top ten customers
represented 62.9% of our net sales and our sales to our top three customers
represented 50.5% of our net sales. For the nine months ended September 30,
2006, our sales to our top ten customers represented 60.3% of our net sales
and
our sales to our top three (3) customers represented 51.3% of our net sales.
Generally, we do not have long term contracts with our customers. The loss
of
any of our principal customers, or a significant reduction in the amount of
our
sales to any of them, would have a material adverse effect on our business
and
financial condition.
In
March,
2006, we entered into a four year agreement with Illinois Tool Works (“ITW”),
one of our top three customers, to provide (i) all of their requirements for
a
certain kind of pouch and (ii) all of their requirements, subject to competitive
pricing, for film for their use in the production of certain pouches. In April
2006, we entered into a license agreement with Rapk, LLC (“Rapak”), also one of
our top three customers, granting Rapak a license under a patent related to
textured film and pouches, and extending the term of an existing supply
agreement with Rapak to October 31, 2008.
We
Rely On Intellectual Property In Our Business And The Failure To Develop,
Acquire Or Protect Our Intellectual Property Could Adversely Affect Our
Business
We
consider patents, copyright licenses and, to some degree trademarks, as being
significant to our competitive position, our ability to obtain and retain
customers and to achieve acceptable margin levels on the sale of our products.
With respect to our film and flexible packaging/pouch business, we believe
that
developing, acquiring and maintaining patent rights are of significance to
us
for those reasons. Over the past five (5) years, we have obtained twelve (12)
patents related to films, pouches, zippers for pouches, the method of inserting
zippers in pouches and certain valves for pouches. We have seven (7) patents
pending with regard to such products. With respect to our novelty balloon
products, we believe that patent rights and trade secrets for product
developments and copyright licenses for characters and designs are of
significance to our ability to compete in the market and to obtain acceptable
margins on the sale of our products. Our limited financial resources have made
it more difficult for us to invest in product and patent developments and to
obtain copyright licenses. If we are unable to develop, acquire, maintain or
enforce some or all of our intellectual property rights, our business, financial
conditions and prospects will be adversely affected.
We
Produce All Of Our Products At Two (2) Plants And Damage To Or Destruction
Of
One (1) Or Both Of The Plants Would Have A Serious Adverse Affect On Our
Business
We
produce all of our film products and pouches at our plant in Barrington,
Illinois and all of our latex balloon products at our plant in Guadalajara,
Mexico. In the event of a fire, flood or other natural disaster, or the
termination of our lease in Mexico, we could lose access to one or both of
our
plants. Loss of, significant damage to, or destruction of, one or both of
these plants would render us unable to produce our products presently produced
in such plants, possibly for an extended period of time and our business,
financial condition and prospects would be materially adversely affected. While
we maintain property and business interruption insurance, the proceeds of such
insurance may not be adequate to compensate us for all of our losses in such
an
event.
We
Are Dependent On The Management Experience Of Our Key
Personnel
We
are
dependent on the management experience and continued services of our executive
officers, including Howard W. Schwan, our President, John H. Schwan, our
Chairman and Stephen M. Merrick, our Chief Financial Officer, as well as
each of these other executive officers of the Company: Brent Anderson, Sam
Komar, Steve Frank and Timothy Patterson. We have an existing employment
agreement with Howard Schwan, dated January 1, 1997, which shall
automatically renew each year on July 1 unless terminated by either party.
The agreement includes confidentiality, inventions, non-compete and other
customary provisions. The loss of any of these executive officers would have
an
adverse effect on our business.
In
addition, our continued growth depends on our ability to attract and retain
experienced key employees. Competition for qualified employees is intense,
and
the loss of such persons, or an inability to attract, retain and motivate such
skilled employees, could have a material adverse effect on our results of
operations, financial condition and prospects. There can be no assurance that
we
will be able to retain our existing personnel or attract and retain additional
qualified employees.
Our
Principal Executive Officers Own A Majority Of Our Outstanding Common Stock,
Have Warrants To Purchase Additional Shares And Have Significant Influence
And
Control Over Our Business
Howard
W.
Schwan (our President), John H. Schwan (our Chairman) and Stephen M.
Merrick (our Chief Financial Officer), in combination, own approximately 49.3%
of the outstanding shares of common stock of the Company and have options and
warrants to purchase additional shares which, if exercised, would aggregate
55.0% of the shares then outstanding. As a result of such ownership, these
executives have the ability to exert significant influence and control on the
outcome of corporate transactions and other matters submitted to the Board
of
Directors or shareholders for approval, including mergers, consolidations and
the sale of all or substantially all of our assets, and also the power to
prevent or cause a change in control of the Company.
Financial
Risks
We
Have A High Level Of Debt Relative To Our Equity And Limited Working Capital,
Which Reduces Cash Available For Our Business Which May Adversely Affect
Our Ability To Obtain Additional Funds And Increases Our Vulnerability To
Economic Or Business Turndowns
We
have a
substantial amount of debt in relation to our shareholders’ equity. As of
September 30, 2006, we had $20,929,000 of debt outstanding and $3,975,000
in shareholders equity. These circumstances could have important adverse
consequences for our Company. For example, they could:
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Increase
our vulnerability to general adverse economic and industry
conditions;
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·
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Require
us to dedicate a substantial portion of our cash flow from operations
to
payments on our debt, thereby limiting our ability to fund working
capital, capital expenditures and other general corporate
purposes;
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Limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
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Place
us at a competitive disadvantage compared to our competitors who
may have
less debt and greater financial resources;
and
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Limit,
among other things, our ability to borrow additional
funds.
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A
Significant Amount Of Cash Will Be Required To Service Our Debt And Our Ability
To Generate Cash Depends On Many Factors Beyond Our
Control
Our
ability to service our debt and to fund our operations and planned capital
expenditures will depend on our financial and operating performance. This,
in
part, is subject to prevailing economic conditions and to financial, business
and other factors beyond our control. If our cash flow from operations is
insufficient to fund our debt service obligations, we may be forced to reduce
or
delay funding capital or working capital, marketing or other commitments or
to
sell assets, obtain additional equity capital or indebtedness or refinance
or
restructure our debt. These alternative measures may not be successful and
may
not permit us to meet our scheduled debt service obligations. In the absence
of
cash flow from operations sufficient to meet our debt service obligations,
we
could face substantial cash problems.
We
Are Subject To A Number Of Restrictive Debt Covenants That May Restrict Our
Business And Financing Activities
Our
credit facility contains restrictive debt covenants that, among other things,
restrict our ability to:
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Pay
dividends and make distributions;
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Make
certain investments;
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Use
assets as security in other
transactions;
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Enter
into affiliate transactions;
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Merge
or consolidate; or
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Transfer
and sell assets.
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In
addition, our credit facility also requires us to meet certain financial tests,
including (i) maintaining tangible net worth in excess of $3,500,000, (ii)
maintaining specified ratios of senior debt to EBITDA and (iii) maintaining
a
ratio of EBITDA to fixed charges. These restrictive covenants may limit our
ability to expand or pursue our business strategies by restricting, among other
things, our ability to fund capital investments, working capital needs,
marketing and sales programs, research and development, patent or copyright
licenses or other items which we would like to acquire or pursue in accordance
with our business strategies. The inability to pursue any of these items may
adversely affect our competitive position, financial condition or
prospects.
Our
ability to comply with the restrictions contained in our credit facility may
be
affected by changes in our business condition or results of operation, adverse
regulatory developments or other events beyond our control. A failure to comply
with these restrictions could result in a default under our credit facility
which, in turn, could cause our debt to become immediately due and payable.
If
our debt were to be accelerated, we cannot assure that we would be able to
repay
it. In addition, a default would give our lender the right to terminate any
commitment to provide us with additional funds.
Our
Common Stock May Be Affected By Limited Trading Volume And
May Fluctuate Significantly, Which May Affect Shareholders’ Ability To
Sell Shares Of Our Common Stock
There
has
been a limited public market for our common stock and a more active trading
market for our common stock may not develop. An absence of an active trading
market could adversely affect our shareholders’ ability to sell our common stock
in short time periods, or possibly at all. Our common stock has experienced,
and
is likely to experience in the future, significant price and volume
fluctuations, which could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes
in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially. These factors may
negatively impact shareholders’ ability to sell shares of CTI’s common
stock.
Our
Common Stock May Be Affected By Sales Of Short Sellers, Which
May Affect Shareholders’ Ability To Sell Shares Of Our Common
Stock
As
stated
above, our common stock has experienced, and is likely to experience in the
future, significant price and volume fluctuations. These fluctuations could
cause short sellers to enter the market from time to time in the belief that
CTI
will have poor results in the future. The market for our stock may not be stable
or appreciate over time and the sale of our common stock may negatively impact
shareholders’ ability to sell shares of CTI’s common stock.
Market
Risks
The
Company Is Exposed To Various Market Risks, Primarily Foreign Currency Risks
And
Interest Rate Risks
The
Company’s earnings are affected by changes in interest rates as a result of
variable rate indebtedness (excluding the portion of our mortgage and term
loans
covered by our interest rate swap agreement). If market interest rates for
our
variable rate indebtedness average one percent (1%) more than the interest
rate
actually paid for the three (3) months ending September 30, 2006 and 2005,
our interest rate expense would have increased, and income after income taxes
would have decreased by $14,000 and $9,500 for these periods, respectively.
If
market interest rates for our variable rate indebtedness average one percent
(1%) more than the interest rate actually paid for the nine months ending
September 30, 2006 and 2005, our interest rate expense would have
increased, and income after income taxes would have decreased by $41,000 and
$37,000 for these periods, respectively. These amounts are determined by
considering the impact of the hypothetical interest rates on our borrowings.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the
event
of a change of such magnitude, management would likely take actions to reduce
our exposure to such change. However, due to the uncertainty of the specific
actions we would take and their possible effects, the sensitivity analysis
assumes no change in our financial structure.
The
Company’s earnings and cash flows are subject to fluctuations due to changes in
foreign currency rates, particularly the Mexican peso and the British pound,
as
the Company produces and sells products in Mexico for sale in the United States
and other countries and the Company’s UK subsidiary purchases balloon products
from the Company in dollars. Also, the Mexican subsidiary purchases goods from
external sources in U.S. dollars and is affected by currency fluctuations in
those transactions. Substantially all of the Company’s purchases and sales of
goods for its operations in the United States are done in U.S. dollars. However,
the Company’s level of sales in other countries may be affected by currency
fluctuations. As a result, exchange rate fluctuations may have an effect on
sales and gross margins. Accounting practices require that the Company’s results
from operations be converted to U.S. dollars for reporting purposes.
Consequently, the reported earnings of the Company in future periods may be
affected by fluctuations in currency exchange rates, generally increasing with
a
weaker U.S. dollar and decreasing with a strengthening U.S. dollar. To date,
we
have not entered into any transactions to hedge against currency fluctuation
results.
We
have
performed a sensitivity analysis as of September 30, 2006 that measures the
change in the results of our foreign operations arising from a hypothetical
ten
percent (10%) adverse movement in the exchange rate of all of the currencies
the
Company presently has operations in. Using the results of operations for the
three months ending September 30, 2006 and 2005, for the Company’s foreign
operations as a basis for comparison, an adverse movement of ten percent (10%)
would create a potential reduction in the Company’s net income, or increase its
net loss before taxes, in the amount of $33,000 and $20,000 for each of those
periods, respectively. Using the results of operations for the nine months
ending September 30, 2006 and 2005, for the Company’s foreign operations as
a basis for comparison, an adverse movement of ten percent (10%) would create
a
potential reduction in the Company’s net income, or increase its net loss before
taxes, in the amount of $49,000 and $60,000 for each of those periods,
respectively.
The
Company is also exposed to market risk in changes in commodity prices in some
of
the raw materials it purchases for its manufacturing needs. However, we do
not
believe this presents a risk that would not have a material effect on the
Company’s results of operations or financial condition.
Risks
Related To This Offering
Future
Sales By Our Shareholders May Negatively Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales
of
our common stock in the public market following this offering could lower the
market price of our common stock. Sales may also make it more difficult for
us
to sell equity securities or equity-related securities in the future at a time
and price that our management deems acceptable or at all. Of the 2,142,097
shares of common stock outstanding as of December 11, 2006, 1,057,062 shares
of
common stock are, or will be, held by our “affiliates” and 1,079,389 shares of
common stock, which will be held by existing shareholders, including the
officers and directors, are “restricted securities” and may be resold in the
public market only if registered or pursuant to an exemption from registration.
Some of these shares may be resold under Rule 144.
Existing
Shareholders Will Experience Significant Dilution From Our Sale Of Shares Under
The Standby Equity Distribution Agreement
The
sale
of shares pursuant to the Standby Equity Distribution Agreement will have a
dilutive impact on our shareholders. For example, if the offering occurred
on
November 27, 2006 at an assumed offering price of $4.59 per share, as determined
under the Standby Equity Distribution Agreement, the new shareholders would
experience an immediate dilution in the net tangible book value of $2.36 per
share. Dilution per share at prices of $3.44, $2.30 and $1.15 per share would
be
$1.39, $0.41 and $(0.56), respectively.
Our
net
income per share could decrease in future periods, and the market price of
our
common stock could decline. In addition, the lower our stock price, the more
shares of common stock we will have to issue under the Standby Equity
Distribution Agreement to draw down the full amount. If our stock price is
lower, then our existing shareholders would experience greater
dilution.
The
Selling Stockholders Intend To Sell Their Shares Of Common Stock In The Market,
Which Sales May Cause Our Stock Price To Decline
The
selling shareholders intend to sell in the public market 403,500 shares of
common stock being registered in this offering. That means that up to 403,500
shares may be sold pursuant to this Registration Statement. Such sales may
cause
our stock price to decline. The officers and directors of CTI and those
shareholders who are significant shareholders as defined by the SEC will
continue to be subject to the provisions of various insider trading and Rule
144
regulations. If our stock price declines, the numbers of shares which CTI will
need to issue to Cornell Capital under the Standby Equity Distribution Agreement
to raise the same amount of funds will increase.
The
Sale Of Our Stock Under Our Standby Equity Distribution Agreement Could
Encourage Short Sales By Third Parties, Which Could Contribute To The Future
Decline Of Our Stock Price
In
some
cases the provision of a Standby Equity Distribution Agreement for companies
that are traded on the NASDAQ Capital Market (“NASDAQ-CM”) has the potential to
cause a significant downward pressure on the price of common stock. This is
especially the case if the shares being sold into the market exceed the market’s
desire to purchase the increased stock or if CTI has not performed in such
a
manner to show that the equity funds raised will be used to grow CTI. Such
an
event could place further downward pressure on the price of common stock. CTI
may request numerous draw downs pursuant to the terms of the Standby Equity
Distribution Agreement. Even if CTI uses the Standby Equity Distribution
Agreement to grow its revenues and profits or invest in assets which are
materially beneficial to CTI the opportunity exists for short sellers (i.e.
sellers who do not actually own our shares at the time of their sale) to
contribute to the future decline of CTI’s stock price. If there are significant
short sales of stock, the price decline that would result from this activity
will cause the share price to decline more, which, in turn, may cause current
owners of our stock to sell their shares; thereby contributing to sales of
stock
in the market. If there are more investors selling our stock then there are
investors desiring to purchase our stock, the market for our stock the price
will necessarily decline.
It
is not
possible to predict the circumstances whereby short sales could materialize
or
the price to which our stock price could drop.
The
Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower
Than The Prices Paid By Other People Participating In This
Offering
The
price
in this offering will fluctuate based on the prevailing market price of the
common stock on the NASDAQ-CM. Accordingly, the price you pay in this offering
may be higher or lower than the prices paid by other people participating in
this offering.
We
May Not Be Able To Access Sufficient Funds Under The Standby Equity
Distribution Agreement When Needed
We
anticipate that a portion of our financing needs will be funded through the
Standby Equity Distribution Agreement. No assurances can be given that our
Standby Equity Distribution Agreement financing will be available in sufficient
amounts or at all when needed, in part, because we are limited to a maximum
drawdown of $100,000 during any five (5) trading day period. In addition,
the number of shares being registered may not be sufficient to draw all funds
available to us under the Standby Equity Distribution Agreement. Based on the
assumed offering price of $4.59 and the 400,000 shares we are registering
pursuant to the SEDA, we would not be able to draw the entire $5 million
available under the Standby Equity Distribution Agreement. At this assumed
offering price, we will be able to draw $1,836,000 with the 400,000 shares being
registered. CTI would be required to register 689,325 additional shares at
this
assumed offering price to obtain the remaining $3,164,000 available under the
Standby Equity Distribution Agreement.
We
May Not Be Able To Draw Down Under The Standby Equity Distribution
Agreement If The Investor Holds More Than 9.9% Of Our Common
Stock
In
the
event Cornell Capital holds more than 9.9% of the then-outstanding common stock
of CTI, we will be unable to draw down on the Standby Equity Distribution
Agreement. Although Cornell Capital may not hold more than 9.9% of the
then-outstanding common stock of CTI at any one time, this restriction does
not
prevent Cornell Capital from selling some of its holdings and then receiving
additional shares. Therefore, Cornell Capital has, and may, sell more than
these
limits while never holding more than those limits. Currently, Cornell Capital
has beneficial ownership of 0% of our common stock and therefore we would be
able to make limited draw downs on the Standby Equity Distribution Agreement
so
long as Cornell Capital’s beneficial ownership remains below 9.9%. If Cornell
Capital’s beneficial ownership becomes 9.9% or more, we would be unable to draw
down on the Standby Equity Distribution Agreement. In that event, if we are
unable to obtain additional external funding or generate revenue from the sale
of our products, we could be forced to curtail or cease our operations.
Cornell
Capital May Sell Shares Of Our Common Stock During An Applicable Pricing
Period Under the Standby Equity Distribution Agreement Which Could Contribute
To
The Decline Of Our Stock Price
The
sale
of common stock to be acquired by Cornell Capital pursuant to an advance request
made by CTI under the Standby Equity Distribution Agreement during an applicable
pricing period could cause downward pressure on the price of our common stock
and, therefore, contribute to the decline of our stock price.
Business
Overview
We
develop, produce, market and sell two (2) principal lines of
products:
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Novelty
products, principally balloons, including metalized balloons, latex
balloons, punch balls and other inflatable toy items,
and
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Specialty
and printed films and flexible containers, for food packaging, specialized
consumer uses and various commercial
applications.
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We
focus
our business and efforts on the printing, processing and converting of plastic
film, and of latex, into finished products. We:
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Coat
and laminate plastic film. Generally, we adhere polyethylene film
to
another film such as nylon or
polyester.
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Print
plastic film and latex balloons. We print films, both plastic and
latex
with a variety of graphics for use as packaging film or for
balloons.
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Convert
printed plastic film to balloons.
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Convert
plastic film to flexible containers. These finished products are
used to
store and package food and for storage of a variety of personal
items.
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Convert
latex to balloons and other novelty
items.
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We
market
and sell metalized and latex balloons in the United States and in several other
countries. We supply coated, laminated and printed films to a number of
companies who generally convert these films into containers for the packaging
of
food and other items. We supply flexible containers to companies who (i) use
them for packaging of food or other items or (ii) market them to consumers
who
use them for the storage of personal items. We also market containers to and
through retail outlets for use by consumers with sealing devices to store food
items in their homes. In March 2006, we announced that we are completing
the development of, and will produce, market and sell a line of pouches for
use
by consumers to store food items. The pouches will include a resealable closure
system and a valve permitting the evacuation of air from the pouch by a small
pump device which we will also supply.
We
were
organized in 1976 and, initially, engaged in the business of manufacturing
“bag-in-box” plastic packaging systems. We sold our assets related to bag-in-box
packaging systems in 1985. In 1978, we began manufacturing metalized balloons
(sometimes referred to as “foil” balloons), which are balloons made of a base
material (usually nylon or polyester) having 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.
In
1985,
we began marketing latex balloons and, in 1988 we began manufacturing latex
balloons. In 1994, we sold our latex balloon manufacturing equipment to a
company in Mexico and entered into an arrangement for that company to
manufacture latex balloons for us. Since 1997, we have manufactured latex
balloons in Mexico through a majority-owned subsidiary.
We
market
and sell our metalized and latex balloons and related novelty items directly
to
retail stores and chains and through distributors, who in turn sell to retail
stores and chains. Our balloon and novelty products are sold to consumers
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
of
our metalized balloons contain printed characters, designs and social expression
messages, such as “Happy Birthday”, “Get Well Soon” and similar items. In a
number of cases, we obtain licenses for well-known characters and print those
characters and messages on our balloons. Currently, we maintain licenses for
Garfield®,
Face
Offs-Tudes®,
Miss
Spider and Sunny Patch Friends® and Andrea Mistretta. In the United Kingdom, we
maintain licenses on Postman Pat®,
The
Crazy Frog® and Dream Fairies®.
Balloons
and novelty items accounted for fifty-seven percent (57%) of our revenues in
2005. The remaining revenues are generated from the sale of laminated film
products, generally intended for use in the packaging of foods, liquids and
other materials. We provide laminated films, often printed film, to a number
of
customers who utilize the film to produce bags or pouches for the packaging
of
food, liquids and other items. We also produce finished products - pouches
and
bags - which are used for a variety of applications, including (i) as vacuumable
consumer storage devices for clothing and other household items, (ii) as
vacuumable pouches for household use in storage of food items, and (iii) as
“dunnage” items which, when inflated, cushion products in a package or
container. In 2005, our revenues from these products represented approximately
forty percent (40%) of our net revenues. For the nine months ending September
30, 2006, balloon and novelty items accounted for 63% of our sales.
We
are an
Illinois corporation with our principal offices and plant at 22160 N. Pepper
Road, Barrington, Illinois.
Business
Strategies
Our
essential business strategies are as follows:
· Focus
on our Core Assets and Expertise.
We have
been engaged in the development, production and sale of film products for thirty
(30) years and have developed assets, technology and expertise which, we
believe, enable us to develop, manufacture, market and sell innovative products
of high quality within our area of knowledge and expertise. We plan to focus
our
efforts in these areas which are our core assets and expertise - laminated
films, printed films, pouches and film novelty products - to develop new
products, to market and sell our products and to build our
revenues.
· Develop
Operating Efficiencies to Enhance our Profitability.
Over the
past two years, we have engaged in a program to reduce and control production
expenses, as well as selling, general and administrative expenses, in order
to
increase the efficiencies of our operations and to become profitable at current
levels of revenue. During 2005, we reduced our domestic production overhead
expenses by more than $1,460,000 compared to 2004 and we reduced our
consolidated SG&A expenses by approximately $1,200,000 from 2004 levels. We
intend to continue our efforts to control expenses, increase efficiencies and
to
become profitable. In the nine months ended September 30, 2006, the company
reduced domestic production overhead from 18.6% of net sales in 2005 to 17.6%
of
net sales in 2006.
In
the nine months ended September 30, 2006, the
company reduced consolidated SG&A expenses from 19.5% to 17.4% in
2006.
· Develop
New Products, Product Improvements and Technologies.
We work
constantly to develop new products, to improve existing products and to develop
new technologies within our core product areas, in order to enhance our
competitive position and our sales. In the novelty line, our development work
includes new designs, new character licenses and new product developments.
During 2005, we introduced more than eighty-five (85) new balloon designs and
obtained three new licensed character designs. We also developed and introduced
a device to amplify sound through a balloon so that voice and music can be
played and amplified using our Balloon Jamz™ balloon. In our commercial line,
over the past several years we have developed new pouch closure systems and
valves and new film methods for liquid packaging applications. We have received
thirteen (13) patents for these developments and have two (2) patent
applications pending.
· Develop
New Channels of Distribution and New Sales
Relationships.
In order
to increase sales, we endeavor to develop new channels of distribution and
new
sales relationships, both for existing and new products. During the past year,
we entered into a sales and marketing relationship for the marketing and sale
of
our newly developed and introduced universal vacuumable sealing bags. Recently,
we announced the development of a resealable bag with a valve and pump system
for household storage and vacuum sealing of food items. In March 2006, we
entered into a four (4)-year agreement with Illinois Tool Works,
Inc. (“ITW”), one of our top three (3) customers, to provide (i) all of
their requirements for a certain kind of pouch and (ii) all of their
requirements, subject to competitive pricing, for film for their use in the
production of certain pouches. In April 2006, we entered into a license
agreement with Rapak LLC (“Rapak”), also one of our top three (3) customers,
granting Rapak a license under a patent related to textured film and pouches,
and extending the term of an existing supply agreement with Rapak to
October 31, 2008.
Products
Metalized
Balloons.
We have
designed, produced and sold metalized balloons since 1979 and, we believe,
are
the second largest manufacturer of metalized balloons in the United States.
Currently, we produce over six hundred fifty (650) balloon designs, in different
shapes and sizes, including the following:
· Superloons®
- 18”
balloons in round or heart shape, generally made to be filled with helium and
remain buoyant for long periods. This is the predominant metalized balloon
size.
· Ultraloons®
- 34”
balloons made to be filled with helium and remain buoyant.
· Miniloons®-
9”
balloons made to be air-filled and sold on holder-sticks or for use in
decorations.
· Card-B-Loons®(4
1/2”)
- air-filled balloons, often sold on a stick, used in floral arrangements or
with a container of candy.
· Shape-A-Loons®
- shaped
balloons made to be filled with helium.
· Minishapes
- small shaped balloons designed to be air filled and sold on sticks as toys
or
inflated characters.
· Balloon
JamzTM
- 20” to
40” round and shaped balloons which emit and amplify sound through a speaker
attached to the balloon.
In
addition to size and shape, a principal element of the Company’s metalized
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. We maintain licenses for several characters, including
Garfield®,
Face
Offs-Tudes, Miss Spider and Sunny Patch Friends® and Andrea Mistretta, and in
the United Kingdom, Postman Pat®
,
The
Crazy Frog® and Dream Fairies®.
For a
period of three (3) years, we also manufactured and distributed certain licensed
designs under an arrangement with Hallmark Cards. This arrangement terminated
on
March 31, 2005.
Latex
Balloons.
Through
our majority-owned subsidiary in Guadalajara, Mexico, Flexo Universal, S.A.
de
C.V. (“Flexo Universal”), we manufacture latex balloons in six (6) shapes
and sizes and forty (40) colors. These balloons are marketed under the name
Partyloons®. We also manufacture toy balloon products including punch balls,
water bombs and “Animal Twisties.”
Packaging
Films.
We
produce and sell films that are utilized for the packaging of various products,
principally food products. We laminate, extrusion coat and print films and
sell
them to customers who utilize the films for packaging applications. Our
customers generally use these film products to convert them to bags or pouches
for the packaging of food and other products.
Pouches,
Bags and Other Custom Film Products.
We
produce a variety of completed film products, generally in the form of a bag
or
pouch. These products include (i) valved, resealable pouches for storage of
household items, (ii) vacuum sealable bags for food storage, (iii) resealable,
valved bags for storage and vacuum sealing of food items in the household,
(v)
“dunnage” bags (inflatable pouches used to cushion products in packages. In
March 2006, we announced that we will be offering a line of resealable,
valved bags for storage and vacuum sealing of food items in the household.
These
storage bags will function with a small hand or powered pump to evacuate air
when the bag is sealed.
Markets
Metalized
Balloons
The
metalized balloon came into existence in the late 1970s. During the 1980s,
the
market for metalized 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. Metalized
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. Metalized balloons
became part of the “social expression” industry, carrying graphics designs,
characters and messages like greeting cards. In the mid-1980s, we 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, discount 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
metalized balloons throughout the United States and in a number of other
countries.
Metalized
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.
Metalized
balloons are sold in the United States and foreign countries directly by
producers to retail outlets and through distributors and wholesalers. Often
the
sale of metalized 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.
Latex
Balloons
For
a
number of years, latex balloons and related novelty/toy latex items have been
marketed and sold throughout the United States and in most other countries.
Latex balloons are sold as novelty/toy items, for decorative purposes, as part
of floral designs and as party goods and favors. In addition to standard size
and shape balloons, inflatable latex items include punch balls, water bombs,
balloons to be twisted into shapes, and other specialty designs. Often, latex
balloons included printed messages or designs.
Latex
balloons are sold principally in retail outlets, including party goods stores,
general merchandise stores, discount chains, gift stores and drugstore chains.
Balloons are also purchased by balloon decorators and floral outlets for use
in
decorative or floral designs. Latex balloons are sold both through distributors
and directly to retail outlets by the producers.
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.
Printed
and Specialty Films
The
industry and market for printed and specialty films is fragmented and includes
many participants. There are hundreds of manufacturers of printed and specialty
film products in the United States and in other markets. In many cases,
companies who provide food and other products in film packages also produce
or
process the films used for their packages. The market for the Company’s film
products consists principally of companies who utilize the films for the
packaging of their products, including food products and other items. In
addition to the packaging of food products, flexible containers are used for
medical purposes (such as colostomy bags, containers for saline solution and
other items), “dunnage” (to cushion products being packaged), storage of
personal and household items and other purposes.
Flexible
Containers/Pouches
The
market for flexible containers and pouches is large and diverse. Many companies
engaged in the production of food items package their products in flexible
containers or pouches, and, therefore, represent a market for these containers.
Many of these companies purchase film - often printed film - and convert the
film to pouches or packages at their own facilities while others purchase
completed containers from suppliers.
Flexible
containers and pouches are sold and utilized in the consumer market in numerous
forms. They include simple open-top plastic bags, resealable bags and zippered
bags. The market also includes containers and pouches of special design or
purpose, including vacuumable bags for storage of food or household items,
medical bags, or commercial uses.
Marketing,
Sales and Distribution
Balloon
Products
We
market
and sell our metalized balloon, latex balloon and related novelty products
throughout the United States and in a number of other countries. We maintain
a
marketing, sales staff and support staff of ten (10) individuals and a customer
service department of four (4) individuals. European sales are conducted by
CTI
Balloons, the Company’s subsidiary located in Rugby, England. Flexo Universal
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.
We
sell
and distribute our balloon products (i) by our employed staffs of sales and
customer service personnel in the United States, Mexico and the UK, (ii) through
a network of distributors and wholesalers in the United States, Mexico and
the
UK, (iii) through several groups of independent sales representatives and (iv)
to selected retail chains. The distributors and wholesalers are generally
engaged principally in the sale of balloons and related products (including
such
items as plush toys, mugs, containers, floral supplies and other items) and
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.
Our
largest customer for balloons during 2005 was Dollar Tree Stores. Sales to
this
chain in 2005 represented $3,987,000 or approximately fourteen percent (14%)
of
our net sales. For the nine months ended September 30, 2006 sales to this chain
represented $5,755,000 or approximately 22% of net sales.
For
a
period of three years, we maintained a relationship with Hallmark Cards under
which we (i) produced balloons of Hallmark designs, and of designs licensed
by
Hallmark, under authority from Hallmark, (ii) sold such balloons, as well as
latex balloons, to Hallmark for resale by Hallmark, and (iii) sold and
distributed these balloon designs to customers in the United States. This
arrangement and the agreements related to it expired and were terminated on
March 31, 2005. We continue to sell balloons bearing these designs from our
inventory during an eighteen (18) month sell-off period. Our domestic sales
of
balloon products to Hallmark during 2004 were $3,421,000 during 2005 were
$306,000, and during the nine months ended September 30, 2006 were
negligible.
We
engage
in a variety of advertising and promotional activities to promote the sale
of
our balloon products. Each year, we produce a complete catalog of our balloon
products, and also prepare various flyers and brochures for special or seasonal
products, which we disseminate to thousands of customers, potential customers
and others. We participate in several trade shows for the gift, novelty, balloon
and other industries and advertise in several trade and other
publications.
Printed
and Specialty Films
We
market
and sell printed and laminated films directly and through independent sales
representatives throughout the United States. We sell laminated and printed
films to companies that utilize these films to produce packaging for a variety
of products, including food products, in both liquid and solid form, such as
cola syrup, coffee, juices and other items. We seek to identify and maintain
customer relationships in which we provide value-added in the form of technology
or systems. Our largest customer for film products is Rapak, L.L.C. (“Rapak”) to
whom we provide a patented embossed film, as well as other film products. During
2005, our sales to Rapak totaled $6,860,000, representing approximately
twenty-four percent (24%) of our net sales and during the nine months ended
September 30, 2006 sales were $5,294,000 representing approximately 21% of
our net sales.Under
our
continuing agreement with Rapak, through October 31, 2008, Rapak is
committed to purchase at least sixty-five percent (65%) of its requirements
for
embossed film from us.
Flexible
Containers/Pouches
We
market
flexible containers and pouches to various companies for commercial packaging
purposes and we market lines of consumer storage packages both to a principal
customer and through a sales and marketing agent to retail chains and
outlets.
We
produce consumer storage bags for ITW Space Bag, a division of Illinois Tool
Works, Inc. (“ITW”) During 2005, ITW was our largest customer for pouches. Our
sales of pouches to them in 2005 were $3,889,000, representing approximately
thirteen percent (13%) of our net sales and during the nine months ended
September 30, 2006 sales were $2,158,000 representing approximately 8% of
net sales.. In March 2006, we entered into a four-year agreement with ITW
under which we will supply all of their requirements in North America for
certain of their pouches which they market under the name Space Bag® and also
are to supply their requirements of film for certain of the pouches which they
produce.
During
2005, we introduced a line of universal vacuumable bags for household storage
of
food products. We marketed these products through a marketing and sales firm,
to
retail stores and chains. These bags are designed to be used with existing
vacuum and sealing devices. In March 2006, we announced the planned
introduction of new household food storage system including a re-sealable bag
incorporating a valve and a hand pump to evacuate air from the bag when the
bag
is sealed.
Production
And Operations
We
conduct our operations at four facilities: (i) our headquarters, offices and
plant at Barrington, Illinois, consisting of a total of approximately 75,000
square feet of office, production and warehouse space, (ii) a warehouse in
Cary,
Illinois, consisting of approximately 16,000 square feet of space, (iii) a
plant, offices and warehouse in Guadalajara, Mexico, consisting of approximately
43,000 square feet of office, warehouse and production space and (iv) an office
and warehouse facility at Rugby, England, consisting of approximately 16,000
square feet of space.
We
conduct production operations at our plants in Barrington, Illinois, and
Guadalajara, Mexico. At our plants, our production operations include (i)
lamination and extrusion coating of films, (ii) slitting of film rolls, (iii)
printing on film and on latex balloons, (iv) converting of film to completed
products including balloons, flexible containers and pouches and (v) production
of latex balloon products. We perform all of the lamination, extrusion coating
and slitting activities in our Barrington, Illinois, plant and produce all
of
our latex balloon products at our Guadalajara, Mexico, plant. We print films
in
Barrington, Illinois, and we print latex balloons in Guadalajara,
Mexico.
We
warehouse raw materials at our plants in Barrington, Illinois, and Guadalajara,
Mexico, and we warehouse finished goods at our facilities in Barrington,
Illinois, Cary, Illinois, Guadalajara, Mexico and Rugby, England. We maintain
customer service and fulfillment operations at each of our warehouse locations.
We conduct sales operations for the United States and for all other markets,
except those handled by our Mexico and England facilities, in the Barrington,
Illinois facility. Sales for Mexico and Latin America are handled in our
Guadalajara, Mexico, facility and sales for the United Kingdom and Europe are
handled at our Rugby, England, facility.
We
maintain a graphic arts and development department at our Barrington, Illinois,
facility which designs our balloon products and graphics. Our 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.
We
conduct administrative and accounting functions at our headquarters in
Barrington, Illinois, and at our facilities in Guadalajara, Mexico, and Rugby,
England.
Raw
Materials
The
principal raw materials we use in manufacturing our products are (i) petroleum
or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii)
latex and (iv) printing inks. The cost of these raw materials represented
forty-one percent (41%) of our net revenues in 2005. During the nine months
ended September 30, 2006, the cost of these raw materials increased to 45%
of
our net revenues. Because much of the raw materials we utilize are based on
petroleum or natural gas, we have experienced fluctuation in pricing, in
relation to the fluctuation of availability and pricing of these source
commodities. To some degree, we have been able to increase the pricing of our
products in relation to changes in our costs of raw materials. However, during
the past year, we have not been able to recover all raw materials price
increases by increasing the price of our products and we are subject to the
risk
that our margins may be negatively affected by changes in the price of petroleum
or natural gas-based raw materials. While we currently purchase our raw
materials from a relatively limited number of sources, films, resin and inks
are
available from numerous sources and, in the past, we have generally been able
to
obtain a sufficient supply of raw materials. However, during August and
September 2005, the petrochemical industry suffered facility damage,
production disruptions and transportation shortages due to the impact of two
(2)
Gulf Coast hurricanes. As a result, both the price and availability of petroleum
and natural gas-based products were affected. While we were generally able
to
obtain a sufficient supply of raw materials to meet our needs during this time,
prices of raw materials escalated rapidly and substantially; hence, the risk
of
shortages of raw materials supply existed. There can be no assurance that the
price of such raw materials, and their availability, will not be affected
similarly in the future and such events could have a material adverse effect
on
the business of the Company.
Information
Technology Systems
Our
corporate headquarters in Barrington, Illinois, and our warehouse facility
in
Cary, Illinois, are serviced by a PC-based local area network. We connect the
facilities via a high speed T1 line that carries both voice and data. The
PC-based network incorporates both Novell and Microsoft servers. Access to
the
network is available to all employees but is secured using password
authentication. The network allows us to leverage printing resources, create
shared file areas for cross-departmental functions and allows for a single
source backup of critical business files. On the network we run Macola financial
system software. Macola is a modular software system, of which we use the
general ledger, order entry, inventory management, purchase order, electronic
data exchange and custom report writing modules. Internal and external employee
communications are handled by industry standard Microsoft Exchange email,
allowing us to communicate with customers and vendors all over the world. We
also provide a secure, firewall protected T1 connection to the Internet so
that
employees can research issues, support customers and securely move
data.
At
each
of our Mexico and England facilities, we operate server computers and local
area
networks, accessible to employees at those facilities. At each of those
facilities, we operate separate integrated financial, order entry and inventory
management systems.
Competition
The
balloon and novelty industry is highly competitive, with numerous competitors.
We believe there are presently six principal manufacturers of metalized balloons
whose products are sold in the United States including Anagram International,
Inc., Pioneer Balloon, Convertidora International, Barton Enterprises and
Betallic. Several companies market and sell metalized balloons designed by
them
and manufactured by others for them.
We
believe there are approximately five (5) manufacturers of latex balloons whose
products are sold in the United States and numerous others whose products are
sold in other countries.
The
market for films, 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 that are the same or similar to
those offered by us and our ability to compete depends on many factors within
and outside our control. There are a number of well-established competitors
in
each of our product lines, several of which possess substantially greater
financial, marketing and technical resources and have established, extensive,
direct and indirect channels of distribution for their products and services.
As
a result, such competitors may be able to 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
we
can. Competitive pressures include, among other things, price competition,
new
designs and product development and copyright licensing.
Patents,
Trademarks And Copyrights
We
have
developed or acquired a number of intellectual property rights which we believe
are significant to our business.
Copyright
Licenses.
We
maintain licenses on certain popular characters and designs for our balloon
products. We presently maintain seven (7) licenses and produce balloon designs
utilizing the characters or designs covered by the licenses. Licenses are
generally maintained for a one (1) or two (2) year term, although the Company
has maintained long term relationships with several of its licensors and has
been able to obtain renewal of its license agreements with them.
Trademarks.
We own
twelve (12) registered
trademarks in the United States relating to our balloon products. Many of these
trademarks are registered in foreign countries, principally in the European
Union. We have a license on the Simply Smart™ trademark for our household
storage line of products.
Patent
Rights.
We own,
or have license rights under, or have applied for, patents related to our
balloon products, certain film products and certain flexible container products.
These include (i) ownership of two (2) patents, and a license under a third,
relating to self-sealing valves for metalized balloons and methods of making
balloons with such valves, (ii) several metalized balloon design patents, (iii)
patents and applications related to the design and structure of, and method
of
inserting and affixing, zipper-closure systems in a bag, (iv) patents related
to
one-way valves for pouches, (v) a patent related to methods of embossing film
and utilizing such film to produce pouches with fitments, and (vi) patent
applications related to vacuumable storage bags with fitments.
Research
And Development
We
maintain a product development and research department of five (5) individuals
for the development or identification of new products, product components and
sources of supply. Research and development includes (i) creative product
development, (ii) creative marketing and (iii) engineering development. During
each of the fiscal years ended December 31, 2005, 2004, 2003, we estimate
that the total amount spent on research and development activities was
approximately $224,000, $246,000 and $335,000, respectively. As of September
30,
2006 we maintain a product development and research department of six
individuals. During the nine months ended September 30, 2006, we estimate that
the total amount spent on research and development activities was
$208,000.
Employees
As
of
September 30, 2006, the Company had eighty-five (85) full-time employees in
the
United States, of whom fifteen (15) are executive or supervisory, four (4)
are
in sales, fifty-four (54) are in manufacturing or warehouse functions and twelve
(12) are clerical. As of that same date, we had ten (10) full-time employees
in
England, of whom two (2) are executive or supervisory, two (2) are in sales,
four (4) are in warehousing and two (2) are clerical. At Flexo Universal, our
Mexico subsidiary, as of December 31, 2005, we had one hundred eighty-five
(185) full-time employees, of whom nineteen (19) are executive or supervisory,
two (2) are in sales, one hundred fifty-six (156) are in manufacturing and
eight
(8) are clerical. The Company is not a party to any collective bargaining
agreement in the United States, has not experienced any work stoppages and
believes that its relationship with its employees is satisfactory.
Regulatory
Matters
Our
manufacturing operations in the United States are subject to the U.S.
Occupational Safety and Health Act (“OSHA”). We believe we are in material
compliance with OSHA. The Company generates liquid, gaseous and solid waste
materials in its operations in Barrington, Illinois and the generation, emission
or disposal of such waste materials are, or may be, subject to various federal,
state and local laws and regulations regarding the generation, emission or
disposal of waste materials. We believe we are in material compliance with
applicable environmental rules and regulations. Several states have enacted
laws
limiting or restricting the release of helium filled metalized balloons. We
do
not believe such legislation will have any material effect on our
operations.
International
Operations
We
sell
balloon products in a number of countries outside the United States. Sales
of
these products for the United Kingdom and Europe are handled by our facility
and
personnel in Rugby, England, and for Mexico and Latin America are handled by
our
facility and personnel in Guadalajara, Mexico. In other countries, we sell
balloon products through distributors located in those countries. We conduct
production, packaging, warehousing and sales operations in Mexico and
warehousing and sales operations in the United Kingdom. We rely and are
dependent on our operations in Mexico for the supply of latex balloons in the
United States, Mexico, Europe and other markets. Interruption of that supply
would have a material adverse effect on the business of the
Company.
Our
domestic and international sales and assets by area over the period 2003 -
2005
have been as follows:
|
|
United
States
|
|
United
Kingdom
|
|
Mexico
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended 9/30/06
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
21,016,000
|
|
$
|
2,265,000
|
|
$
|
4,696,000
|
|
|
($2,221,000
|
)
|
$
|
25,756,000
|
|
Operating
income
|
|
|
1,373,000
|
|
|
75,000
|
|
|
478,000
|
|
|
|
|
|
1,926,000
|
|
Net
income
|
|
|
322,000
|
|
$
|
83,000
|
|
|
338,000
|
|
|
|
|
|
743,000
|
|
Total
Assets
|
|
$
|
23,146,000
|
|
$
|
2,630,000
|
|
$
|
5,146,000
|
|
|
($6,003,000
|
)
|
$
|
24,919,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended 12/31/05
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,564,000
|
|
$
|
2,573,000
|
|
$
|
4,536,000
|
|
|
($1,483,000
|
)
|
$
|
29,190,000
|
|
Operating
income (loss)
|
|
|
602,000
|
|
|
290,000
|
|
|
(240,000
|
)
|
|
|
|
|
652,000
|
|
Net
(loss) income
|
|
|
(342,000
|
)
|
$
|
220,000
|
|
|
(211,000
|
)
|
|
|
|
|
(333,000
|
)
|
Total
Assets
|
|
$
|
21,343,000
|
|
$
|
2,122,000
|
|
$
|
4,818,000
|
|
|
($4,747,000
|
)
|
$
|
23,536,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended 12/31/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,855,000
|
|
$
|
2,664,000
|
|
$
|
4,890,000
|
|
|
($3,216,000
|
)
|
$
|
37,193,000
|
|
Operating
income
|
|
|
(92,000
|
)
|
|
121,000
|
|
|
(31,000
|
)
|
|
(48,000
|
)
|
|
(50,000
|
)
|
Net
(loss) income
|
|
|
(2,595,000
|
)
|
|
223,000
|
|
|
(59,000
|
)
|
|
(48,000
|
)
|
|
(2,479,000
|
)
|
Total
Assets
|
|
$
|
24,072,000
|
|
$
|
1,989,000
|
|
$
|
5,319,000
|
|
|
($3,492,000
|
)
|
$
|
27,888,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended 12/31/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,687,000
|
|
$
|
2,415,000
|
|
$
|
4,003,000
|
|
|
($2,845,000
|
)
|
$
|
36,260,000
|
|
Operating
income
|
|
|
(216,000
|
)
|
|
191,000
|
|
|
(102,000
|
)
|
|
(96,000
|
)
|
|
(223,000
|
)
|
Net
(loss) income
|
|
|
(883,000
|
)
|
|
163,000
|
|
|
249,000
|
|
|
(95,000
|
)
|
|
(566,000
|
)
|
Total
Assets
|
|
$
|
27,603,000
|
|
$
|
1,412,000
|
|
$
|
5,476,000
|
|
|
($4,221,000
|
)
|
$
|
30,270,000
|
|
Properties
We
own
our principal plant and offices located in Barrington, Illinois, approximately
forty-five (45) miles northwest of Chicago, Illinois. The facility includes
approximately 75,000 square feet of office, manufacturing and warehouse space.
This facility is subject to a mortgage loan in the principal amount of
$2,800,000, having a term of five (5) years, with payments amortized over
twenty-five (25) years.
We
lease
a warehouse facility in Cary, Illinois under a two (2) year lease at the base
rate of $6,000 per month and at a total monthly cost of approximately $8,000.
The lease expires on September 30, 2007. The facility includes 16,306
square feet of warehouse and office space which is utilized principally for
the
warehousing of balloon inventory.
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 in 2019.
This facility is utilized to warehouse balloon products and to manage and
service the Company’s operations in England and Europe.
In
January 2003, Flexo Universal entered into a five (5) year lease agreement
for the lease of approximately 43,000 square feet of manufacturing, warehouse
and office space in Guadalajara, Mexico at the cost of $17,000 per
month.
We
believe that our properties have been adequately maintained, are in generally
good condition and are suitable for our business as presently conducted. We
believe our existing facilities provide sufficient production capacity for
our
present needs and for our presently anticipated needs in the foreseeable future.
We also believe that, with respect to leased properties, upon the expiration
of
our current leases, we will be able to either secure renewal terms or to enter
into leases for alternative locations at market terms.
Legal
Proceedings
On
September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South, Inc.
and Airgas-East, Inc. filed a joint action against CTI for claimed breach of
contract in the Circuit Court of Lake County, Illinois claiming as damages
the
aggregate amount of $162,242. The Company filed an answer denying the material
claims of the complaint, affirmative defenses and a counterclaim. In the action,
the plaintiffs claimed that CTI owed them certain sums for (i) helium sold
and
delivered, (ii) rental charges with respect to helium tanks and (iii)
replacement charges for tanks claimed to have been lost. On November 2,
2004, this matter was settled. The amount agreed to be paid by the Company
in
settlement totaled $100,000. The entire amount of the settlement payment has
been made.
On
June 4, 2004, Spar Group, Inc. initiated an arbitration proceeding in New
York City against the Company. In the proceeding, Spar Group claimed that there
was due from the Company to Spar Group a sum for services rendered in the amount
of $180,043, plus interest. Spar Group claimed to have rendered services to
the
Company in various Eckerd stores with respect to the display and ordering of
metalized and latex balloons for sale in those stores. The Company filed an
answer denying liability with respect to the claim and asserted a counterclaim
for damages against Spar Group for breach of its agreement to provide such
services. On January 13, 2005, this matter was settled. The amount agreed
to be paid by the Company in settlement totaled $100,000 and such amount has
been paid in full.
In
addition, the Company is also party to certain lawsuits or claims arising in
the
normal course of business. The ultimate outcome of these matters is unknown,
but
in the opinion of management, we do not believe any of these proceedings will
have, individually or in the aggregate, a material adverse effect upon our
financial condition, future results of operation or cash flows.
On
December 20, 2006, Pliant Corporation filed an
action against the Company in the Circuit Court of Cook County, Illinois. In
the
action Pliant claims that there is due from the Company to Pliant the sum of
$245,000 for goods sold and delivered by Pliant to the Company as well as
interest on such amount. The Company was served with the complaint in the action
on December 22, 2006. Management of the Company is evaluating the complaint
and
intends to vigorously defend the action. Management believes that the Company
has established adequate reserves regarding the claim.
SELLING
SHAREHOLDERS
The
following table presents information regarding the selling shareholders. The
selling shareholders are the entities who have assisted in or provided financing
to CTI. A description of the selling shareholders’ relationship to CTI and how
the selling shareholders acquired the shares to be sold in this offering is
detailed in the information immediately following this table.
|
|
Shares
Beneficially Owned Before Offering
|
|
Percentage
Of Outstanding Shares Beneficially Owned Before
Offering(1)
|
|
Shares
To Be Acquired Under The Standby Equity Distribution
Agreement
|
|
Percentage
Of Outstanding Shares To Be Acquired Under The Standby Equity Distribution
Agreement
|
|
Shares
To Be Sold In The Offering
|
|
Percentage
Of Shares Beneficially Owned After Offering(1)
|
|
Shares
Acquired in Financing Transactions with CTI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornell
Capital Partners, LP
|
|
|
0
|
|
|
*
|
|
|
400,000
|
|
|
15.74
|
%
|
|
400,000
|
(2)
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newbridge
Securities Corporation
|
|
|
3,500
|
(3)
|
|
*
|
|
|
0
|
|
|
0
|
%
|
|
3,500
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,500
|
(3)
|
|
*
|
|
|
400,000
|
|
|
15.74
|
%
|
|
403,500
|
|
|
0
|
%
|
*
|
Less
than one percent (1%).
|
(1)
|
Applicable
percentage of ownership is based on 2,142,097 shares
of common stock outstanding as of Dceember 11, 2006, together with
securities exercisable or convertible into shares of common stock
within
sixty (60) days of December 11, 2006, for each shareholder.
Beneficial ownership is determined in accordance with the rules of
the SEC
and generally includes voting or investment power with respect to
securities. Shares of common stock subject to securities exercisable
or
convertible into shares of common stock that are currently exercisable
or
exercisable within sixty (60) days of December 11, 2006 are deemed to
be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person,
but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Note that affiliates are subject to
Rule
144 and Insider trading regulations - percentage computation is for
form
purposes only.
|
(2)
|
Includes
the 400,000 shares that may be acquired by Cornell Capital under
the
Standby Equity Distribution
Agreement.
|
(3)
|
Includes
3,500 Shares issued in connection with the 2006 Standby Equity
Distribution Agreement.
|
The
following information contains a description of each selling shareholder’s
relationship to CTI and how each selling shareholder acquired the shares to
be
sold in this offering. None of the selling shareholders have held a position
or
office, or had any other material relationship, with CTI, except as follows:
Shares
Acquired In Financing Transactions With CTI
Cornell
Capital Partners, LP.
Cornell
Capital is the investor under the Standby Equity Distribution Agreement. All
investment decisions of, and control of, Cornell Capital are held by its general
partner, Yorkville Advisors, LLC (“Yorkville Advisors”). Mr. Mark
Angelo, the managing member of Yorkville Advisors, makes the investment
decisions on behalf of and controls Yorkville Advisors. Cornell Capital acquired
all shares being registered in this offering in financing transactions with
CTI.
Those transactions are explained below:
|
·
|
Standby
Equity Distribution Agreement.
On
June 6, 2006 (the “Closing Date”), the Company entered into a Standby
Equity Distribution Agreement (also referred to herein as the “SEDA”) with
Cornell Capital pursuant to which the Company may, at its discretion,
periodically sell to Cornell Capital shares of its common stock,
no par
value per share for a total purchase price of up to Five Million
Dollars
($5,000,000). For each share of common stock purchased under the
SEDA, Cornell Capital will pay to the Company one hundred percent
(100%)
of the lowest volume weighted average price (as quoted by Bloomberg,
LP)
of the Company’s common stock on the principal market (whichever is
at such time the principal trading exchange or market for the common
stock) during the five (5) consecutive trading days after the Advance
Notice Date (as such term is defined in the SEDA). However, the Company
and Cornell Capital have agreed that the Company will not sell to
Cornell
Capital in excess of 400,000 shares unless and until the Company
shall
have obtained shareholder approval for such sales.
|
Cornell
will retain five percent (5%) of each advance under the SEDA. The Company paid
to Yorkville Advisors a structuring fee equal to Fifteen Thousand Dollars
($15,000) on the Closing Date and shall pay Five Hundred Dollars ($500) to
Yorkville Advisors on each Advance Date directly out of the gross proceeds
of
each Advance (as such terms are defined in the SEDA). Cornell’s obligation to
purchase shares of common stock under the SEDA is subject to certain conditions,
including, without limitation: (a) the Company obtaining an effective
registration statement for shares of its common stock sold under the SEDA
pursuant to that certain Registration Rights Agreement dated as of the Closing
Date and (b) the amount for each Advance as designated by the Company in the
applicable Advance Notice shall not be more than One Hundred Thousand Dollars
($100,000).
Newbridge
Securities Corporation. Newbridge
Securities Corporation is an unaffiliated registered broker-dealer that has
been
retained by us. For its services in connection with the Standby Equity
Distribution Agreement, Newbridge Securities Corporation received a fee paid
by
the issuance of 3,500 shares of common stock of the Company. These shares are
being registered in this offering. All investment decisions of Newbridge
Securities Corporation are made by its President, Guy Amico.
STANDBY
EQUITY DISTRIBUTION AGREEMENT
Summary
On
June 6, 2006, we entered into a Standby Equity Distribution Agreement with
Cornell Capital pursuant to which we may, at our discretion, periodically sell
to Cornell Capital shares of common stock for a total purchase price of up
to $5
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital will pay one hundred percent (100%)
of the lowest volume weighted average price (as quoted by Bloomberg, LP) of
our
common stock on the NASDAQ Capital Market or other principal market on which
our
common stock is traded for the five (5) days immediately following the
notice date. The number of shares purchased by Cornell Capital for each advance
is determined by dividing the amount of each advance by the purchase price
for
the shares of common stock. Furthermore, Cornell Capital will receive five
percent (5%) of each advance in cash under the Standby Equity Distribution
Agreement as an underwriting discount. Cornell’s obligation to purchase shares
of our common stock under the Agreement is subject to certain conditions,
including: (i) we shall have obtained an effective registration statement for
the shares of common stock sold to Cornell under the Agreement and (ii) the
amount of each advance requested by us under the Agreement shall not be more
than $100,000.
Cornell
Capital is a private limited partnership whose business operations are conducted
through its general partner, Yorkville Advisors, LLC. In addition, we engaged
Newbridge Securities Corporation, a registered broker-dealer, as our placement
agent in connection with the Standby Equity Distribution Agreement. For its
services, Newbridge received 3,500 shares of our common stock on or about
June 6, 2006, equal to approximately $11,200 based on our stock price of
$3.20 when the shares were issued on June 26, 2006. The effectiveness of
the sale of the shares under the Standby Equity Distribution Agreement was
conditioned upon us registering the shares of common stock with the SEC and
obtaining all necessary permits or qualifying for exemptions under applicable
state law. The costs associated with this registration will be borne by the
Company. Except as stated above, there are no other significant closing
conditions to draws under the Standby Equity Distribution
Agreement.
Standby
Equity Distribution Agreement Explained
Pursuant
to the Standby Equity Distribution Agreement, we may periodically sell shares
of
common stock to Cornell Capital to raise capital to fund our working capital
needs. The periodic sale of shares is known as an advance. We may request an
advance every five (5) trading days. A closing will be held the first trading
day after the pricing period at which time we will deliver shares of common
stock and Cornell Capital will pay the advance amount. There are no closing
conditions imposed on CTI for any of the draws other than that CTI has filed
its
periodic and other reports with the SEC, has delivered the stock for an advance
the trading of CTI’s common stock has not been suspended. We may request
advances under the Standby Equity Distribution Agreement until Cornell Capital
has advanced $5 million or twenty-four (24) months after the effective date
of
this Registration Statement, whichever occurs first. It is unlikely that we
will
be able to draw the entire amount of $5 million before twenty-four (24) months
after the effective date of this Registration Statement, given the limitations
on the size and frequency with which we may request advances from Cornell
Capital, unless our stock price increases significantly.
The
amount of each advance is subject to a maximum amount of $100,000, and we may
not submit an advance within five (5) trading days of a prior advance. The
amount available under the Standby Equity Distribution Agreement is not
dependent on the price or volume of our common stock. Our ability to request
advances is conditioned upon us registering the shares of common stock with
the
SEC. In addition, we may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital owning more than
9.9% of our outstanding common stock. Cornell Capital’s current beneficial
ownership of CTI common stock is 0%. We would be permitted to make draws on
the
Standby Equity Distribution Agreement only so long as Cornell Capital’s
beneficial ownership of our common stock remains lower than 9.9% and, therefore,
a possibility exists that Cornell Capital may own more than 9.9% of CTI’s
outstanding common stock at a time when we would otherwise plan to make an
advance under the Standby Equity Distribution Agreement.
We
do not
have any agreements with Cornell Capital regarding the distribution of such
stock, although Cornell Capital has indicated that it intends to promptly sell
any stock received under the Standby Equity Distribution Agreement.
We
cannot
predict the actual number of shares of common stock that will be issued pursuant
to the Standby Equity Distribution Agreement, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions, and
we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. We are registering 400,000 shares of common stock
for
the sale under the Standby Equity Distribution Agreement. Assuming an offering
price of $4.59 per share, we will receive gross proceeds of and be able to
utilize $1,836,000 of the $5 million available under the Standby Equity
Distribution Agreement. These shares would represent approximately 15.74% of
our
outstanding common stock upon issuance. The Company and Cornell have agreed
that
the Company will not sell to Cornell Capital in excess of 400,000 shares unless
and until the Company shall have obtained shareholder approval for such sales.
CTI would be required to register 689,825 additional
shares at the assumed offering price of $4.59 per share to obtain the $5 million
available under the Standby Equity Distribution Agreement. In order to access
all funds available to us under the Standby Equity Distribution Agreement with
the 400,000 shares being registered in this offering, the average price of
shares issued under the Standby Equity Distribution Agreement would need to
be
$12.50 or an approximately 2.72 times our stock price as of November 27,
2006.
There
is
an inverse relationship between our stock price and the number of shares to
be
issued under the Standby Equity Distribution Agreement. That is, as our stock
price declines, we would be required to issue a greater number of shares under
the Standby Equity Distribution Agreement for a given advance. This inverse
relationship is demonstrated by the following tables, which show the net cash
to
be received by CTI and the number of shares to be issued under the Standby
Equity Distribution Agreement at an assumed offering price, as determined under
the Standby Equity Distribution Agreement, of $4.59 per share and twenty-five
percent (25%), fifty percent (50%) and seventy-five percent (75%)
discounts to the assumed offering price.
Net
Cash To The Company
|
|
Assumed
Offering
Price
|
|
75%
of Assumed Offering Price
|
|
50%
of Assumed Offering Price
|
|
25%
of Assumed Offering Price
|
|
Purchase
Price:
|
|
$
|
4.59
|
|
$
|
3.44
|
|
$
|
2.30
|
|
$
|
1.15
|
|
No. of
Shares(1):
|
|
|
400,000
|
|
|
400,000
|
|
|
400,000
|
|
|
400,000
|
|
Total
Outstanding(2):
|
|
|
2,542,097
|
|
|
2,542,097
|
|
|
2,542,097
|
|
|
2,542,097
|
|
Percent
Outstanding(3):
|
|
|
15.74
|
%
|
|
15.74
|
%
|
|
15.74
|
%
|
|
15.74
|
%
|
Gross
Cash to CTI:
|
|
$
|
1,836,000
|
|
$
|
1,376,000
|
|
$
|
920,000
|
|
$
|
460,000
|
|
Net
Cash to CTI(4):
|
|
$
|
1,659,200
|
|
$
|
1,222,200
|
|
$
|
789,000
|
|
$
|
352,000
|
|
(1)
|
Represents
the number of shares of common stock registered in the accompanying
Registration Statement, which may be issued to Cornell Capital under
the
SEDA at the prices set forth in the table. Does not represent the
3500
shares issued to Newbridge Securities pursuant to the Placement Agent
Agreement in connection with the
SEDA.
|
(2)
|
Represents
the total number of shares of common stock outstanding at December
11,
2006 after the issuance of the shares to Cornell Capital under the
SEDA.
|
(3)
|
Represents
the shares of common stock to be issued as a percentage of the total
number of shares outstanding at December 11,
2006.
|
(4)
|
Net
cash equals the gross proceeds minus the five percent (5%)
underwriting discount and minus $85,000 in offering expenses.
|
Number
Of Shares To Be Issued To Receive Gross Proceeds Of $5
Million
|
|
Assumed
Offering Price
|
|
75%
of Assumed Offering Price
|
|
50%
of Assumed Offering Price
|
|
25%
of Assumed Offering Price
|
|
Purchase
Price:
|
|
$
|
4.59
|
|
$
|
3.44
|
|
$
|
2.30
|
|
$
|
1.15
|
|
No. of
Shares(1):
|
|
|
1,089,325
|
|
|
1,453,488
|
(5)
|
|
2,173,914
|
|
|
4,347,827
|
|
Total
Outstanding(4):
|
|
|
3,231,422
|
(2)(5)
|
|
3,595,585
|
(2)(5)
|
|
4,316,011
|
(2)(5)
|
|
6,489,924
|
(2)(3)
|
Percent
Outstanding(6):
|
|
|
33.71
|
%
|
|
40.42
|
%
|
|
50.37
|
%
|
|
66.99
|
%
|
Gross
Proceeds to CTI(7):
|
|
|
5,000,000
|
|
|
5,000,000
|
|
|
5,000,000
|
|
|
5,000,000
|
|
Net
Cash to CTI
|
|
$
|
4,665,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
(1)
|
Represents
that total number of shares of common stock which would need to be
issued
at the stated purchase price. We are only registering 400,000 shares
of
common stock under this Prospectus pursuant to the SEDA. We will
need to
register additional shares of common stock to obtain the entire $5
million
available under the SEDA at these stated purchase
prices.
|
(2)
|
The
Company and Cornell Capital have agreed that the Company will not
sell to
Cornell Capital in excess of 400,000 shares unless the Company shall
have
obtained shareholder approval for such
shares.
|
(3)
|
At
the stated purchase price and based on the limited number of available
authorized shares of common stock, CTI would need to obtain shareholder
approval to increase the authorized shares of common stock to obtain
the
entire $5 million available under the
SEDA.
|
(4)
|
Represents
the total number of shares of common stock outstanding at December
11,
2006 after the issuance of the shares to Cornell Capital under the
SEDA.
|
(5)
|
CTI’s
Certificate of Incorporation authorizes the issuance of 5,000,000
shares
of common stock.
|
(6)
|
Represents
the shares of common stock to be issued as a percentage of the total
number shares outstanding at December 11,
2006.
|
(7)
|
Net
cash equals the gross proceeds minus the five percent (5%)
underwriting discount and minus $85,000 in offering expenses.
|
(7)
|
If
CTI drew down on the entire $5 million available under the SEDA,
Cornell
Capital would receive an aggregate underwriting discount equal to
$250,000.
|
Proceeds
used under the Standby Equity Distribution Agreement will be used in the manner
set forth in the “Use of Proceeds” section of this Prospectus. We cannot predict
the total amount of proceeds to be raised in this transaction because we have
not determined the total amount of the advances we intend to draw. Cornell
Capital has the ability to permanently terminate its obligation to purchase
shares of common stock from CTI under the Standby Equity Distribution Agreement
if there shall occur any stop order or suspension of the effectiveness of this
Registration Statement for an aggregate of fifty (50) trading days
other than due to acts by Cornell Capital or if CTI fails materially to comply
with certain terms of the Standby Equity Distribution Agreement, which remain
uncured for thirty (30) days after notice from Cornell Capital.
All
fees
and expenses under the Standby Equity Distribution Agreement will be borne
by
CTI. We expect to incur expenses of approximately $85,000 in connection with
this Registration Statement, consisting primarily of professional fees. In
connection with the Standby Equity Distribution Agreement, we issued 3,500
shares of common stock to Newbridge Securities Corporation, an unaffiliated
registered broker-dealer, as compensation for its services as our placement
agent in connection with the Standby Equity Distribution Agreement.
This
Prospectus relates to shares of our common stock that may be offered and sold
from time to time by certain selling shareholders. There will be no proceeds
to
us from the sale of shares of common stock in this offering. However, we may
receive proceeds from the sale of shares of common stock to Cornell Capital
pursuant to the Standby Equity Distribution Agreement. The purchase price of
the
shares purchased under the Standby Equity Distribution Agreement will be equal
to one hundred percent (100%) of the lowest volume weighted average price
of our common stock on the NASDAQ Capital Markets for the five (5) days
immediately following the notice date. CTI will pay to Cornell Capital five
percent (5%) of each advance, in cash as an underwriting
discount.
Pursuant
to the Standby Equity Distribution Agreement, CTI cannot draw more than $100,000
every five (5) trading days or more than $5 million over
twenty-four (24) months. There is currently $5 million available under the
Standby Equity Distribution Agreement. The Company and Cornell have agreed
that
the Company will not sell to Cornell Capital in excess of 400,000 shares unless
and until the Company shall have obtained shareholder approval for such
sales.
We
anticipate that the proceeds received under the Standby Equity Distribution
Agreement will be utilized for general corporate purposes. For illustrative
purposes only, we have set forth below our intended use of proceeds for the
range of net proceeds indicated below to be received under the Standby Equity
Distribution Agreement. The table assumes estimated offering expenses of
$85,000, plus a five percent (5%) underwriting discount of each advance in
cash payable to Cornell Capital pursuant to the Standby Equity Distribution
Agreement. The figures below are estimates only, and may be changed due to
various factors, including the timing of the receipt of the
proceeds.
|
|
$
|
460,000
|
|
$
|
1,836,000
|
|
$
|
5,000,000
|
(1)
|
Net
proceeds(2)
|
|
$
|
352,000
|
|
$
|
1,659,200
|
|
$
|
4,665,000
|
|
Number
of shares to be issued pursuant to the Standby Equity Distribution
Agreement
|
|
|
400,000
|
|
|
400,000
|
|
|
1,089,325
|
|
USE
OF PROCEEDS: (NET)
|
|
AMOUNT
|
|
AMOUNT
|
|
AMOUNT
|
|
General
Working Capital
|
|
$
|
246,000
|
|
$
|
1,159,000
|
|
$
|
3,358,000
|
|
Capital
Investments
|
|
$
|
106,000
|
|
$
|
500,000
|
|
$
|
1,307,000
|
|
Total
|
|
$
|
352,000
|
|
$
|
1,659,000
|
|
$
|
4,665,000
|
|
(1)
|
CTI
would need to register 689,325 additional shares of common stock
to access
this amount of gross proceeds under the Standby Equity Distribution
Agreement at an assumed offering price of
$4.59.
|
(2)
|
Net
proceeds equals gross proceeds minus the five percent (5%) underwriting
discount and minus $85,000 in offering
expenses.
|
The
Standby Equity Distribution Agreement limits CTI’s use of proceeds to general
corporate purposes and prohibits the use of proceeds to pay any judgment or
liability incurred by any officer, director or employee of CTI, except under
certain limited circumstances.
The
net
tangible book value of CTI as of September 30, 2006 was $3,975,288 or $1.87
per share of common stock. Net tangible book value per share is determined
by
dividing the tangible book value of CTI (total tangible assets less total
liabilities) by the number of outstanding shares of our common stock. Since
this
offering is being made solely by the selling shareholder and none of the
proceeds will be paid to CTI, our net tangible book value will be unaffected
by
this offering. Our net tangible book value and our net tangible book value
per
share, however, will be impacted by the common stock to be issued under the
Standby Equity Distribution Agreement. The amount of dilution will depend on
the
offering price and number of shares to be issued under the Standby Equity
Distribution Agreement. The following example shows the dilution to new
investors at an assumed offering price of $4.59 per share.
Although
we are registering only 400,000 shares of common stock, if we assume that
such
shares were sold at an assumed offering price of $4.59 per share, less
an
underwriting discount equal to five percent (5%) and offering expenses of
$85,000, our net tangible book value as of September 30, 2006 would have
been $5,634,488 or $2.23 per share. Such an offering would represent an
immediate increase in net tangible book value to existing shareholders
of $0.36
per share and an immediate dilution to new shareholders of $2.36 per share.
The
following table illustrates the per share dilution:
|
|
|
|
|
$
|
4.59
|
|
Net
tangible book value per share before this offering
|
|
$
|
1.87
|
|
|
|
|
Increase
attributable to new investors
|
|
$
|
0.36
|
|
|
|
|
Net
tangible book value per share after this offering
|
|
|
|
|
$
|
2.23
|
|
Dilution
per share to new shareholders
|
|
|
|
|
$
|
2.36
|
|
The
offering price of our common stock is based on the then-existing market price.
In order to give prospective investors an idea of the dilution per share they
may experience, we have prepared the following table showing the dilution per
share at various assumed offering prices:
ASSUMED
OFFERING PRICE
|
|
NO.
OF SHARES
TO
BE ISSUED(1)
|
|
DILUTION
PER
SHARE
TO
NEW INVESTORS
|
|
$
|
4.59
|
|
|
400,000
|
|
$
|
2.36
|
|
$
|
3.44
|
|
|
400,000
|
|
$
|
1.39
|
|
$
|
2.30
|
|
|
400,000
|
|
$
|
0.41
|
|
$
|
1.15
|
|
|
400,000
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
This
represents the maximum number of shares of common stock that are
being
registered pursuant to the Standby Equity Distribution Agreement
at this
time.
|
PLAN
OF DISTRIBUTION
The
selling shareholders have advised us that the sale or distribution of our common
stock owned by the selling shareholders may be effected directly to purchasers
by the selling shareholders as principals or through one (1) or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on
the over-the-counter market or on any other market in which the price of our
shares of common stock are quoted or (ii) in transactions otherwise than on
the over-the-counter market or in any other market on which the price of our
shares of common stock are quoted. Any of such transactions may be effected
at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at varying prices determined at the time of sale
or at
negotiated or fixed prices, in each case as determined by the selling
shareholders or by agreement between the selling shareholders and underwriters,
brokers, dealers or agents, or purchasers. If the selling shareholders effect
such transactions by selling their shares of common stock to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers
or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions
or commissions as to particular underwriters, brokers, dealers or agents may
be
in excess of those customary in the types of transactions
involved).
Cornell
Capital is an “underwriter” within the meaning of the Securities Act in
connection with the sale of common stock under the Standby Equity Distribution
Agreement. Cornell Capital will pay us one hundred percent (100%) of the
lowest volume weighted average price of our common stock on the NASDAQ Capital
Markets or other principal trading market on which our common stock is traded
for the five (5) days immediately following the advance date. In addition,
Cornell Capital will receive cash equal to five percent (5%) of the
proceeds received by us under the Standby Equity Distribution Agreement as
an
underwriting discount. If CTI drew down on the entire $5 million available
under
the Standby Equity Distribution Agreement, Cornell Capital would receive an
aggregate underwriting discount equal to $250,000. In addition, we engaged
Newbridge Securities Corporation, an unaffiliated registered broker-dealer,
to
act as our placement agent in connection with the Standby Equity Distribution
Agreement. Newbridge Securities Corporation is not participating in the
distribution of our common stock. We issued 3,500 shares of our common stock
to
Newbridge in connection with the Standby Equity Distribution Agreement which
shares are also being registered herein.
Cornell
Capital was formed in February 2000 as a Delaware limited partnership.
Cornell Capital is a domestic hedge fund in the business of investing in and
financing public companies. Cornell Capital does not intend to make a market
in
our stock or to otherwise engage in stabilizing or other transactions intended
to help support the stock price. Prospective investors should take these factors
into consideration before purchasing our common stock.
Under
the
securities laws of certain states, the shares of common stock may be sold in
such states only through registered or licensed brokers or dealers. The selling
shareholders are advised to ensure that any underwriters, brokers, dealers
or
agents effecting transactions on behalf of the selling shareholders are
registered to sell securities in all fifty (50) states. In addition, in
certain states the shares of common stock may not be sold unless the shares
have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We
will
pay all expenses incident to the registration, offering and sale of the shares
of common stock to the public hereunder other than commissions, fees and
discounts of underwriters, brokers, dealers and agents. If any of these other
expenses exists, CTI expects the selling shareholder to pay these expenses.
We
have agreed to indemnify Cornell Capital and its controlling persons against
certain liabilities, including liabilities under the Securities Act. We estimate
that the expenses of the offering to be borne by us will be approximately
$85,000. These offering expenses are estimated to consist of: an SEC
registration fee of $213, printing expenses of $2,500, accounting fees of
$15,000, legal fees of $50,000 and miscellaneous expenses of $17,287. We will
not receive any proceeds from the sale of any of the shares of common stock
by
the selling shareholder. We may, however, receive proceeds from the sale of
common stock under the Standby Equity Distribution Agreement.
The
selling shareholders are subject to applicable provisions of the Securities
Exchange Act of 1934, as amended, and its regulations, including, Regulation
M.
Under Registration M, the selling shareholders or their agents may not bid
for,
purchase, or attempt to induce any person to bid for or purchase, shares of
our
common stock while such selling shareholders are distributing shares covered
by
this Prospectus. Pursuant to the requirements of Item 512 of Regulation S-K
and
as stated in Part II of this Registration Statement, CTI must file a
post-effective amendment to the accompanying Registration Statement once
informed of a material change from the information set forth with respect to
the
Plan of Distribution.
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe
Harbor Provision of the Private Securities Litigation Act of 1995 and Forward
Looking Statements
The
Company operates in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The market for metalized and latex balloon
products is generally characterized by intense competition, frequent new product
introductions and changes in customer tastes that can render existing products
unmarketable. The statements contained in this Section 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, as amended) that
are subject to a variety of risks and uncertainties more fully described in
the
Company’s filings with the SEC. The forward-looking statements are based on the
beliefs of the Company’s management, as well as assumptions made by, and
information currently available to the Company’s management. Accordingly, these
statements are subject to significant risks, uncertainties and contingencies
which could cause the Company’s actual growth, results, performance and business
prospects and opportunities in 2006 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.
Overview
The
Company produces film products for novelty, packaging and container
applications. These products include metalized balloons, latex balloons and
related latex toy products, films for packaging applications, and flexible
containers for packaging and storage applications. We produce all of our film
products for packaging and container applications at the facilities in
Barrington, Illinois. We produce all of our latex balloons and latex products
at
our facility in Guadalajara, Mexico. Substantially all of our film products
for
packaging applications and flexible containers for packaging and storage are
sold to customers in the United States. We market and sell our novelty items
-
principally metalized balloons and latex balloons - in the United States,
Mexico, the United Kingdom and a number of additional countries.
Our
revenues from each of our product categories in each of the past three (3)
years
is as follows:
|
|
(000
Omitted)
|
|
|
|
$
|
|
%
of
|
|
$
|
|
%
of
|
|
$
|
|
%
of
|
|
Product
Category
|
|
2005
|
|
Net
Sales
|
|
2004
|
|
Net
Sales
|
|
2003
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metalized
Balloons
|
|
|
11,737
|
|
|
40.2
|
|
|
16,238
|
|
|
43.9
|
|
|
12,401
|
|
|
34.2
|
|
Latex
Balloons
|
|
|
4,855
|
|
|
16.6
|
|
|
5,244
|
|
|
14.1
|
|
|
4,134
|
|
|
11.4
|
|
Films
|
|
|
7,616
|
|
|
26.1
|
|
|
8,808
|
|
|
23.7
|
|
|
6,722
|
|
|
18.5
|
|
Pouches
|
|
|
4,079
|
|
|
14
|
|
|
5,028
|
|
|
13.5
|
|
|
10,718
|
|
|
29.6
|
|
Helium/Other
|
|
|
903
|
|
|
3.1
|
|
|
1,875
|
|
|
4.8
|
|
|
2,284
|
|
|
6.3
|
|
|
|
|
29,190
|
|
|
|
|
|
37,193
|
|
|
|
|
|
36,259
|
|
|
|
|
Our
primary expenses include the cost of products sold and selling, general and
administrative expenses.
Cost
of
products sold primarily consists of expenses related to raw materials, labor,
quality control and overhead directly associated with production of our
products, as well as shipping costs relating to the shipment of products to
customers. Cost of products sold is impacted by the cost of the raw materials
used in our products, the cost of shipping, along with our efficiency in
managing the production of our products.
Selling,
general and administrative expenses include the compensation and benefits paid
to our employees, all other selling expenses, marketing, promotional expenses,
travel and other corporate administrative expenses. These other corporate
administrative expenses include professional fees, depreciation and
amortization, occupancy costs, communication costs and other similar operating
expenses. Selling, general and administrative expenses can be affected by a
number of factors, including staffing levels and the cost of providing
competitive salaries and benefits, the cost of regulatory compliance and other
administrative costs.
Purchases
by a limited number of customers represent a significant portion of our total
revenues. In 2005, sales to our top ten (10) customers represented sixty-two
and
9/10 percent (62.9%) of net revenues. During 2005, there were three (3)
customers to whom our sales represented more than ten percent (10%) of net
revenues:
Customer
|
|
Product
|
|
2005
Sales
|
|
%
of 2005 Revenues
|
|
Dollar
Tree Stores
|
|
|
Balloons
|
|
$
|
3,987,000
|
|
|
13.6
|
|
Rapak
L.L.C
|
|
|
Pouches
|
|
$
|
6,860,000
|
|
|
23.5
|
|
ITW
Space Bag
|
|
|
Film
|
|
$
|
3,889,000
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
The
loss
of one or more of these principal customers, or a significant reduction in
purchases by one (1) or more of them, could have a material adverse effect
on
our business.
Over
the
past three (3) years, we have endeavored to reduce our operating costs and
to
become more efficient in our production activities. Our total SG&A and
factory overhead expenses for each of the years ended December 31, 2005,
2004 and 2003 have been as follows:
|
|
For
the Year Ending 12/31
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Overhead
(US Operation Only)
|
|
$
|
4,575,000
|
|
$
|
6,042,000
|
|
$
|
7,124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
(Consolidated)
|
|
$
|
5,812,000
|
|
$
|
6,402,000
|
|
$
|
6,856,000
|
|
Results
Of Operations
The
following table sets forth selected results of our operations expressed as
a
percentage of net sales for the years ended December 31, 2005, 2004 and
2003. Our results of operations for the periods described below are not
necessarily indicative of results of operations for future
periods.
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
77.9
|
|
|
82.9
|
|
|
81.7
|
|
Selling,
general and administrative
|
|
|
19.9
|
|
|
17.2
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
2.2
|
|
|
(0.1
|
)
|
|
(0.6
|
)
|
Interest
expense
|
|
|
(4.2
|
)
|
|
(3.6
|
)
|
|
(3.0
|
)
|
Other
income (loss)
|
|
|
0.2
|
|
|
0.5
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1.8
|
)
|
|
(3.2
|
)
|
|
(3.7
|
)
|
Provision
for income taxes
|
|
|
(0.7
|
)
|
|
3.4
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1.1
|
)%
|
|
(6.6
|
)%
|
|
(1.6
|
)%
|
Results
of Operations For The Year Ended December 31, 2005 Compared To The Year
Ended December 31, 2004
Net
Sales
For
the
fiscal year ended December 31, 2005, consolidated net sales from the sale
of all products were $29,190,000 compared to consolidated net sales of
$37,193,000 for the year ended December 31, 2004, a decline of twenty-one
and one half percent (21.5)%. The decline in sales is attributable principally
to a decline in metalized balloon sales of $4,501,000, a decline in pouch sales
of $949,000 and a decline in film sales of $1,192,000. With respect to metalized
balloons, the decline in sales reflects (i) a decline in sales to Hallmark
Cards
from $3,421,000 in 2004 to $306,000 in 2005 and (ii) a decline in sales totaling
$1,624,000 to five (5) other of our larger balloon customers, which was offset
by an increase in sales of $428,000 to a new customer. The decline in sales
to
Hallmark Cards resulted from the expiration and termination of our agreements
and relationship with Hallmark Cards in March 2005. Sales of metalized
balloons to a drug chain declined as the result of the sale of the chain and
the
termination of the balloon program in certain of the stores that were sold.
The
decline in pouch sales is attributable to a decline in sales of pouches to
ITW
from $4,838,000 in fiscal 2004 to $3,889,000 in fiscal 2005. This decline is
the
result of increased internal production of pouches by ITW at their production
facility and also the fact that ITW has purchased and supplied to the Company
certain components of the pouches produced by the Company. The decline in film
sales is attributable principally to a decline in the sales of laminated film
to
Rapak from $7,466,000 in fiscal 2004 to $6,860,000 in fiscal 2005. The Company
continues to produce film for Rapak and fluctuations in the volume of film
supplied are a reflection of variances in Rapak’s requirements from time to
time.
Cost
Of Sales
Cost
of
sales declined in fiscal 2005 to seventy-seven and 9/10 percent (77.9%) of
net
sales from a level of eighty-two and 9/10 percent (82.9%) in fiscal 2004. This
decline is attributable principally to the fact that we reduced our factory
overhead in the United States from $6,042,000 in fiscal 2004 to $4,575,000
in
fiscal 2005, a reduction of $1,467,000 or twenty-four percent (24%). This
decrease in the factory overhead element of cost of sales was offset to some
degree by increases we experienced in raw materials costs, particularly the
cost
of polyester and polyethylene sheeting and resin and of latex.
We
believe that we will experience further declines in the cost of sales as a
percentage of net sales in 2006 because (i) we expect raw materials costs to
stabilize or decline, (ii) we expect to allocate factory overhead costs over
a
greater number of units in 2006 compared to 2005 and (iii) we expect to
experience some continuing reduction in direct production costs during
2006.
General
And Administrative
For
fiscal 2005, administrative expenses were $3,847,000, or thirteen percent (13%)
of net sales, compared to administrative expenses in fiscal 2004 of $4,411,000,
or eleven and 8/10 percent (11.8%) of net sales, a reduction of $564,000 or
almost thirteen percent (13%) of net sales. The decrease in administrative
costs
during 2005 is attributable to the following items: (i) a reduction of $167,000
in consulting fees, (ii) a decrease of $146,000 in legal expense, and (iii)
a
reduction of $102,000 in bad debt expense.
We
do not
anticipate further decreases in administrative expenses during fiscal
2006.
Selling
Selling
expenses declined from $1,495,000 in fiscal 2004, or four percent (4%) of net
sales, to $1,065,000 in fiscal 2005, or four percent (4%) of net sales.
Components of the decline in selling expenses for 2005 were: (i) a reduction
in
royalties of $190,000, (ii) a reduction in salary expense of $188,000 and (iii)
a reduction in commissions of $65,000.
Marketing
And Advertising
Marketing
expenses declined from $1,014,000 in fiscal 2004, or three percent (3%) of
net
sales, to $777,000 in fiscal 2005, or three percent (3%) of net sales. The
components of the decline in expense for 2005 included: (i) reduced salary
expense of $73,000 and (ii) a reduction in service fees of
$160,000.
Gain
on Sale of Assets and Other Operating Income
Income
from operations in fiscal 2004, as restated, was affected by (i) gain on the
sale of assets in the amount of $122,499 and (ii) other income of $395,489.
Such
other income consisted of (i) gains related to a review and determination that
various accrued items on the books of the Mexican subsidiaries of the Company
(CTI Mexico and Flexo) are not due or payable; these items included: (a) accrued
amounts for profit sharing or seniority benefits determined on the basis of
legal review not to be due, totaling $98,000, (b) accrued amounts related to
an
asset tax determined not to be due or beyond the statute of limitations, in
the
amount approximately of $49,000, (c) accrued amounts with respect to various
accounts settled or determined not to be due or payable, in the aggregate amount
of $190,000 and (ii) gains totaling $70,000 based on the settlement of various
accounts in consideration of the payment of an amount less than the amount
accrued. These items were offset by $12,000 in other expenses. Most of these
gains are attributable to the first quarter of 2004 and relate to the
restructuring of CTI Mexico which commenced in February 2003 when CTI Mexico
effected a spin-off under Mexican law in which a portion of the assets,
liabilities and capital of that company were transferred to Flexo Universal
and
FlexoUniversal became the primary subsidiary of the Company in Mexico. These
other gains are not recurring.
These
items of gain on the sales of assets and other income were reported as Other
Income in the Consolidated Statements of Operations for the year ended December
31, 2004 and have been re-classified into income (loss) from operations in
the
Restated Consolidated Statements of Operations for that
year.
Other
Expense
During
2005, the Company incurred $1,231,000 in interest expense compared to $1,350,000
in interest expense in fiscal 2004. The decline in interest expense is
attributable to lower level of borrowings during 2005 compared to 2004. We
anticipate that interest expense in 2006 will increase over 2005 due to (i)
increased levels of borrowing and (ii) increased interest rates.
Foreign
currency gains realized in 2005 were $45,128 compared to foreign currency gains
in 2004 of $208,000. The decline in foreign currency gains was the result of
reduced rates of change in currency values from 2004 to 2005.
Net
Income Or Loss
The
Company incurred a net loss before income taxes and minority interest of
$534,000 in 2005 compared to a net loss before income taxes and minority
interest of $1,192,000 in 2004.
Income
Taxes
In
2005,
the Company recognized an income tax benefit of $200,000 arising from the
deferred tax benefit of the loss incurred for the year. Management has
determined based upon the evaluation of certain transactions involving the
repatriation of profits from our U.K. subsidiary that it is more likely than
not
that deferred tax assets will be realized in 2005. In 2004, the Company
incurred an income tax expense of $1,286,000, which represented the amount
of
the reserve the Company took against the then outstanding deferred tax benefit
recorded by the Company.
Results
Of Operation For The Year Ended December 31, 2004 Compared To The Year
Ended December 31, 2003
Net
Sales
For
the
fiscal year ended December 31, 2004, consolidated revenues from the sale of
all products were $37,193,000, compared to consolidated revenues of $36,260,000
for the year ended December 31, 2003, an increase of 2.6%. Revenue changes
in our principal product categories included: (i) a 20.7% decrease in sales
of
printed and laminated films from $17,439,000 in 2003 to $13,823,000 in 2004,
(ii) a 31.6% increase in sales of metalized balloons from $12,405,000 in
2003 to $16,320,000 in 2004 and (iii) a 27.4% increase in the sales of
latex balloons from $4,125,000 in 2003 to $5,255,000 in 2004. These changes
in
revenues included a decrease in sales to two principal customers. Sales in
2003
to these two customers were as follows: (i) $10,298,000 to ITW Spacebag for
film
and consumer storage bags and (ii) $4,006,000 to Hallmark Cards, principally
for
metalized balloons. During 2004, sales to each of those customers, respectively,
were: (i) $6,266,000 and (ii) $3,421,000. These decreases were offset by an
increase in sales to Rapak, LLC, a principal customer of packaging film and
to a
new customer of foil balloons. During 2003, sales to Rapak were $5,360,000.
During 2004, sales to each of those customers, respectively, were $7,466,000
and $4,352,000.
For
the
fiscal year 2004, on a consolidated basis, metalized balloons represented 43.9%
of sales, laminated and printed films 37.2% of sales and latex balloons 14.1%
of
sales. During fiscal 2003, metalized balloons represented 34.2% of sales,
laminated and printed films 48.1% of sales and latex balloons 11.4% of sales.
The Company anticipates that in 2005, the mix of products will change in so
far
as the percentage of metalized balloons will decrease, laminated and printed
films will be consistent and latex balloon sales should increase.
Cost
Of Sales
For
fiscal 2004, cost of sales increased to 82.9% of net sales compared to 81.7%
of
net sales for fiscal 2003. In 2004, the product mix changed from selling a
majority of laminate and printed film to a majority of metalized balloons which
historically have lower margins. In fiscal 2004, profit margins on metalized
balloons, latex balloons and laminated and printed film were 13.0%, 10.1% and
25.3%, respectively, compared to margins on the same product lines for 2003
of
10.4%, 9.1% and 34.9%. The decrease in the margins of the laminated and printed
film was a result of the difference in the product mix and a reduction of
the prices charged for consumer storage bags. Cost of sales were higher, as
a
percentage of net sales in the fourth quarter of 2004 than in prior quarters
of
2004 and the fourth quarter of 2003, resulting in lower gross profit than in
those prior quarters by reason of the facts that: (i) sales of storage bags
continued to decline resulting in a shift in product mix to lower margin
products, (ii) higher costs of production in prior quarters resulted in higher
unit costs for metalized balloons sold during the fourth quarter and (iii)
there
were discounted and low margin sales of balloon products in the fourth quarter.
Management anticipates improvement in margins for balloon products during 2005
as reduced production overhead expenses are reflected in lower unit costs.
General
And Administrative
For
fiscal 2004, administrative expenses were $4,411,000 or 11.9% of net sales,
as
compared to $4,055,000 or 11.2% of net sales for fiscal 2003. The increase
in
general and administrative expenses is attributable to an increase in bad debt
reserves and personnel costs. The Company expects that in 2005, there will
be an
increase in these expenses involving personnel costs.
Selling
For
fiscal 2004, selling expenses were $1,495,000 or 4.0% of net sales compared
to
$1,442,000, or 4.0% of net sales for fiscal 2003. There was no significant
change in selling expenses from 2003 to 2004. The Company expects an increase
in
selling expenses in 2005.
Marketing
And Advertising
For
fiscal 2004, advertising and marketing expenses were $1,014,000 or 2.7% of
net
sales, compared to $1,816,000 or 5% of net sales for fiscal 2003. The decrease
is attributable principally to a reduction in personnel cost, a reduction in
catalog expense, and decrease in artwork and films expenses. The Company
expects a small decrease in these expenses in 2005.
Gain
on Sale of Assets and Other Operating Income
Income
from operations in fiscal 2004, as restated, was affected by (i) gain on the
sale of assets in the amount of $122,499 and (ii) other income of $395,489.
Such
other income consisted of (i) gains related to a review and determination that
various accrued items on the books of the Mexican subsidiaries of the Company
(CTI Mexico and Flexo) are not due or payable; these items included: (a) accrued
amounts for profit sharing or seniority benefits determined on the basis of
legal review not to be due, totaling $98,000, (b) accrued amounts related to
an
asset tax determined not to be due or beyond the statute of limitations, in
the
amount approximately of $49,000, (c) accrued amounts with respect to various
accounts settled or determined not to be due or payable, in the aggregate amount
of $190,000 and (ii) gains totaling $70,000 based on the settlement of various
accounts in consideration of the payment of an amount less than the amount
accrued. These items were offset by $12,000 in other expenses. Most of these
gains are attributable to the first quarter of 2004 and relate to the
restructuring of CTI Mexico which commenced in February 2003 when CTI Mexico
effected a spin-off under Mexican law in which a portion of the assets,
liabilities and capital of that company were transferred to Flexo Universal
and
FlexoUniversal became the primary subsidiary of the Company in Mexico. These
other gains are not recurring.
The
Company had other income during 2003 of $428,000 arising principally from the
forgiveness of certain indebtedness. These items of gain from sales of assets
and other income were reported as Other Income in the Consolidated Statements
of
Operations for the years ended December 31, 2004 and have been re-classified
into income (loss) from operations in the Restated Consolidated Statements
of
Operations for those years.
Other
Income (Expense)
For
fiscal 2004, interest expense and loan fees totaled $1,350,000 or 3.6% of sales.
For fiscal 2003, interest expense and loan fees totaled $1,103,000 or 3.0%
of
sales. The increase in interest expense is attributable principally to increased
levels of borrowing and an increased average rate of interest on outstanding
indebtedness. The Company had currency exchange gains during 2004 of $208,000
compared to currency exchange losses during fiscal 2003 of $36,000.
Net
Income Or Loss
For
the
fiscal year ended December 31, 2004, the Company had a loss before taxes
and minority interest of $1,192,000 compared to a loss before taxes and minority
interest for fiscal 2003 of $1,349,000. The net loss for fiscal 2004 was
$2,479,000 compared to net loss for fiscal 2003 of $566,000.
Income
Taxes
For
the
fiscal year ended December 31, 2004, the Company had an income tax expense
of $1,286,000 compared to an income tax benefit of $782,000 for fiscal 2003.
The
amount of the income tax expense or benefit recognized by the Company for both
2004 and 2003 reflects adjustments in deferred tax assets and other items
arising from the operating results of the Company for each year. This increase,
which was recorded during the fourth quarter, was made after management
determined, based on fourth quarter activity, that the realization of the
deferred tax asset was not likely in the foreseeable future. Fourth quarter
activity affecting this determination included lower than anticipated sales
in
the storage bag product line and lower margin sales of novelty products.
Results
Of Operations For The Three and Nine Months Ended September 30, 2006
Compared To The Three and Nine Months Ended September 30,
2005
Net
Sales
For
the
three months ended September 30, 2006, net sales were $8,603,000 compared to
net
sales of $6,034,000 for the same period of 2005, an increase of 42.6%. For
the
quarters ended September 30, 2006 and 2005, net sales by product category were
as follows:
|
|
Three
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
$
|
|
%
of
|
|
$
|
|
%
of
|
|
Product
Category
|
|
(000)
Omitted
|
|
Net
Sales
|
|
(000)
Omitted
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
Metalized
Balloons
|
|
|
4,120
|
|
|
48
|
%
|
|
2,035
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Films
|
|
|
2,066
|
|
|
24
|
%
|
|
1,582
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pouches
|
|
|
698
|
|
|
8
|
%
|
|
1,099
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latex
Balloons
|
|
|
1,641
|
|
|
19
|
%
|
|
1,145
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Helium/Other
|
|
|
78
|
|
|
1
|
%
|
|
173
|
|
|
3
|
%
|
For
the
nine months ended September 30, 2006, net sales were $25,756,000 compared to
net
sales of $22,710,000 for the nine months ended September 30, 2005, an increase
of 13.4%. For the nine months ended September 30, 2006 and 2005, net sales
by
product category were as follows:
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
$
|
|
%
of
|
|
$
|
|
%
of
|
|
Product
Category
|
|
(000)
Omitted
|
|
Net
Sales
|
|
(000)
Omitted
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
Metalized
Balloons
|
|
|
12,378
|
|
|
48
|
%
|
|
8,670
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Films
|
|
|
5,948
|
|
|
23
|
%
|
|
6,256
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pouches
|
|
|
2,582
|
|
|
11
|
%
|
|
3,353
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latex
Balloons
|
|
|
4,295
|
|
|
15
|
%
|
|
3,693
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Helium/Other
|
|
|
553
|
|
|
3
|
%
|
|
738
|
|
|
3
|
%
|
The
increase in net sales for the three months ended September 30, 2006 compared
to
the same period of 2005 is attributable principally to our increase in sales
of
metalized balloons from $2,035,000 in the third quarter of 2005 to $4,120,000
in
the third quarter of 2006. For the first nine months of the year, sales of
metalized balloons increased from $8,670,000 for that period last year to
$12,378,000 in 2006, an increase of $3,708,000 or 42.8%. This increase in net
sales of metalized balloons includes increased sales to a major customer as
well
as several chain retail accounts.
During
the first nine months of 2006 compared to the same period last year, sales
of
laminated films declined by 4.9% representing a decline in sales to customers
other than our principal films customer, Rapak, L.L.C. (“Rapak”) (related party
prior to 3rd quarter 2006). On April 28, 2006, we entered into a License
Agreement with Rapak under which we granted a worldwide, irrevocable license
to
Rapak under a patent relating to textured film and pouches utilizing such film
which was issued during 2006 and will expire in January of 2027. The term of
the
license is for the entire term of the patent. The License Agreement also amends
our existing Supply Agreement with Rapak, entered into on December 20, 2002,
under which we supply textured film to Rapak for use by them in the production
of pouches. The License Agreement extends the term of the Supply Agreement
until
October 31, 2008; the Supply Agreement is automatically renewed thereafter
for
successive one-year terms unless terminated by either party. We have supplied
textured film to Rapak for several years and will continue to supply textured
film to Rapak under the License Agreement and the Supply Agreement as amended.
For the nine months ended September 30, 2005, our net sales of film to Rapak
were $6,860,000, representing 24% of our total net sales for 2005. During the
first nine months of 2006, our net sales of film to Rapak were $5,294,000,
representing 20.6% of our total net sales for that period.
Sales
of
pouches declined from $3,353,000 in the first nine months of 2005 to $2,582,000
or 23% in the first nine months of 2006. This decline reflects a reduction
for
those periods in sales to our principal customer for pouches, ITW Spacebag,
a
division of Illinois Tool Works, Inc. (“ITW”).
In
March
2006, we entered into a four-year agreement with ITW under which we will supply
all of their requirements in North America for certain of their pouches which
they market under the name Space Bag® and also are to supply their requirements
of film for certain of the pouches which they produce, if pricing for the film
is competitive. We have supplied ITW with certain pouches for several years.
During 2005, ITW was our largest customer for pouches, accounting for total
net
sales of $3,889,000, which represented 13.3% of our total net sales. During
the
three months ended September 30, 2006, our net sales of pouches to ITW were
$591,000 representing 6.9% of our total net sales. During the first nine months
of 2006, our net sales of pouches to ITW were $2,158,000, representing 8.4%
of
our total net sales.
For
the
nine-month period ended September 30, 2006 sales of latex balloons increased
to
$4,295,000 compared to sales of $3,693,000 for the same period of 2005, an
increase of 16.3% principally due to a new customer of our Mexican
affiliate.
The
decline in other sales is due to a decrease in helium sales. Since 1998, the
Company has engaged in arranging for the supply of helium to certain customers.
During 2005, the Company stopped supplying helium to one customer, which
accounts for most of the reduction in helium sales.
Sales
to
a limited number of customers continue to represent a large percentage of our
net sales. The table below illustrates the impact on sales of our top two and
ten customers for the three and nine months ended September 30, 2006 and
2005.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
%
of Net Sales
|
|
%
of Net Sales
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Top
2 customers
|
|
|
46.5
|
%
|
|
38.3
|
%
|
|
42.9
|
%
|
|
38.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top
10 Customers
|
|
|
63.4
|
%
|
|
58.4
|
%
|
|
60.3
|
%
|
|
61.5
|
%
|
During
the nine months ended September 30, 2006, there were two customers whose
purchases represented more than 10% of the Company’s sales (Dollar Tree Stores,
Inc. and Rapak LLC). The sales to each of these customers for the nine months
ended September 30, 2006 were $5,755,000 or 22.3% of net sales and $5,294,000
or
20.6% of net sales, respectively. In the same period of 2005, net sales for
these same customers were $2,454,000 or 10.8% and $5,610,000 or 24.7%,
respectively. During the three months ended September 30, 2006, there were
two
customers whose purchases represented more than 10% of the Company’s sales. The
sales to each of these customers for the three months ended September 30, 2006
were $2,064,000 or 24.0% and $1,939,000 or 22.5% of net sales, respectively.
Sales to these same customers in the same period of 2005 were $484,000 or 8.0%
and $1,247,000 or 20.7% of net sales, respectively. For the quarter ended
September 30, 2006, the total amount owed by these customers was $1,094,000
and
$1,061,000, respectively. The balances owed at September 30, 2005 were $234,000
and $638,000, respectively.
Cost
of Sales.
During
the three months ended September 30, 2006, cost of sales represented 73.8%
of
net sales compared to 79.4% for the third quarter of 2005. For the nine months
ended September 30, 2006, the cost of sales represented 75.1% of net sales
compared to 79.3% for the same period of 2005. This improvement in gross margin
has resulted principally from a change in the mix of products sold and from
increased unit production during 2006 to date compared to the same period of
2005.
General
and Administrative.
For the
three months ended September 30, 2006, general and administrative expenses
were
$1,216,000 or 14.1% of net sales, compared to $987,000 or 16.4% of net sales
for
the same period in 2005. For the nine months ended September 30, 2006, general
and administrative expenses were $3,321,000 or 12.9% of net sales, compared
to
$3,027,000 or 13.3% for the same period of 2005. The increase in general and
administrative expenses during the third quarter of 2006, compared to the same
period of the prior year was caused by an increase in auditing , consulting
and
salary expense due to additional staff.
Selling.
For the
three months ended September 30, 2006, selling expenses were $213,000 or 2.5%
of
net sales for the quarter, compared to $247,000 or 4.0% of net sales for the
same three months of 2005. For the nine months ended September 30, 2006, selling
expenses were $624,000 or 2.4% of net sales for that period, compared to
$796,000 or 3.5% of net sales for the same period of 2005. The decrease in
selling expense is attributable to reductions in salary and royalty expenses
in
the metalized balloon product line, and reallocation of some personnel expenses
to marketing.
Advertising
and Marketing.
For the
three months ended September 30, 2006, advertising and marketing expenses were
$361,000 or 4.2% of net sales for the period, compared to $166,000 or 2.8%
of
net sales for the same period of 2005. For the first nine months of 2006,
advertising and marketing expenses were $846,000 or 3.3% of net sales for that
period, compared to $602,000 or 2.7% for the same period of 2005. The change
in
advertising and marketing expenses during these periods of 2006 compared to
the
same periods of 2005 resulted from a reallocation of certain personnel expenses
from sales to marketing and an increase in rebates.
Loss
on Sale of Assets.
During
the three months ended September 30, 2006, the Company incurred a loss on the
disposal of fixed assets amounting to $142,000 in two of our Mexican
subsidiaries.
Other
Operating Income.
During
the three months ended September 30, 2006, the Company recorded other operating
income arising from the settlement of items recorded as obligations of one
of
our Mexican subsidiaries, and the determination that certain items recorded
as
tax obligations are not due or payable, in the aggregate amount of $460,000.
These items of other income are not recurring.
Net
Interest Expense.
For the
three months ended September 30, 2006, the Company recorded net interest expense
of $514,000 compared to $281,000 for the same period of 2005. For the nine
months ended September 30, 2006, the company incurred net interest expense
of
$1,297,000, compared to $868,000 during the same period of 2005. The increase
in
expense between the periods reflects (i) a higher rate of interest payable
on
outstanding loan balances and (ii) increased levels of borrowing.
Foreign
Currency Transaction Gain (Loss).
During
the three months ended September 30, 2006, the Company had currency transaction
gains of $64,000 compared to currency transaction losses of $(4,000) . During
the nine months ended September 30, 2006, the Company had currency transaction
gains of $154,000 compared to currency transaction gains during the same period
of 2005 in the amount of $217,000.
Income
Taxes.
For the
three months ended September 30, 2006, the provision for income taxes was
$12,000 all of which related to provision for income taxes in the United Kingdom
for CTI Balloons, Ltd, the Company’s subsidiary in the United Kingdom. For the
same period of 2005, the Company recorded a net income tax benefit of $26,000
,
of which $37,000 was attributable to a loss in our Mexican entities offset
by an
income tax expense of $11,000 attributable to earnings generated in the United
Kingdom. For the nine months ended September 30, 2006, the provision for income
taxes was $59,000, of which $45,000 is related to provision for income taxes
in
the United Kingdom for CTI Balloons, Ltd, the Company’s subsidiary in the United
Kingdom. The remaining $14,000 was from the Company’s Mexican subsidiaries.. For
the same period of 2005, the Company recorded a net income tax expense of
$8,000, of which a $68,000 tax expense was related to income taxes in the United
Kingdom, offset by an income tax benefit of $60,000 attributable to losses
in
our Mexican subsidiaries.
Net
Income (Loss).
For the
three months ended September 30, 2006, the Company had net income of $315,000
or
$0.15 per share basic and diluted, compared to a net loss for the same period
in
2005 of $(416,000) or $(0.21) per share (basic and diluted). For the nine months
ended September 30, 2006, the Company had net income of $741,000 or $0.36 per
share basic and $0.34 per share diluted, compared to a net loss of $(385,000)
or
($0.20) per share (basic and diluted) for the same period of 2005. The
improvement in net income for the year to date in 2006 compared to the same
periods of 2005 is attributable principally to the improvement in our gross
margins compared to the same periods of 2005 and also to the recognition of
other operating income derived from the settlement of certain obligations of
two
Mexican subsidiaries.
Financial
Condition, Liquidity And Capital Resources
Cash
Flow From Operations
Cash
flow
from operations for the fiscal year ended December 31, 2005 was $2,658,000,
compared to cash flow used in operations for the fiscal year ended
December 31, 2004 of $385,000. Significant changes in working capital items
contributing to cash flow from operations during 2005 were:
|
·
|
Depreciation
and amortization of $1,480,000
|
· |
Other
non-cash changes for reserves and allowances of
$474,000
|
· |
A
decrease in accounts receivable of
$1,681,000
|
· |
A
decrease in inventory of $1,130,000
|
· |
A
decrease in other assets in the amount of
$167,000
|
· |
A
decrease in accounts payable in the amount of
$1,976,000
|
Depreciation
declined by $160,000 in 2005 compared to 2004. We anticipate the level of
depreciation to continue for 2006 at approximately the same level as 2005.
The
decrease in inventory during 2005 resulted from an effort to reduce our
inventory of novelty balloon items through discounted and special sales and
from
reduced levels of production arising from reduced sales levels.
During
the nine months ended September 30, 2006, net cash used in operations was
$1,434,000, compared to net cash provided by operations during the same period
in 2005 of $3,417,000.
Significant
changes in working capital items during the nine months ended September 30,
2006
consisted of (i) an increase in accounts receivable of $1,347,000, (ii) an
increase in inventories of $1,265,000, (iii) depreciation in the amount of
$1,073,000, (iv) a decrease in trade payables of $1,288,000, and (v) an increase
in accrued liabilities of $114,000. The increase in receivables is the result
of
increased sales levels compared to the first nine months of 2005. We do
anticipate some reduction in inventories during the fourth quarter of 2006,
but
we do not anticipate other significant changes in working capital items during
the balance of 2006.
Cash
Used In Investing Activities
During
2005, we used net $400,000 in investing activities, consisting of purchases
of
equipment in the amount of $551,000 and sales of assets in the amount of
$151,000. During the nine months ended September 30, 2006, cash used in
investing activities was $330,000, compared to $289,000 in same period of 2005.
We do anticipate incurring additional capital expenditures during the balance
of
2006 for improvements and for the acquisition of production equipment.
Cash
Used In Financing Activities
During
fiscal 2005, cash used in financing activities amounted to $2,474,000, compared
to cash provided by financing activities of $869,000 during fiscal 2004. We
used
a total of $2,604,000 to reduce our short and long term bank debt, and received
$231,000 from the issuance of new long term debt.
As
of
December 31, 2005, we had total loans outstanding from financial
institutions of $10,074,000 consisting principally of a term loan and revolving
line of credit from Cole Taylor Bank, Chicago, Illinois in the total amount
of
$7,209,000 and a mortgage loan from Banco Popular having a balance of
$2,781,000. Under the terms of our loan agreement with Cole Taylor Bank, the
credit facility with that bank expired on December 31, 2005. In December
2005 we entered into an agreement with Cole Taylor Bank under which this credit
facility was extended through January 31, 2006.
On
February 1, 2006, we entered into a Loan Agreement with Charter One Bank,
Chicago, Illinois, under which the Bank agreed to provide a credit facility
to
our Company in the total amount of $12,800,000, which includes (i) a five (5)
year mortgage loan secured by our Barrington, Illinois property in the principal
amount of $2,800,000, amortized over a twenty (20) year period, (ii) a five
(5)
year term-loan secured by our equipment at the Barrington, Illinois plant in
the
amount of $3,500,000 and (iii) a three (3) year revolving line of credit up
to a
maximum amount of $7,000,000, secured by inventory and receivables. The amount
we can borrow on the revolving line of credit includes eighty-five percent
(85%)
of eligible accounts receivable and sixty percent (60%) of eligible inventory.
This loan agreement was amended on June 28, 2006, and again on December 18,
2006 to (i) eliminate the requirement of excess availability and (ii) reduce
the
applicable interest rate.
Certain
key terms of the loan agreement include:
Restrictive
Covenants.
The Loan
Agreement includes several restrictive covenants under which we are prohibited
from, or restricted in our ability to:
· |
Pay
dividends and make distributions;
|
· |
Make
certain investments;
|
· |
Use
assets as security in other
transactions;
|
· |
Enter
into affiliate transactions;
|
· |
Merge
or consolidate; or
|
· |
Transfer
and sell assets.
|
Financial
Covenants.
The loan
agreement includes a series of financial covenants we are required to meet
including:
· |
Commencing
with the quarter ending June 30, 2006 and each quarter thereafter,
we are
required to maintain a tangible net worth (as defined in the agreement)
in
excess of an amount equal to $3,500,000 plus 50% of the consolidated
net
income of the Company in all periods commencing with the quarter
ending
June 30, 2006;
|
· |
We
are required to maintain specified ratios of senior debt to EBITDA
on an
annual basis and determined quarterly commencing as of June 30, 2006;
and,
|
· |
We
are required to maintain a level of EBITDA to fixed charges determined
at
the end of each fiscal quarter commencing on June 30, 2006 for computation
periods provided in the agreement of 1.15 to
1.00
|
The
loan
agreement provides for interest at varying rates in excess of the Bank’s prime
rate, depending on the level of senior debt to EBITDA over time. The initial
interest rate under the loan was prime plus 1.5% per annum. As the Loan
Agreement was amended, on a quarterly basis, commencing with the quarter ended
June 30, 2006, this ratio is measured and the interest rate changed in
accordance with the table below:
When
Senior Debt to Equity is:
|
|
The
Premium to the
Prime
Rate is:
|
|
Greater
or equal to 4.5 to 1.0
|
|
|
1.00
|
%
|
Between
4.5 to 1 and 4.0 to 1
|
|
|
0.75
|
%
|
Between
4.0 to 1 and 3.5 to 1
|
|
|
0.50
|
%
|
Between
3.5 to 1 and 2.75 to 1
|
|
|
0.25
|
%
|
Less
than 2.75 to 1
|
|
|
0.00
|
%
|
|
|
|
|
|
As
of
September 30, 2006, the applicable premium being applied was
0.50%.
Also,
under the loan agreement, we are required to purchase a swap agreement with
respect to at least sixty percent (60%) of the mortgage and term loan portions
of our loan. On April 5, 2006, we entered into a swap arrangement with
Charter One Bank with respect to sixty percent (60%) of the principal amounts
of
the mortgage loan and the term loan, which had the effect of fixing the interest
rate for such portions of the loans for the balance of the loan
terms.
This
loan
closed on February 1, 2006. At that time, we used $10,353,000 of proceeds
of the loan to pay off the loan balances of our Company for the credit facility
at Cole Taylor Bank, Chicago, Illinois and the mortgage loan at Banco
Popular.
Also,
on
February 1, 2006, two (2) principal officers and shareholders of our
Company each loaned to our Company the sum of $500,000 in exchange for (i)
promissory notes due January 31, 2011 and bearing interest at the rate of
two percent (2%) per annum in excess of the prime rate determined quarterly
and
(ii) five (5) year warrants to purchase up to 151,515 shares of common stock
of
the Company at the price of $3.30 per share (110% of the closing market price
on
the day preceding the date of the loans).
For
the
nine (9) months ended September 30, 2006, cash provided by financing
activities was $1,763,000 compared to cash used in financing activities for
the
same period of 2005 in the amount of $3,427,000. Cash provided by financing
activities consisted principally of the proceeds of long-term loans from the
Company’s new banking facility and loans from principal shareholders on
February 1, 2006.
Current
Assets
As
of
December 31, 2005, the total current assets of the Company were
$12,335,000, compared to total current assets of $15,645,000 as of
December 31, 2004. The change in current assets reflects, principally (i) a
reduction in receivables of $1,779,000, (ii) a reduction in inventories of
$1,325,000, (iii) a reduction in cash of $264,000 and (iv) an increase in
prepaid expenses of $60,000. The reduction in receivables is a reflection of
the
reduced level of sales of the Company during the second half of 2005. The net
inventories of the Company decreased from $8,348,000 as of December 31,
2004 to $7,023,000 as of December 31, 2005, a reduction of $1,325,000 or
about fifteen and 9/10 percent (15.9%). The reduction reflects principally
a
decline in the Company’s finished goods inventory of metalized balloons, as the
result of management’s efforts to reduce inventory levels of that product line
and also reduced production levels during the second half of 2005.
As
of September 30, 2006, the total current assets of
the Company were $14,560,000.
Property,
Plant And Equipment
During
fiscal 2005, the Company invested $550,000 in capital items. During 2004, the
Company invested $306,000 in capital items.
During
the nine months ended September 30, 2006, the
Company invested $357,000 in capital items.
Current
Liabilities
Total
current liabilities decreased from $18,435,000 as of December 31, 2004 to
$14,761,000 as of December 31, 2005, a decrease of $3,674,000 or twenty
percent (20%). This reduction reflects: (i) a decrease of $1,430,000 in accounts
payable, (ii) a decrease of $1,350,000 in the amount outstanding on our
revolving line of credit, (iii) an increase in the amount of $6,000 in the
current portion of long term debts and (iv) a decrease of $886,000 in accrued
liabilities.
As
of September 30, 2006, the total current
liabilities of the Company were $13,701,000.
Liquidity
And Capital Resources
As
of
December 31, 2005, our current liabilities exceeded our current assets by
$2,426,000. However, as the result of the Loan Agreement with Charter One Bank
and the long-term subordinated debt investment of two (2) of our principal
shareholders on February 1, 2006, we received long-term debt funding
totaling $7,300,000 and then had positive working capital of approximately
$990,000. At September 30, 2006, the Company had a cash balance of $320,000.
At
September 30, 2006, the Company had a working capital balance of $858,000
compared to a working capital deficit of $2,426,000 at December 31,
2005.
The
Company’s current cash management strategy includes utilizing the Company’s
revolving line of credit for liquidity. On February 1, 2006, the Company
entered into a loan agreement with Charter One Bank, under which the Bank agreed
to provide a credit facility to the Company in the total amount of $12,800,000,
which includes: (i) a five (5) year mortgage loan secured by the
Barrington, Illinois, property in the principal amount of $2,800,000, amortized
over a twenty (20) year period; (ii) a five (5) year loan secured by
the equipment at the Barrington, Illinois, plant in the amount of $3,500,000;
and (iii) a three (3) year revolving line of credit up to a maximum amount
of $6,500,000 secured by inventory and receivables. We are entitled to borrow
an
amount equal to eighty-five percent (85%) of eligible receivables and sixty
percent (60%) of eligible inventory, up to a maximum of $6,500,000. Foreign
receivables and inventory held by our foreign subsidiaries are not eligible.
This loan agreement was amended on June 28, 2006 to (i) eliminate the
requirement of excess availability and (ii) reduce the applicable interest
rate.
In order to be permitted to make advances under the line of credit, we are
required to meet various financial covenants, as set forth above. Proceeds
of
this loan totaling $10,353,000 were utilized to pay the entire outstanding
principal amount of the Company’s outstanding debt obligations to Cole Taylor
Bank and Banco Popular. Under the terms of the loan agreement, the Company
is
restricted from declaring any cash dividends or other distribution on its
shares. As of September 30, 2006, we had complied with all applicable financial
covenants in the loan agreement. Based on our results to date for the year
and
our projected results of operations for the balance of this year, we believe
we
will be in compliance with all applicable financial covenants of the loan
agreement for the balance of 2006. Further, we believe that with our present
cash and working capital and the amounts available to us under our line of
credit, we will have sufficient funds to enable us to meet our obligations
during the balance of 2006. On February 1, 2006, two (2) principal
shareholders and officers of the Company each loaned to the Company the sum
of
$500,000 in exchange for (i) promissory notes due January 31, 2011 and
bearing interest at the rate of two percent (2%) per annum in excess of the
prime rate determined quarterly and (ii) five (5) year warrants to purchase
up
to 151,515 shares of the common stock of the Company, each, at the price of
$3.30 per share (110% of the closing market price on the day preceding the
date
of the loans).
On
June 6, 2006 (the “Closing Date”), the Company entered into a Standby
Equity Distribution Agreement with Cornell Capital pursuant to which the Company
may, at its discretion, periodically sell to Cornell Capital shares of its
common stock, no par value per share, for a total purchase price of up to Five
Million Dollars ($5,000,000). For each share of common stock purchased
under the SEDA, Cornell Capital will pay to the Company one hundred percent
(100%) of the lowest volume weighted average price (as quoted by Bloomberg,
LP)
of the Company’s common stock on the principal market (whichever is at such time
the principal trading exchange or market for the common stock) during the five
(5) consecutive trading days after the Advance Notice Date (as such term is
defined in the SEDA). However, the Company and Cornell Capital have agreed
that
the Company will not sell to Cornell Capital in excess of 400,000 shares unless
and until the Company shall have obtained shareholder approval for such sales.
Cornell’s obligation to purchase shares of our common stock under the Agreement
is subject to certain conditions, including: (i) we shall have obtained an
effective registration statement for the shares of common stock sold to Cornell
under the Agreement and (ii) the amount of each advance requested by us under
the Agreement shall not be more than $100,000.
Cornell
Capital will retain five percent (5%) of each advance under the SEDA as an
underwriting discount. The Company has paid to Yorkville Advisors, LLC
(“Yorkville”) a structuring fee equal to Fifteen Thousand Dollars ($15,000) on
the Closing Date and shall pay Five Hundred Dollars ($500) to Yorkville on
each
Advance Date directly out of the gross proceeds of each Advance (as such terms
are defined in the SEDA). Cornell Capital’s obligation to purchase shares of
common stock under the SEDA is subject to certain conditions, including, without
limitation: (a) the Company obtaining effectiveness of this registration
statement for shares of common stock sold under the SEDA pursuant to that
certain Registration Rights Agreement, dated as of the Closing Date, by and
between the Company and Cornell Capital and (b) the amount for each Advance
as
designated by the Company in the applicable Advance Notice shall be not more
than One Hundred Thousand Dollars ($100,000).
The
Company also entered into that certain Placement Agent Agreement (hereinafter
the “PAA”), dated as of the Closing Date, by and among the Company, Cornell
Capital and Newbridge pursuant to which the Company engaged Newbridge to act
as
it exclusive placement agent in connection with the SEDA. Upon the execution
of
the PAA, the Company issued to Newbridge Three Thousand Five Hundred (3,500)
shares (the “Newbridge Shares”) of the Company’s common stock. Newbridge is
entitled to “piggy-back” registration rights with respect to the Newbridge
Shares and such Newbridge Shares are being registered in this
offering.
On
March 9, 2006, the Company entered into a four (4) year term Production and
Supply Agreement with ITW Spacebag, a division of ITW, under which ITW is to
purchase from the Company (i) all of its requirements for a certain kind of
pouch for the storage of personal and household items and (ii) all of its
requirements, subject to being price competitive, for film to be utilized by
ITW
to produce certain other storage pouches.
We
believe that we have sufficient cash and financial resources to meet our
operating requirements through December 31, 2007.
Shareholders’
Equity
Shareholders’
equity was $2,726,000 as of December 31, 2005 compared to $2,951,000 as of
December 31, 2004.
As
of September 30, 2006, shareholders' equity was
$3,975,000.
The
contractual commitments of the Company, determined as of December 31, 2005,
over the next five (5) years are as follows:
|
|
Future
Minimum Principal Payments
|
|
Operating
Leases
|
|
Other
Liabilities
|
|
Licenses
|
|
Total
|
|
2006
|
|
$
|
3,567,144
|
|
$
|
414,876
|
|
$
|
--
|
|
$
|
76,664
|
|
$
|
4,058,684
|
|
2007
|
|
|
811,992
|
|
|
345,643
|
|
|
850,000
|
|
|
76,664
|
|
|
2,084,299
|
|
2008
|
|
|
811,992
|
|
|
51,700
|
|
|
794,339
|
|
|
76,664
|
|
|
1,734,695
|
|
2009
|
|
|
896,454
|
|
|
51,700
|
|
|
--
|
|
|
--
|
|
|
948,154
|
|
2010
|
|
|
811,992
|
|
|
51,700
|
|
|
--
|
|
|
--
|
|
|
863,692
|
|
Thereafter
|
|
|
2,375,366
|
|
|
465,300
|
|
|
--
|
|
|
--
|
|
|
2,840,666
|
|
Total
|
|
$
|
9,274,940
|
|
$
|
1,380,919
|
|
$
|
1,644,339
|
|
$
|
229,992
|
|
$
|
12,530,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company does not have any current material commitments for capital
expenditures.
Seasonality
In
recent
years, sales in the metalized balloon product line have historically been
seasonal with approximately forty-five percent (45%) occurring in the period
from December through March and twenty-one percent (21%) being
generated in the period from July through October. The sale of latex
balloons and laminated film products have not historically been seasonal, and
as
sales in these products lines have increased as a percentage of total sales,
the
seasonality of the Company’s total net sales has decreased.
Critical
Accounting Policies
The
financial statements of the Company are based on the selection and application
of significant accounting policies which require management to make various
estimates and assumptions. The following are some of the more critical judgment
areas in the application of our accounting policies that currently affect our
financial condition and results of operation.
Revenue
Recognition
Substantially
all of the Company’s revenues are derived from the sale of products. With
respect to the sale of products, revenue from a transaction is recognized when
(i) a definitive arrangement exists for the sale of the product,
(ii) delivery of the product has occurred, (iii) the price to the buyer has
been fixed or is determinable and (iv) collectibility is reasonably assured.
The
Company generally recognizes revenue for the sale of products when the products
have been shipped and invoiced. In some cases, product is provided on
consignment to customers. In those cases, revenue is recognized when the
customer reports a sale of the product.
Allowance
For Doubtful Accounts
We
estimate our allowance for doubtful accounts based on an analysis of specific
accounts, an analysis of historical trends, payment and write-off histories.
Our
credit risks are continually reviewed and management believes that adequate
provisions have been made for doubtful accounts. However, unexpected changes
in
the financial condition of customers or changes in the state of the economy
could result in write-offs, which exceed estimates and negatively impact our
financial results.
Inventory
Valuation
Inventories
are stated at the lower of cost or market. Cost is determined using standard
costs which approximate costing determined on a first-in, first out basis.
Standard costs are reviewed and adjusted periodically and at year end based
on
actual direct and indirect production costs. Labor, overhead and purchase price
variances from standard costs are determined on a monthly basis and inventory
is
adjusted monthly reflecting these variances. On a periodic basis, the Company
reviews its inventory levels for estimated obsolescence or unmarketable items,
in reference to future demand requirements and shelf life of the products.
As of
December 31, 2005, the Company had established a reserve for obsolescence,
marketability or excess quantities with respect to inventory in the aggregate
amount of $255,000. As of December 31, 2004, the amount of the reserve was
$187,000. In addition, on a periodic basis, the Company disposes of inventory
deemed to be obsolete or unsaleable and, at such time, records an expense for
the value of such inventory.
As
of September 30, 2006, the amount of the reserve
was $359,000.
Valuation
Of Long-Lived Assets
We
evaluate whether events or circumstances have occurred which indicate that
the
carrying amounts of long-lived assets (principally property and equipment and
goodwill) may be impaired or not recoverable. Significant factors which may
trigger an impairment review include: changes in business strategy, market
conditions, the manner of use of an asset, underperformance relative to
historical or expected future operating results, and negative industry or
economic trends. In 2001, the FASB issued Statement No. 142, “Goodwill and
Other Intangible Assets”, which among other things, eliminates the amortization
of goodwill and certain other intangible assets and requires that goodwill
be
evaluated annually for impairment by applying a fair-value based test. We
retained valuation consulting firms to conduct an evaluation of our goodwill
in
our Mexico subsidiary December 2004 and 2005. As of December 31, 2005,
the valuation consulting firm determined that the fair value of the Company’s
interest in Flexo Universal was $988,000, and the carrying value of $1,113,000
was impaired by $124,000. Accordingly, we have recorded the amount of this
impairment as an expense and have reduced the carrying value of the Company’s
interest in Flexo Universal to $989,000.
Income
Taxes And Deferred Tax Assets
Income
taxes are accounted for as prescribed in SFAS No. 109-Accounting for Income
Taxes. Under the asset and liability method of Statement 109, the Company
recognizes the amount of income taxes currently payable. 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.
As
of
December 31, 2005, the Company had a net deferred tax asset of $2,807,000,
representing the amount the Company may recover in future years from future
taxable income. As of December 31, 2004, the amount of the deferred tax
asset was $2,606,299. Each quarter and year-end management must make a judgment
to determine the extent to which the deferred tax asset will be recovered from
future taxable income. Management of the Company has determined that an
appropriate allowance against the deferred tax asset, as of December 31,
2005, is $2,454,000. The Company recorded a deferred tax benefit of
$200,000 during 2005 as management has determined that this
deferred tax asset is more likely than not to be realized.
As
of September 30, 2006, the Company had a net
deferred tax asset of $2,606,000.
Recently
Issued Accounting Standards
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123(R), “Share-Based
Payment” (“SFAS Statement 123R”), which replaces SFAS No. 123, “Accounting
for Stock-Based Compensation”, and supercedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees”. This statement requires that all
share-based payments to employees be recognized in the financial statements
based on their fair values on the date of grant. The Company currently uses
the
intrinsic value method to measure compensation expense for stock-based awards.
The Stock Based Compensation caption within Note 3 provides a pro forma net
income (loss) and earnings per share as if the Company had used a fair-value
based method provided by SFAS l23R to measure stock-based compensation for
2004,
2003 and 2002. SFAS No. 123R is effective as of the beginning of the first
interim or annual reporting period that begins after December 31, 2005 and
applies to all awards granted, modified, repurchased or cancelled after the
effective date. The Company is evaluating the requirements of SFAS 123R and
expects that its adoption will not have a material impact on the Company’s
consolidated results of operations and earnings per share.
In
November of 2004, the FASB issued SFAS No. 151, “Inventory Cost”,
which amends the guidance in APB No. 43, Chapter 4, “Inventory Pricing”, to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). This statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally,
SFAS 151 requires that allocation of fixed production overheads to the costs
of
conversion be based on the normal capacity of the production facilities. The
Company is required to adopt the provisions of SFAS No. 151 in the first
quarter of 2006. The Company does not expect SFAS 151 to have a material impact
on its consolidated results of operations or financial condition.
In
December of 2004, the FASB issued SFAS No. 153, “Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29” (SFAS 153). SFAS
153 eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS 153 is effective for fiscal
years beginning after June 15, 2005 and is required to be adopted by the
Company in the first quarter of 2006. The Company does not believe that the
adoption of SFAS 153 will have a material impact on the Company’s consolidated
results of operations or financial condition.
In
May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, “Accounting Changes and Error
Corrections - a replacement of APB No. 20 and FASB Statement No. 3”
(“SFAS 154”). SFAS 154 replaces APB No. 20, “Accounting Changes” and FASB
Statement No. 3, “Reporting Accounting Changes in Interim Financial
Statements” and changes the requirement for accounting for and reporting of a
change in accounting principles. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company does not anticipate that adoption of SFAS 154 will have a
material impact on the financial position, results of operations or its cash
flows.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income
Taxes-an interpretation FASB No. 109
(“FIN
48”), which prescribes accounting for and disclosure of uncertainty in tax
positions. This interpretation defines the criteria that must be met for the
benefits of a tax position to be recognized in the financial statements and
the
measurement of tax benefits recognized. The provisions of FIN 48 are effective
as of the beginning of the Company’s 2007 fiscal year, with the cumulative
effect of the change in accounting principle recorded as an adjustment to
opening retained earnings. The Company is currently evaluating that impact
of
adopting FIN 48 on the Company’s consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair
Value Measurements,
(“SFAS
157”). This Standard defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The adoption of SFAS 157 is not expected
to
have a material impact on the Company’s financial position, results of
operations or cash flows.
MANAGEMENT
The
Directors and executive officers of CTI, their age, positions in CTI, the dates
of their initial election or appointment as Directors or executive officers,
and
the expiration of the terms are as follows:
Name
|
|
Age
|
|
Position
With The Company
|
John H.
Schwan
|
|
63
|
|
Chairman
and Director
|
Howard
W. Schwan
|
|
52
|
|
President
and Director
|
Stephen M.
Merrick
|
|
65
|
|
Executive
Vice President, Secretary and Director
|
Brent
Anderson
|
|
40
|
|
Vice
President of Manufacturing
|
Samuel
Komar
|
|
50
|
|
Vice
President of Marketing
|
Steven
Frank
|
|
45
|
|
Vice
President of Sales
|
Timothy
Patterson
|
|
46
|
|
Vice
President of Finance and Administration
|
Stanley
M. Brown
|
|
60
|
|
Director
|
Bret
Tayne
|
|
48
|
|
Director
|
Michael
Avramovich
|
|
54
|
|
Director
|
John
I. Collins
|
|
46
|
|
Director
|
|
|
|
|
|
All
directors hold office until the annual meeting next following their election
and/or until their successors are elected and qualified. Officers are elected
annually by the Board of Directors (the “Board”) and serve at the discretion of
the Board. Information with respect to the business expenses 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 an executive officer of Rapak L.L.C.
or affiliated companies (a related party) for over the last fifteen (15) years.
Mr. Schwan has over twenty (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.
Howard
W. Schwan, President.
Mr. Schwan has been associated with the Company for twenty-one (21) 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.
Stephen M.
Merrick, Executive Vice President and Secretary.
Mr. Merrick has been a Director of the Company for more than twenty (20)
years and has been an officer of the Company since 1996. Mr. Merrick was a
principal of the law firm Merrick & Associates, P.C. and is Of Counsel to
the law firm of Vanasco Genelly & Miller, Chicago, Illinois, who have
provided legal services to the Company, and has been engaged in the practice
of
law for more than forty (40) years. Mr. Merrick 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.
Brent
Anderson, Vice President of Manufacturing.
Mr. Anderson has been employed by the Company since January 1989, and
was named Vice President of Manufacturing in June 1997. Mr. Anderson
has held several management positions within the Company including Plant Manger
and Plant Engineer. In such capacities Mr. Anderson was responsible for the
design and manufacture of much of the Company’s manufacturing equipment.
Mr. Anderson earned a Bachelor of Science Degree in Manufacturing
Engineering from Bradley University.
Samuel
Komar, Vice President of Marketing.
Mr. Komar has been employed by the Company since March of 1998, and
was named Vice-President of Sales in September of 2001. Mr. Komar has
worked in sales for sixteen (16) years, and prior to his employment with the
Company, Mr. Komar was with Bob Gable & Associates, a manufacturer of
sporting goods. Mr. Komar received a Bachelor of Science Degree in Sales
and Marketing from Indiana University.
Steven
Frank, Vice President of Sales.
Mr. Frank has been employed by the Company since July 1996.
Mr. Frank was hired as Sales Manager Wholesale Division and in
March 1998 was promoted to National Sales Manager and most recently to Vice
President of Sales in May 2005. Mr. Frank is responsible for all sales
functions of the Novelty Division.
Timothy
Patterson, Vice President of Finance and
Administration.
Mr. Patterson has been employed by the Company as Vice President of Finance
and Administration since September, 2003. Prior to his employment with the
Company, Mr. Patterson was Manager of Controllers for the Thermoforming
group at Solo Cup Company for two (2) years. Prior to that, Mr. Patterson
was Manager of Corporate Accounting for Transilwrap Company for three years.
Mr. Patterson received a Bachelor of Science degree in finance from
Northern Illinois University and an MBA from the University of Illinois at
Chicago.
Stanley
M. Brown, Director.
Mr. Brown was appointed as a Director of the Company in January 1996.
Since March 1996, Mr. Brown has been President of Inn-Room Systems,
Inc., a manufacturer and lessor of in-room vending systems for hotels. 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 the 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.
Michael
Avramovich, Director.
Mr. Avramovich is a principal of the law firm of Avramovich &
Associates, P.C. of Chicago, Illinois, and has been engaged in the practice
of
law for over seven (7) years. Prior to the practice of law, Mr. Avramovich
was an Associate Professor of Accounting and Finance at National-Louis
University in Chicago, Illinois. Mr. Avramovich has also worked in various
financial accounting positions at Molex International, Inc. of Lisle, Illinois.
Mr. Avramovich received a Bachelor of Arts degree in History and
International Relations from North Park University, a Master of Management,
Accounting and Information Systems, and Finance from Northwestern University,
a
Juris Doctor from the John Marshall Law School and an LLM in International
and
Corporate Law from Georgetown University Law Center.
John
I. Collins, Director.
Mr. Collins is the Chief Administrative Officer and the former Chief
Financial Officer of Mid-States Corporate Federal Credit Union (“MSCFCU”). Prior
to his affiliation with MSCFCU in 2001, Mr. Collins was employed as both a
Controller and Chief Financial Officer by Great Lakes Credit Union (“GLCU”), a
$350 million financial institution located in North Chicago, Illinois.
Mr. Collins is currently the Treasurer of the Illinois Credit Union
Executives Society, and is a former member of the Chicago Federal Reserve Bank
Advisory Group. Mr. Collins received a Bachelor of Arts degree in
Economics, History and English from Ripon College, and a Masters in Business
Administration from Emory University. Mr. Collins has also participated in
the Kellogg Management Institute and the Consumer Marketing Strategy programs
at
Northwestern University on a post-graduate basis.
John H.
Schwan and Howard W. Schwan are brothers.
Committees
of the Board of Directors
The
Company’s Board of Directors has standing Audit, Compensation and Nominating
Committees. The Board of Directors met four times during 2005. No director
attended less than 75% of the combined Board of Directors and Committee
meetings.
The
Compensation Committee is composed of Stanley M. Brown, John I. Collins and
Bret
Tayne. The Compensation Committee reviews and makes recommendations to the
Board
of Directors concerning the compensation of officers and key employees of the
Company. The Compensation Committee met one time during 2005.
The
Nominating Committee is composed of Stanley M. Brown and John I. Collins. The
Nominating Committee identifies and reviews potential candidates for the Board
of Directors and makes recommendations concerning potential candidates for
the
Board of Directors of the Company. The Nominating Committee did not meet
separately during 2005.
Audit
Committee
Since
2000, the Company has had a standing Audit Committee, which is presently
composed of Mr. Tayne, Mr. Brown, Mr. Collins and
Mr. Avramovich. Mr. Avramovich has been designated and is the
Company’s “Audit Committee Financial Expert” pursuant to paragraph (h)(1)(i)(A)
of Item 401 of Regulation S-K of the Exchange Act. The Audit Committee held
four
meetings during fiscal year 2005, including quarterly meetings with management
and independent auditors to discuss the Company’s financial statements.
Mr. Avramovich and each appointed member of the Audit Committee satisfies
the definition of “independent” as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act. The Company’s Board of Directors has
adopted a written charter for the Company’s Audit Committee. The Audit Committee
reviews and makes recommendations to the Company about its financial reporting
requirements. Information regarding the functions performed by the Committee
is
set forth in the “Report of the Audit Committee”, as follows:
Report
of the Audit Committee
The
Audit
Committee oversees the Company’s financial reporting process on behalf of the
Board of Directors. Management has the primary responsibility for the financial
statements and the reporting process including the systems of internal controls.
In fulfilling its oversight responsibilities, the Committee reviewed the audited
financial statements in the Annual Report with management including a discussion
of the quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in
the
financial statements.
The
Committee reviewed with the independent auditors, who are responsible for
expressing an opinion on the conformity of those audited financial statements
with generally accepted accounting principles, their judgments as to the
quality, not just the acceptability, of the Company’s accounting principles and
such other matters as are required to be discussed with the Committee under
generally accepted auditing standards, including but not limited to those
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU §380). In addition, the Committee has discussed with the
independent auditors the auditor’s independence from management and the Company
including the matters in the written disclosures required by the Independence
Standards Board.
The
Committee discussed with the Company’s independent auditors the overall scope
and plans for their respective audits. The Committee meets with the independent
auditors, with and without management present, to discuss the results of their
examinations, their evaluations of the Company’s internal controls, and the
overall quality of the Company’s financial reporting.
In
reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Annual Report on Form 10-K
for
the year ended December 31, 2005 for filing with the Securities and
Exchange Commission. The Committee and the Board have also recommended, subject
to future shareholder approval at the Company’s 2006 annual meeting of
shareholders, the selection of Weiser LLP as the Company’s independent
auditors.
Michael
Avramovich, Audit Committee Chair
Bret
Tayne, Audit Committee Member
Stanley
M. Brown, III, Audit Committee Member
John
I.
Collins, Audit Committee Member
Nominating
Committee
In
2005,
the Company established a Nominating Committee. The Nominating Committee
consists of two directors, Stanley M. Brown III and John I. Collins. The
Nominating Committee does not have a charter. The Board of Directors has
determined that each of the members of the Nominating Committee is independent
as defined in the listing standards for the NASDAQ Stock Market.
The
Nominating Committee has not adopted a formal policy with regard to
consideration of director candidates recommended by security holders. The
Company believes that continuing service of qualified incumbent members of
the
Board of Directors promotes stability and continuity at the Board level,
contributes to the Board’s ability to work as a collective body and provides the
benefit of familiarity and insight into the Company’s affairs. Accordingly, the
process of the Nominating Committee for identifying nominees reflects the
Company’s practice of re-nominating incumbent directors who continue to satisfy
the criteria for membership on the Board. For vacancies which are anticipated
on
the Board of Directors, the Nominating Committee intends to seek out and
evaluate potential candidates from a variety of sources that may include
recommendations by security holders, members of management and the Board of
Directors, consultants and others. The minimum qualifications for potential
candidates for the Board of Directors include demonstrated business experience,
decision-making abilities, personal integrity and a good reputation. In light
of
the foregoing, and the fact that one new independent director was elected to
the
Board in 2004, it is believed that a formal policy and procedure with regard
to
consideration of director candidates recommended by security holders is not
necessary in order for the Nominating Committee to perform its
duties.
The
Nominating Committee did not meet separately during 2005. All of the independent
directors of the Board of Directors of the Company participated in the
nominating process and voted in favor of the nomination of the of the persons
nominated for election as directors at the Annual Meeting of Stockholders to
be
held on November 10, 2006.
Executive
Compensation
The
following table sets forth a summary of the compensation paid or accrued during
the last three fiscal years by the Company to its President, Chief Executive
Officer and any other officer who was an officer of the Company at
December 31, 2005, and who received compensation in excess of $100,000
(“Named Executive Officers”).
Summary
Compensation Table
|
|
|
|
Annual
Compensation
|
|
Long
Term Compensation
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
$
|
|
Underlying
Options
#
of Shares
|
|
All
Other Compensation ($)
|
|
Howard
W. Schwan -
|
|
|
2005
|
|
$
|
138,000
|
|
|
|
|
$
|
20,280
|
(1)
|
President
|
|
|
2004
|
|
$
|
153,000
|
|
|
|
|
$
|
12,705
|
(2)
|
|
|
|
2003
|
|
$
|
162,500
|
|
|
|
|
$
|
17,445
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Frank -
|
|
|
|
|
$
|
97,000
|
|
|
10,000
|
|
|
|
|
VP
of Sales
|
|
|
|
|
$
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent
Anderson -
|
|
|
2005
|
|
$
|
105,000
|
|
|
10,000
|
|
|
|
|
VP
of Manufacturing
|
|
|
2004
|
|
$
|
99,000
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Samuel
Komar -
|
|
|
2005
|
|
$
|
104,200
|
|
|
7,500
|
|
|
|
|
VP
of Market
|
|
|
2004
|
|
$
|
108,000
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
104,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Patterson -
|
|
|
2005
|
|
$
|
92,500
|
|
|
10,000
|
|
|
|
|
VP
of Finance
|
|
|
2004
|
|
$
|
92,500
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
85,000
|
|
|
5,000
|
|
|
|
|
(1)
Includes
Payment of Country Club Dues of $5,520, Employer matching contributions to
the
company’s 401(k) plan, a defined contribution plan of $2,760 and Directors Fees
paid to the directors of our UK subsidiary CTI Balloons Ltd of
$12,000.
(2)
Includes
Payment of Country Club Dues of $5,520, Employer matching contributions to
the
company’s 401(k) plan, a defined contribution plan, of $4,685, premiums on Life
Insurance policy on which Mr. Schwan’s estate is entitled to death
benefits, $2,500.00.
(3)
Includes
Payment of Country Club Dues of $5,520, Employer matching contributions to
the
company’s 401(k) plan, a defined contribution plan of $1,925 and premiums on
Life Insurance policy on which Mr. Schwan’s estate is entitled to death
benefits, $10,000.
The
Company has never granted any stock appreciation rights. During the period
from
January 1, 1999 to December 31, 2003, there have been no awards or
payments made for long-term incentive compensation (other than stock option
and
warrant grants) and there have been no restricted stock grants to any of the
Named Executive Officers.
Certain
Named Executive Officers have received warrants to purchase Common Stock of
the
Company in connection with their guarantee of certain bank loans secured by
the
Company and in connection with their participation in a private offering of
notes and warrants conducted by the Company. See “Board of Director Affiliations
and Related Transactions” below.
The
following table provides information related to options to purchase our common
stock granted to Named Executives during the fiscal year ended December 31,
2005:
|
|
|
|
|
|
|
|
|
|
Potential
Realizable Value at Assumed Annual Rates of Stock Price Appreciation
for
Option Term
|
|
Grantee
|
|
#
of Options
|
|
%
of Total Options Granted to Employees
|
|
Exercise
Price
|
|
Expiration
Date
|
|
5%
($)
|
|
10%
(%)
|
|
Schwan,
Howard
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Komar,
Sam
|
|
|
7,500
|
|
|
9.50
|
%
|
$
|
2.88
|
|
|
12/30/15
|
|
$
|
13,584.12
|
|
|
159.40
|
%
|
Anderson,
Brent
|
|
|
10,000
|
|
|
12.70
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
18,112.17
|
|
|
159.40
|
%
|
Patterson,
Tim
|
|
|
10,000
|
|
|
12.70
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
18,112.17
|
|
|
159.40
|
%
|
Frank,
Steve
|
|
|
10,000
|
|
|
12.70
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
18,112.17
|
|
|
159.40
|
%
|
Collins,
John
|
|
|
1,000
|
|
|
1.30
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
1,811.21
|
|
|
159.40
|
%
|
Brown,
Stanley
|
|
|
1,000
|
|
|
1.30
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
1,811.21
|
|
|
159.40
|
%
|
Tayne,
Bret
|
|
|
1,000
|
|
|
1.30
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
1,811.21
|
|
|
159.40
|
%
|
Avromovich,
Michael
|
|
|
1,000
|
|
|
1.30
|
%
|
|
2.88
|
|
|
12/30/15
|
|
|
1,811.21
|
|
|
159.40
|
%
|
Aggregated
Option Exercises in Last Fiscal Year and FY-End Option
Values
Name
|
|
Shares
Acquired on Exercise
(#)
|
|
Value
Realized ($)
|
|
Number
of Securities Underlying Unexercised Options at Year End (#)
Exercisable/Unexercisable
|
|
Value
of Unexercised In- the-Money Options at Fiscal Year End ($)
Exercisable/Unexercisable
(1)
|
|
John H.
Schwan
|
|
|
0
|
|
|
0
|
|
|
21,826/0
|
|
$
|
2,143/0
|
(1)
|
Howard
W. Schwan
|
|
|
0
|
|
|
0
|
|
|
53,968/0
|
|
$
|
32,859/0
|
(1)
|
Stephen M.
Merrick
|
|
|
0
|
|
|
0
|
|
|
21,826/0
|
|
$
|
2,143/0
|
(1)
|
Brent
Anderson
|
|
|
0
|
|
|
0
|
|
|
41,549/0
|
|
$
|
25,715/0
|
(1)
|
Samuel
Komar
|
|
|
0
|
|
|
0
|
|
|
32,501/0
|
|
$
|
25,869/0
|
(1)
|
Timothy
Patterson
|
|
|
0
|
|
|
0
|
|
|
15,000/0
|
|
$
|
3,400/0
|
(1)
|
Stanley
M. Brown
|
|
|
0
|
|
|
0
|
|
|
9,532/0
|
|
$
|
1,816/0
|
(1)
|
Bret
Tayne
|
|
|
0
|
|
|
0
|
|
|
9,532/0
|
|
$
|
5,459/0
|
(1)
|
Michael
Avramovich
|
|
|
0
|
|
|
0
|
|
|
1,000/0
|
|
$
|
30/0
|
(1)
|
John
Collins
|
|
|
0
|
|
|
0
|
|
|
1,000/0
|
|
$
|
30/0
|
(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, 2004.
|
Equity
Compensation Plan Information
The
following table provides information regarding the Company’s equity compensation
plans as of December 31, 2005:
Equity
Compensation Plan Information
|
|
Number
of securities to be issued upon exercise of outstanding
options.
|
|
Weighted-average
exercise price of outstanding options.
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
Plan
Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
Stock Option Plan
|
|
|
120,454
|
|
$
|
2.61
|
|
|
25,382
|
|
2001
Stock Option Plan
|
|
|
47,645
|
|
|
1.93
|
|
|
74,335
|
|
1999
Stock Option Plan
|
|
|
53,574
|
|
|
1.89
|
|
|
91,468
|
|
1007
Stock Option Plan
|
|
|
92,463
|
|
|
6.52
|
|
|
32,540
|
|
Outside
Options
|
|
|
23,810
|
|
|
2.10
|
|
|
23,810
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
337,946
|
|
$
|
3.44
|
|
|
247,535
|
|
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee of the Board of Directors of the Company is composed
of
Stanley M. Brown, John I. Collins and Bret Tayne. All members of the
Compensation Committee are independent directors. None of the members of the
Compensation Committee is an officer or employee of our Company. No executive
officer of our company serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our Compensation Committee.
Compensation
Committee Report on Executive Compensation
The
Compensation Committee is responsible for establishing the standards and
philosophy of the Board of Directors regarding executive compensation, for
reviewing and evaluating executive compensation and compensation programs,
and
for recommending levels of salary and other forms of compensation for executives
of the Company to the Board of Directors. The full Board of Directors of the
Company is responsible for setting and administering salaries, bonus payments
and other compensation awards to executives of the Company.
Compensation
Philosophy
The
philosophy of the Compensation Committee, and of the Board of Directors of
the
Company, regarding executive compensation includes the following principal
components:
To
attract and retain quality executive talent, which is regarded as critical
to
the long and short-term success of the Company, in substantial part by offering
compensation programs which provide attractive rewards for successful
effort.
To
provide a reasonable level of base compensation to senior
executives.
To
create
a mutuality of interest between executive officers of the Company and
shareholders through long-term compensation structures, particularly stock
option programs, so that executive officers share the risks and rewards of
strategic decision making and its effect on shareholder value.
The
Compensation Committee has recommended, and the Board of Directors has
determined, to take appropriate action to comply with the provisions of Section
162(m) of the Internal Revenue Code so that executive compensation will be
deductible as an expense to the fullest extent allowable.
The
Company’s executive compensation program consists of two key elements: (i) an
annual component consisting of base salary and (ii) a long-term component,
principally stock options.
Annual
Base Compensation
The
Compensation Committee recommends annual salary levels for each of the Named
Executives, and for other senior executives of the Company, to the Board of
Directors. The recommendations of the Compensation Committee for base salary
levels for senior executives of the Company are determined annually, in part,
by
evaluating the responsibilities of the position and examining market
compensation levels and trends for similar positions in the marketplace.
Additional factors which the Compensation Committee considers in recommending
annual adjustments to base salaries include: results of operation of the
Company, sales, shareholder returns, and the experience, work-performance,
leadership and team building skills of each executive. The Company receives
information from the Chief Executive Officer with regard to these matters.
While
each of these factors is considered in relatively equal weight, the Compensation
Committee does not utilize performance matrices or measured weightings in its
review. Each year, the Compensation Committee conducts a structured review
of
base compensation of senior executives with input from the Chief Executive
Officer.
Long-Term
Component - Stock Options
The
long-term component of compensation provided to executives of the Company has
been in the form of stock options. The Compensation Committee has recommended
to
the Board of Directors that a significant portion of the total compensation
to
executives be in the form of incentive stock options. Stock options are granted
with an exercise price equal to or greater than the fair market value of the
Company’s Common Stock on the date of the grant. Stock options are exercisable
between one and ten years from the date granted. Such stock options provide
incentive for the creation of shareholder value over the long-term since the
full benefit of the compensation package for an executive cannot be realized
unless an appreciation in the price of the Company’s Common Stock occurs over a
specified number of years.
The
magnitude of the stock option awards are determined annually by the Compensation
Committee and the Board of Directors. Generally, the number of options granted
to an executive has been based on the relative salary level of the
executive.
On
December 30, 2005, incentive stock options to purchase up to 10,000,
10,000, 10,000, 1,000, 1,000, 1,000 and 1,000 shares of the Company’s Common
Stock were granted to Messrs. Brent Anderson, Steven Frank, Timothy Patterson,
Bret Tayne, Stanley M. Brown, Michael Avromovich, and John Collins,
respectively, under the 2002 Stock Option Plan (the “2002 Plan”). On
December 31, 2003, options to purchase up to 5,000 shares of the Company’s
Common Stock were granted to Timothy Patterson under the 2002 Stock Option
Plan.
There
were no other stock options granted to any of the Named Executives in 2003,
2004
or 2005.
CEO
Compensation
The
Compensation Committee utilizes the same standards and methods for recommending
annual base compensation for the Chief Executive Officer of the Company as
it
does for other senior executive officers of the Company.
In
1997,
the Company entered into an Employment Agreement with Howard W. Schwan,
President of the Company, providing that Mr. Schwan’s base annual
compensation would not be less than $135,000. During 2003, 2004 and 2005, upon
the recommendation of the Compensation Committee, the base salary of
Mr. Schwan was $162,500, $153,000 and $138,000, respectively.
The
Compensation Committee has evaluated the compensation of Mr. Schwan in
light of the results of operation of the Company and in comparison to
compensation levels of similar companies. The Compensation Committee determined
that Mr. Schwan’s level of base compensation be $138,000.
Compensation
Committee
Comparative
Stock Price Performance Graph
The
following graph compares, for the period January 1, 2001 to
December 31, 2005, the cumulative total return (assuming reinvestment of
dividends) on the Company’s Common Stock with (i) the NASDAQ Stock Market Index
(U.S.) and (ii) a peer group including S&P 500 Specialty Stores. The graph
assumes an investment of $100 on January 1, 2001, in the Company’s Common
Stock and each of the other investment categories.
Comparison
of Cumulative Total Return
|
|
INDEXED
RETURNS
|
|
|
|
Base
Period
|
|
Years
Ending
|
|
Company
/ Index
|
|
|
Oct-00
|
|
|
Dec-00
|
|
|
Dec-01
|
|
|
Dec-02
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
CTI
INDUSTRIES CORP
|
|
|
100
|
|
|
53.33
|
|
|
93.33
|
|
|
397.46
|
|
|
143.49
|
|
|
92.06
|
|
|
222.10
|
|
NASDAQ
U.S. INDEX
|
|
|
100
|
|
|
72.95
|
|
|
57.87
|
|
|
40.01
|
|
|
59.82
|
|
|
65.10
|
|
|
75.60
|
|
S&P
500 SPECIALTY STORES
|
|
|
100
|
|
|
86.63
|
|
|
139.84
|
|
|
124.3
|
|
|
167.37
|
|
|
176.08
|
|
|
181.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment
Agreements
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 was through June 30, 2002 and is automatically
renewed thereafter for successive one year terms. 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 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 $24,000 in fiscal 2005 for his services
as Chairman of the Board of Directors. Further, he received an additional
$12,000 in directors fees in 2005 from CTI Balloons Limited located in the
United Kingdom. Directors other than members of management received a fee of
$1,000 for each Board meeting attended.
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 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 2004, all Section 16(a) filing requirements applicable to the
officers, directors and ten-percent beneficial shareholders were complied
with.
Code
of Ethics
The
Company has adopted a code of ethics that applies to its senior executive and
financial officers. The Company’s Code of Ethics seeks to promote (i) honest and
ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships, (ii) full, fair,
accurate, timely and understandable disclosure of information to the Commission,
(iii) compliance with applicable governmental laws, rules and regulations,
(iv)
prompt internal reporting of violations of the Code to predesignated persons,
and (v) accountability for adherence to the Code.
PRINCIPAL
SHAREHOLDERS
The
following table provides information concerning the beneficial ownership of
the
Company’s common stock by each director and nominee for director, certain
executive officers, and by all directors and officers of the Company as a group
as of December 11, 2006. In addition, the table provides information concerning
the beneficial owners known to the Company to hold more than five percent (5%)
of the outstanding common stock of the Company as of December 11,
2006.
The
amounts and percentage of stock beneficially owned are reported on the basis
of
regulations of the “SEC” governing the determination of beneficial ownership of
securities. Under the rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares “voting power”, which includes
the power to dispose of or to direct the disposition of such security. A person
is also deemed to be a beneficial owner of any securities of which that person
has a right to acquire beneficial ownership within sixty (60) days after
December 11, 2006. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed a beneficial
owner of securities as to which he has no economic interest. Percentage of
class
is based on 2,142,097 shares of common stock outstanding as of December 11,
2006.
Name
and Address (1)
|
|
Shares
of Common Stock Beneficially Owned (2)
|
|
Percent
of Common Stock(4)
|
|
|
|
|
|
|
|
John
H. Schwan
|
|
|
744,228(3
|
)
|
|
34.74
|
%
|
Stephen
M. Merrick
|
|
|
698,123(5
|
)
|
|
32.59
|
%
|
Howard
W. Schwan
|
|
|
176,676(6
|
)
|
|
8.25
|
%
|
Brent
Anderson
|
|
|
67,385(7
|
)
|
|
3.15
|
%
|
Steve
Frank
|
|
|
29,049(8
|
)
|
|
1.36
|
%
|
Samuel
Komar
|
|
|
20,834(9
|
)
|
|
*
|
|
Timothy
Patterson
|
|
|
16,448(10
|
)
|
|
*
|
|
Stanley
M. Brown
|
|
|
|
|
|
|
|
1140
Larkin
|
|
|
|
|
|
|
|
Wheeling,
IL 60090
|
|
|
9,532(11
|
)
|
|
*
|
|
Bret
Tayne
|
|
|
|
|
|
|
|
6834
N. Kostner Avenue
|
|
|
|
|
|
|
|
Lincolnwood,
IL 60712
|
|
|
9,532(12
|
)
|
|
*
|
|
Michael
Avramovich
|
|
|
|
|
|
|
|
70
W. Madison Street, Suite 1400
|
|
|
|
|
|
|
|
Chicago,
IL 60602
|
|
|
1,000(13
|
)
|
|
*
|
|
John
Collins
|
|
|
|
|
|
|
|
262
Pine Street
|
|
|
|
|
|
|
|
Deerfield,
IL 60015
|
|
|
1,000(14
|
)
|
|
*
|
|
All
Current Directors and Executive Officers As A Group (11
persons)
|
|
|
1,773,807
|
|
|
82.81%(4
|
)
|
* 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.
|
(2)
|
A
person is deemed to be the beneficial owner of securities that can
be
acquired within sixty (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 sixty (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 ownership of any other
person.
|
(3)
|
Includes
warrants to purchase up to 151,515 shares of common stock at $3.30
per
share, warrants to purchase up to 93,000 shares of common stock at
$4.87
per share, options to purchase 15,873 shares of common stock at $6.93
per
share granted under the Company’s 1997 Stock Option Plan and options to
purchase up to 5,953 shares of common stock at $2.55 per share granted
under the Company’s 2002 Stock Option
Plan.
|
(4)
|
Assumes
the exercise of all warrants and options owned by the named person
into
shares of common stock.
|
(5)
|
Includes
warrants to purchase up to 151,515 shares of common stock at $3.30
per
share, warrants to purchase up to 70,000 shares of common stock at
$4.87
per share, options to purchase 15,873 shares of common stock at $6.93
per
share granted under the Company’s 1997 Stock Option Plan and options to
purchase up to 5,953 shares of common stock at $2.55 per share granted
under the Company’s 2002 Stock Option
Plan.
|
(6)
|
Includes
options to purchase up to 15,873 shares of common stock at $6.30
per share
granted under the Company’s 1997 Stock Option Plan, options to purchase up
to 23,810 shares of common stock at $1.89 per share granted under
the
Company’s 1999 Stock Option Plan and options to purchase up to 14,286
shares of common stock at $2.31 per share granted under the Company’s 2002
Stock Option Plan.
|
(7)
|
Includes
options to purchase up to 4,762 shares of common stock at $6.30 per
share
granted under the Company’s 1997 Stock Option Plan, options to purchase up
to 17,858 shares of common stock at $1.47 per share, granted under
the
Company’s 2001 Stock Option Plan, options to purchase up to 8,929 shares
of common stock at $2.31 per share and options to purchase up to
10,000
shares of common stock at $2.88 per share granted under the Company’s 2002
Stock Option Plan.
|
(8) |
Includes
options to purchase up to 4,762 shares of common stock at $6.30 per
share
granted under the Company’s 1997 Stock Option Plan, options to purchase up
to 8,334 shares of common stock at $1.89 per share granted under
the
Company’s 1999 Stock Option Plan, options to purchase up to 5,953 shares
of common stock at $1.47 per share granted under the Company’s 2001 Stock
Option Plan and options to purchase up to 10,000 of common stock
at $2.88
per share granted under the Company’s 2002 Stock Option Plan.
|
(9) |
Includes
options to purchase up to 4,762 shares of common stock at $6.30 per
share
granted under the Company’s 1997 Stock Option Plan, options to purchase up
to 8,334 shares of common stock at $1.89 per share granted under
the
Company’s 1999 Stock Option Plan,, options to purchase 7,500 shares of
common stock at $2.88 per share granted under the Company’s 2002 Stock
Option Plan and 238 shares of common stock held by immediate family
members.
|
(10)
|
Includes
options to purchase up to 5,000 shares of common stock at $2.29 per
share,
options to purchase up to 10,000 shares of common stock at $2.88
per share
granted under the Company’s 2002 Stock Option Plan and 1,448 shares of
common stock.
|
(11)
|
Includes
options to purchase up to 1,984 shares of common stock at $6.30 per
share
granted under the Company’s 1997 Stock Option Plan, options to purchase up
to 3,572 shares of common stock at $1.89 per share granted under
the
Company’s 1999 Stock Option Plan and options to purchase up to 2,976
shares of common stock at $2.31 per share and options to purchase
1,000
shares of common stock at $2.88 per share granted under the Company’s 2002
Stock Option Plan.
|
(12)
|
Includes
options to purchase up to 1,984 shares of common stock at $6.30 per
share
granted under the Company’s 1997 Stock Option Plan, options to purchase up
to 3,572 shares of common stock at $1.89 per share granted under
the
Company’s 1999 Stock Option Plan and options to purchase up to 2,976
shares of common stock at $2.31 per share granted under the Company’s 2002
Stock Option Plan.
|
(13)
|
Includes
options to purchase up to 1,000 shares of common stock at $2.88 per
share
granted under the Company’s 2002 stock Option
Plan.
|
(14)
|
Includes
options to purchase up to 1,000 shares of common stock at $2.88 per
share
granted under the Company’s 2002 Stock Option
Plan.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Stephen
M. Merrick, Executive Vice President and Secretary of the Company, was a
principal of the law firm of Merrick & Associates, P.C. which served as
general counsel for the Company during portions of 2005 and is Of Counsel to
Vanasco, Genelly & Miller, a law firm who provided services to the Company
in 2005. In addition, Mr. Merrick is a principal stockholder of the
Company. During 2005, Mr. Merrick and such firms were paid total fees and
compensation by the Company and subsidiaries in the amount of $165,000. The
amount paid in the nine months ending September 30, 2006 was
$99,000.
John
H.
Schwan is a principal of Shamrock Packaging. The Company purchased a total
of
$165,000 in packaging materials from Shamrock Packaging during 2005. The Company
made purchases from Shamrock Packaging of approximately $184,000 during the
nine
months ending September 30, 2006.
During
portions of 2005, John H. Schwan was an officer of an affiliate of Rapak. Rapak
purchased an aggregate of $ 6,860,000 in goods from the Company in 2005. Rapak
purchased $5,294,000 in goods from the Company during the nine months ended
September 30, 2006.
Messrs.
Schwan and Merrick made advances to the Company’s Mexican affiliate, Flexo
Universal, in the amount of $112,500 and $141,900 respectively, in 2005. On
October 25, 2006, Stephen Merrick made an advance to the Company's Mexican
affiliate, Flexo Universal, in the amount of $60,000. Additionally, in 2005,
Messrs. Schwan and Merrick advanced $130,000 and $155,000, respectively, to
the
Company’s UK affiliate, CTI Balloons, Ltd. These advances are reflected in
demand notes bearing interest at the rate of 7% per annum. Mr. Merrick also
advanced $19,209 to the Company in December 2005.
In
July,
2001, certain members of Company management were issued warrants to purchase
119,050 shares of the Company’s common stock at an exercise price of $1.50 per
share in consideration of their facilitating, securing and guaranteeing bank
loans to the Company in the amount of $1.4 million and for advancing additional
monies to the Company that were repaid in 2001. Mr. Schwan and
Mr. Merrick exercised these warrants on June 12, 2006.
On
January 10, 2006, an officer of Flexo Universal, Pablo Gortazar, acquired
all rights in a loan of a credit union to Flexo Universal and CTF International,
both Mexican subsidiaries of the Company, for the book value of the loan. The
principal amount of the obligation of Flexo Universal and CTF International
acquired was $191,000 and such amount bears interest at the rate of 9.5% per
annum.
On
February 1, 2006, Mssrs. John Schwan and Stephen Merrick each loaned to the
Company the sum of $500,000 in exchange for five (5) year subordinated notes
and
warrants to purchase up to 151,515 shares of common stock of the Company,
each.
Interest
paid to related parties during 2005 was $146,898. Interest paid to related
parties during the nine months ended September 30, 2006 was
$129,000.
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 must be approved by a majority of disinterested directors and
subject to review in the context of the Company’s Code of Ethics.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S
COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS
Market
Information.
The
Company’s common stock was admitted to trading on the NASDAQ SmallCap
Market (now the NASDAQ Capital 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.
The
high
and low sales prices for the last eleven (11) fiscal quarters (retroactively
adjusted to reflect post-reverse split share and stock dividend values),
according to the NASDAQ Stock Market’s Stock Price History Report,
were:
|
|
High
|
|
Low
|
|
January 1,
2004 to March 31, 2004
|
|
|
4.10
|
|
|
2.01
|
|
April 1,
2004 to June 30, 2004
|
|
|
4.38
|
|
|
1.62
|
|
July 1,
2004 to September 30, 2004
|
|
|
3.15
|
|
|
1.32
|
|
October 1,
2004 to December 31, 2004
|
|
|
2.40
|
|
|
1.25
|
|
January 1,
2005 to March 31, 2005
|
|
|
3.15
|
|
|
1.50
|
|
April 1,
2005 to June 30, 2005
|
|
|
4.74
|
|
|
0.50
|
|
July 1,
2005 to September 30, 2005
|
|
|
7.67
|
|
|
1.48
|
|
October 1,
2005 to December 31, 2005
|
|
|
5.50
|
|
|
2.72
|
|
January 1,
2006 to March 31, 2006
|
|
|
4.18
|
|
|
2.74
|
|
April 1,
2006 to June 30, 2006
|
|
|
3.90
|
|
|
2.60
|
|
July 1,
2006 to September 30, 2006
|
|
|
4.68
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
As
of
December 11, 2006, there were approximately 52 holders of record of the
Company’s common stock. The Company believes that its total number of actual
shareholders is substantially greater than the number of record
shareholders.
Dividends
The
Company has never paid any cash dividends on its common stock and does not
currently intend to pay cash 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 cash dividends or other
distributions on its shares.
General
CTI’s
authorized capital consists of Five Million (5,000,000) shares of common stock,
no par value per share, and Two Million (2,000,000) shares of preferred stock,
no par value per share. As of December 11, 2006, there were 2,142,097 shares
of
common stock, zero (0) shares of zero (0) shares of preferred stock issued
and
outstanding. Set forth below is a description of certain provisions relating
to
CTI’s capital stock.
Common
Stock
Holders
of common stock shall share equally, on a per share basis, in all dividends
declared by the Company and will participate equally in the proceeds of
dissolution of the Company, on a per share basis. The common stock does not
possess cumulative voting rights or preemptive rights.
Preferred
Stock
CTI
is
authorized to issue 2,000,000 shares of preferred stock, no par value, of which
zero (0) shares are outstanding. The preferred stock, which is commonly known
as
“blank check preferred”, may be issued by the Board with rights, designations,
preferences and other terms, as may be determined by the Directors in their
sole
discretion, at the time of issuance.
Warrants
In
2003,
Stephen Merrick and John Schwan were issued warrants in the amount of 70,000
and
93,000 shares, respectively. The exercise date is 3/20/2008 and the warrants
carry an exercise price of $4.87. In 2006, Stephen Merrick and John Schwan
were
issued warrants in the amount of 151,515 shares each. The exercise date is
2/11/2011 and the warrants carry an exercise price of $3.30. No other warrants
are outstanding as of December 11, 2006.
Options
The
Company has a total of 337,946 stock options outstanding from various stock
option plans. The exercise price ranges from $1.47 to $6.93 and the remaining
life of the options range from 0.9 years to 9.0 years.
Limitation
Of Liability: Indemnification
Our
Articles of Incorporation includes an indemnification section under which we
have agreed to indemnify directors and officers of CTI from and against certain
claims arising from or related to future acts or omissions as a director or
officer of CTI. For example, the Company shall have power to indemnify any
person who was or is party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by the reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney’s fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or
proceeding if he acted in good faith and in a manner he reasonably believed
to
be in or not opposed to the best interests of the Company and, with respect
to
any criminal action or proceedings, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere
or
its equivalent, shall not, of itself, create a presumption that the person
did
not act in good faith and in a manner which he reasonably believed to be in
or
not opposed to the best interests of the Company and with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Furthermore,
The Company shall have power to indemnify any person who was or is a party
or is
threatened to be made a party to any threatened, pending or completed action
or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent
of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys’ fees) actually
and reasonably incurred by him in connection with the defense of and in a manner
he reasonably believes to be in or not opposed to the best interests of the
Company and except that no indemnification shall be made in respect of any
claim, issue or matter he reasonably believes to be in or not opposed to the
best interest of the Company and except that no indemnification shall be made
in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable or negligence or misconduct in the performance of this
duty to the Company unless and only to the extent that the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Expenses
incurred in defending a civil or criminal action, suit or proceeding may be
paid
by the Corporation in advance of the final disposition of such action, suit
or
proceeding as authorized by the board of directors in the specific case upon
receipt of an undertaking by or on behalf of the director or officer, to repay
such amount unless it shall ultimately be determined that he is entitled to
be
indemnified by the Corporation as authorized in the by-laws. Such expenses
incurred by other employees or agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
Any
indemnification under the above (unless ordered by a court) shall be made by
the
Company only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in
the paragraphs above. Such determination shall be made (such action, suit or
proceeding, or, if such a quorum is not obtainable, or, even if obtainable
and a
quorum of disinterested directors so directs, by independent legal counsel
in a
written opinion, or by the stockholders.
The
indemnification provided above shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any by-laws, agreement, vote
of
stockholders or disinterested directors or otherwise, both as to action in
his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
The
Corporation shall have power to purchase and maintain insurance on behalf of
any
person who is or was a director, officer, employee or agent of the Corporation
or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or
other enterprise against any liability asserted against him and incurred by
him
in any such capacity, or arising out of his status as such, whether or not
the
Company would have the power to indemnify him against such liability under
the
provisions set forth above.
The
transfer agent for CTI common stock is Continental Stock Transfer & Trust
Company, New York, New York.
Anti-Takeover
Effects Of Provisions Of The Articles Of Incorporation
Authorized
And Unissued Stock
The
authorized but unissued shares of our common are available for future issuance
without our shareholders’ approval. These additional shares may be utilized for
a variety of corporate purposes including but not limited to future public
or
direct offerings to raise additional capital, corporate acquisitions and
employee incentive plans. The issuance of such shares may also be used to deter
a potential takeover of CTI that may otherwise be beneficial to shareholders
by
diluting the shares held by a potential suitor or issuing shares to a
shareholder that will vote in accordance with the desires of the Board. A
takeover may be beneficial to shareholders because, among other reasons, a
potential suitor may offer shareholders a premium for their shares of stock
compared to the then-existing market price. The existence of authorized but
unissued and unreserved shares of preferred stock may enable the Board to issue
shares to persons friendly to current management which would render more
difficult or discourage an attempt to obtain control of our Company by means
of
a proxy contest, tender offer, merger or otherwise, and thereby protect the
continuity of our Company’s management.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective
February 10, 2005, the Company engaged Weiser, LLP as the Company’s
principal accountants to audit the Company’s financial statements for the year
ending December 31, 2004. Weiser, LLP replaced Eisner, LLP, which had
previously been engaged for the same purpose, and whose dismissal was effective
February 10, 2005. The decision to change the Company’s principal
accountants was approved by the Company’s Audit Committee on February 10,
2005.
The
reports of Eisner, LLP, on the Company’s financial statements for the fiscal
year ended December 31, 2003, as amended, did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
The
consolidated financial statements for the years ended December 31, 2005 and
December 31, 2004 included in this Prospectus, and in the Registration
Statement, have been audited by Weiser, LLP, independent auditors, and the
consolidated financial statements for the year ended December 31, 2003
included in this Prospectus, and in the Registration Statement have been audited
by Eisner LLP, independent auditors, as stated in their reports appearing with
the financial statements herein and incorporated by reference in the
Registration Statement, and are included in reliance upon the report of such
firms given upon their authority as experts in accounting and
auditing.
The
validity of the shares offered herein will be opined on for us by Vanasco,
Genelly & Miller, which has acted as our outside legal counsel in relation
to certain restricted tasks.
HOW
TO GET MORE INFORMATION
We
have
filed with the SEC a Registration Statement on Form S-1 under the
Securities Act with respect to the securities offered by this Prospectus. This
Prospectus, which forms a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, as permitted by
the
rules and regulations of the SEC. For further information with respect to us
and
the securities offered by this Prospectus, reference is made to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document that we have filed as an exhibit to the Registration
Statement are qualified in their entirety by reference to the exhibits for
a complete statement of their terms and conditions. The Registration
Statement and other information may be read and copied at the SEC’s Public
Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling
the
SEC at 1-800-SEC-0330. The SEC maintains a web site at http://www.sec.gov
that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
CTI
INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
|
|
PAGE(S)
|
|
|
|
|
|
CTI
INDUSTRIES CORPORATION AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED SEPTEMBER 30, 2006 AND
2005
|
|
|
|
|
Interim
Balance Sheet (Unaudited) as of September 30, 2006 and December 31,
2005
|
|
|
F-1
- F-2
|
|
Interim
Statements of Operations (Unaudited) for the Periods Ended
September 30,
2006 and 2005
|
|
|
F-3
|
|
Interim
Statements of Cash Flows (Unaudited) for the Periods
Ended
September 30, 2006 and 2005
|
|
|
F-4
|
|
Consolidated
Earnings Per Share (Unaudited)
|
|
|
F-5
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
F-6
- F-10
|
|
|
|
|
|
|
CTI
INDUSTRIES CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS FOR
THE YEARS
ENDED DECEMBER 31, 2005 AND 2004
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
|
|
F-11
- F-12
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-13
- F-14
|
|
Consolidated
Statements of Operations for the Years Ended
December 31,
2005, 2004 and 2003
|
|
|
F-15
|
|
Consolidated
Statements of Changes in Shareholder’s Equity and Comprehensive
Loss
for
the Years Ended December 31, 2005, 2004 and 2003
|
|
|
F-16
|
|
Consolidated
Statements of Cash Flows for the Years Ended
December 31,
2005, 2004 and 2003
|
|
|
F-17
- F-18
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-19
- F-35
|
|
CTI
Industries Corporation and Subsidiaries
Consolidated
Balance Sheets
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
320,471
|
|
$
|
261,982
|
|
Accounts
receivable, (less allowance for doubtful accounts of $176,000 and
$80,000
respectively)
|
|
|
5,550,133
|
|
|
4,343,671
|
|
Inventories,
net
|
|
|
8,026,935
|
|
|
7,022,569
|
|
Prepaid
expenses and other current assets
|
|
|
661,994
|
|
|
707,082
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
14,559,533
|
|
|
12,335,304
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
18,638,031
|
|
|
18,869,276
|
|
Building
|
|
|
2,612,166
|
|
|
2,602,922
|
|
Office
furniture and equipment
|
|
|
2,025,800
|
|
|
2,010,557
|
|
Land
|
|
|
250,000
|
|
|
250,000
|
|
Leasehold
improvements
|
|
|
455,305
|
|
|
510,134
|
|
Fixtures
and equipment at customer locations
|
|
|
2,330,483
|
|
|
2,330,483
|
|
Projects
under construction
|
|
|
288,543
|
|
|
130,994
|
|
|
|
|
26,600,328
|
|
|
26,704,366
|
|
Less
: accumulated depreciation and amortization
|
|
|
(17,921,337
|
)
|
|
(17,087,622
|
)
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
|
8,678,991
|
|
|
9,616,744
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Deferred
financing costs, net
|
|
|
228,217
|
|
|
74,396
|
|
Goodwill
|
|
|
989,108
|
|
|
989,108
|
|
Net
deferred income tax asset
|
|
|
293,359
|
|
|
352,689
|
|
Other
assets
|
|
|
169,744
|
|
|
167,809
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
1,680,428
|
|
|
1,584,002
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
24,918,952
|
|
|
23,536,050
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Checks
written in excess of bank balance
|
|
|
112,230
|
|
|
500,039
|
|
Trade
payables
|
|
|
3,443,538
|
|
|
4,717,733
|
|
Line
of credit
|
|
|
5,682,398
|
|
|
5,050,753
|
|
Notes
payable - current portion
|
|
|
1,004,713
|
|
|
1,329,852
|
|
Notes
payable - officers, current portion, net of debt discount
|
|
|
2,149,869
|
|
|
2,237,292
|
|
Accrued
liabilities
|
|
|
1,308,566
|
|
|
925,719
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
13,701,314
|
|
|
14,761,388
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Other
liabilities (related parties $1,173,000 and $1,056,000)
|
|
|
1,363,491
|
|
|
1,644,339
|
|
Notes
payable
|
|
|
5,160,115
|
|
|
4,394,390
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
Notes
payable - officers, subordinated, net of debt discount
|
|
|
704,476
|
|
|
0
|
|
Total
long-term liabilities
|
|
|
7,228,082
|
|
|
6,038,729
|
|
Minority
interest
|
|
|
14,268
|
|
|
10,091
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
Stock -- no par value 2,000,000 shares authorized
|
|
|
|
|
|
|
|
0
shares issued and outstanding
|
|
|
0
|
|
|
0
|
|
Common
stock - no par value, 5,000,000 shares authorized,
|
|
|
|
|
|
|
|
2,400,392
and 2,268,269 shares issued, 2,130,192 and
|
|
|
|
|
|
|
|
2,036,474
shares outstanding, respectively
|
|
|
3,764,020
|
|
|
3,764,020
|
|
Class
B Common stock - no par value, 500,000 shares authorized,
|
|
|
|
|
|
|
|
0
shares issued and outstanding
|
|
|
|
|
|
|
|
Paid-in-capital
|
|
|
6,072,098
|
|
|
5,869,828
|
|
Warrants
issued in connection with subordinated debt and bank debt
|
|
|
1,038,487
|
|
|
595,174
|
|
Accumulated
deficit
|
|
|
(5,599,715
|
)
|
|
(6,340,646
|
)
|
Accumulated
other comprehensive earnings
|
|
|
(241,820
|
)
|
|
(223,420
|
)
|
Less:
|
|
|
|
|
|
|
|
Treasury
stock - 270,200 and 231,796 shares, respectively
|
|
|
(1,057,782
|
)
|
|
(939,114
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
3,975,288
|
|
|
2,725,842
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
24,918,952
|
|
$
|
23,536,050
|
|
See
accompanying notes to condensed consolidated unaudited statements
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Operations
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
8,602,733
|
|
$
|
6,033,831
|
|
$
|
25,755,891
|
|
$
|
22,709,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
6,349,870
|
|
|
4,791,645
|
|
|
19,352,602
|
|
|
18,010,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,252,863
|
|
|
1,242,186
|
|
|
6,403,289
|
|
|
4,699,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,216,107
|
|
|
987,069
|
|
|
3,325,537
|
|
|
3,027,127
|
|
Selling
|
|
|
213,414
|
|
|
246,623
|
|
|
624,332
|
|
|
795,789
|
|
Advertising
and marketing
|
|
|
360,598
|
|
|
165,738
|
|
|
846,231
|
|
|
602,346
|
|
Loss
on sale of asset
|
|
|
141,977
|
|
|
|
|
|
141,977
|
|
|
-
|
|
Other
(income)
|
|
|
(460,295
|
)
|
|
|
|
|
(460,295
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,471,801
|
|
|
1,399,430
|
|
|
4,477,782
|
|
|
4,425,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
781,062
|
|
|
(157,244
|
)
|
|
1,925,507
|
|
|
273,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(520,747
|
)
|
|
(281,047
|
)
|
|
(1,296,977
|
)
|
|
(868,154
|
)
|
Interest
income
|
|
|
6,282
|
|
|
-
|
|
|
20,463
|
|
|
-
|
|
Foreign
currency gain (loss)
|
|
|
63,828
|
|
|
(3,798
|
)
|
|
154,382
|
|
|
216,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (expense)
|
|
|
(450,637
|
)
|
|
(284,845
|
)
|
|
(1,122,132
|
)
|
|
(651,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and minority interest
|
|
|
330,425
|
|
|
(442,089
|
)
|
|
803,375
|
|
|
(377,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
11,719
|
|
|
(25,544
|
)
|
|
59,330
|
|
|
8,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before minority interest
|
|
|
318,706
|
|
|
(416,545
|
)
|
|
744,045
|
|
|
(385,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in income (loss) of subsidiary
|
|
|
3,242
|
|
|
(278
|
)
|
|
3,114
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
315,464
|
|
$
|
(416,267
|
)
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) applicable to common shares
|
|
$
|
315,464
|
|
$
|
(416,267
|
)
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share
|
|
$
|
0.15
|
|
$
|
(0.21
|
)
|
$
|
0.36
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share
|
|
$
|
0.15
|
|
$
|
(0.21
|
)
|
$
|
0.34
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares and equivalent shares of common stock
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,055,553
|
|
|
1,963,615
|
|
|
2,071,199
|
|
|
1,957,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,129,658
|
|
|
1,963,615
|
|
|
2,156,025
|
|
|
1,957,283
|
|
See
accompanying notes to condensed consolidated unaudited statements
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Restated
|
|
Net
income (loss)
|
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
Adjustment
to reconcile net income to cash
|
|
|
|
|
|
|
|
(used
in) provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,072,851
|
|
|
1,101,299
|
|
Amortization
of debt discount
|
|
|
78,030
|
|
|
30,558
|
|
Minority
interest in loss of subsidiary
|
|
|
3,114
|
|
|
(203
|
)
|
Provision
for losses on accounts receivable
|
|
|
118,299
|
|
|
100,000
|
|
Provision
for losses on inventories
|
|
|
123,937
|
|
|
150,000
|
|
Deferred
income taxes
|
|
|
59,330
|
|
|
8,168
|
|
Loss
on disposition of assets
|
|
|
141,977
|
|
|
0
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,347,195
|
)
|
|
2,032,456
|
|
Inventories
|
|
|
(1,265,918
|
)
|
|
1,175,677
|
|
Prepaid
expenses and other assets
|
|
|
39,559
|
|
|
359,853
|
|
Trade
payables
|
|
|
(1,288,396
|
)
|
|
(521,937
|
)
|
Accrued
liabilities
|
|
|
89,637
|
|
|
(633,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(1,433,844
|
)
|
|
3,417,476
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
26,690
|
|
|
0
|
|
Purchases
of property, plant and equipment
|
|
|
(356,964
|
)
|
|
(289,001
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(330,274
|
)
|
|
(289,001
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Checks
written in excess of bank balance
|
|
|
(386,583
|
)
|
|
(185,351
|
)
|
Net
change in revolving line of credit
|
|
|
655,086
|
|
|
(2,485,563
|
)
|
Proceeds
from issuance of long-term debt and warrants
|
|
|
|
|
|
|
|
(received
from related party $1,000,000 in 2006)
|
|
|
2,833,067
|
|
|
153,498
|
|
Repayment
of long-term debt (related parties $ 15,000 and $ 45,000)
|
|
|
(1,168,920
|
)
|
|
(962,723
|
)
|
Proceeds
from exercise of warrants and options
|
|
|
83,604
|
|
|
53,500
|
|
Cash
paid for deferred financing fees
|
|
|
(253,332
|
)
|
|
0
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,762,922
|
|
|
(3,426,639
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
59,685
|
|
|
(25,702
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
58,489
|
|
|
(323,866
|
)
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
261,982
|
|
|
526,469
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
320,471
|
|
$
|
202,603
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
payments for interest
|
|
$
|
872,487
|
|
$
|
896,945
|
|
|
|
|
|
|
|
|
|
Cash
payments for taxes
|
|
$
|
80,508
|
|
$
|
86,120
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of non-cash activity
|
|
|
|
|
|
|
|
Stock
issued to select consultants in lieu of cash
|
|
$
|
-
|
|
$
|
200,916
|
|
See
accompanying notes to condensed consolidated unaudited statements
CTI
Industries Corporation and Subsidiaries
Consolidated
Earnings per Share
|
|
Quarter
Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock outstanding during the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
|
|
|
2,055,553
|
|
|
1,963,615
|
|
|
2,071,199
|
|
|
1,957,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
315,464
|
|
$
|
(416,267
|
)
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
for per share computation
|
|
$
|
315,464
|
|
$
|
(416,267
|
)
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share amount
|
|
$
|
0.15
|
|
$
|
(0.21
|
)
|
$
|
0.36
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock outstanding during the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
|
|
|
2,055,553
|
|
|
1,963,615
|
|
|
2,071,199
|
|
|
1,957,283
|
|
Net
additional shares assuming stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
and warrants exercised and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
proceeds
used to purchase treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
74,105
|
|
|
-
|
|
|
84,826
|
|
|
-
|
|
Weighted
average number of shares and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalent
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
during the period
|
|
|
2,129,658
|
|
|
1,963,615
|
|
|
2,156,025
|
|
|
1,957,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
315,464
|
|
$
|
(416,267
|
)
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
for per share computation
|
|
$
|
315,464
|
|
$
|
(416,267
|
)
|
$
|
740,931
|
|
$
|
(385,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share amount
|
|
$
|
0.15
|
|
$
|
(0.21
|
)
|
$
|
0.34
|
|
$
|
(0.20
|
)
|
See
accompanying notes to condensed consolidated unaudited statements
CTI
Industries Corporation and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
The
accompanying financial statements are unaudited but in the opinion of management
contain all the adjustments (consisting of those of a normal recurring nature)
considered necessary to present fairly the financial position and the results
of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. Operating results for the three and nine months ended September
30,
2006 are not necessarily indicative of the results that may be expected for
the
fiscal year ending December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K/A for the fiscal year ended December 31,
2005.
Principles
of consolidation and nature of operations:
The
consolidated financial statements include the accounts of CTI Industries
Corporation (“CTI-US”) and its wholly-owned subsidiaries, CTI Balloons Limited,
CTI Helium, Inc. and CTF International S.A. de C.V., as well as its
majority-owned subsidiaries CTI Mexico S.A. de C.V., and Flexo Universal,
S.A.
de C.V. (together referred to as the “Company”). All significant intercompany
transactions and accounts have been eliminated in consolidation. The Company
(i)
designs, manufactures and distributes balloon products throughout the world
and
(ii) operates systems for the production, lamination, coating and printing
of
films used for food packaging and other commercial uses and for conversion
of
films to flexible packaging containers and other products.
Use
of estimates:
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 amounts reported of the assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses during the reporting
period in the financial statements and accompanying notes. Actual results
may
differ from those estimates. The company’s significant estimates include
reserves for doubtful accounts, reserves for the lower of cost or market
of
inventory, valuation of deferred tax assets and recovery value of
goodwill.
Note
2 - Legal Proceedings
The
Company is party to certain lawsuits or claims arising in the normal course
of
business. The ultimate outcome of these matters is unknown but, in the opinion
of management, the settlement of these matters is not expected to have a
material effect on the future financial position, cash flow or results of
operations of the Company.
Note
3 - Comprehensive Income (Loss)
Other
comprehensive income (loss) comprised of income (loss) from foreign currency
translation amounted to ($52,142) and ($11,982) for the three months ending
September 30, 2006 and 2005, respectively, and ($18,422) and ($102,233) for
the
nine months ended on such dates.
Note
4 - Stock-Based Compensation
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). Prior to the adoption of SFAS
123(R), the Company had adopted the disclosure-only provisions of SFAS 123
and
accounted for employee stock-based compensation under the intrinsic value
method, and no expense related to stock options was recognized. Under this
method, the Company’s consolidated financial statements as of and for the three
and nine months ended September 30, 2006 reflect the impact of SFAS 123(R),
while the consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). SFAS
123(R)
amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax
benefits be reported as a financing cash flow rather than as an operating
cash
flow. Adoption of SFAS 123(R) did not have a material impact on the consolidated
statements of cash flows for the three or nine months ended September 30,
2006.
The
Company sponsors a number of stock option plans allowing for incentive stock
options to be granted to employees and eligible directors. The Plan provides
that shares may be issued at an option price not less than the fair market
value
of the stock at the time the option is granted. The Plans expire 10 years
after
all of the options in the plan have been issued. In 2005, the Company issued
grants of 79,000 shares. The 2005 option grants were issued with an exercise
price equal to the fair value of the shares at the time of grant and were
fully
vested in the year of grant. Accordingly, no stock-based compensation expense
has been recognized relating to the 2005 option grants. As of September 30,
2006, 26,714 shares remain available for grant under the 2001 Plan and 22,406
under the 2002 Plan.
The
fair
value of the options granted in 2005 were estimated at the date of grant
using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 3.89% no dividend yield, volatility
factor of the expected price of the Company’s stock ranging from 139%; and a
weighted average expected life of 5.0 years. The weighted average fair value
of
options granted during 2005 was $2.88 per share.
There
were no options granted during the nine months ended September 30, 2006.
A
summary
of the Company’s stock option activity and related information for the nine
months ended September 30, 2006 follows:
|
|
September
30, 2006
|
|
Weighted
Avg. Exercise Price
|
|
Outstanding
and
|
|
|
|
|
|
|
|
exercisable,
|
|
|
|
|
|
|
|
beginning
of period
|
|
|
361,405
|
|
$
|
3.36
|
|
Granted
|
|
|
0
|
|
|
|
|
Exercised
|
|
|
9,572
|
|
|
2.39
|
|
Cancelled
|
|
|
0
|
|
|
|
|
Outstanding
and
|
|
|
|
|
|
|
|
exercisable
at the
|
|
|
|
|
|
|
|
end
of period
|
|
|
351,833
|
|
$
|
3.39
|
|
Options
outstanding as of September 30, 2006:
|
|
Outstanding
|
|
Exercisable
|
|
Exercise
Price
|
|
Remaining
Life (Years)
|
|
September
1997
|
|
|
32,144
|
|
|
32,144
|
|
$
|
6.30
|
|
|
1.0
|
|
September
1998
|
|
|
62,303
|
|
|
62,303
|
|
$
|
6.64
|
|
|
2.0
|
|
September
1998
|
|
|
11,907
|
|
|
11,907
|
|
$
|
2.10
|
|
|
2.0
|
|
March
2000
|
|
|
53,572
|
|
|
53,572
|
|
$
|
1.89
|
|
|
3.5
|
|
December
2001
|
|
|
44,048
|
|
|
44,048
|
|
$
|
1.47
|
|
|
5.3
|
|
April
2002
|
|
|
11,905
|
|
|
11,905
|
|
$
|
2.10
|
|
|
1.7
|
|
October
2002
|
|
|
55,954
|
|
|
55,954
|
|
$
|
2.36
|
|
|
6.1
|
|
December
2003
|
|
|
5,000
|
|
|
5,000
|
|
$
|
2.29
|
|
|
7.3
|
|
December
2005
|
|
|
75,000
|
|
|
75,000
|
|
$
|
2.88
|
|
|
9.3
|
|
Total
|
|
|
351,833
|
|
|
351,833
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Raw
Materials
|
|
$
|
1,383,346
|
|
$
|
1,316,885
|
|
Work
in process
|
|
|
818,501
|
|
|
730,752
|
|
Finished
goods
|
|
|
6,183,656
|
|
|
5,229,677
|
|
Allowance,
excess quantities
|
|
|
(358,568
|
)
|
|
(254,745
|
)
|
Inventories,
net
|
|
$
|
8,026,935
|
|
$
|
7,022,569
|
|
Note
6 - Geographic Segment Data
The
Company has determined that it operates primarily in one business segment
which
designs, manufactures and distributes film products for use in packaging
and
novelty balloon products. The Company operates in foreign and domestic regions.
Information about the Company’s operations by geographic areas is as follows.
|
|
Net
Sales For the Three Months Ended September 30
|
|
Net
Sales For the Nine Months Ended September 30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
6,726,000
|
|
$
|
4,507,000
|
|
$
|
19,926,000
|
|
$
|
17,766,000
|
|
Mexico
|
|
|
1,175,000
|
|
|
932,000
|
|
|
3,565,000
|
|
|
2,906,000
|
|
United
Kingdom
|
|
|
702,000
|
|
|
595,000
|
|
|
2,265,000
|
|
|
2,038,000
|
|
|
|
$
|
8,603,000
|
|
$
|
6,034,000
|
|
$
|
25,756,000
|
|
$
|
22,710,000
|
|
|
|
Total
Assets at
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
23,146,000
|
|
$
|
21,343,000
|
|
Mexico
|
|
|
5,146,000
|
|
|
4,818,000
|
|
United
Kingdom
|
|
|
2,630,000
|
|
|
2,122,000
|
|
Eliminations
|
|
|
(6,003,000
|
)
|
|
(4,747,000
|
)
|
|
|
$
|
24,919,000
|
|
$
|
23,536,000
|
|
Note
7 - 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 uncollectable. Such losses have historically been within
management’s expectations. During the nine months ended September 30, 2006,
there were two customers whose purchases represented more than 10% of the
Company’s sales. The sales to each of these customers for the nine months ended
September 30, 2006 were $5,755,000 or 22.3% of net sales for the period and
$5,294,000 or 20.6% of net sales respectively. In the same period of 2005
net
sales for these customers were $2,454,000 or 14.7% and $5,610,000 or 33.6%
respectively. During the three months ended September 30, 2006, there were
two
customers whose purchases represented more than 10% of the Company’s sales. The
sales to each of these customers for the three months ended September 30,
2006
were $2,064,000 or 24.0% and $1,939,000 or 22.5% of net sales, respectively.
Sales to these customers in the same period of 2005 were $484,000 or 6.4%
and
$1,247,000 or 16.5% of net sales, respectively. As of September 30, 2006,
the
amount owed by each of the top two customers represented 19.8% and 19.2%
of
accounts receivable, respectively. As of September 30, 2005, the amount owed
by
each of these same two customers represented 5.8% and 15.9% of accounts
receivable, respectively.
Note
8 - Cash and Cash Equivalents Concentration
As
of
September 30, 2006, the Company had cash and cash equivalents deposits at
one
financial institution that exceeded FDIC limits by $342,000.
Note
9 - Bank Loan
On
February 1, 2006, we entered into a Loan Agreement with Charter One Bank,
Chicago, Illinois, under which the Bank agreed to provide a credit facility
to
our Company in the total amount of $12,800,000, which includes (i) a five
year
mortgage loan secured by our Barrington, Illinois property in the principal
amount of $2,800,000, amortized over a 20 year period, (ii) a five year
term-loan secured by our equipment at the Barrington, Illinois plant in the
amount of $3,500,000 and (iii) a three-year revolving line of credit up to
a
maximum amount of $6,500,000, secured by inventory and receivables. The amount
we can borrow on the revolving line of credit includes 85% of eligible accounts
receivable and 60% of eligible inventory. The Loan Agreement was amended
on June
28, 2006 to (i) eliminate the excess availability requirement and (ii) reduce
the interest rate.
Certain
terms of the loan agreement include:
· |
Restrictive
Covenants: The Loan Agreement includes several restrictive covenants
under
which we are prohibited from, or restricted in our ability
to:
|
· |
Pay
dividends and make distributions;
|
· |
Make
certain investments;
|
· |
Use
assets as security in other transactions;
|
· |
Enter
into affiliate transactions;
|
· |
Merge
or consolidate; or
|
· |
Transfer
and sell assets.
|
· |
Financial
Covenants: The loan agreement includes a series of financial covenants
we
are required to meet including:
|
· |
We
are required to meet certain levels of earnings before interest taxes
and
depreciation (EBITDA) measured on a monthly cumulative basis during
the
first six months of the loan term;
|
· |
Commencing
with the quarter ended June 30, 2006 and each quarter thereafter,
we are
required to maintain a tangible net worth (as defined in the agreement)
in
excess of an amount equal to $3,500,000 plus 50% of the consolidated
net
income of the Company in all periods commencing with the quarter
ended
June 30, 2006;
|
· |
We
are required to maintain specified ratios of senior debt to EBITDA
on an
annual basis and determined quarterly commencing as of June 30, 2006;
and,
|
· |
We
are required to maintain a specified level of EBITDA to fixed charges
determined at the end of each fiscal quarter commencing on June 30,
2006
for computation periods provided in the
agreement.
|
The
loan
agreement provides for interest at varying rates in excess of the Bank’s prime
rate, depending on the level of senior debt to EBITDA over time. The initial
interest rate under the loan is prime plus 1.5% per annum. As amended by
the
June 28, 2006 amendment, on a quarterly basis, commencing with the quarter
ended
June 30, 2006, this ratio will be measured and the interest rate charged
in
accordance to the table below.
When
Senior Debt to Equity is:
|
|
The
Premium to the Prime Rate is:
|
|
Greater
or equal to 4.5 to 1.0
|
|
|
1.00
|
%
|
Between
4.5 to 1 and 4.0 to 1
|
|
|
0.75
|
%
|
Between
4.0 to 1 and 3.5 to 1
|
|
|
0.50
|
%
|
Between
3.5 to 1 and 2.75 to 1
|
|
|
0.25
|
%
|
Less
than 2.75 to 1
|
|
|
0.0
|
%
|
As
of
September 30, 2006, the applicable premium being applied was 0.50%.
Also,
under the loan agreement, we are required to purchase a swap agreement with
respect to at least 60% of the mortgage and term loan portions of our loan.
On
April 6, we entered into a swap arrangement with Charter One Bank with respect
to 60% of the principal amounts of the mortgage loan and the term loan, which
had the effect of fixing the interest rate for such portions of the loans
for
the balance of the loan terms. This swap agreement is subject to fair value
adjustments.
Also,
on
February 1, 2006, two principal officers and shareholders of our Company
each
loaned to our Company the sum of $500,000 in exchange for (i) Promissory
Notes
due January 31, 2011 and bearing interest at the rate of 2% per annum in
excess
of the prime rate determined quarterly and (ii) five year Warrants to purchase
up to 151,515 shares of common stock of the Company at the price of $3.30
per
share (110% of the closing market price on the day preceding the date of
the
loans.
Note
9 - Related Party Transactions
Stephen
M. Merrick, Executive Vice President, Secretary and a Director of the Company,
is of counsel to the law firm of Vanasco Genelly and Miller PC which provides
legal services to the Company. Legal fees incurred by the Company with this
firm
for the three months ended September 30, 2006 and 2005 were $21,000 and $32,000,
respectively. Legal fees incurred during the nine months ended September
30,
2006 and 2005 were $57,000 and $78,000, respectively. Also, the Company paid
Mr.
Merrick $21,000 for consulting services in the three months ended September
30,
2006. During the same period of 2005, the company paid Mr. Merrick $12,000
for
services. For the nine months ended September 30, 2006 and 2005, the company
paid Mr. Merrick $42,000 and $24,000, respectively.
John
Schwan is a principal of Shamrock Packaging and affiliated companies. The
Company made purchases from Shamrock of approximately $52,000 during the
three
months ended September 30, 2006 and $108,000 during the three months ended
September 30, 2005. The Company made purchases from Shamrock of approximately
$184,000 during the nine months ended September 30, 2006 and $219,000 during
the
nine months ended September 30, 2005.
John
Schwan was an officer of an affiliate of Rapak L.L.C. Rapak purchased $1,939,000
of products from the Company during the three months ended September 30,
2006
and $1,247,000 during the three months ended September 30, 2005. Rapak purchased
$5,294,000 of products from the Company during the nine months ended September
30, 2006 and $5,610,000 during the nine months ended September 30, 2005.
Also,
the Company paid Mr. Schwan $15,000 for services during the three months
ended
September 30, 2006 and $6,000 during the three months ended September 30,
2005.
The Company paid Mr. Schwan $45,000 for consulting services during the nine
months ended September 30, 2006 and $18,000 during the nine months ended
September 30, 2005.
Interest
payments have been made to John H. Schwan and Stephen M. Merrick for loans
made
to the Company. These interest payments for the three months ended September
30,
2006 totaled $49,000 and $24,000 respectively. In 2005, for the three months
ending September 30, 2005, the amounts were $37,000 and $12,000, respectively.
These interest payments for the nine months ending September 30, 2006 totaled
$89,000 and $40,000 respectively. For the nine months ending September 30,
2005,
the amounts were $81,000 and $38,000, respectively.
On
February 1, 2006, Mr. Schwan and Mr. Merrick advanced $500,000 each to the
Company in exchange for (a) five year promissory notes bearing interest at
2%
over the prime rate determined quarterly and (b) five year warrants to purchase
an aggregate of 303,030 shares of common stock of the Company at the price
of
$3.30 per share.
Note
10 - Restatements
The
cash
flows statement for the nine months ended September 30, 2005 has been restated
to reflect the reclassification of accrued expenses and other liabilities
into
separate line items and to properly reflect the effect of changes in the
exchange rate on cash. The effect of the restatement was to increase cash
flows
from operating activities by $70,000, no effect on cash flows from investing
activities and (decrease) cash flows from financing activities by $91,800.
There
was no change in our reported cash balance as a result of these
restatements.
Note
11 - New Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an interpretation FASB No. 109 (“FIN 48”), which prescribes
accounting for and disclosure of uncertainty in tax positions. This
interpretation defines the criteria that must be met for the benefits of
a tax
position to be recognized in the financial statements and the measurement
of tax
benefits recognized. The provisions of FIN 48 are effective as of the beginning
of the Company’s 2007 fiscal year, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings.
The
Company is currently evaluating that impact of adopting FIN 48 on the Company’s
consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements, (“SFAS 157”). This Standard defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. The
adoption of SFAS 157 is not expected to have a material impact on the Company’s
financial position, results of operations or cash flows.
Note
12 - Equity Distribution Agreement
On
June
6, 2006, we entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners, LP (“Cornell”), pursuant to which we may, at our discretion,
sell to Cornell shares of our common stock for a total purchase price of
up to
$5,000,000. For each share of CTI common stock purchased under this Agreement,
Cornell will pay to us one hundred percent (100%) of the lowest volume weighted
average price of our common stock on the Nasdaq Capital Market during the
five
consecutive trading days after we give notice of the sale to Cornell. Cornell
will retain 5% of each payment made to us under the Agreement for the purchase
of our stock. The Agreement provides that we will not sell more than 400,000
shares of our common stock to Cornell under this Agreement without first
having
obtained shareholder approval for the transaction. Cornell’s obligation to
purchase shares of our common stock under the Agreement is subject to certain
conditions, including: (i) we shall have obtained an effective registration
statement for the shares of common stock sold to Cornell under the Agreement
and
(ii) the amount of each advance requested by us under the agreement shall
not be
more than $100,000.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and
Stockholders
of CTI Industries Corporation
We
have
audited the accompanying consolidated balance sheets of CTI Industries
Corporation and Subsidiaries (the “Company”) as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders’
equity and comprehensive loss, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits 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 consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of CTI Industries
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the
results of their consolidated operations and their consolidated cash flows
for
the years then ended in conformity with U.S. generally accepted accounting
principles.
We
have
also audited the consolidated financial statement Schedule II for the years
ended December 31, 2005 and 2004. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
As
described in Note 2 to the consolidated financial statements, the Company
has
restated its 2004 consolidated statement of operations and its 2005 and 2004
consolidated statements of cash flows.
Weiser
LLP
New
York,
New York
March 13,
2006, except with respect to Note 2 as
to
which
the date is September 28, 2006
The
Board
of Directors and Stockholders
CTI
Industries Corporation
We
have
audited the accompanying consolidated statements of operations, stockholders’
equity and cash flows of CTI Industries Corporation and subsidiaries (the
“Company”) for the year ended December 31, 2003. 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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of the Company for the year ended December 31, 2003, in conformity with
generally accepted accounting principles in the United States of
America.
/s/
Eisner LLP
New
York,
New York
February 18,
2004
With
respect to the first paragraph of Note 6
April 14,
2004
With
respect to the third paragraph of Note 3
October 1,
2004 (not presented herein)
With
respect to Note 2
September 28,
2006
CTI
Industries Corporation and Subsidiaries
Consolidated
Balance Sheets
|
|
December 31,
2005
|
|
December 31,
2004
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$
|
261,982
|
|
$
|
526,470
|
|
Accounts
receivable, (less allowance for doubtful accounts of $80,000 and
$404,000
respectively)
|
|
|
4,343,671
|
|
|
6,123,137
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
|
7,022,569
|
|
|
8,348,494
|
|
Prepaid
expenses and other current assets
|
|
|
707,082
|
|
|
646,805
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
12,335,304
|
|
|
15,644,906
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
18,869,276
|
|
|
18,451,428
|
|
Building
|
|
|
2,602,922
|
|
|
2,614,271
|
|
Office
furniture and equipment
|
|
|
2,010,557
|
|
|
1,926,371
|
|
Land
|
|
|
250,000
|
|
|
250,000
|
|
Leasehold
improvements
|
|
|
510,134
|
|
|
640,428
|
|
Fixtures
and equipment at customer locations
|
|
|
2,330,483
|
|
|
2,286,814
|
|
Projects
under construction
|
|
|
130,994
|
|
|
55,650
|
|
|
|
|
26,704,366
|
|
|
26,224,962
|
|
Less
: accumulated depreciation and amortization
|
|
|
(17,087,622
|
)
|
|
(15,636,451
|
)
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
|
9,616,744
|
|
|
10,588,511
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Net
deferred financing costs, net
|
|
|
74,396
|
|
|
120,375
|
|
Goodwill
|
|
|
989,108
|
|
|
1,113,108
|
|
Net
deferred income tax asset
|
|
|
352,689
|
|
|
175,288
|
|
Other
assets
|
|
|
167,809
|
|
|
245,376
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
1,584,002
|
|
|
1,654,147
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
23,536,050
|
|
$
|
27,887,564
|
|
|
|
|
December 31,
2005
|
|
|
December 31,
2004
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Checks
written in excess of bank balance
|
|
$
|
500,039
|
|
$
|
513,417
|
|
Trades
payable
|
|
|
4,717,733
|
|
|
6,147,969
|
|
Line
of credit
|
|
|
5,050,753
|
|
|
6,401,225
|
|
Notes
payable - current portion
|
|
|
1,329,852
|
|
|
3,500,669
|
|
Notes
payable - officers current portion
|
|
|
2,237,292
|
|
|
60,000
|
|
Accrued
liabilities
|
|
|
925,719
|
|
|
1,811,775
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
14,761,388
|
|
|
18,435,055
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Other
liabilities (related parties of $1,056,000 and $517,000)
|
|
|
1,644,339
|
|
|
1,371,364
|
|
Notes
payable
|
|
|
4,394,390
|
|
|
2,864,129
|
|
Notes
payable - officers
|
|
|
0
|
|
|
2,255,616
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
6,038,729
|
|
|
6,491,109
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
10,091
|
|
|
10,230
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock - no par value 2,000,000 shares authorizes, 0 shares issued
and
outstanding
|
|
|
0
|
|
|
0
|
|
Common
stock - no par value, 5,000,000 shares authorized, 2,268,269 and
2,185,896
shares issued, 2,036,474 and 1,954,100 shares outstanding,
respectively
|
|
|
3,764,020
|
|
|
3,764,020
|
|
Class
B Common stock - no par value, 500,000 shares authorized, 0 shares
issued
and outstanding
|
|
|
0
|
|
|
0
|
|
Paid-in-capital
|
|
|
5,869,828
|
|
|
5,615,411
|
|
Warrants
issued in connection with subordinated debt and bank debt
|
|
|
595,174
|
|
|
595,174
|
|
Accumulated
deficit
|
|
|
(6,340,646
|
)
|
|
(6,007,437
|
)
|
Accumulated
other comprehensive loss
|
|
|
(223,420
|
)
|
|
(76,884
|
)
|
Less:
|
|
|
|
|
|
|
|
Treasury
stock - 231,796 shares
|
|
|
(939,114
|
)
|
|
(939,114
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
2,725,842
|
|
|
2,951,170
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
23,536,050
|
|
$
|
27,887,564
|
|
See
accompanying notes to consolidated financial statements
CTI
Industries Corporation and Subsidiaries
Consolidated
Statement of Operations
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2004
|
|
2003
|
|
2003
|
|
|
|
|
|
As
Reported
|
|
Restated
|
|
As
Reported
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
29,189,974
|
|
$
|
37,193,109
|
|
$
|
37,193,109
|
|
$
|
36,259,638
|
|
$
|
36,259,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
22,725,825
|
|
|
30,840,989
|
|
|
30,840,989
|
|
|
29,626,450
|
|
|
29,626,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,464,149
|
|
|
6,352,120
|
|
|
6,352,120
|
|
|
6,633,188
|
|
|
6,633,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,846,538
|
|
|
4,410,595
|
|
|
4,410,595
|
|
|
4,054,607
|
|
|
4,054,607
|
|
Selling
|
|
|
1,064,944
|
|
|
1,495,257
|
|
|
1,495,257
|
|
|
1,441,501
|
|
|
1,441,501
|
|
Advertising
and marketing
|
|
|
776,571
|
|
|
1,014,463
|
|
|
1,014,463
|
|
|
1,816,301
|
|
|
1,816,301
|
|
(Gain)
on sale of assets
|
|
|
|
|
|
|
|
|
(122,499
|
)
|
|
|
|
|
(28,007
|
)
|
Other
(income)
|
|
|
|
|
|
|
|
|
(395,489
|
)
|
|
|
|
|
(428,125
|
)
|
Asset
impairment loss
|
|
|
124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,812,053
|
|
|
6,920,315
|
|
|
6,402,327
|
|
|
7,312,409
|
|
|
6,856,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
652,096
|
|
|
(568,195
|
)
|
|
(50,207
|
)
|
|
(679,221
|
)
|
|
(223,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,230,964
|
)
|
|
(1,350,085
|
)
|
|
(1,350,085
|
)
|
|
(1,103,395
|
)
|
|
(1,103,395
|
)
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,618
|
|
|
13,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
-
|
|
|
122,499
|
|
|
|
|
|
28,007
|
|
|
|
|
Foreign
currency (loss) gain
|
|
|
45,128
|
|
|
208,213
|
|
|
208,213
|
|
|
(36,132
|
)
|
|
(36,132
|
)
|
Other
|
|
|
|
|
|
395,489
|
|
|
|
|
|
428,125
|
|
|
|
|
Total
other (expense) income
|
|
|
(1,185,836
|
)
|
|
(623,884
|
)
|
|
(1,141,872
|
)
|
|
(669,777
|
)
|
|
(1,125,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and minority interest
|
|
|
(533,740
|
|
|
(1,192,079
|
)
|
|
(1,192,079
|
)
|
|
(1,348,998
|
)
|
|
(1,348,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(200,392
|
)
|
|
1,286,232
|
|
|
1,286,232
|
|
|
(782,468
|
)
|
|
(782,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest
|
|
|
(333,348
|
)
|
|
(2,478,311
|
)
|
|
(2,478,311
|
)
|
|
(566,530
|
)
|
|
(566,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in (loss) income of subsidiary
|
|
|
(139
|
)
|
|
1,063
|
|
|
1,063
|
|
|
(483
|
)
|
|
(483
|
)
|
Net
loss
|
|
$
|
(333,209
|
)
|
$
|
(2,479,374
|
)
|
$
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
$
|
(566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shares
|
|
$
|
(333,209
|
)
|
$
|
(2,479,374
|
)
|
$
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
$
|
(566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per common share
|
|
$
|
(0.17
|
)
|
$
|
(1.28
|
)
|
$
|
(1.28
|
)
|
$
|
(0.30
|
)
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per common share
|
|
$
|
(0.17
|
)
|
$
|
(1.28
|
)
|
$
|
(1.28
|
)
|
$
|
(0.30
|
)
|
$
|
(0.30
|
)
|
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Stockholders’ Equity and Comprehensive Loss
|
|
Common
Stock
|
|
Class
B
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
|
Warrants
issued in connection with subordinated
|
|
Accumulated
|
|
Accumulated
Other Comprehensive
|
|
Treasury
Stock
|
|
Notes
Recvble
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
|
|
debt
|
|
Deficit
|
|
Loss
|
|
Shares
|
|
Amount
|
|
Shareholders
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
|
2,141,882
|
|
$
|
3,748,270
|
|
|
-
|
|
$
|
-
|
|
$
|
5,554,332
|
|
|
-
|
|
$
|
135,462
|
|
$
|
(2,962,016
|
)
|
$
|
(6,002
|
)
|
|
231,796
|
|
$
|
(939,114
|
)
|
$
|
(56,456
|
)
|
$
|
5,474,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercised
|
|
|
8,334
|
|
|
15,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,750
|
|
Subordinated
debt contributed to exercise warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459,712
|
|
Collection
of Notes Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,456
|
|
|
56,456
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(566,047
|
)
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($228,766
|
)
|
|
|
|
|
|
|
|
|
|
|
(228,766
|
)
|
Total
comprehen-sive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(794,813
|
)
|
Balance,
December 31, 2003
|
|
|
2,150,216
|
|
$
|
3,764,020
|
|
|
-
|
|
$
|
-
|
|
|
5,554,332
|
|
$
|
-
|
|
$
|
595,174
|
|
$
|
(3,528,063
|
)
|
$
|
(234,768
|
)
|
|
231,796
|
|
$
|
(939,114
|
)
|
$
|
-
|
|
$
|
5,211,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for Services
|
|
|
35,680
|
|
|
-
|
|
|
|
|
|
|
|
|
61,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,079
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($2,479,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,479,374
|
)
|
Other
comprehen-sive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,884
|
|
|
|
|
|
|
|
|
|
|
|
157,884
|
|
Total
comprehen-sive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,321,490
|
)
|
Balance,
December 31, 2004
|
|
|
2,185,896
|
|
$
|
3,764,020
|
|
|
-
|
|
$
|
-
|
|
|
5,615,411
|
|
$
|
-
|
|
$
|
595,174
|
|
$
|
(6,007,437
|
)
|
$
|
(76,884
|
)
|
|
231,796
|
|
$
|
(939,114
|
)
|
$
|
-
|
|
$
|
2,951,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercised
|
|
|
32,144
|
|
|
|
|
|
|
|
|
|
|
|
53,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,501
|
|
Stock
issued for Services
|
|
|
50,229
|
|
|
|
|
|
|
|
|
|
|
|
200,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,916
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(333,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($333,209
|
)
|
Other
comprehen-sive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($146,536
|
)
|
|
|
|
|
|
|
|
|
|
|
(146,536
|
)
|
Total
comprehen-sive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(479,745
|
)
|
Balance,
December 31, 2005
|
|
|
2,268,269
|
|
$
|
3,764,020
|
|
|
-
|
|
$
|
-
|
|
|
5,869,828
|
|
$
|
-
|
|
$
|
595,174
|
|
$
|
(6,340,646
|
)
|
$
|
(223,420
|
)
|
|
231,796
|
|
$
|
(939,114
|
)
|
$
|
-
|
|
$
|
2,725,842
|
|
See
accompanying notes to consolidated financial statements
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Year
Ended December 31,
|
|
|
|
|
|
Restated
|
|
|
|
Restated
|
|
|
|
Restated
|
|
|
|
2005
|
|
2005
|
|
2004
|
|
2004
|
|
2003
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(333,209
|
)
|
|
(333,209
|
)
|
$
|
(2,479,374
|
)
|
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
|
(566,047
|
)
|
Adjustment
to reconcile net loss to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,463,369
|
|
|
1,479,916
|
|
|
1,651,322
|
|
|
1,639,808
|
|
|
1,618,563
|
|
|
1,628,492
|
|
Deferred
gain on sale/leaseback
|
|
|
0
|
|
|
|
|
|
(175,271
|
)
|
|
(175,271
|
)
|
|
(30,047
|
)
|
|
(30,047
|
)
|
Amortization
of debt discount
|
|
|
35,967
|
|
|
35,967
|
|
|
251,490
|
|
|
251,490
|
|
|
238,199
|
|
|
238,199
|
|
Minority
interest in loss of subsidiary
|
|
|
65
|
|
|
65
|
|
|
1,063
|
|
|
1,063
|
|
|
(483
|
)
|
|
(483
|
)
|
Loss
on asset impairment
|
|
|
124,000
|
|
|
124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for losses on accounts receivable
|
|
|
145,000
|
|
|
145,000
|
|
|
288,562
|
|
|
288,562
|
|
|
220,000
|
|
|
220,000
|
|
Provision
for losses on inventories
|
|
|
205,000
|
|
|
205,000
|
|
|
60,000
|
|
|
60,000
|
|
|
135,000
|
|
|
135,000
|
|
Shares
issued for services
|
|
|
200,916
|
|
|
200,916
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
Deferred
income taxes
|
|
|
(200,392
|
)
|
|
(200,392
|
)
|
|
1,189,135
|
|
|
1,189,135
|
|
|
(782,468
|
)
|
|
(782,468
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,634,466
|
|
|
1,680,617
|
|
|
(1,791,423
|
)
|
|
(1,523,274
|
)
|
|
619,113
|
|
|
430,362
|
|
Inventories
|
|
|
1,120,925
|
|
|
1,129,594
|
|
|
854,666
|
|
|
890,945
|
|
|
560,433
|
|
|
475,844
|
|
Other
assets
|
|
|
205,731
|
|
|
167,332
|
|
|
426,662
|
|
|
397,345
|
|
|
66,313
|
|
|
60,091
|
|
Trade
payables, accrued and other liabilities
|
|
|
(1,862,861
|
)
|
|
(1,976,307
|
)
|
|
(847,411
|
)
|
|
(925,237
|
)
|
|
1,129,596
|
|
|
1,297,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
2,738,977
|
|
|
2,658,499
|
|
|
(570,579
|
)
|
|
(384,808
|
)
|
|
3,208,172
|
|
|
3,106,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(549,547
|
)
|
|
(551,256
|
)
|
|
(305,546
|
)
|
|
(281,494
|
)
|
|
(2,007,104
|
)
|
|
(2,164,510
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
151,206
|
|
|
151,206
|
|
|
32,094
|
|
|
22,123
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(398,341
|
)
|
|
(400,050
|
)
|
|
(273,452
|
)
|
|
(259,371
|
)
|
|
(2,007,104
|
)
|
|
(2,164,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checks
written in excess of bank balance
|
|
|
(13,378
|
)
|
|
(14,225
|
)
|
|
172,309
|
|
|
172,291
|
|
|
227,648
|
|
|
228,041
|
|
Net
change in revolving line of credit
|
|
|
(1,350,472
|
)
|
|
(1,350,472
|
)
|
|
2,706,984
|
|
|
2,706,984
|
|
|
(1,948,408
|
)
|
|
(1,948,408
|
)
|
Proceeds
from issuance of long-term debt (Received from related parties 559,000,
267,000 and 250,000)
|
|
|
300,439
|
|
|
231,392
|
|
|
558,077
|
|
|
583,298
|
|
|
6,768,759
|
|
|
6,725,426
|
|
Repayment
of long-term debt
|
|
|
(811,776
|
)
|
|
(850,986
|
)
|
|
(2,513,261
|
)
|
|
(2,552,139
|
)
|
|
(5,649,014
|
)
|
|
(5,571,574
|
)
|
Repayment
of short-term debt (Related parties 60,000 in 2005)
|
|
|
(402,324
|
)
|
|
(402,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
53,501
|
|
|
53,501
|
|
|
0
|
|
|
|
|
|
15,750
|
|
|
15,750
|
|
Collection
of stockholder note
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
56,456
|
|
|
56,456
|
|
Cash
paid for deferred financing fees
|
|
|
(141,316
|
)
|
|
(141,316
|
)
|
|
(41,234
|
)
|
|
(41,234
|
)
|
|
(275,044
|
)
|
|
(275,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(2,365,326
|
)
|
|
(2,474,430
|
)
|
|
882,875
|
|
|
869,200
|
|
|
(803,853
|
)
|
|
(769,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(239,797
|
)
|
|
(48,506
|
)
|
|
157,884
|
|
|
(28,293
|
)
|
|
(227,966
|
)
|
|
(3,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(264,487
|
)
|
|
(264,487
|
)
|
|
196,728
|
|
|
196,728
|
|
|
169,249
|
|
|
169,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
526,469
|
|
|
526,469
|
|
|
329,742
|
|
|
329,742
|
|
|
160,493
|
|
|
160,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
261,982
|
|
|
261,982
|
|
$
|
526,470
|
|
|
526,470
|
|
$
|
329,742
|
|
|
329,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
payments for interest
|
|
|
950,280
|
|
|
950,280
|
|
|
952,682
|
|
|
952,682
|
|
|
865,196
|
|
|
865,196
|
|
Cash
payments for taxes
|
|
|
88,151
|
|
|
88,151
|
|
|
47,186
|
|
|
47,186
|
|
|
42,295
|
|
|
42,295
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of liability with third party via ownership transfer of long-term
asset
|
|
|
|
|
|
|
|
|
241,268
|
|
|
241,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued to reduce vendor obligations at fair value
|
|
|
|
|
|
|
|
|
61,079
|
|
|
61,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable converted to notes payable
|
|
|
453,503
|
|
|
453,503
|
|
|
|
|
|
|
|
|
3,534,326
|
|
|
3,534,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance
mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,671,243
|
|
|
2,671,243
|
|
See
accompanying notes to consolidated financial statements
CTI
Industries Corporation and Subsidiaries
Notes
to the Consolidated Financial Statements
1. Nature
of Operations
CTI
Industries Corporation, its United Kingdom subsidiary (CTI Balloons Limited),
and Mexican subsidiaries (Flexo Universal, S.A. de C.V., CTI Mexico Corporation,
S.A. de C.V. and CTF International S.A. de C.V.), and CTI Helium, Inc. (the
“Company”) (i) design, manufacture and distribute metallized and latex balloon
products throughout the world and (ii) operate systems for the production,
lamination, coating and printing of films used for food packaging and other
commercial uses and for conversion of films to flexible packaging containers
and
other products.
2. Restatements
The
consolidated statements of operations for the years ended December 31, 2004
and 2003 and the consolidated statements of cash flows for the years ended
December 31, 2005, 2004 and 2003 have been restated for correction of
errors. The restatements do not result in any changes in net loss, net loss
per
share or net (decrease) increase in cash.
Statements
of Operations
Certain
items presented in other income and (expense) have been reclassified to income
(loss) from operations in the consolidated statements of operations. The amounts
of such reclassifications for each year are as follows:
Income
(loss) from operations:
|
|
2005
|
|
2004
|
|
2003
|
|
As
originally reported
|
|
$
|
652,096
|
|
$
|
(568,195
|
)
|
$
|
(679,221
|
)
|
As
restated
|
|
|
652,096
|
|
|
(50,207
|
)
|
|
(223,089
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
|
(1,185,836
|
)
|
|
(623,884
|
)
|
|
(669,777
|
)
|
As
restated
|
|
|
(1,185,836
|
)
|
|
(1,141,872
|
)
|
|
(1,125,909
|
)
|
Statements
of Cash Flows
The
consolidated statements of cash flows have been restated to properly present
the
effect of exchange rate changes on cash within operating and financing
activities.
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
As
originally reported
|
|
|
2,738,977
|
|
|
(570,579
|
)
|
|
3,208,172
|
|
As
restated
|
|
|
2,658,499
|
|
|
(384,808
|
)
|
|
3,106,218
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
|
(398,341
|
)
|
|
(273,452
|
)
|
|
(2,007,104
|
)
|
As
restated
|
|
|
(400,050
|
)
|
|
(259,371
|
)
|
|
(2,164,510
|
)
|
Cash
flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
|
(2,365,326
|
)
|
|
882,875
|
|
|
(803,853
|
)
|
As
restated
|
|
|
(2,474,430
|
)
|
|
869,200
|
|
|
(769,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash:
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
|
(239,797
|
)
|
|
157,884
|
|
|
(227,966
|
)
|
As
restated
|
|
|
(48,506
|
)
|
|
(28,293
|
)
|
|
(3,106
|
)
|
3. Summary
of Significant Accounting Policies
Basis
of Presentation
The accompanying
consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred recurring
operating losses, has a working capital deficit of $2,426,000 and an accumulated
deficit of $6,341,000 as of December 31, 2005. The Company refinanced its
credit facilities and two shareholders of the Company loaned the Company
$1,000,000 as more fully described in Note 22. Management believes that as
a
result of these events that it will have sufficient liquidity to meet its
obligations as they come due. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Principles
of Consolidation
The
consolidated financial statements include the accounts of CTI Industries
Corporation, its wholly owned subsidiaries CTI Balloons Limited, CTF
International S.A. de C.V., and CTI Helium, Inc. and its majority owned
subsidiaries, Flexo Universal and CTI Mexico Corporation. All significant
intercompany accounts and transactions have been eliminated upon
consolidation.
Foreign
Currency Translation
The
financial statements of foreign subsidiaries are translated into U.S. dollars
using the exchange rate at each balance sheet date for assets and liabilities,
the historical exchange rate for stockholders’ equity, and a weighted average
exchange rate for each period for revenues and expenses. Translation adjustments
are recorded in accumulated other comprehensive income (loss) as the local
currencies of the subsidiaries are the functional currencies. Foreign currency
transaction gains and losses are recognized in the period incurred and are
included in the Consolidated Statements of Operations.
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 amounts reported of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period in the financial statements and accompanying notes. Actual results may
differ from those estimates. The Company’s significant estimates include
reserves for doubtful accounts, reserves for lower of cost to market of
inventory and recovery value of goodwill.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand, demand deposits and short term
investments with original maturities of three months or less.
Accounts
Receivable
Trade
receivables are carried at original invoice amount less an estimate for doubtful
receivables based on a review of all outstanding amounts on a monthly basis.
Management determines the allowance for doubtful accounts by identifying
troubled accounts, evaluating the individual customer receivables then
considering the customer’s financial condition, credit history and current
economic conditions and by using historical experience applied to an aging
of
accounts. A trade receivable is considered to be past due if any portion of
the
receivable balance is outstanding for a period over the customers’ normal terms.
Trade receivables are written off when deemed uncollectible. Recoveries of
trade
receivables previously written off are recorded when received.
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,
to
reflect the actual cost of production of inventories.
Production
costs of work in process and finished goods include material labor and overhead,
including general and administrative expenses where applicable. Work in process
and finished goods are not recorded in excess of net realizable
value.
Property,
Plant and Equipment
Property
and equipment are 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. Leasehold improvements are amortized on a straight-line method
over the lesser of the estimated useful life or the lease term. 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
|
|
Projects
in process represent those costs capitalized in connection with construction
of
new assets and/or improvements to existing assets. Upon completion, these costs
are reclassified to the appropriate asset class.
Goodwill
The
Company applies the provisions of SFAS 142, “Goodwill and Other Intangible
Assets”, under which goodwill is not amortized but is tested at least annually
for impairment. Goodwill on the accompanying balance sheets relates to Flexo
Universal. It is the Company’s policy to perform impairment testing for Flexo
Universal annually as of December 31, or as circumstances
change.
Valuation
of Long Lived Assets
The
Company evaluates whether events or circumstances have occurred which indicate
that the carrying amounts of long-lived assets (principally property, plant
and
equipment) may be impaired or not recoverable. The significant factors that
are
considered that could trigger an impairment review include: changes in business
strategy, market conditions, or the manner of use of an asset; underperformance
relative to historical or expected future operating results; and negative
industry or economic trends. In evaluating an asset for possible impairment,
management estimates that asset’s future undiscounted cash flows and appraised
values to measure whether the asset is recoverable, the Company measures the
impairment based on the projected discounted cash flows of the asset over its
remaining life. While the Company believes that our estimates of future cash
flows are reasonable, different assumptions regarding such cash flows could
materially affect these evaluations.
Deferred
Financing Costs
Deferred
financing costs are amortized on a straight line basis over the term of the
loan.
Income
Taxes
The
Company accounts for income taxes using the liability method. As such, deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes
and
the amount used for income tax purposes. Deferred tax assets and liabilities
are
measured using enacted tax rates expected to be in effect when the anticipated
reversal of these differences is scheduled to occur. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more
likely than not that some portion or all of the deferred tax assets will not
be
realized. The Company is subject to U.S. Federal, state and local taxes as
well
as foreign taxes in the United Kingdom and Mexico. The Company’s investments in
non-U.S. subsidiaries are deemed to be invested for an indefinite period of
time.
Fair
Value of Financial Instruments
The
fair
value of the Company’s financial instruments relating to accounts receivable,
trades payable and accrued expenses approximates fair value due to their
short-term nature. The fair value of debt approximates its carrying value as
the
interest rates applicable to these debt instruments are comparable to current
market rates for similar maturities.
Other
Comprehensive Income (Loss)
For
years
ended December 31, 2005,2004 and 2003 other comprehensive income (loss)
consisted of foreign currency translation adjustments, which is a component
of
accumulated other comprehensive loss within stockholder’s equity.
Revenue
Recognition
The
Company recognizes revenue when title transfers upon shipment. Revenue from
a
transaction is not recognized until (i) a definitive arrangement exists, (ii)
delivery of the product has occurred or the services have been performed and
legal title and risk are transferred to the customer, (iii) the price to the
buyer has been fixed or is determinable and (iv) collectibility is reasonably
assured. In some cases, product is provided on consignment to customers. For
these cases, revenue is recognized when the customer reports a sale of the
product.
Stock-Based
Compensation
At
December 31, 2005, the Company has four stock-based compensation plans,
which are described more fully in Note 17. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees” and related interpretations. The
Company recognizes compensation cost for stock-based compensation awards equal
to the difference between the quoted market price of the stock at the date
of
grant or award and the price to be paid by the employee upon exercise in
accordance with the provisions of APB No. 25. Based upon the terms of Company’s
current stock option plans, the stock price on the date of grant and price
paid
upon exercise are the same. Accordingly, no stock-based employee compensation
cost has been recognized, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the
date of grant. The Company has adopted the disclosure provision of Statement
of
Financial Accounting Standards (“SFAS”) No. 148 “Accounting for Stock-Based
Compensation - Transition Disclosure,” an amendment of SFAS Statement No. 123
(“SFAS No. 148”) The following table illustrates the effect on net loss and
earnings per share had compensation cost for all of the stock-based compensation
plans been determined based on the grant date fair values of
awards:
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
loss:
|
|
|
|
|
|
|
|
Reported
|
|
|
(333,000
|
)
|
|
(2,479,000
|
)
|
|
(566,000
|
)
|
Deduct
total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(124,000
|
)
|
|
-
|
|
|
(9,000
|
)
|
Pro
forma net loss
|
|
|
(457,000
|
)
|
|
(2,479,000
|
)
|
|
(575,000
|
)
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- As reported
|
|
|
(0.17
|
)
|
|
(1.28
|
)
|
|
(0.30
|
)
|
Basic
- Proforma
|
|
|
(0.23
|
)
|
|
(1.28
|
)
|
|
(0.30
|
)
|
Diluted
- As reported
|
|
|
(0.17
|
)
|
|
(1.28
|
)
|
|
(0.30
|
)
|
Diluted
- Proforma
|
|
|
(0.23
|
)
|
|
(1.28
|
)
|
|
(0.30
|
)
|
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:
|
|
2005
|
|
2004
|
|
2003
|
|
Expected
life (years)
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Volatility
|
|
|
138.86
|
%
|
|
128.49
|
%
|
|
136.6
|
%
|
Risk-free
interest rate
|
|
|
3.89
|
%
|
|
1.9
|
%
|
|
4.4
|
%
|
Dividend
yield
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Research
and Development
The
Company conducts product development and research activities which includes
(i)
creative product development, (ii) creative marketing, and (iii)
engineering. During the years ended December 31, 2005, 2004 and 2003,
research and development activities totaled $224,000, $246,000 and $335,000,
respectively.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expenses amounted
to
$50,000, $152,000 and $252,000 for the years ended December 31, 2005, 2004,
and 2003, respectively.
Reclassifications
Reclassifications
were made to the year end 2004 balance sheet to conform to the year end 2005
presentation.
4. Recently
Issued Accounting Standards
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123, “Share-Based Payment”
(“SFAS Statement 123R”), which replaces SFAS No. 123, “Accounting for
Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” This statement requires that all share-based
payments to employees be recognized in the financial statements based on
their
fair values on the date of grant. The Company currently uses the intrinsic
value
method to measure compensation expense for stock-based awards. The Stock
Based
Compensation caption within Note 3 provides a pro forma net income (loss)
and
earnings per share as if the Company had used a fair-value based method provided
by SFAS l23R to measure stock-based compensation for 2004, 2003 and 2002.
SFAS
No. 123R is effective as of the beginning of the first interim or annual
reporting period that begins after December 31, 2005 and applies to all
awards granted, modified, repurchased or cancelled after the effective date.
The
Company is evaluating the requirements of SFAS 123R and expects that its
adoption will not have a material impact on the Company’s consolidated results
of operations and earnings per share.
In
November of 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which
amends the guidance in APB No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This statement requires that those
items
be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities.
The
Company is required to adopt the provisions of SFAS No. 151 in the first
quarter
of 2006. The Company does not expect SFAS 151 to have a material impact on
its
consolidated results of operations or financial condition.
In
December of 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29” (SFAS 153). SFAS 153 eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces
it
with a general exception for exchanges of nonmonetary assets that do not
have
commercial substance. SFAS 153 is effective for fiscal years beginning after
June 15, 2005 and is required to be adopted by the Company in the first
quarter of 2006. The Company does not believe that the adoption of SFAS 153
will
have a material impact on the Company’s consolidated results of operations or
financial condition.
In
May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, “Accounting Changes and Error
Corrections - a replacement of APB No. 20 and FASB Statement No. 3” (“SFAS
154”). SFAS 154 replaces APB No. 20, “Accounting Changes” and FASB Statement No.
3, “Reporting Accounting Changes in Interim Financial Statements” and changes
the requirement for accounting for and reporting of a change in accounting
principles. SFAS 154 is effective for accounting changes and corrections
of
errors made in fiscal years beginning after December 15, 2005. The Company
does not anticipate that adoption of SFAS 154 will have a material impact
on the
financial position, results of operations or its cash flows.
5. Major
Customers
For
the
year ended December 31, 2005, the Company had three customers that
accounted for approximately 23.5%, 13.6%, and 13.3%, respectively, of
consolidated net sales. Corresponding percentages of consolidated net sales
generated by these customers for the year ended December 31, 2004, were
approximately 20.1%, 11.7%, and 16.8% respectively. Corresponding percentages
of
consolidated net sales generated by these customers for the year ended
December 31, 2003, were approximately 14.7%, 28.4% and 0.5%, respectively
and one other customer represented 11.0% of net sales. At December 31,
2005, the outstanding accounts receivable balances due from these three
customers were $910,250 (related party), $1,403,861 and $110,908, respectively.
At December 31, 2004, the outstanding accounts receivable balances due from
these three customers were $956,739 (related party), $1,438,153 and $301,724,
respectively.
6. Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using standard
costs which approximate costing determined on a first-in, first out basis.
Standard costs are reviewed and adjusted periodically and at year end based
on
actual direct and indirect production costs. On a periodic basis, the Company
reviews its inventory levels for estimated obsolescence or unmarketable items,
in reference to future demand requirements and shelf life of the
product.
Inventories
are comprised of the following:
|
|
December 31,
|
|
December 31,
|
|
|
|
2005
|
|
2004
|
|
Raw
materials
|
|
$
|
1,316,885
|
|
$
|
888,643
|
|
Work
in process
|
|
|
730,752
|
|
|
806,495
|
|
Finished
goods
|
|
|
5,229,677
|
|
|
6,840,068
|
|
Allowance
for excess quantities
|
|
|
(254,745
|
)
|
|
(186,713
|
)
|
Total
inventories
|
|
$
|
7,022,569
|
|
$
|
8,348,494
|
|
7. Notes
Payable
Long-term
debt consists of:
|
|
Dec
31, 2005
|
|
Dec
31, 2004
|
|
Term
Loan with bank, payable in monthly installments of $58,333 including
interest at prime (7.25% at December 31, 2005) plus 1.5%(8.75%)
(amortized over 60 months) balance due January 31,
2006
|
|
$
|
2,158,341
|
|
$
|
2,858,337
|
|
Mortgage
Loan with bank, payable in monthly installments of $19,209 including
interest at 6.25% due May 5, 2008
|
|
$
|
2,780,553
|
|
$
|
2,832,302
|
|
Vendor
Notes, at various rates of interest (weighted average of6%) maturing
through December 2007
|
|
$
|
700,886
|
|
$
|
649,697
|
|
Subordinated
Notes (Officers) due 2006, interest at 9% net of debt discount
of $23,441
and $59,408 at December 31, 2005 and 2004, respectively (See Notes 7,
10)
|
|
$
|
1,423,059
|
|
$
|
1,460,592
|
|
Subordinated
Notes (Officers) due 2006, interest at 9%(See Notes 7,10)
|
|
$
|
814,233
|
|
$
|
795,024
|
|
Loan
payable to a Mexican finance institution denominated in Mexican
Pesos
bearing interest at 9.81% due 2009
|
|
$
|
84,462
|
|
$
|
84,462
|
|
Total
long-term debt
|
|
$
|
7,961,534
|
|
$
|
8,680,414
|
|
Less
current portion
|
|
$
|
(3,567,144
|
)
|
$
|
(3,560,669
|
)
|
Total
Long-term debt, net of current portion
|
|
$
|
4,394,390
|
|
$
|
5,119,745
|
|
On
December 31, 2003, the Company entered into a Loan and Security Agreement
(“Loan Agreement”) with Cole Taylor Bank under which the Bank provided to the
Company a credit facility in the aggregate amount of $11,000,000, collateralized
by substantially all assets of the Company. The credit facility expired on
December 31, 2005 and was renewed to January 31, 2006. The credit
facility included a term loan of $3,500,000, at an interest rate of prime
plus
1.5% per annum (8.75% at December 31, 2005), which is based upon the
appraised (liquidation basis) value of the machinery and equipment of the
Company and a revolving line of credit at an interest rate of prime plus
1.5%
per annum (8.75% at December 31, 2005), the amount of which was based on
advances of up to 85% of eligible trade receivables and up to 50% of the
value
of the Company’s eligible inventory. In connection with the Loan Agreement, two
principals of the Company executed agreements pursuant to which they agreed,
in
the event appraisals of the Company’s machinery and equipment to be performed
during 2004 indicated values less than those specified in the Loan Agreement
(liquidation value), to provide guarantees of a portion of the term loan
or
subordinated loan funds to the Company. During 2004, these two principals
pledged certain of their individual assets as security for the amount by
which
the principal balance of the term loan exceeded the most recent appraised
value
of the Company’s machinery and equipment. The Loan Agreement also provided that,
upon the receipt of any proceeds of sale or other disposition of equipment,
or
any proceeds from damage, destruction or condemnation, such proceeds were
to be
paid as a mandatory prepayment of the term loan. In addition, 50% of excess
cash
flow was required to be paid as a prepayment of the term loan. The Loan
Agreement also included financial covenants requiring a minimal level of
tangible net worth and ratio of EBITDA to fixed charges. The Bank had issued
a
waiver of this covenant for December 31, 2004 and had agreed to an
amendment modifying the covenants. The entire balance outstanding under the
Loan
Agreement was paid in full on February 1, 2006.
As
of
December 31, 2005, the balance outstanding on the revolving line of credit
was $5,050,753.
In
January 2001, Banco Popular 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 mortgage loan is collateralized by this building
and
property, with a net carrying value of $2,886,595, and was made in the form
of
two notes. The first note was in the principal amount of $2,700,000, bearing
interest at the rate of 9.75%, and had a term of five years with an amortization
period of 25 years. In May of 2003, the terms of this note were
renegotiated to a note in the principal amount of $2,912,000 bearing 6.25%
with
a term of 5 years amortized over 30 years.
The
second note was in the principal amount of $173,000 with an interest rate
of
10%, and has a term of three years. This obligation was paid in full
January 2004.
Future
minimum principal payments, exclusive of debt discount, for amounts outstanding
under these long-term debt agreements for each of the years ended
December 31:
2006
|
|
$
|
3,567,144
|
|
2007
|
|
|
922,215
|
|
2008
|
|
|
811,992
|
|
2009
|
|
|
896,454
|
|
2010
|
|
|
811,992
|
|
Thereafter
|
|
|
951,737
|
|
|
|
$
|
7,961,534
|
|
On
February 1, 2006, the Company entered into a Loan Agreement with Charter
One Bank, Chicago, Illinois. Proceeds of this loan were utilized in part
to pay
the entire outstanding balance of the Cole Taylor Bank loan and the Banco
Popular mortgage loan. (See Note 22)
8. Subordinated
Debt
In
February 2003, the Company received $1,630,000 from certain shareholders in
exchange for (a) two year 9% subordinated notes, and (b) five year warrants
to
purchase 163,000 common shares at $4.87 per share. The proceeds were to (i)
re-finance the bank loan of CTI Mexico in the amount of $880,000 and (ii)
to
provide financing for CTI Mexico and Flexo Universal. The value of the warrants
was $640,427 calculated using Black-Scholes option pricing formula. The Company
applied the debt discount of $459,780 against the subordinated debt. The
debt
discount was amortized using the effective interest method over the term
of the
debt. These loans are subordinated to the Bank debt of the Company.
In
February 2006, the Company received $1,000,000 from two shareholders in
exchange for (a) five year subordinated notes bearing interest at 2% over
the
prime rate determined on a quarterly basis and (b) five year warrants to
purchase an aggregate of 303,030 shares of common stock of the Company at
the
price of $3.30 per share.
At
various times during 2003, John H. Schwan loaned an aggregate of $795,204
to the
Company in exchange for notes bearing interest at various annual rates (5%-8%).
These notes are subordinated to the bank loan of the Company. Mr. Merrick
also advanced $19,209 to the Company in December 2005.
9. Income
Taxes
The
income tax provisions are comprised of the following:
|
|
Dec.
31
|
|
Dec.
31
|
|
Dec.
31
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Foreign
|
|
$
|
-
|
|
$
|
97,097
|
|
$
|
-
|
|
|
|
$ |
-
|
|
$
|
97,097
|
|
$
|
-
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(180,134
|
)
|
|
1,223,030
|
|
|
(361,881
|
)
|
State
|
|
|
(24,797
|
)
|
|
(63,753
|
)
|
|
(61,281
|
)
|
Foreign
|
|
$
|
4,539
|
|
|
29,858
|
|
|
(359,306
|
)
|
|
|
|
(200,392
|
)
|
|
1,189,135
|
|
|
(782,468
|
)
|
Total
Income Tax (Benefit) Provision
|
|
$
|
(200,392
|
)
|
$
|
1,286,232
|
|
$
|
(782,468
|
)
|
The
components of the net deferred tax asset at December 31 are as
follows:
|
|
2005
|
|
2004
|
|
Deferred
tax assets:
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
32,752
|
|
$
|
127,150
|
|
Inventory
allowances
|
|
|
195,095
|
|
|
168,006
|
|
Accrued
liabilities
|
|
|
132,776
|
|
|
126,372
|
|
Unicap
263A adjustment
|
|
|
52,380
|
|
|
52,380
|
|
Net
operating loss carryforwards
|
|
|
3,302,982
|
|
|
2,988,093
|
|
Alternative
minimum tax credit carryforwards
|
|
|
338,612
|
|
|
338,612
|
|
State
investment tax credit carryforward
|
|
|
18,041
|
|
|
18,041
|
|
Other
foreign tax items
|
|
|
(3,179
|
)
|
|
109,833
|
|
Foreign
asset tax credit carryforward
|
|
|
160,784
|
|
|
160,784
|
|
Total
deferred tax assets
|
|
|
4,230,243
|
|
|
4,089,271
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Book
over tax basis of capital assets
|
|
|
(1,074,863
|
)
|
|
(1,134,282
|
)
|
Cash
basis of foreign inventory purchases
|
|
|
(348,690
|
)
|
|
(348,690
|
)
|
|
|
|
2,806,690
|
|
|
2,606,299
|
|
Less:
Valuation allowance
|
|
|
(2,454,001
|
)
|
|
(2,454,001
|
)
|
Net
deferred tax asset
|
|
$
|
352,689
|
|
$
|
152,298
|
|
The
Company maintains a valuation allowance with respect to deferred tax assets
as a
result of the uncertainty of ultimate realization. At December 31, 2005,
the Company has net operating loss carryforwards of approximately $5,392,538
expiring in various years through 2025. In addition, the Company has
approximately $338,600 of alternative minimum tax credits as of
December 31, 2005, which have no expiration date. Management has determined
based upon the evaluation of certain transactions involving the repatriation
of
profits from its U.K. subsidiary that it is more likely than not that deferred
tax assets will be realized in 2005. The increase in the valuation allowance,
which was recorded in the fourth quarter of 2004, was made after management
determined that the realization of the deferred tax asset was not likely
to be
realized in the foreseeable future. Income tax provisions differed from the
taxes calculated at the statutory federal tax rate as follows:
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Taxes
at statutory rate
|
|
$
|
(186,809
|
)
|
$
|
(417,228
|
)
|
$
|
(393,154
|
)
|
State
income taxes
|
|
|
(25,716
|
)
|
|
(57,434
|
)
|
|
(55,504
|
)
|
Nondeductible
expenses
|
|
|
12,757
|
|
|
15,355
|
|
|
20,564
|
|
Increase
in deferred tax
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
-
|
|
|
1,715,401
|
|
|
-
|
|
Foreign
taxes and other
|
|
|
(624
|
)
|
|
30,138
|
|
|
(354,374
|
)
|
Income
tax provision
|
|
$
|
(200,392
|
)
|
$
|
1,286,232
|
|
$
|
(782,468
|
)
|
10. Other
Income/Expense
Other
income/expense set forth on the Company’s Consolidated Statement of Operations
for the fiscal year ended December 31, 2005 included gains of $45,000
related to currency translation items
10A. Operating
Expenses - Other income
Other
income of $395,489 set forth on the Company’s Restated Consolidated Statement of
Operations for the year ended December 31, 2004 includes (i) gains related
to a review and determination that various accrued items on the books of
the
Mexican subsidiaries of the Company (CTI Mexico and Flexo) are not due or
payable and (ii) gains based on the settlement of the various accounts in
consideration for the payment of an amount less than the amount accrued.
These
settlements primarily relate to CTI Mexico an inactive subsidiary. For the
year
ending December 31, 2003, the Company had other income of $428,125. This
amount includes income derived from the settlement of certain outstanding
liabilities due to vendors for less than the amount recorded on the books
of the
Company.
11. Other
Liabilities
Items
identified as Other Liabilities in the Company’s Consolidated Balance Sheet as
of December 31, 2005 include (i) loans by officers/shareholders to Flexo
Universal totaling $1,056,000, and (ii) obligations of CTI Mexico, Flexo,
and
CTF International totaling $587,000. Items identified as Other Liabilities
in
the Company’s Consolidated Balance Sheet as of December 31, 2004 include
(i) loans by officers/shareholders to Flexo Universal totaling $517,000 due
in
2007 and 2008, (ii) capital lease for equipment for $5,000, (iii) obligations
of
CTI Mexico, Flexo, and CTF International totaling $779,000 to vendors on
deferred payment terms, and (iv) $70,000 of others.
12. Employee
Benefit Plan
The
company has a defined contribution plan for substantially all employees.
Profit
sharing contributions may be made at the discretion of the Board of Directors.
Effective January 1, 2004, the Company amended its defined contribution
plan. Under the amended plan, the maximum contribution for the Company is
2% of
gross wages. Employer contributions to the plan totaled $52,147, $57,172,
and
$54,836 for the years ended December 31, 2005, 2004 and 2003,
respectively.
13. Related
Party Transactions, See Note 16.
Stephen
M. Merrick is a shareholder of a law firm from which we received legal services
during the year. Mr. Merrick is both a director and a shareholder of the
Company. Legal fees incurred with this firm were $117,000 for the year ended
December 31, 2005, $97,000 for the year ended December 31, 2004 and
$107,000 for the year ended December 31, 2003. In 2005, Mr. Merrick
received $48,000 for services performed from CTI Industries and an additional
$12,000 in directors fees from CTI Balloons Limited located in the United
Kingdom.
In
February 2003, the Company received $1,630,000 from certain shareholders in
exchange for (a) two year 9% subordinated notes, and (b) five year warrants
to
purchase 163,000 common shares at $4.87 per share. The proceeds were to (i)
re-finance the bank loan of CTI Mexico in the amount of $880,000 and (ii)
to
provide financing for CTI Mexico and Flexo Universal. The value of the warrants
was $640,427 calculated using Black-Scholes option pricing formula. The Company
applied the debt discount of $459,780 against the subordinated debt. The
debt
discount was amortized using the effective interest method over the term
of the
debt.
John
H.
Schwan is principal of Shamrock Packaging and affiliated companies. The Company
made purchases of packaging materials from them of approximately $165,000,
$172,000 and $274,000 during the years ended December 31, 2005, 2004 and
2003, respectively.
John
H.
Schwan is an officer of an affiliate of Rapak L.L.C. Rapak purchased an
aggregate of $6,860,000, $7,837,000 and $5,360,000 of film from the Company
during the fiscal years 2005, 2004 and 2003, respectively.
For
each
of the years ended December 31, 2005, 2004 and 2003, respectively,
Mr. Schwan received $24,000 for services performed from CTI Industries.
Further, he received an additional $12,000 in directors fees in 2005 from
CTI
Balloons Limited located in the United Kingdom.
In
July 2001 certain members of Company management were issued warrants to
purchase 119,050 shares of the Company’s Common Stock at an exercise price of
$1.50 per share in consideration of their facilitating and guaranteeing and
securing bank loans to the Company in the amount of $1.4 million and for
advancing additional monies to the Company that were repaid in 2001. The
warrants have a term of five years.
At
various times during 2003, John H. Schwan loaned an aggregate of $795,204
to the
Company in exchange for notes bearing interest at various annual rates (5%-8%).
These notes are subordinated to the bank loan of the Company. Mr. Merrick
also advanced $19,209 to the Company in December 2005.
Messrs.
Schwan and Merrick made advances to the Company’s Mexican affiliate, Flexo
Universal in the amount of $112,500 and $141,900, respectively in 2005, $86,000
and $181,000, respectively in 2004, and $225,000 and $25,000 in 2003,
respectively. Additionally, Messrs. Schwan and Merrick advanced $130,000
and
$155,000, in 2005 respectively to the Company’s UK affiliate, CTI Balloons Ltd.
These advances are reflected in demand notes bearing interest at the rate
of 8%
per annum in 2004 and 2003, and 7% in 2005.
On
February 1, 2006, Mr. Schwan and Mr. Merrick advanced $500,000
each to the Company in exchange for (a) five year promissory notes bearing
interest at 2% over the prime rate determined quarterly and (b) five year
warrants to purchase an aggregate of 303,030 shares of common stock of the
Company at the price of $3.30 per share.
Interest
paid to related parties during 2005, 2004 and 2003 was $146,898, $119,230
and
$150,674, respectively.
14. Goodwill
and Intangible Assets
Under
the
provisions of SFAS 142, goodwill is subject to at least annual assessments
for
impairment by applying a fair-value based test. SFAS 142 also requires that
an
acquired intangible asset should be separately recognized if the benefit
of the
intangible asset is obtained through contractual or other legal rights, or
if
the asset can be sold, licensed, rented or exchanged, regardless of the
acquirer’s intent to do so. The Company has no acquired intangible assets other
than goodwill.
The
Company retained a valuation consulting firm to conduct an evaluation of
our
goodwill in our Mexico subsidiary December 2004 and December 2005. As
of December 31, 2005, the valuation consulting firm determined that the
fair value of the Company’s interest in Flexo Universal was $988,000, and the
carrying value of $1,113,000 was impaired by $124,000. Accordingly, we have
recorded the amount of this impairment as an expense and have reduced the
carrying value of the Company’s interest in Flexo Universal to
$989,108.
The
carrying amount of goodwill as of December 31, 2005 was $989,108 and as of
December 31, 2004 was $1,113,108. When acquired prior to 2003, goodwill was
recorded at $1,299,954. When goodwill ceased to be amortized with the adoption
of SFAS 142, amortization was $186,846, resulting in the $1,113,108 carrying
value through December 31, 2004. The primary indicator attributable to the
impairment loss was the inability of the subsidiary to meet its financial
projections.
15. Commitments
and Contingencies
Operating
Leases
In
July of 2004, the Company signed a month to month lease with HP Properties
LLC for approximately 35,000 square feet of space in Cary, Illinois. In
September of 2005, the Company signed a lease to rent 16,306 square feet of
space from Trinity Assets replacing the previous lease with HP Properties.
This
lease has a 2 year term. The Company’s United Kingdom subsidiary also maintains
a lease for office and warehouse space which expires in 2019. The Company’s
Mexico subsidiary signed a five year lease in January of 2003 to rent
43,000 square feet of space at a cost of approximately $17,000 per month.
The
Company leases office equipment under operating leases which expire on various
dates through December 2006. See Note 16 relating to cancellation of
Pepper Road lease.
The
net
lease expense was $598,440, $401,848 and $555,197 for the years ended
December 31, 2005, 2004, and 2003, respectively, which includes $76,500 and
$193,615 paid to Pepper Road (a related party) in 2004 and 2003,
respectively.
The
future aggregate minimum net lease payments under existing agreements as
of
December 31, as follows:
|
|
Trinity
Assets
|
|
Other
|
|
Total
Lease Payments
|
|
2006
|
|
$
|
77,117
|
|
|
337,759
|
|
$
|
414,876
|
|
2007
|
|
|
58,916
|
|
|
286,727
|
|
|
345,643
|
|
2008
|
|
|
|
|
|
51,700
|
|
|
51,700
|
|
2009
|
|
|
|
|
|
51,700
|
|
|
51,700
|
|
2010
|
|
|
|
|
|
51,700
|
|
|
51,700
|
|
Thereafter
|
|
|
|
|
|
465,300
|
|
|
465,300
|
|
Total
|
|
$
|
136,033
|
|
$
|
1,244,886
|
|
$
|
1,380,919
|
|
Licenses
The
Company has certain merchandising license agreements which are of a one to
two
year duration 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:
2006
|
|
$
|
76,664
|
|
2007
|
|
$
|
76,664
|
|
2008
|
|
$
|
76,664
|
|
16. Sale/Leaseback
of Building - Related Party
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 was owned by an entity
in
which officers/shareholders of the Company have a controlling interest. The
gain
realized on the sale was deferred and was being recognized into income over
the
10 year lease term. In July of 2004, this building was sold and the
remaining deferred gain of $160,000 was fully recognized.
17. Stock
Options and Warrants
Under
the
Company’s 1997 Stock Option Plan (effective July 1, 1997), a total of
119,050 shares of Common Stock are reserved for issuance under the Stock
Option
Plan. Options to purchase 98,416 shares of Common Stock have been granted
as of
October 31, 1998, and remain outstanding at December 31, 2005. 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.
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 158,733 shares of the
Company’s Common Stock. As of December 31, 2005, 148,219 options had been
granted under the 1999 Stock Option Plan. The options are exercisable
immediately upon grant, and have a term of ten years.
On
April 12, 2001, the Board of Directors approved for adoption, effective
December 27, 2001, the 2001 Stock Option Plan (“Plan”). The Plan authorizes
the grant of options to purchase up to an aggregate of 158,733 shares of
the
Company’s Common Stock. As of December 31, 2005, 112,503 options had been
granted under the 2001 Stock Option Plan. The options are exercisable
immediately upon grant and have a term of ten years.
On
April 24, 2002, the Board of Directors approved for adoption, effective
October 12, 2002, the 2002 Stock Option Plan (“Plan”). The Plan authorizes
the grant of options to purchase up to an aggregate of 142,860 shares of
the
Company’s Common Stock. As of December 31, 2005, 141,954 options had been
granted under the 2002 Stock Option Plan. The options are exercisable
immediately upon grant and have a term of ten years.
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
(Board of Directors or other designated person) 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 11,905 shares of
the Company’s Common Stock at an exercise price of $2.10 per share to Thornhill
Capital LLC in consideration for services. The option has a term of 10 years.
In
September 1999, warrants to purchase 19,079 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 $1.42 per share. In April 2002, the Company issued an
option to purchase 11,905 shares of the Company’s Common Stock at an exercise
price of $2.10 per share to Thornhill Capital in consideration of
services.
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 had a term of 3 years and were exercised in 2002.
In
July 2001, certain members of company management were issued warrants to
purchase 119,050 shares of the Company’s Common Stock at an exercise price of
$1.50 per share in consideration of their facilitating and guaranteeing and
securing bank loans to the Company in the amount of $1.4 million and for
advancing additional monies to the company that were repaid in 2001. The
warrants have a term of five years.
In
March 2003, certain members of company management were issued warrants to
purchase 163,000 shares of the Company’s Common Stock at an exercise price of
$4.87 per share in consideration of their loaning the company
$1,630,000.
In
December 2003, certain members of company management were issued
incentive-based options to purchase 7,000 shares of the Company’s Common Stock
at an exercise price of $2.29 per share. These options have a term of 10
years.
In
December 2005, certain members of company management were issued
incentive-based options to purchase 79,000 shares of the Company’s Common Stock
at an exercise price of $2.88 per share. These options have a term of 10
years.
In
February 2006, certain members of company management were issued warrants
to purchase 303,030 shares of the Company’s Common Stock at an exercise price of
$3.30 per share in consideration of their loaning the company
$1,000,000.
The
following is a summary of the activity in the Company’s stock option plans and
other options and warrants issued, for the years ended December 31, 2005,
2004 and 2003, respectively.
|
|
Dec.
31,
|
|
Weighted
Avg. Exercise
|
|
Dec.
31,
|
|
Weighted
Avg. Exercise
|
|
Dec.
31,
|
|
Weighted
Avg. Exercise
|
|
|
|
2005
|
|
Price
|
|
2004
|
|
Price
|
|
2003
|
|
Price
|
|
Outstanding
and exercisable, beginning of period
|
|
|
687,472
|
|
$
|
3.16
|
|
|
725,597
|
|
$
|
2.58
|
|
|
572,862
|
|
$
|
2.58
|
|
Granted
|
|
|
79,000
|
|
|
2.88
|
|
|
0
|
|
|
|
|
|
170,000
|
|
|
2.22
|
|
Exercised
|
|
|
(32,144
|
)
|
|
1.70
|
|
|
0
|
|
|
|
|
|
(8,336
|
)
|
|
1.54
|
|
Cancelled
|
|
|
(90,876
|
)
|
|
1.77
|
|
|
(38,125
|
)
|
|
1.81
|
|
|
(8,929
|
)
|
|
6.51
|
|
Outstanding
and exercisable at the end of period
|
|
|
643,452
|
|
$
|
3.40
|
|
|
687,472
|
|
$
|
3.33
|
|
|
725,597
|
|
$
|
2.58
|
|
At
December 31, 2005, available options to grant were 907.
Significant
option and warrant groups outstanding at December 31, 2005 and related
weighted average price and remaining life information are as
follows:
Grant
Date
|
|
Outstanding
|
|
Exercisable
|
|
Exercise
Price
|
|
Remaining
Life (Years)
|
|
September 1997
|
|
|
5,953
|
|
|
5,953
|
|
$
|
6.28
|
|
|
1
|
|
September 1998
|
|
|
88,494
|
|
|
88,494
|
|
$
|
6.51
|
|
|
2
|
|
September 1998
|
|
|
11,905
|
|
|
11,905
|
|
$
|
2.10
|
|
|
2
|
|
March 2000
|
|
|
57,143
|
|
|
57,143
|
|
$
|
1.95
|
|
|
4
|
|
July 2001
|
|
|
119,050
|
|
|
119,050
|
|
$
|
1.50
|
|
|
0.5
|
|
December 2001
|
|
|
44,048
|
|
|
44,048
|
|
$
|
1.47
|
|
|
5
|
|
April 2002
|
|
|
11,905
|
|
|
11,905
|
|
$
|
2.10
|
|
|
6
|
|
December 2002
|
|
|
55,954
|
|
|
55,954
|
|
$
|
2.36
|
|
|
6
|
|
February 2003
|
|
|
163,000
|
|
|
163,000
|
|
$
|
4.87
|
|
|
2
|
|
December 2003
|
|
|
7,000
|
|
|
7,000
|
|
$
|
2.29
|
|
|
8
|
|
December 2005
|
|
|
79,000
|
|
|
79,000
|
|
$
|
2.88
|
|
|
9
|
|
|
|
|
643,452
|
|
|
643,452
|
|
|
|
|
|
|
|
There
were 79,000 options issued in 2005, no options issued in 2004, the weighted
average fair value of options granted during the years ending December 31,
2005 and December 31, 2003 was $2.88 and $2.29 per share,
respectively.
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.
CTI
Industries Corporation and Subsidiaries
Consolidated
Earnings per Share
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Basic
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the period
|
|
|
1,977,235
|
|
|
1,930,976
|
|
|
1,918,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings:
|
|
|
|
|
|
|
|
|
|
|
Net
loss:
|
|
$
|
(333,210
|
)
|
$
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amount
for per share Computation
|
|
$
|
(333,210
|
)
|
$
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings applicable to Common Shares
|
|
$
|
(0.17
|
)
|
$
|
(1.28
|
)
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
1,977,235
|
|
|
1,930,976
|
|
|
1,918,260
|
|
Weighted
averages shares Outstanding Common stock equivalents (options,
warrants)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the period
|
|
|
1,977,235
|
|
|
1,930,976
|
|
|
1,918,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(333,210
|
)
|
$
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amount
for per share computation
|
|
$
|
(333,210
|
)
|
$
|
(2,479,374
|
)
|
$
|
(566,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to Common Shares
|
|
$
|
(0.17
|
)
|
$
|
(1.28
|
)
|
$
|
(0.30
|
)
|
19. Geographic
Segment Data
The
Company’s operations consist of a business segment which designs, manufactures,
and distributes film 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 December 31,
2003, December 31, 2004 and December 31, 2005 are as
follows:
|
|
United
States
|
|
United
Kingdom
|
|
Mexico
|
|
Eliminations
|
|
Consolidated
|
|
Year
ended 12/31/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,564,000
|
|
$
|
2,573,000
|
|
$
|
4,536,000
|
|
|
($1,483,000
|
)
|
$
|
29,190,000
|
|
Operating
income (loss)
|
|
$
|
602,000
|
|
$
|
290,000
|
|
|
($240,000
|
)
|
|
|
|
$
|
652,000
|
|
Net
(loss) income
|
|
|
($342,000
|
)
|
$
|
220,000
|
|
|
($211,000
|
)
|
|
|
|
|
($333,000
|
)
|
Total
Assets
|
|
$
|
21,343,000
|
|
$
|
2,122,000
|
|
$
|
4,818,000
|
|
|
($4,747,000
|
)
|
$
|
23,536,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended 12/31/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,855,000
|
|
$
|
2,664,000
|
|
$
|
4,890,000
|
|
|
($3,216,000
|
)
|
$
|
37,193,000
|
|
Operating
(loss) income (restated)
|
|
|
($92,000
|
)
|
$
|
121,000
|
|
|
($31,000
|
)
|
|
($48,000
|
)
|
|
($50,000
|
)
|
Net
(loss) income
|
|
|
($2,595,000
|
)
|
$
|
223,000
|
|
|
($59,000
|
)
|
|
($48,000
|
)
|
|
($2,479,000
|
)
|
Total
Assets
|
|
$
|
24,072,000
|
|
$
|
1,989,000
|
|
$
|
5,319,000
|
|
|
($3,492,000
|
)
|
$
|
27,888,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended 12/31/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,687,000
|
|
$
|
2,415,000
|
|
$
|
4,003,000
|
|
|
($2,845,000
|
)
|
$
|
36,260,000
|
|
Operating
(loss) income (restated)
|
|
|
($216,000
|
)
|
$
|
191,000
|
|
|
($102,000
|
)
|
|
($96,000
|
)
|
|
($223,000
|
)
|
Net
(loss) income
|
|
|
($883,000
|
)
|
$
|
163,000
|
|
$
|
249,000
|
|
|
($95,000
|
)
|
|
($566,000
|
)
|
Total
Assets
|
|
$
|
27,603,000
|
|
$
|
1,412,000
|
|
$
|
5,476,000
|
|
|
($4,221,000
|
)
|
$
|
30,270,000
|
|
20. Litigation
On
September 5, 2003, Airgas Inc., Airgas-Southwest, Inc., Airgas-South, Inc.
and Airgas-East, Inc. filed a joint action against CTI Industries Corporation
for claimed breach of contract in the Circuit Court of Lake County, Illinois
claiming as damages the aggregate amount of $162,242. The Company has filed
an
answer denying the material claims of the complaint, affirmative defenses and
a
counterclaim. In the action, the plaintiffs claim that CTI Industries
Corporation owes them certain sums for (i) helium sold and delivered, (ii)
rental charges with respect to helium tanks and (iii) replacement charges for
tanks claimed to have been lost. On November 2, 2004, this matter was
settled. The amount agreed to be paid by the Company in settlement totaled
$100,000. The first payment of $50,000 was paid on November 15, 2004. The
balance of $50,000 was payable in five consecutive $10,000 monthly installments,
commencing December 30, 2004 and has been paid. The Company had fully
accrued the amount of the settlement as of December 31, 2004.
On
June 4, 2004, Spar Group, Inc. initiated an arbitration proceeding in New
York City against the Company. In the proceeding, Spar Group claimed that there
was due from the Company to Spar Group a sum for services rendered in the amount
of $180,043, plus interest. Spar Group claimed to have rendered services to
the
Company in various Eckerd stores with respect to the display and ordering of
metalized and latex balloons for sale in those stores. The Company filed an
answer denying liability with respect to the claim and asserted a counterclaim
for damages against Spar Group for breach of its agreement to provide such
services. On January 13, 2005, this matter was settled. The amount agreed
to be paid by the Company in settlement totaled $100,000. The first payment
of
$30,000 was paid on February 1, 2005. The balance of $70,000 was payable in
seven consecutive $10,000 monthly installments, commencing March 1, 2005
and has been paid in full. The Company had fully accrued the amount of the
settlement as of December 31, 2004.
In
addition, the Company is also party to certain lawsuits arising in the normal
course of business. The ultimate outcome of these matters is unknown, but in
the
opinion of management, the settlement of these matters is not expected to have
a
significant effect on the future financial position, cash flows or results
of
operations of the Company.
21. Quarterly
Financial Data (Unaudited):
The
following table sets forth selected unaudited statements of income for each
quarter of fiscal 2005 and 2004:
|
|
Quarter
Ended(1)
|
|
|
|
March 31,
|
|
June 30,
|
|
Sept.
30,
|
|
Dec.
31,
|
|
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
Net
sales
|
|
$
|
9,103,327
|
|
$
|
7,572,626
|
|
$
|
6,033,831
|
|
$
|
6,480,189
|
|
Gross
profit
|
|
$
|
1,873,993
|
|
$
|
1,582,954
|
|
$
|
1,242,186
|
|
$
|
1,765,016
|
|
Net
income (loss)
|
|
$
|
84,488
|
|
|
($53,616
|
)
|
|
($416,267
|
)
|
$
|
52,186
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
($0.03
|
)
|
|
($0.21
|
)
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.04
|
|
|
($0.03
|
)
|
|
($0.21
|
)
|
$
|
0.02
|
|
(1)
|
Earnings
per common share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per common share
information may not equal the annual earnings per common
share
|
|
|
Quarter
Ended(1)
|
|
|
|
March 31,
|
|
June 30,
|
|
Sept.
30,
|
|
Dec.
31,
|
|
|
|
2004
|
|
2004
|
|
2004
|
|
2004(2)(3)
|
|
Net
sales
|
|
$
|
10,893,964
|
|
$
|
9,591,785
|
|
$
|
8,125,521
|
|
$
|
8,581,819
|
|
Gross
profit
|
|
$
|
2,147,370
|
|
$
|
2,032,028
|
|
$
|
1,669,778
|
|
$
|
502,944
|
|
Net
income (loss)
|
|
$
|
371,901
|
|
|
($135,681
|
)
|
|
($150,370
|
)
|
|
($2,565,224
|
)
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
($0.07
|
)
|
|
($0.08
|
)
|
|
($1.31
|
)
|
Diluted
|
|
$
|
0.18
|
|
|
($0.07
|
)
|
|
($0.08
|
)
|
|
($1.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Earnings
per common share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per common share
information may not equal the annual earnings per common
share.
|
(2)
|
Cost
of sales were higher, as a percentage of net sales in the fourth
quarter
of 2004 than in prior quarters of 2004, resulting in lower gross
profit
than in those prior quarters by reason of the facts that: (i) sales
of
storage bags continued to decline resulting in a shift in product
mix to
lower margin products, (ii) higher costs of production in prior quarters
resulted in higher unit costs for metalized balloons sold during
the
fourth quarter and (iii) there were discounted and low margin sales
of
balloon products in the fourth
quarter.
|
(3)
|
The
amount of the income tax expense recognized by the Company in 2004
reflects adjustments in deferred tax assets and other items arising
from
the operating results of the Company for the year. This increase,
which
was recorded during the fourth quarter, was made after management
determined, based on fourth quarter activity, that the realization
of the
deferred tax asset was not likely in the foreseeable future. Fourth
quarter activity affecting this determination included lower than
anticipated sales in the storage bag product line and lower margin
sales
of novelty products, as described
above.
|
22. Subsequent
Events
On
February 1, 2006, the Company entered into a Loan Agreement with Charter
One Bank, Chicago, Illinois, under which the Bank agreed to provide a credit
facility to the Company in the total amount of $12,800,000, which includes
(i) a
five year mortgage loan secured by the Barrington, Illinois property in the
principal amount of $2,800,000, amortized over a 20 year period, (ii) a five
year term loan secured by the equipment at the Barrington, Illinois plant in
the
amount of $3,500,000 and (iii) a three-year revolving line of credit up to
a
maximum amount of $6,500,000, secured by inventory and receivables. The amount
the Company can borrow on the revolving line of credit includes 85% of eligible
receivables and 60% of eligible inventory. Proceeds of this loan totaling
$10,349,653 were utilized to pay the entire outstanding principal amount of
the
Company’s outstanding debt obligations to Cole Taylor Bank and Banco Popular.
Under the terms of the Loan Agreement, the Company is restricted from declaring
any cash dividends or other distributions on its shares.
On
January 10, 2006, an officer of Flexo Universal, Pablo Gortazar, acquired
all rights in a loan of a credit union to Flexo Universal and CTF International
both Mexican subsidiaries of the Company for the book value. The principal
amount of the obligation of Flexo Universal and CTF International acquired
was
$191,000, and such amount bears interest at the rate of 9.5% per
annum.
On
February 1, 2006, two principal shareholders and officers of the Company
each loaned to the Company the sum of $500,000 in exchange for (i) promissory
notes due January 31, 2011 and bearing interest at the rate of 2% per annum
in excess of the prime rate determined quarterly and (ii) five-year warrants
to
purchase up to 151,515 shares of the common stock of the Company, each, at
the
price of $3.30 per share.
On
March 9, 2006, the Company entered into a four-year term Production and
Supply Agreement with ITW Spacebag, a division of Illinois Tool Works, Inc.,
under which ITW is to purchase from the Company (i) all of its requirements
for
a certain kind of pouch for the storage of personal and household items and
(ii)
all of its requirements, subject to being price competitive, for film to be
utilized by ITW to produce certain other storage pouches.
Schedule
II -Valuation and qualifying accounts:
The
following is a summary of the allowance for doubtful accounts related to
accounts receivable for the years ended December 31:
|
|
2005
|
|
2004
|
|
2003
|
|
Balance
at beginning of year
|
|
$
|
404,070
|
|
$
|
316,047
|
|
$
|
391,406
|
|
Charged
to expenses
|
|
$
|
145,000
|
|
$
|
288,562
|
|
$
|
145,000
|
|
Uncollectible
accounts written off
|
|
$
|
(468,865
|
)
|
$
|
(200,539
|
)
|
$
|
(220,359
|
)
|
Balance
at end of year
|
|
$
|
80,205
|
|
$
|
404,070
|
|
$
|
316,047
|
|
The
following is a summary of the allowance for obsolete inventory for the years
ended December 31:
|
|
2005
|
|
2004
|
|
2003
|
|
Balance
at beginning of year
|
|
$
|
186,713
|
|
$
|
492,157
|
|
$
|
392,142
|
|
Charged
to expenses
|
|
$
|
205,000
|
|
$
|
60,000
|
|
$
|
210,000
|
|
Obsolete
inventory written off
|
|
$
|
(136,968
|
)
|
$
|
(365,444
|
)
|
$
|
(109,985
|
)
|
Balance
at end of year
|
|
$
|
254,745
|
|
$
|
186,713
|
|
$
|
492,157
|
|
The
following is a summary of property and equipment and the related accounts of
accumulated depreciation for the years ended December 31:
|
|
2005
|
|
2004
|
|
2003
|
|
Cost
Basis
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
26,224,962
|
|
$
|
27,023,245
|
|
$
|
25,881,777
|
|
Additions
|
|
$
|
549,547
|
|
$
|
305,547
|
|
$
|
2,007,104
|
|
Disposals
|
|
$
|
(70,143
|
)
|
$
|
(1,103,830
|
)
|
$
|
(865,636
|
)
|
Balance
at end of year
|
|
$
|
26,704,366
|
|
$
|
26,224,962
|
|
$
|
27,023,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
15,636,451
|
|
$
|
14,815,596
|
|
$
|
14,166,764
|
|
Depreciation
|
|
$
|
1,463,369
|
|
$
|
1,651,322
|
|
$
|
1,514,468
|
|
Disposals
|
|
$
|
(12,198
|
)
|
$
|
(830,467
|
)
|
$
|
(865,636
|
)
|
Balance
at end of year
|
|
$
|
17,087,622
|
|
$
|
15,636,451
|
|
$
|
14,815,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
9,616,744
|
|
$
|
10,588,511
|
|
$
|
12,207,649
|
|
We
have not authorized any dealer, salesperson or other person to
provide any
information or make any representations about CTI Industries Corporation,
except the information or representations contained in this Prospectus.
You should not rely on any additional information or representations
if
made.
|
|
|
|
This
Prospectus does not constitute an offer to sell, or a solicitation
of an
offer to buy any securities:
|
|
|
|
·
except
the common stock offered by this Prospectus;
|
|
|
|
·
in any jurisdiction in which the offer
or solicitation is not authorized;
|
PROSPECTUS
|
|
|
·
in
any jurisdiction where the dealer or other salesperson is not qualified
to
make the offer or solicitation;
|
403,500
shares of Common Stock
|
|
|
·
to
any person to whom it is unlawful to make the offer or solicitation;
or
|
CTI
INDUSTRIES CORPORATION
|
|
|
·
to
any person who is not a United States resident or who is outside
the
jurisdiction of the United States.
|
________________
__, 2007
|
|
|
The
delivery of this Prospectus or any accompanying sale does not imply
that:
|
|
|
|
·
there
have been no changes in the affairs of CTI Industries Corporation
after
the date of this Prospectus; or
|
|
|
|
·
the
information contained in this Prospectus is correct after the date
of this
Prospectus.
|
|
|
|
Until
_________, 2007, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution,
may be
required to deliver a Prospectus. This is in addition to the obligation
of
dealers to deliver a Prospectus when acting as
underwriters.
|
|
INFORMATION
NOT REQUIRED IN PROSPECTUS
Our
Certificate of Incorporation include an indemnification provision under which
we
have agreed to indemnify directors and officers of CTI from and against certain
claims arising from or related to future acts or omissions as a director or
officer of CTI. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of CTI pursuant to the foregoing, or otherwise, CTI has been advised that in
the
opinion of the SEC such indemnification is against public policy as expressed
in
the Securities Act and is, therefore, unenforceable.
The
following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered. CTI will pay all expenses in connection with this
offering.
SEC
Registration Fee
|
|
$
|
200
|
|
Printing
and Engraving Expenses
|
|
$
|
2,500
|
|
Accounting
Fees and Expenses
|
|
$
|
15,000
|
|
Legal
Fees and Expenses
|
|
$
|
50,000
|
|
Miscellaneous
|
|
$
|
17,300
|
|
TOTAL
|
|
$
|
85,000
|
|
On
July 1, 2004, the Company entered into a Standby Equity Distribution
Agreement (the “2004 SEDA”) with Cornell Capital under which Cornell Capital
agreed to provide up to $5 million to the Company in connection with the
purchase of common stock of the Company over a two (2) year term. On
August 5, 2004, the Company issued 14,162 shares of its common stock to
Cornell Capital and 3,500 shares of its common stock to Newbridge Securities
Corporation, Cornell Capital’s stock placement agent for underwriting services
as partial consideration under the terms of SEDA. The Company did not take
any
action to register shares to be sold under the 2004 SEDA.
On
September 13, 2004, the Company issued 18,018 shares of its common stock to
Thornhill Capital, LLC as payment for consulting services.
On
September 23, 2005, the Company issued 50,229 shares of its common stock to
three (3) service providers as payment for services.
On
February 1, 2006, the Company issued to two principal shareholders and
officers of the Company five-year warrants to purchase up to 151,515 shares
of
common stock of the Company, each, at the purchase price of $3.30, per share,
an
amount equal to 110% of the market price of the Common Stock of the Company
on
the day immediately preceding the transaction. The warrants were issued in
consideration of these shareholders each loaning to the Company the principal
amount of $500,000 for five year promissory notes which are subordinated to
the
bank loans to the Company. The warrants were issued on a restricted basis and
were not registered in reliance upon an exemption from registration for sales
not involving a public offering.
On
June
12, 2006, two principal shareholders and officers of the Company exercised
warrants to purchase 119,050 shares of common stock of the Company, at the
purchase price of $1.50 per share which were issued in 2001. The warrants were
exercised by a return of 38,404 shares with a market value of $118,668 on the
day of return, by one of the principle officers and a cash payment of $59,524
by
the other officer. The warrants, and the shares of common stock issued upon
exercise of the warrants, were issued on a restricted basis and were not
registered in reliance upon an exemption from registration for sales not
involving a public offering.
ITEM
27. EXHIBITS
|
|
DESCRIPTION
|
|
LOCATION
|
3.1
|
|
Third
Restated Certificate of Incorporation of CTI Industries Corporation
|
|
Incorporated
by reference to the Company’s Schedule 14A Definitive Proxy Statement for
solicitation of written consent of shareholders, as filed with the
SEC on
October 25, 1999
|
3.2
|
|
Bylaws
of CTI Industries Corporation
|
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2 (File
No. 333-31969) effective November 5, 1997
|
4.1
|
|
Form
of CTI Industries Corporation’s common stock certificate
|
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2 (File
No. 333-31969) effective November 5, 1997
|
4.2
|
|
CTI
Industries Corporation 1999 Stock Option Plan
|
|
Incorporated
by reference to the Company’s Schedule 14A Definitive Proxy Statement, as
filed with the SEC on March 26, 1999
|
4.3
|
|
CTI
Industries Corporation 2001 Stock Option Plan
|
|
Incorporated
by reference to Schedule 14A Definitive Proxy Statement, as filed
with SEC
on May 21, 2001
|
4.4
|
|
CTI
Industries Corporation 2002 Stock Option Plan
|
|
Incorporated
by reference to the Company’s Schedule 14A Definitive Proxy Statement, as
filed with the SEC on May 15, 2002
|
5.1
|
|
Opinion
re: legality
|
|
Provided
herewith
|
10.1
|
|
Employment
Agreement, dated June 30, 1997, by and between CTI Industries
Corporation and Howard W. Schwan
|
|
Incorporated
by reference to the Company’s Registration Statement (File
No. 333-31969) effective November 5, 1997
|
10.2
|
|
Warrant,
dated July 17, 2001, issued to John H. Schwan to purchase 79,364
shares of common stock
|
|
Incorporated
by reference the Company’s Annual Report on Form 10-KSB, as filed with the
SEC on May 1, 2003
|
10.3
|
|
Warrant,
dated July 17, 2001, issued to Stephen M. Merrick to purchase
39,683 shares of common stock
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB, as filed with
the SEC on May 1, 2003
|
10.4
|
|
Note,
dated January 28, 2003, issued to Stephen M. Merrick in the sum
of $500,000
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB, as filed with
the SEC on May 1, 2003
|
10.5
|
|
Note,
dated February 28, 2003, issued to Stephen M. Merrick in the sum
of $200,000
|
|
Incorporated
by reference to Exhibits contained in the Company’s Annual Report on Form
10-KSB, as filed with the SEC on May 1, 2003
|
10.5
|
|
Note,
dated February 10, 2003, issued to John H. Schwan in the sum of
$150,000
|
|
Incorporated
by reference to Exhibits contained in the Company’s Annual Report on Form
10-KSB, as filed with the SEC on May 1,
2003
|
|
|
DESCRIPTION
|
|
LOCATION
|
10.7
|
|
Note,
dated February 15, 2003, issued to John Schwan in the sum of $680,000
|
|
Incorporated
by reference to Exhibits contained in the Company’s Annual Report on Form
10-KSB, as filed with the SEC on May 1, 2003
|
10.8
|
|
Note,
dated March 3, 2003, issued to John H. Schwan in the sum of
$100,000.
|
|
Incorporated
by reference to Exhibits contained in the Company’s Annual Report on Form
10-KSB, as filed with the SEC on May 1, 2003
|
10.9
|
|
Warrant,
dated March 20, 2003, issued to Stephen M. Merrick to purchase
70,000 shares of common stock
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB, as filed with
the SEC on May 1, 2003
|
10.10
|
|
Warrant,
dated March 20, 2003, issued to John H. Schwan to purchase
93,000 shares of common stock
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB, as filed with
the SEC on May 1, 2003
|
10.11
|
|
Loan
and Security Agreement, dated December 30, 2003, by and between the
Company and Cole Taylor Bank
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K, as filed with
the SEC on April 14, 2004
|
10.12
|
|
Term
Note, dated December 30, 2003, made by CTI Industries Corporation to
Cole Taylor Bank in the sum of $3,500,000
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K, as filed with
the SEC on April 14, 2004
|
10.13
|
|
Revolving
Note dated December 30, 2003, made by CTI Industries Corporation to
Cole Taylor Bank in the sum of $7,500,000
|
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K, as filed with
the SEC on April 14, 2004
|
10.14
|
|
Mortgage,
dated January 12, 2001, for the benefit of Banco Popular,
N.A.
|
|
Incorporated
by reference to the Company’s Amended Annual Report on Form 10-KSB/A, as
filed with the SEC on May 1, 2003
|
10.15
|
|
Secured
Promissory Note in the sum of $2,700,000 dated December 15, 2000 made
by CTI Industries Corporation to Banco Popular, N.A.
|
|
Incorporated
by reference to the Company’s Amended Annual Report on Form 10-KSB/A, as
filed with the SEC on May 1, 2003
|
10.16
|
|
Secured
Promissory Note, dated December 15, 2000 made by CTI Industries
Corporation to Banco Popular, N.A. in the sum of $173,000
|
|
Incorporated
by reference to the Company’s Amended Annual Report on Form 10-KSB/A, as
filed with the SEC on May 1, 2003
|
10.17
|
|
Amendment
No. 7 to Loan and Security Agreement dated September 29, 2005 by
and between the Company and Cole Taylor Bank
|
|
Incorporated
by reference to the Company’s Report on Form 8-K dated September 30,
2005
|
10.18
|
|
Amendment
No. 8 to Loan and Security Agreement dated December 28, 2005 by
and between Company and Cole Taylor Bank
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K as filed with the
SEC on December 30, 2005
|
10.19
|
|
Loan
and Security Agreement dated February 1, 2006 by and between Charter
One Bank and the Company
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated
February 3, 2006
|
10.20
|
|
Warrant,
dated February 1, 2006, to purchase 151,515 shares of common stock
issued to John H. Schwan
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K as filed with the
SEC on February 3, 2006
|
|
|
DESCRIPTION
|
|
LOCATION
|
10.21
|
|
Warrant,
dated February 1, 2006, to purchase 151,515 shares of common stock
issued to Stephen M. Merrick
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated
February 3, 2006
|
10.22
|
|
Note,
dated February 1, 2006, issued to John Schwan in the sum of
$500,000
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated
February 3, 2006
|
10.23
|
|
Note,
dated February 1, 2006, issued to Stephen M. Merrick in the sum
of $500,000
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated
February 3, 2006
|
10.24
|
|
Production
and Supply Agreement, dated March 17, 2006, by and between ITW
Spacebag and the Company
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated
March 17, 2006
|
10.25
|
|
License
Agreement, dated April 28, 2006, by and between Rapak LLC and the
Company
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated
April 28, 2006
|
10.26
|
|
Standby
Equity Distribution Agreement, dated as of June 6, 2006, by and
between the Company and Cornell Capital Partners, LP
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K as filed with the
SEC on June 7, 2006
|
10.27
|
|
Registration
Rights Agreement, dated as of June 6, 2006, by and between the
Company and Cornell Capital Partners, LP
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K as filed with the
SEC on June 7, 2006
|
10.28
|
|
Placement
Agent Agreement, dated as of June 6, 2006, by and among the Company,
Cornell Capital Partners, LP and Newbridge Securities Corporation,
as
placement agent
|
|
Incorporated
by reference to the Company’s Current Report on Form 8-K as filed with the
SEC on June 7, 2006
|
10.29
|
|
First
Amendment to Loan and Security Agreement, dated June 28, 2006, by
and
between Charter One Bank and the Company
|
|
Incorporated
by reference to Exhibit 10.11 to the Company’s Quarterly Report or Form
10-Q as filed with the SEC on November 20, 2006
|
11
|
|
Computation
of Earnings Per Share
|
|
Incorporated
by reference to Note 17 of the Consolidated Financial Statements
for the
fiscal years ended December 31, 2005 and 2004
|
14
|
|
Code
of Ethics
|
|
Incorporated
by reference to the Company’s Amended Annual Report on Form 10-K/A as
filed with the SEC on October 8, 2004
|
21
|
|
Subsidiaries
|
|
Description
incorporated by reference to the Company’s Annual Report on Form 10-K/A
under Item 1as filed with the SEC on October 4, 2006
|
23.1
|
|
Consent
of Illinois Counsel
|
|
Incorporated
by reference to Exhibit 5.1 herewith
|
23.2
|
|
Consent
of Independent Auditors, Weiser LLP
|
|
Provided
herewith
|
23.3
|
|
Consent
of Independent Auditors, Eisner LLP
|
|
Provided
herewith
|
(a) The
undersigned Registrant hereby undertakes:
(1)
|
To
file, during any period in which offers or sales are being made,
a
post-effective amendment to this registration
statement:
|
|
(i)
|
To
include any prospectus required by Section 10(a) (3) of the Securities
Act
of 1933, as amended (the “Securities
Act”);
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of this registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease
in the
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC pursuant to
Rule
424(b) if, in the aggregate, the changes in volume and price represent
no
more than 20 percent change in the maximum aggregate offering price
set
forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in this registration statement or any material
change to such information in this registration
statement;
|
provided,
however,
that
paragraphs (1) (i), (1) (ii) and (1) (iii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the SEC by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) that are incorporated by reference
in this registration statement.
(2)
|
That,
for the purposes of determining any liability under the Securities
Act,
each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of
such securities at the time shall be deemed to be the initial bona
fide
offering thereof.
|
(3)
|
To
remove from registration by means of a post-effective amendment any
of the
securities being registered which remain unsold at the termination
of the
offering.
|
(5)
|
That
for the purpose of determining liability under the Securities Act
to any
purchaser:
|
|
(i)
|
If
the registrant is relying on Rule
430B:
|
|
(A)
|
Each
prospectus filed by the registrant pursuant to Rule 424 (b)(3) shall
be
deemed to be part of the registration statement as of the date the
filed
prospectus was deemed part of and included in the registration statement;
and
|
|
(B)
|
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii)
or (x)
for the purpose of providing the information required by Section
10(a) of
the Securities Act shall be deemed to be part of and included in
the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the
issuer
and any person that is at that date an underwriter, such date shall
be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be
deemed
to be the initial bona
fide
offering thereof. Provided,
however,
that no statement made in a registration statement or prospectus
that is
part of the registration statement or made in a document incorporated
or
deemed incorporated by reference into the registration statement
or
prospectus that is part of the registration statement will, as to
a
purchaser with a time of contract of sale prior to such effective
date,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement
or
made in any such document immediately prior to such effective date;
or
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(ii)
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If
the registrant is subject to Rule 430C, each prospectus filed pursuant
to
Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other
than
prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of
and included in the registration statement as of the date it is first
used
after effectiveness. Provided,
however,
that no statement made in a registration statement or prospectus
that is
part of the registration statement or made in a document incorporated
or
deemed incorporated by reference into the registration statement
or
prospectus that is part of the registration statement will, as to
a
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement
or
made in any such document immediately prior to such date of first
use.
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(6)
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That,
for the purpose of determining liability of the registrant under
the
Securities Act to any purchaser in the initial distribution of the
securities: The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to
this
registration statement, regardless of the underwriting method used
to sell
the securities to the purchaser, if the securities are offered or
sold to
such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will
be
considered to offer or sell such securities to such
purchaser:
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(i)
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Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
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(ii)
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Any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
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(iii)
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The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant
or its
securities provided by or on behalf of the undersigned registrant;
and
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(iv)
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Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
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(b)
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The
undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant’s
annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan’s annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide
offering thereof.
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(c)
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Insofar
as indemnification for liabilities arising under the Securities Act
may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the indemnification provisions described herein, or otherwise,
the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of
any
action, suit or proceeding) is asserted by such director, officer
or
controlling person in connection with the securities being registered,
the
Registrant will, unless in the opinion of its counsel the matter
has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such
issue.
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In
accordance with the requirements of the Securities Act, the Company certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing of Form S-1/A (Amendment No. 1) and authorized this Registration
Statement to be signed on our behalf by the undersigned, on January
18, 2007.
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Date: January
18, 2007
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CTI
INDUSTRIES CORPORATION
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By: |
/s/
Howard W. Schwan |
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Name: Howard
W. Schwan
Title: President
and
Chief Executive Officer
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By: |
/s/ Stephen
M. Merrick |
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Name: Stephen
M. Merrick
Title: Chief
Financial Officer, Principal Accounting Officer,
Secretary
and Executive Vice
President
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In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
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Title
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Date
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/s/
Howard W. Schwan
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President,
Chief Executive Officer
and Director
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January
18, 2007
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Howard
W. Schwan
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/s/
John H. Schwan
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Chairman
and Director
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John H.
Schwan
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/s/
Stephen M. Merrick
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Chief
Financial Officer, Principal Accounting Officer,
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Secretary,
Executive
Vice President,
and Director
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/s/
Stanley M. Brown
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Director
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Stanley
M. Brown
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/s/
Bret Tayne
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Director
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Bret
Tayne
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/s/
Michael Avramovich
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Director
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Michael
Avramovich
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/s/
John I. Collins
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Director
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John
I. Collins
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