YUNHONG GREEN CTI LTD. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _________to_________
Commission
File Number
000-23115
CTI
INDUSTRIES CORPORATION
(Exact
name of Registrant as specified in its charter)
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Illinois
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36-2848943
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification Number)
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incorporation
or organization)
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22160
N. Pepper Road
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Lake
Barrington, Illinois
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60010
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (847) 382-1000
Securities
Registered pursuant to sections 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, No Par
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NASDAQ
Capital Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ
Indicate
by check mark whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
Reporting Company þ
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Based upon the closing price of $1.99
per share of the Registrant’s Common Stock as reported on NASDAQ Capital Market
tier of The NASDAQ Stock Market on June 30, 2009, the aggregate market value of
the voting common stock held by non-affiliates of the Registrant was then
approximately $2,667,000. (The determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose.)
The number of shares outstanding of the
Registrant’s Common Stock as of March 1, 2010 was 2,775,623 (excluding treasury
shares).
DOCUMENTS
INCORPORATED BY REFERENCE
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Part
of Form 10-K into Which
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Document
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Document Is Incorporated
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Sections
of the registrant’s Proxy Statement
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Part
III
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To
be filed on or before April 30, 2010 for the
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Annual
Meeting of Stockholders
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TABLE
OF CONTENTS
INDEX
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FORWARD
LOOKING STATEMENTS
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Part
I
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Item
No. 1
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Description
of Business
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1
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Item No. 1B
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Unresolved
Staff Comments
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13
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Item
No. 2
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Properties
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13
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Item
No. 3
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Legal
Proceedings
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14
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Part
II
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Item
No. 5
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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14
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Item
No. 7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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Item No. 7A
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Quantitative
and Qualitative Disclosures Regarding Market Risk
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25
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Item
No. 8
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Financial
Statements and Supplementary Data
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25
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Item
No. 9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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26
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Item
No. 9A
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Controls
and Procedures
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26
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Item
No. 9B
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Other
Information
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27
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Part
III
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Item
No. 10
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Directors
and Executive Officers of the Registrant
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27
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Item
No. 11
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Executive
Compensation
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27
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Item
No. 12
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Security
Ownership of Certain Beneficial Owners and and Management and Related
Stockholder Matters
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27
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Item
No. 13
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Certain
Relationships and Related Transactions
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27
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Item
No. 14
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Principal
Accounting Fees and Services
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28
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Part
IV
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Item
No. 15
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Exhibits
and Financial Statement Schedules
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28
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FORWARD-LOOKING
STATEMENTS
This
annual report includes both historical and “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. We have based these forward-looking statements on our
current expectations and projections about future results. Words such
as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential,” “continue,” or similar words are intended to
identify forward-looking statements, although not all forward-looking statements
contain these words. Although we believe that our opinions and
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements, and our actual results may differ substantially from the views and
expectations set forth in this annual report. We disclaim any intent
or obligation to update any forward-looking statements after the date of this
annual report to conform such statements to actual results or to changes in our
opinions or expectations. These forward-looking statements are
affected by risks, uncertainties and assumptions that we make.
Business
Overview
We are a
leading developer, manufacturer and supplier of innovative flexible film
products. We provide value-added design, engineering and production
for flexible film products. We have developed, designed, and produced
a number of innovative products utilizing flexible films including: novelty foil
balloons, zippered pouches for food and home storage, specialty films for
packaging and unique film products for medical applications.
We
produce, market and sell four principal lines of products:
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Novelty Products,
principally balloons, including foil balloons, latex balloons, punch balls
and other inflatable toy items,
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Flexible Containers for
home and consumer use for the storage and preservation of food and
personal items,
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Flexible Films for food
and other packaging and commercial applications,
and,
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Specialty Film Products
of unique design for various applications including for medical
uses.
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1
Our
design and development services, and the application of our technical expertise
to the development of flexible film products, represent a significant component
of our business activity. We leverage our technology to design and
develop proprietary products which we market and sell and which we develop for
our customers. We have been engaged in the business of developing
flexible film products for 34 years and have acquired significant technology and
know-how in that time. Presently, we hold 11 patents, and have 4
patent applications pending, relating to flexible film products including
specific films, zipper closures, valves and other features of these
products.
We print,
process and convert plastic film into finished products and we produce latex
balloons and novelty items. Our principal manufacturing processes
include:
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Coating
and laminating plastic film. Generally, we adhere polyethylene
film to another film such as nylon or
polyester.
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Printing
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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Converting
printed plastic film to balloons.
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Converting
plastic film to flexible
containers.
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Producing
latex balloons and other latex novelty
items.
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We market
and sell foil 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 market them to consumers who use them for the storage of food and personal
items. We also market containers to and through retail outlets for
use by consumers that include a resealable closure system and a valve permitting
the evacuation of air from the pouch by a small pump device, which we also
supply.
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 1999, we acquired an extrusion coating and
laminating machine and began production of coated and laminated films, which we
have produced since that time.
During
the period from 1976 to 1986 and from 1996 to the present, we have produced
flexible containers for the storage of liquids, food products, household goods
and other items.
2
We market
and sell our foil 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, discount and drugstore chains, grocery chains, card and gift shops,
and party goods stores, as well as through florists and balloon
decorators.
Most of
our foil balloons contain printed characters, designs and social expression
messages, such as “Happy Birthday”, “Get Well” and similar items. For
a number of our balloon designs, we obtain licenses for well-known characters
and print those characters and messages on our balloons.
We
provide laminated films, and printed films, 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) custom and medical
applications.
In 2009,
our revenues from our product lines, as a percent of total revenues
were:
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Novelty
Products
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66.6%
of revenues
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Film
Products
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16.7%
of revenues
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Flexible
Containers
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16.7%
of revenues
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We are an
Illinois corporation with our principal offices and plant at 22160 N. Pepper
Road, Lake Barrington, Illinois.
Business
Strategies
Our
essential business strategies are as follows:
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Focus on our Core Assets and
Expertise. We have been engaged in the development,
production and sale of film products for 34 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, specialty film products and film novelty
products – to develop new products, to market and sell our products and to
build our revenues.
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Maintain a Focus on Margin
Levels and Cost Controls in Order to Establish and Maintain
Profitability. We engage in constant review and effort
to control our production, and our selling, general and administrative
expenses, in order to establish and enhance
profitability.
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Develop New Products, Product
Improvements and Technologies. We work 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. We seek to leverage our technology to
develop innovative and proprietary products. In the novelty
line, our development work includes new designs, new character licenses
and new product developments. 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 eleven patents for these developments and have four patent
applications pending. During 2008, we
introduced a line of resealable pouches with a valve and pump system for
household storage and vacuum sealing of food items. We work
with customers to develop custom film products which serve the unique
needs or requirements of the customer. Recently, we have
participated in the development of, and are now producing a new product
for a medical application.
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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. On
February 1, 2008, we entered into a Supply and License Agreement with S.C.
Johnson & Son, Inc. to manufacture and supply to SC Johnson certain
home food management products to be sold under the SC Johnson ZipLoc®
brand. During 2009, we developed new distributors and customers
for our pouch products and for novelty products in Europe, Australia and
New Zealand.
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Products
Foil Balloons. We
have designed, produced and sold foil balloons since 1979 and, we believe, are
the second largest manufacturer of foil balloons in the United States.
Currently, we produce over 500 foil balloon designs, in different shapes and
sizes, including the following:
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Superloons® -
18" foil balloons in round or heart shape, generally made to be filled
with helium and remain buoyant for long periods. This is the predominant
foil balloon size.
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Ultraloons® -
31" jumbo foil balloons made to be filled with helium and remain
buoyant.
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Miniloons®-
9" foil balloons made to be air-filled and sold on holder-sticks or for
use in decorations.
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Card-B-Loons®-
(4 1/2") air-filled foil balloons, often sold on a stick, used in
floral arrangements or with a container of
candy.
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4
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Shape-A-Loons® -
“18 to 48” shaped foil balloons made to be filled with
helium.
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Minishapes
– 11” to 16” small shaped foil balloons designed to be air filled and sold
on sticks as toys or inflated
characters.
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Balloon
JamzTM –
20” to 40” round and shaped foil balloons which emit and amplify sound
through a speaker attached to the
balloon.
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In
addition to size and shape, a principal element of the Company's foil 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 well-known
characters.
Latex
Balloons. Through our majority-owned subsidiary in
Guadalajara, Mexico, Flexo Universal, S.A. de C.V. (“Flexo Universal”), we
manufacture latex balloons in 11 shapes and 46 colors. These balloons
are marketed under the name Partyloons® and
Hitex®. We
also manufacture toy balloon products including punch balls, water bombs and
"Animal Twisties."
Packaging Films and Custom Film
Products. 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 and Bags. 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, and
(iii) resealable, valved bags for storage and vacuum sealing of food items in
the household. During 2008, we introduced a line of resealable,
valved bags for storage and vacuum sealing of food items in the
household. These storage bags function with a small hand or powered
pump to evacuate air when the bag is sealed. This product line is
marketed under the brand ZipVac™.
Custom Film
Products. We develop and produce for customers unique products
composed of flexible film, including products for medical
applications.
5
Markets
Foil
Balloons
The foil
balloon came into existence in the late 1970s. During the 1980s, the market for
foil 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. Foil 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. Foil 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 foil balloons throughout the
United States and in a number of other countries, although “vendors” remain a
significant means of distribution in a number of areas.
Foil
balloons are now sold in virtually every region of the world. The United States,
however, remains the largest market for these products.
Foil
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 foil 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.
Printed
latex balloons are sold both in retail outlets and for balloon decoration
purposes including floral designs. "Toy" balloons include novelty balloons sold
in toy departments or stores, punch balls, water bombs and other specialty
designs.
Latex
balloons are sold both through distributors and directly to retail outlets by
the producers.
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,
usually by converting the film to a flexible container. 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.
6
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 foil balloon, latex balloon and related novelty products throughout
the United States and in a number of other countries. We maintain a
marketing staff, sales staff and support staff of 6 individuals and a customer
service department of 3 individuals in the United States. European sales are
conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. In January 2010, we also commenced the sales of balloon
products through a facility in Frankfurt, Germany. 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.
7
Our
largest customer for balloons during 2009 was Dollar Tree
Stores. Sales to this chain in 2009 represented $11,437,000 or
approximately 27.7% of our consolidated net sales.
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 2009, our sales to Rapak
totaled $6,360,000, representing 15.4% of our consolidated net sales. Under our
agreement with Rapak, which continues through October 31, 2011, Rapak is
committed to purchase at least 75% 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 to retail chains and outlets.
On
February 1, 2008, we entered into a License and Supply Agreement with S.C.
Johnson & Son, Inc (“SC Johnson”). The agreement provides for the
Company to manufacture and sell to SC Johnson (or its designee, Goodwill
Commercial Services, Inc.) certain home food management products to be sold
under the SC Johnson ZipLoc® brand. The agreement is for a term
expiring on June 30, 2011 and provides for two renewal terms of two years each
at the option of SC Johnson. During 2009, our sales to SC Johnson
totaled $4,583,000, representing 11.1% of our consolidated net sales.
We
produce consumer storage bags for ITW Space Bag, a division of Illinois Tool
Works, Inc. (“ITW”). In March 2006, we entered into a four-year
agreement with ITW, expiring on March 31, 2010, providing for us to supply
certain of the pouches which they market under the name Space Bag®.
8
During
2005, we introduced a line of universal vacuumable bags for household storage of
food products. These bags are designed to be used with existing vacuum and
sealing devices. We market these bags through various retail
channels. During 2007, we introduced a line of re-sealable pouches
incorporating a valve permitting the evacuation of air from the sealed pouch by
use of a hand pump supplied with the pouches. This line of products
is marketed under the brand name ZipVac™. We market this line of
products to various retail outlets.
Production
and Operations
We
conduct our operations at our facilities: (i) our headquarters,
offices and plant in Barrington, Illinois, consisting of a total of
approximately 75,000 square feet of office, production and warehouse space, (ii)
a warehouse in Elgin, Illinois consisting of approximately 30,000 square feet,
(iii) a plant, office 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 in 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, Elgin, 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, at
the Barrington, Illinois facility. Sales for Mexico and Latin America
are handled at our Guadalajara, Mexico facility and sales for the United Kingdom
are handled at our Rugby, England facility. In January 2010, we
commenced the sale of balloon products from a facility in Frankfurt,
Germany.
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.
9
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 raw materials represents a
significant portion of the total cost of our products, with the result that
fluctuations in the cost of raw materials has a material effect on our
profitability. The cost of our raw materials represented 43.9% of our net
revenues in 2009 compared to 43.2% in 2008. During the past several
years, we have experienced significant fluctuations in the cost of these raw
materials. We do not have any long-term agreements for the supply of
raw materials and may experience wide fluctuations in the cost of raw materials
in the future. Further, although we have been able to obtain adequate
supplies of raw materials in the past, there can be no assurance that we will be
able to obtain adequate supplies of one or more of our raw materials in the
future.
Information
Technology Systems
Our
corporate headquarters in Barrington, Illinois and our warehouse facility in
Elgin, 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
communications. Access to the network is available to all appropriate
employees but is secured through four Microsoft servers running Active Directory
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. We presently use the general ledger, order entry, inventory
management, purchase order, manufacturing costing, controls and inventory
controls, electronic data exchange and custom report writing modules of that
system. 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, load balanced and redundant T1 and cable internet connection
allowing employees to use e-mail, 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 foil balloons
whose products are sold in the United States including Anagram International,
Inc., Pioneer Balloon Company, Convertidora International S.A. de C.V., Barton
Enterprises Inc., and Betallic, LLC. Several companies market and
sell foil balloons designed by them and manufactured by others for
them.
10
We
believe there are approximately five manufacturers of latex balloons whose
products are sold in the United States and numerous others whose products are
sold in other countries.
We also
compete with other manufacturers of foil and latex balloons in Europe, Latin
America and Asia.
The
market for films, packaging, flexible containers 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 a number of licenses
and produce balloon designs utilizing the characters or designs covered by the
licenses. Licenses are generally maintained for a one or two-year term, although
the Company has maintained long term relationships with several of its
licensors.
Trademarks. We own 9 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.
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 patents, relating to self-sealing valves for
foil balloons and methods of making balloons with such valves, (ii) several foil
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.
11
Research
and Development
We
maintain a product development and research department of five 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, 2009 and 2008, we estimate that the
total amount spent on research and development activities was approximately
$360,000 and $357,000, respectively.
Employees
As of
December 31, 2009, the Company had 117 full-time employees in the United States,
of whom 23 are executive or supervisory, 6 are in sales, 67 are in manufacturing
or warehouse functions and 21 are clerical. As of that same date, we
had 9 full-time employees in England, of whom 3 are executive or supervisory, 2
are in sales, 3 are in warehousing and 1 is clerical. At Flexo
Universal, our Mexico subsidiary, as of December 31, 2009, we had 225 full-time
employees, of whom 5 are executive or supervisory, 3 are in sales, 205 are in
manufacturing and 12 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 foil
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 of the United
States. Our facility and personnel in Rugby, England handle the sales
of these products in the United Kingdom. Our facility and personnel in
Guadalajara, Mexico handle the sales of these products in Mexico and Latin
America. In January 2010, we commenced the sale of novelty products
in Europe through a facility in Frankfurt, Germany. In other
countries, we sell balloon products through distributors located in those
countries. We conduct production, packaging, warehousing and sales operations in
Mexico. We conduct 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 materially adverse effect on the business of the
Company.
12
Our
domestic and international sales to outside customers and assets by area over
the period 2008 - 2009 have been as follows:
|
United
States
|
United
Kingdom
|
Mexico
|
Consolidated
|
|||||||||||||
|
Year
ended 12/31/09
|
||||||||||||||||
|
Sales
to outside customers
|
$ | 31,873,000 | $ | 1,971,000 | $ | 7,451,000 | $ | 41,295,000 | ||||||||
|
Total
Assets
|
$ | 23,801,000 | $ | 733,000 | $ | 5,861,000 | $ | 30,395,000 | ||||||||
|
United
States
|
United
Kingdom
|
Mexico
|
Consolidated
|
|||||||||||||
|
Year
ended 12/31/08
|
||||||||||||||||
|
Sales
to outside customers
|
$ | 34,701,000 | $ | 2,762,000 | $ | 7,518,000 | $ | 44,981,000 | ||||||||
|
Total
Assets
|
$ | 24,709,000 | $ | 740,000 | $ | 4,539,000 | $ | 29,988,000 | ||||||||
Item
No. 1B – Unresolved Staff Comments
As of the
filing of this Annual report on Form 10-K, we had no unresolved comments from
the staff of the Securities and Exchange Commission that were received not less
than 180 days before the end of our 2009 fiscal year.
We own
our principal plant and offices located in Barrington, Illinois, approximately
45 miles northwest of Chicago, Illinois. The facility includes approximately
75,000 square feet of office, manufacturing and warehouse space. This facility
is subject to a mortgage loan in the principal amount of $2,800,000, having a
term of 5 years, with payments amortized over 25 years.
We have
entered into a month-to-month agreement to rent approximately 30,000 square feet
of warehouse space as required in Elgin, Illinois.
During a
portion of 2009, we leased approximately 16,000 square feet of warehouse space
in Cary, Illinois. The lease for this space expired in September
2009.
CTI
Balloons, Ltd. leases approximately 15,000 square feet of office and warehouse
space in Rugby, England at an annual lease cost of $46,980, expiring in 2019.
This facility is utilized to warehouse balloon products and to manage and
service the Company's operations in England.
13
In
February 2008, Flexo Universal entered into a 3-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 $19,200 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.
On
December 20, 2006, Pliant Corporation filed an action against the Company in the
Circuit Court of Cook County, Illinois. In the action, Pliant claimed
that there was 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. On September 30, 2009, this action was settled and dismissed
in consideration of a payment to Pliant Corporation by the Company in the amount
of $125,000.
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, cash flows or future results of operation.
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.
The high
and low sales prices for the last eight 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:
14
|
High
|
Low
|
|||||
|
January
1, 2008 to March 31, 2008
|
$6.43
|
$3.25 | ||||
|
April
1, 2008 to June 30, 2008
|
6.10 | 4.16 | ||||
|
July
1, 2008 to September 30, 2008
|
7.30 | 4.50 | ||||
|
October
1, 2008 to December 31, 2008
|
5.29 | 1.60 | ||||
|
January
1, 2009 to March 31, 2009
|
2.65 | 1.20 | ||||
|
April
1, 2009 to June 30, 2009
|
2.50 | 1.23 | ||||
|
July
1, 2009 to September 30, 2009
|
2.65 | 1.75 | ||||
|
October
1, 2009 to December 31, 2009
|
2.84 | 1.95 |
The
Company has never paid any cash dividends on its Common Stock. 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.
Item
No. 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
Company produces film products for novelty, packaging and container and custom
product applications. These products include foil balloons, latex balloons and
related latex toy products, films for packaging applications, flexible
containers for packaging and storage applications and custom film products. 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 foil 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 two years have
been as follows:
|
(000
Omitted)
|
||||||||||
|
$
|
% of
|
$
|
% of
|
|||||||
|
Product
Category
|
2009
|
Net Sales
|
2008
|
Net
Sales
|
||||||
|
Metalized
Balloons
|
19,824
|
48.0%
|
17,629
|
|
39.2%
|
|||||
|
Film
Products
|
6,913
|
|
16.7%
|
8,212
|
|
18.3%
|
||||
|
Pouches
|
6,895
|
|
16.7%
|
10,893
|
|
24.2%
|
||||
|
|
||||||||||
|
Latex
Balloons
|
7,024
|
|
17.0%
|
7,597
|
|
16.9%
|
||||
|
|
||||||||||
|
Helium/Other
|
639
|
|
1.6%
|
650
|
|
1.4%
|
||||
|
Total
|
41,295
|
|
100.0%
|
44,981
|
|
100.0%
|
||||
15
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 expenses such as supervisory labor, depreciation,
utilities expense and facilities expense 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 of equipment and
facilities utilized in administration, 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 2009, sales to our top 10 customers represented 70.2% of net
revenues. During 2009, there were three customers to whom our sales
represented more than 10% of net revenues. Our principal customers
and 2009 sales to them were:
|
Customer
|
Product
|
2009 Sales
|
% of 2009
Revenues
|
2008 Sales
|
% of 2008
Revenues
|
|||||||||||||
|
Dollar
Tree Stores
|
Balloons
|
$ | 11,437,000 |
27.7%
|
$ | 9,014,000 |
20.0%
|
|||||||||||
|
Rapak
L.L.C
|
Films
|
$ | 6,360,000 |
15.4%
|
$ | 7,608,000 |
16.9%
|
|||||||||||
|
S.C.
Johnson & Son, Inc
|
Pouches
|
$ | 4,583,000 |
11.1%
|
$ | 6,990,000 |
15.5%
|
|||||||||||
The loss
of one or more of these principal customers, or a significant reduction in
purchases by one or more of them, could have a material adverse effect on our
business.
Except as
previously described (see page 8), we generally do not have agreements with our
customers under which customers are obligated to purchase any specific or
minimum amount of product from us.
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, 2009 and 2008. Our
results of operations for the periods described below are not necessarily
indicative of results of operations for future periods.
16
|
Year
ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
sales
|
100.0%
|
100.0% | ||||||
|
Costs
and expenses:
|
||||||||
|
Cost
of products sold
|
77.7 | 77.1 | ||||||
|
Operating
Expenses
|
16.9 | 17.6 | ||||||
|
Income
from operations
|
5.4 | 5.3 | ||||||
|
Interest
expense
|
(2.7) | (2.3) | ||||||
|
Other
income
|
0.0 | 0.1 | ||||||
|
Income
before income taxes
|
2.7 | 3.1 | ||||||
|
Provision
for income taxes
|
0.3 | 0.5 | ||||||
|
Net
profit
|
2.4% | 2.6% | ||||||
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net
Sales
For the
fiscal year ended December 31, 2009, consolidated net sales from the sale of all
products were $41,295,000 compared to consolidated net sales of $44,981,000 for
the year ended December 31, 2008, a decrease of 8%.
Sales of
foil balloons increased by 12.5% from $17,629,000 in 2008 to $19,824,000 in
2009. Most of the increase is attributable to an increase in 2009 in
our sales to Dollar Tree Stores of $2,423,000 over 2008 sales.
Sales of
film products decreased by 15.8% from $8,212,000 in 2008 to $6,913,000 in
2009. This decrease is attributable to a decrease in sales to Rapak,
L.L.C.
Sales of
pouch products decreased by 36.7% from $10,893,000 in 2008 to $6,895,000 in
2009. This decrease is attributable to a decrease in pouch sales to
Goodwill Commercial Services (for S.C. Johnson & Son, Inc.) from $6,990,000
in 2008 to $4,583,000 in 2009 and to ITW Spacebag from $2,956,000 in 2008 to
$1,258,000 in 2009. We anticipate that sales of pouches to ITW
Spacebag will continue to decline in 2010. Other pouch sales in 2009
included sales of our ZipVac Brand line.
Sales of
latex balloons decreased by 7.5% from $7,597,000 in 2008 to $7,024,000 in
2009. The decline in the dollar volume of latex balloon sales in 2009
compared to 2008 is attributable to the fact that a relatively high percentage
of our latex balloons sales are of balloons produced and sold in Mexico and,
although the unit volume of latex balloon sales in Mexico during 2009 was
greater than in 2008, the dollar volume in 2009 is lower due to the decline in
the value of the Mexican peso in that period.
17
Cost of
Sales
Cost of
sales increased from 77.1% of sales in 2008 to 77.7% of sales in
2009. The increase in cost of goods as a percentage of sales
during 2009 is the result of a change in the mix of products sold, reflecting
increased sales of certain novelty balloon products having a higher level of
cost as a percentage of sales than other products.
General and Administrative
Expenses
General
and administrative expenses decreased from $5,376,000 in 2008 or 12.0% of net
sales to $4,539,000 or 11.0% of net sales in 2009. This decrease is
attributable principally to (i) a decrease in administrative salaries of
$92,000, (ii) a decrease in administrative travel expenses in the amount of
$42,000, (iii) a decrease in audit expenses of $63,000 and (iv) a decrease in
legal expenses of $99,000.
Selling
Selling
expenses decreased from $886,000 or 2.0% of sales in 2008 to $871,000 or 2.1% of
sales in 2009. This decreased is attributable principally to (i) a
decrease in salary expense of $118,000, (ii) a decrease in travel expenses in
the amount of $61,000 (iii) a decrease in licensing royalty payments in the
amount of $34,000 and (iv) these decreases were offset by an increase in
consulting selling expense of $211,000.
Advertising and
Marketing
Advertising
and marketing expenses decreased from $1,678,000 or 3.7% of sales in 2008 to
$1,576,000 or 3.8% of sales in 2009. This decrease is attributable
principally to (i) a decrease in marketing and promotion expenses of $92,000,
(ii) a decrease in artwork and films in the amount of $93,000 and (iii) and
decrease in trade booth expense of $56,000.
Other Income or
Expense
During
2009, we incurred net interest expense of $1,085,000 compared to net interest
expense of $1,031,000 during 2008.
During
2009, we realized a foreign currency loss in the amount of $20,000 compared to
foreign currency gain in 2008 of $50,000.
18
Net Income or
Loss
During
2009, we had net income of $1,003,000 compared to net income of $1,154,000 in
2008. The decline in net income for 2009 compared to 2008 is the
result principally of a modest decline in both sales and gross
margins.
Income
Taxes
In 2009,
the Company recognized income tax expense, on a consolidated basis, of
$114,000. This income tax expense is composed of an income tax
benefit realized by CTI Balloons, our United Kingdom subsidiary, in the amount
of $96,000 and an income tax expense by Flexo Universal, our Mexico subsidiary,
in the amount of $210,000. In 2008, the Company recognized income tax
expense, on a consolidated basis, of $247,000. This income tax
expense is composed of income tax expense realized by CTI Balloons, our United
Kingdom subsidiary, in the amount of $116,000 and by Flexo Universal and CTI
Mexico, our Mexico subsidiaries, in the amounts of $119,000 and $12,000,
respectively. The Company did not recognize any income tax expense in
the United States in 2009 or 2008 by reason of its net operating loss
carryforward and adjustments to the Company’s reserve in its deferred tax asset
account.
Financial
Condition, Liquidity and Capital Resources
Cash
Flow Provided by Operating Activities During fiscal
2009, cash provided by operating activities amounted to $3,113,000, compared to
cash flow provided by operating activities during fiscal 2008 of
$401,000. Significant changes in working capital items affecting cash
flow provided by operating activities were:
|
|
·
|
Depreciation
and amortization of $1,958,000
|
|
|
·
|
A
decrease in net inventory of
$948,000
|
|
|
·
|
An
increase in accounts receivable of
$1,411,000
|
|
|
·
|
An
increase in prepaid expenses and other assets of
$283,000
|
|
|
·
|
An
increase in accrued liabilities of
$588,000
|
The
decrease in inventory during 2009 is the result of our efforts to control the
inventory levels of finished goods. We do not anticipate significant
changes in inventory levels during 2010. The increase in accounts
receivable reflects a temporary increase due to high levels of sales in December
2009. Accordingly, we expect the receivables level to decline during
the first half of 2010.
Cash
Used in Investing Activities During fiscal 2009, cash
used in investing activities amounted to $732,000 compared to cash used in
investing activities during fiscal 2008 of $2,200,000. Cash used in
investing activities was principally for the purchase of production
equipment. Although we do not presently have any commitments for
capital expenditures, we do anticipate that the level of capital expenditures in
2010 will increase over 2009 and will include maintenance capital expenditure
levels of approximately $500,000 as well as certain other capital expenditures
for new equipment or improvements.
19
Cash
Provided by Financing Activities During fiscal 2009,
cash used in financing activities amounted to $1,728,000, compared to cash
provided by financing activities of $1,681,000 during fiscal
2008. During 2009, we repaid long-term debt of $1,251,000 and reduced
by $362,000 the amount outstanding under our revolving line of
credit.
On
February 1, 2006, we entered into a Loan Agreement with RBS, Chicago, Illinois,
under which, as amended, the Bank has agreed to provide a credit facility to our
Company in the total amount of $15,300,000, 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 25 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 $9,000,000, secured by inventory and
receivables. On January 26, 2010, we entered into an amendment of the
loan agreement extending the term of the revolving line of credit to April 30,
2010 and amending certain covenants. The amount we can borrow on the
revolving line of credit includes 85% of eligible accounts receivable and 60% of
eligible inventory.
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:
|
|
|
o
|
Borrow
money;
|
|
|
o
|
Pay
dividends and make distributions;
|
|
|
o
|
Issue
stock;
|
|
|
o
|
Make
certain investments;
|
|
|
o
|
Use
assets as security in other
transactions;
|
|
|
o
|
Create
liens;
|
|
|
o
|
Enter
into affiliate transactions;
|
|
|
o
|
Merge
or consolidate; or
|
|
|
o
|
Transfer
and sell assets.
|
|
|
·
|
Financial
Covenants: The loan agreement includes a series of
financial covenants we are required to meet
including:
|
|
|
o
|
We
are required to maintain a tangible net worth in excess of
$3,500,000;
|
|
|
o
|
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,
|
|
|
o
|
We
are required to maintain a specified level of EBITDA to fixed charges for
the six months ending June 30, 2006, the nine months ending September 30,
2006 and twelve months thereafter.
|
As of
December 31, 2009 the Company was in compliance with these financial
covenants.
20
The loan
agreement as amended 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. On a quarterly basis, this ratio will be measured and the
interest rate changed in accordance to the table below.
|
When Senior Debt to EBITDA is:
|
The Premium
to the Prime
Rate is:
|
|||
|
Greater
or equal to 4.00 to 1.00
|
1.50 | % | ||
|
Greater
than or equal to 3.50 to 1.00; Less than 4.00 to 1.00
|
1.25 | % | ||
|
Greater
than or equal to 3.25 to 1.00; Less than 3.50 to 1.00
|
1.00 | % | ||
|
Greater
than or equal to 2.75 to 1.00; Less than 3.25 to 1.00
|
0.75 | % | ||
|
Less
than 2.75 to 1.00
|
0.50 | % | ||
At
December 31, 2009 the Company was paying a premium of 0.75% over
Prime.
Also,
under the loan agreement, we were required to purchase a swap agreement with
respect to part of the mortgage and term loan portions of our loan. On April 5,
2006, we entered into a swap arrangement with RBS 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 at 8.49% for the
balance of the loan terms. On January 28, 2008, we entered into
another swap agreement with respect to $3,000,000 in principal amount of our
revolving loan fixing the interest rate for this portion of the revolving loan
at 6.17%. The value of these swap agreements vary as the result of
variations in interest rates. We record changes in the valuation of
these swap agreements as other comprehensive income (or expense). As
of December 31, 2009, the net effect of the changes in the value of these swap
agreements is a liability of $189,000.
Each of
John H. Schwan and Stephen M. Merrick, officers, directors and principal
shareholders of the Company have personally guaranteed the obligations of the
company to RBS up to $2,000,000.
On
November 13, 2007, RBS granted to the Company a capital lease line of credit of
up to $1,500,000 to fund equipment acquisitions by the
Company. During the years ended December 31, 2009 and 2008, the
Company received aggregate advances under this line of $0 and $1,224,000,
respectively.
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).
21
Current Assets. As
of December 31, 2009, the total current assets of the Company were $19,148,000,
compared to total current assets of $17,688,000 at December 31,
2008. The change in current assets reflects, principally, (i) a
decrease in inventories of $861,000, and (ii) an increase in cash and
equivalents of $690,000, (iii) an increase in the net deferred income tax asset
of $32,000, and (iv) an increase in prepaid expenses and other current assets of
$101,000.
Property, Plant and
Equipment. During fiscal 2009, the Company invested $732,000
in capital items, principally in production equipment and plant
improvements.
Current
Liabilities. Accrued other liabilities includes $776,000 in
payroll accruals and $189,000 in mark to market liabilities. Total
current liabilities increased from $16,222,000 as of December 31, 2008 to
$16,735,000 as of December 31, 2009. Changes in current liabilities
included: (i) an increase of $84,000 in trade payables, (ii) a decrease of the
line of credit of $362,000, (iii) an increase in the balance of the current
portion of long term indebtedness of $20,000 and (iv) an increase in the balance
of notes payable to officers of $6,000.
Liquidity and Capital
Resources; Working
Capital. As of December 31, 2009, our current assets exceeded
our current liabilities by $2,414,000, we had cash and cash equivalents of
$870,000 and there was available under our line of credit up to $868,000 in
additional funds. Management believes that these available funds, our
internally generated funds and the borrowing capacity under our revolving line
of credit facility will be sufficient to meet working capital requirements for
the remainder of 2010. The Company is in negations for, and believes
it will be able to conclude, an agreement for the extension of its current line
of credit or other loan agreement.
Shareholders’
Equity. Shareholders’ equity was $8,763,000 as of December 31,
2009 compared to $7,735,000 as of December 31, 2008.
Seasonality
In the
foil product line, sales have historically been seasonal with approximately 45%
occurring in the period from December through March of the succeeding year and
21% being generated in the period July through October in recent years. The sale
of latex balloons, pouches 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.
22
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 at the time of introduction
of a new product or design, 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 products. As of
December 31, 2009, the Company had established a reserve for obsolescence,
marketability or excess quantities with respect to inventory in the aggregate
amount of $342,000. As of December 31, 2008, the amount of the
reserve was $429,000. 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. We record freight income as
a component of net sales and record freight costs as a component of cost of
goods sold.
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. We apply the provisions of FASB GAAP USA under
which goodwill is evaluated at least annually for impairment. We
conducted a valuation analysis of our goodwill in our Mexico subsidiary for the
year ended December 31, 2009 and 2008. And determined that the
recorded value of the Company’s interest in Flexo Universal as recorded for
December 31, 2006 was not impaired.
Foreign Currency
Translation. All balance sheet accounts are translated using
the exchange rates in effect at the balance sheet date. Statements of
operations amounts are translated using the average exchange rates for the
year-to-date periods. The gains and losses resulting from the changes
in exchange rates during the period have been reported in other comprehensive
income or loss.
23
Stock-Based
Compensation. We have adopted FASB GAAP USA which requires all
stock-based payments to employees, including grants of employee stock options,
to be recognized in the consolidated financial statements based on their
grant-date fair values.
We use
the Black-Scholes option pricing model to determine the fair value of stock
options which requires us to estimate certain key assumptions. In
accordance with the application of FASB GAAP USA, we incurred employee
stock-based compensation cost of $87,000 for the year ended December 31,
2009. At December 31, 2009, we had $97,000 of unrecognized
compensation cost relating to stock options.
Income Taxes and Deferred Tax
Assets. Income taxes are accounted for as prescribed in FASB
GAAP USA. Under the asset and liability method of GAAP USA, 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, 2009, the Company had a net deferred tax asset of $1,068,000
(deferred tax assets of $1,597,000 less a valuation allowance of $529,000)
representing the amount the Company may recover in future years from future
taxable income. As of December 31, 2008, the amount of the net
deferred tax asset was $1,017,000. Each quarter and year-end
management makes a judgment to determine the extent to which the deferred tax
asset will be recovered from future taxable income. Management
reduced the valuation allowance related to the deferred tax asset by $373,000 in
2009 from $902,000 as of December 31, 2008 to $529,000 as of December 31,
2009.
Fair
Value Measurements
In
September 2006, the FASB issued FASB GAAP USA which defines fair value,
establishes a framework for measuring fair value, establishes a fair value
hierarchy based on the quality of inputs used to measure fair value and enhances
disclosure requirements for fair value measurements. FASB GAAP USA
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. FASB GAAP USA also requires
that a fair value measurement reflect the assumptions market participants would
use in pricing an asset or liability based upon the best information
available. In February 2008, the FASB issued guidance now codified in
FASB GAAP USA which provides for delayed application of certain guidance related
to non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).
24
In
February 2007, the FASB issued FASB GAAP USA which permits companies to choose
to measure certain financial instruments and other items at fair
value. The standard requires that unrealized gains and losses are
reported in earnings for items measured using the fair value
option. FASB GAAP USA is effective for us on January 1,
2008. We did not elect the fair value option for any assets or
liabilities that were not previously carried at fair
value. Accordingly, the adoption of FASB GAAP USA had no impact on
our consolidated financial statements.
In
October 2008, the FASB issued clarification to FASB GAAP USA which clarifies the
application of FASB GAAP USA in a market that is not active, and addresses
application issues such as the use of internal assumptions when relevant
observable data does not exist, the use of observable market information when
the market is not active, and the use of market quotes when assessing the
relevance of observable and unobservable data. FASB GAAP USA is
effective for all periods presented in accordance with FASB GAAP
USA. The adoption of FASB GAAP USA did not have a significant impact
on our consolidated financial statements.
Reclassifications
and Adoption of New Accounting Pronouncements
Certain
amounts in the 2008 consolidated financial statements have been reclassified to
conform to the current period presentation. In addition, as of January 1,
2009 we adopted the following accounting pronouncement that required
retrospective application, in which all periods presented reflect the necessary
changes.
As of
January 1, 2009, we adopted a new generally accepted accounting principle
related to noncontrolling interests in consolidated financial statements, which
changed the reporting for minority interest in our consolidated majority owned
subsidiary by re-characterizing as a noncontrolling interest and re-classifying
such minority interest as a component of equity in our consolidated balance
sheets. This principle also changed the presentation of the income allocated to
the minority interest by re-characterizing it as allocation to noncontrolling
interest and re-classifying such income as an adjustment to net income to arrive
at net income attributable to the Company.
As of
June 30, 2009, we adopted a new generally accepted accounting principle
related to subsequent events which provides guidance on our assessment of
subsequent events. The new standard clarifies that we must evaluate, as of each
reporting period, events or transactions that occur after the balance sheet date
through the date that the financial statements are issued. We performed our
assessment of subsequent events and all material events or transactions since
December 31, 2009 have been integrated into our disclosures in the
accompanying consolidated financial statements.
Not
applicable.
Reference
is made to the Consolidated Financial Statements contained in Part IV
hereof.
25
None
Disclosure
Controls and Procedures
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer (together the
“Certifying Officers”), of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2009, the end of the
period covered by this report. Based upon that evaluation, the
Certifying Officers concluded that our disclosure controls and procedures were
effective as of December 31, 2009 to provide reasonable assurance that the
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to our management, including our Certifying Officers, as appropriate, to allow
for timely decisions regarding required disclosure. There were no
material changes in our internal control over financial reporting during the
fourth quarter of 2009 that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of the management and the Board; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Company assets that could have a
material effect on the financial statements.
26
Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operation effectiveness of controls and a conclusion on this
evaluation. Although there are inherent limitations in the
effectiveness of any system of internal controls over financial reporting, based
on our evaluation, management has concluded our internal controls over financial
reporting were effective as of December 31, 2009.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
Item
9B – Other Information
None
Item
No. 10 – Directors and Executive Officers of the Registrant
Information
called for by Item 9 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2010 Annual Meeting of Shareholders which is expected to
be filed with the Commission within 120 days after December 31,
2009.
Item
No. 11 – Executive Compensation
Information
called for by Item 10 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2010 Annual Meeting of Shareholders which is expected to
be filed with the Commission within 120 days after December 31,
2009.
Item
No. 12 – Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information
called for by Item 11 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2010 Annual Meeting of Shareholders which is expected to
be filed with the Commission within 120 days after December 31,
2009.
Item
No. 13 – Certain Relationships and Related Transactions
Information
called for by Item 12 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2010 Annual Meeting of Shareholders which is expected to
be filed with the Commission within 120 days after December 31,
2009.
27
Item
No. 14 – Principal Accountant Fees and Services
Information
called for by Item 13 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2010 Annual Meeting of Shareholders which is expected to
be filed with the Commission within 120 days after December 31,
2009.
Item
No. 15 Exhibits and Financial Statement Schedules
|
|
1.
|
The
Consolidated Financial Statements filed as part of this report on Form
10-K are listed on the accompanying Index to Consolidated Financial
Statements and Consolidated Financial Statement
Schedules.
|
|
|
2.
|
Financial
schedules required to be filed by Item 8 of this form, and by Item 15(d)
below:
|
Schedule
II Valuation and qualifying
accounts
All other
financial schedules are not required under the related instructions or are
inapplicable and therefore have been omitted.
|
|
3.
|
Exhibits:
|
|
Exhibit
|
||
|
Number
|
Document
|
|
|
3.1
|
Third
Restated Certificate of Incorporation of CTI Industries Corporation
(Incorporated by reference to Exhibit A contained in Registrant’s Schedule
14A Definitive Proxy Statement for solicitation of written consent of
shareholders, as filed with the Commission on October 25,
1999)
|
|
|
3.2
|
By-Laws
of CTI Industries Corporation (Incorporated by reference to Exhibits,
contained in Registrant’s Form SB-2 Registration Statement (File No.
333-31969) effective November 5, 1997)
|
|
|
4.1
|
Form
of CTI Industries Corporation’s common stock certificate (Incorporated by
reference to Exhibits, contained in Registrant’s Form SB-2 Registration
Statement (File No. 333-31969) effective November 5,
1997)
|
|
|
10.1
|
CTI
Industries Corporation 1999 Stock Option Plan (Incorporated by reference
to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
Statement, as filed with the Commission on March 26,
1999)
|
|
|
10.2
|
CTI
Industries Corporation 2001 Stock Option Plan (Incorporated by reference
to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
Statement, as filed with the Commission on May 21,
2001)
|
28
|
10.3
|
CTI
Industries Corporation 2002 Stock Option Plan (Incorporated by reference
to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
Statement, as filed with the Commission on May 15,
2002)
|
|
|
10.4
|
CTI
Industries Corporation 2007 Stock Incentive Plan (Incorporated by
reference to Exhibit contained in Registrant’s Schedule 14A Definitive
Proxy Statement, as filed with the Commission on April 30,
2007)
|
|
|
10.5
|
Employment
Agreement dated June 30, 1997, between CTI Industries Corporation and
Howard W. Schwan (Incorporated by reference to Exhibits, contained in
Registrant’s Form SB-2 Registration Statement (File No. 333-31969)
effective November 5, 1997.)
|
|
|
10.6
|
Warrant
dated July 17, 2001 to purchase 79,364 shares of Common Stock John H.
Schwan (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.7
|
Warrant
dated July 17, 2001 to purchase 39,683 shares of Common Stock Stephen M.
Merrick (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.8
|
Note
dated January 28, 2003, CTI Industries Corporation to Stephen M. Merrick
in the sum of $500,000 (Incorporated by reference to Exhibits contained in
the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.9
|
Note
dated February 28, 2003, CTI Industries Corporation to Stephen M. Merrick
in the sum of $200,000 (Incorporated by reference to Exhibits contained in
the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.10
|
Note
dated February 10, 2003, CTI Industries Corporation to John H. Schwan in
the sum of $150,000 (Incorporated by reference to Exhibits contained in
the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.11
|
Note
dated February 15, 2003, CTI Industries Corporation to John Schwan in the
sum of $680,000 (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.12
|
Note
dated March 3, 2003, CTI Industries Corporation to John H. Schwan in the
sum of $100,000 (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.13
|
Warrant
dated March 20, 2003, to purchase 70,000 shares of Common Stock - Stephen
M. Merrick (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
29
|
10.14
|
Warrant
dated March 20, 2003, to purchase 93,000 shares of Common Stock - John H.
Schwan (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.15
|
Loan
and Security Agreement between RBS Citizens, N.A. and the Company dated
February 1, 2006 (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.16
|
Warrant
dated February 1, 2006, to purchase 151,515 shares of Common Stock - John
H. Schwan (Incorporated by reference to Exhibits contained in Registrant’s
Report on Form 8-K dated February 3, 2006)
|
|
|
10.17
|
Warrant
dated February 1, 2006, to purchase 151,515 shares of Common Stock –
Stephen M. Merrick (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.18
|
Note
dated February 1, 2006, CTI Industries Corporation to John Schwan in the
sum of $500,000 (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.19
|
Note
dated February 1, 2006, CTI Industries Corporation to Stephen M. Merrick
in the sum of $500,000 (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.20
|
Production
and Supply Agreement between ITW Spacebag and the Company dated March 17,
2006 (Incorporated by reference to Exhibits contained in Registrant’s
Report on Form 8-K dated March 17, 2006)
|
|
|
10.21
|
License
Agreement between Rapak, LLC and the Company dated April 28, 2006
(Incorporated by reference to Exhibit contained in Registrant’s Report on
Form 8-K dated May 3, 2006)
|
|
|
10.22
|
Second
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated December 18, 2006 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K dated December 21,
2006.)
|
|
|
10.23
|
Third
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated November 13, 2007 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 10-Q dated November 13,
2007)
|
|
|
10.24
|
CTI
Industries Corporation Incentive Compensation Plan (Incorporated by
reference to Exhibit contained in Registrant’s Report on Form 8-K dated
October 2, 2007)
|
|
|
10.25
|
Supply
and License Agreement among Registrant and S.C. Johnson & Son, Inc.
dated February 1, 2008 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K/A dated March 19,
2008)
|
30
|
10.26
|
Agreement
between Babe Winkelman Productions Inc and the Company dated April 10,
2008 (Incorporated by reference to Exhibit contained in Registrant’s
Report on Form 8-K dated April 14, 2008)
|
|
|
10.27
|
Amendment
to the License Agreement between Rapak, LLC and the Company dated May 6,
2008 (Incorporated by reference to Exhibit contained in Registrant’s
Report on Form 8-K dated May 8, 2008)
|
|
|
10.28
|
Fifth
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated January 30, 2009 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K dated February 2, 2009)
|
|
|
10.29
|
Sixth
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated January 26, 2010 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K dated January 29, 2010)
|
|
|
14
|
Code
of Ethics (Incorporated by reference to Exhibit contained in the
Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on
October 8, 2004)
|
|
|
21
|
Subsidiaries
(description incorporated in Form 10-K under Item No.
1)
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm, Blackman Kallick,
LLP
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith)
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith)
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
|
|
(a)
|
The
Exhibits listed in subparagraph (a)(3) of this Item 15 are attached hereto
unless incorporated by reference to a previous
filing.
|
|
(b)
|
The
Schedule listed in subparagraph (a)(2) of this Item 15 is attached
hereto.
|
31
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized on March 29, 2010.
|
CTI
INDUSTRIES CORPORATION
|
|
|
By:
|
/s/ Howard W. Schwan
|
|
Howard
W. Schwan, President
|
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.
|
Signatures
|
Title
|
Date
|
||
|
/s/ Howard W. Schwan
|
President
and Director
|
March
29, 2010
|
||
|
Howard
W. Schwan
|
||||
|
/s/ John H. Schwan
|
Chairman
and Director
|
March
29, 2010
|
||
|
John
H. Schwan
|
||||
|
/s/ Stephen M. Merrick
|
Executive
Vice President,
|
March
29, 2010
|
||
|
Stephen
M. Merrick
|
Secretary,
Chief Financial Officer and Director
|
|||
|
/s/ Stanley M. Brown
|
Director
|
March
29, 2010
|
||
|
Stanley
M. Brown
|
||||
|
/s/ Bret Tayne
|
Director
|
March
29, 2010
|
||
|
Bret
Tayne
|
||||
|
/s/ John I. Collins
|
Director
|
March
29, 2010
|
||
|
John
I. Collins
|
||||
|
/s/ Phil Roos
|
Director
|
March
29, 2010
|
||
32
EXHIBIT
INDEX
|
Exhibit
|
||
|
Number
|
Document
|
|
|
3.1
|
Third
Restated Certificate of Incorporation of CTI Industries Corporation
(Incorporated by reference to Exhibit A contained in Registrant’s Schedule
14A Definitive Proxy Statement for solicitation of written consent of
shareholders, as filed with the Commission on October 25,
1999)
|
|
|
3.2
|
By-Laws
of CTI Industries Corporation (Incorporated by reference to Exhibits,
contained in Registrant’s Form SB-2 Registration Statement (File No.
333-31969) effective November 5, 1997)
|
|
|
4.1
|
Form
of CTI Industries Corporation’s common stock certificate (Incorporated by
reference to Exhibits, contained in Registrant’s Form SB-2 Registration
Statement (File No. 333-31969) effective November 5,
1997)
|
|
|
10.1
|
CTI
Industries Corporation 1999 Stock Option Plan (Incorporated by reference
to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
Statement, as filed with the Commission on March 26,
1999)
|
|
|
10.2
|
CTI
Industries Corporation 2001 Stock Option Plan (Incorporated by reference
to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
Statement, as filed with the Commission on May 21,
2001)
|
|
|
10.3
|
CTI
Industries Corporation 2002 Stock Option Plan (Incorporated by reference
to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
Statement, as filed with the Commission on May 15,
2002)
|
|
|
10.4
|
CTI
Industries Corporation 2007 Stock Incentive Plan (Incorporated by
reference to Exhibit contained in Registrant’s Schedule 14A Definitive
Proxy Statement, as filed with the Commission on April 30,
2007)
|
|
|
10.5
|
Employment
Agreement dated June 30, 1997, between CTI Industries Corporation and
Howard W. Schwan (Incorporated by reference to Exhibits, contained in
Registrant’s Form SB-2 Registration Statement (File No. 333-31969)
effective November 5, 1997.)
|
|
|
10.6
|
Warrant
dated July 17, 2001 to purchase 79,364 shares of Common Stock John H.
Schwan (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.7
|
Warrant
dated July 17, 2001 to purchase 39,683 shares of Common Stock Stephen M.
Merrick (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
33
|
10.8
|
Note
dated January 28, 2003, CTI Industries Corporation to Stephen M. Merrick
in the sum of $500,000 (Incorporated by reference to Exhibits contained in
the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.9
|
Note
dated February 28, 2003, CTI Industries Corporation to Stephen M. Merrick
in the sum of $200,000 (Incorporated by reference to Exhibits contained in
the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.10
|
Note
dated February 10, 2003, CTI Industries Corporation to John H. Schwan in
the sum of $150,000 (Incorporated by reference to Exhibits contained in
the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.11
|
Note
dated February 15, 2003, CTI Industries Corporation to John Schwan in the
sum of $680,000 (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.12
|
Note
dated March 3, 2003, CTI Industries Corporation to John H. Schwan in the
sum of $100,000 (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.13
|
Warrant
dated March 20, 2003, to purchase 70,000 shares of Common Stock - Stephen
M. Merrick (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.14
|
Warrant
dated March 20, 2003, to purchase 93,000 shares of Common Stock - John H.
Schwan (Incorporated by reference to Exhibits contained in the
Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
2003)
|
|
|
10.15
|
Loan
and Security Agreement between RBS Citizens, N.A. and the Company dated
February 1, 2006 (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.16
|
Warrant
dated February 1, 2006, to purchase 151,515 shares of Common Stock - John
H. Schwan (Incorporated by reference to Exhibits contained in Registrant’s
Report on Form 8-K dated February 3, 2006)
|
|
|
10.17
|
Warrant
dated February 1, 2006, to purchase 151,515 shares of Common Stock –
Stephen M. Merrick (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.18
|
Note
dated February 1, 2006, CTI Industries Corporation to John Schwan in the
sum of $500,000 (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3,
2006)
|
34
|
10.19
|
Note
dated February 1, 2006, CTI Industries Corporation to Stephen M. Merrick
in the sum of $500,000 (Incorporated by reference to Exhibits contained in
Registrant’s Report on Form 8-K dated February 3, 2006)
|
|
|
10.20
|
Production
and Supply Agreement between ITW Spacebag and the Company dated March 17,
2006 (Incorporated by reference to Exhibits contained in Registrant’s
Report on Form 8-K dated March 17, 2006)
|
|
|
10.21
|
License
Agreement between Rapak, LLC and the Company dated April 28, 2006
(Incorporated by reference to Exhibit contained in Registrant’s Report on
Form 8-K dated May 3, 2006)
|
|
|
10.22
|
Second
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated December 18, 2006 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K dated December 21,
2006.)
|
|
|
10.23
|
Third
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated November 13, 2007 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 10-Q dated November 13,
2007)
|
|
|
10.24
|
CTI
Industries Corporation Incentive Compensation Plan (Incorporated by
reference to Exhibit contained in Registrant’s Report on Form 8-K dated
October 2, 2007)
|
|
|
10.25
|
Supply
and License Agreement among Registrant and S.C. Johnson & Son, Inc.
dated February 1, 2008 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K/A dated March 19, 2008)
|
|
|
10.26
|
Agreement
between Babe Winkelman Productions Inc and the Company dated April 10,
2008 (Incorporated by reference to Exhibit contained in Registrant’s
Report on Form 8-K dated April 14, 2008)
|
|
|
10.27
|
Amendment
to the License Agreement between Rapak, LLC and the Company dated May 6,
2008 (Incorporated by reference to Exhibit contained in Registrant’s
Report on Form 8-K dated May 8, 2008)
|
|
|
10.28
|
Fifth
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated January 30, 2009 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K dated February 2, 2009)
|
|
|
10.29
|
Sixth
Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
dated January 26, 2010 (Incorporated by reference to Exhibit contained in
Registrant’s Report on Form 8-K dated January 29, 2010)
|
|
|
14
|
Code
of Ethics (Incorporated by reference to Exhibit contained in the
Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on
October 8, 2004)
|
|
|
21
|
Subsidiaries
(description incorporated in Form 10-K under Item No.
1)
|
35
|
23.1
|
Consent
of Independent Registered Public Accounting Firm, Blackman Kallick,
LLP
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith)
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith)
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
|
36
CTI
Industries Corporation
and
Subsidiaries
Consolidated
Financial Statements
Years
ended December 31, 2009 and 2008
Contents
|
Consolidated
Financial Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income
(Loss) for the years ended December 31, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-5
|
|
Notes
to Consolidated Financial Statements for the years ended December 31, 2009
and 2008
|
F-6
|
|
Financial
Statement Schedule:
|
|
|
Schedule
II – Valuation and Qualifying Accounts for the years ended December 31,
2009 and 2008
|
F-30
|
All other
schedules for which a provision is made in the applicable accounting regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been
omitted.
Report of
Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
CTI
Industries Corporation
We have
audited the accompanying consolidated balance sheets of CTI Industries
Corporation and Subsidiaries (the “Company”) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss) and cash flows for the years then ended. Our audits
also included the financial statement schedule listed in the Index at item
15(a). These consolidated financial statements and consolidated schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and consolidated schedule
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 audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, 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 financial position of CTI Industries Corporation
and Subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/
Blackman Kallick, LLP
Chicago,
Illinois
March 29,
2010
F-1
Consolidated
Balance Sheets
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 870,446 | $ | 180,578 | ||||
|
Accounts
receivable, (less allowance for doubtful accounts of $57,000 and $39,000,
respectively)
|
7,320,181
|
5,821,593
|
||||||
|
Inventories,
net
|
9,643,914 | 10,504,769 | ||||||
|
Net
deferred income tax asset
|
706,754 | 674,872 | ||||||
|
Prepaid
expenses and other current assets
|
607,127 | 506,225 | ||||||
|
Total
current assets
|
19,148,422 | 17,688,037 | ||||||
|
Property,
plant and equipment:
|
||||||||
|
Machinery
and equipment
|
22,390,891 | 21,612,995 | ||||||
|
Building
|
3,183,795 | 3,179,909 | ||||||
|
Office
furniture and equipment
|
2,677,476 | 1,898,642 | ||||||
|
Intellectual
property
|
345,092 | 345,092 | ||||||
|
Land
|
250,000 | 250,000 | ||||||
|
Leasehold
improvements
|
428,864 | 409,797 | ||||||
|
Fixtures
and equipment at customer locations
|
2,541,881 | 2,539,033 | ||||||
|
Projects
under construction
|
270,131 | 1,017,737 | ||||||
| 32,088,130 | 31,253,205 | |||||||
|
Less
: accumulated depreciation and amortization
|
(22,554,719 | ) | (20,677,223 | ) | ||||
|
Total
property, plant and equipment, net
|
9,533,411 | 10,575,982 | ||||||
|
Other
assets:
|
||||||||
|
Deferred
financing costs, net
|
11,846 | 123,229 | ||||||
|
Goodwill
|
989,108 | 989,108 | ||||||
|
Net
deferred income tax asset
|
361,457 | 341,714 | ||||||
|
Other
assets (due from related party $79,000 and $63,000,
respectively)
|
351,065 | 270,121 | ||||||
|
Total
other assets
|
1,713,476 | 1,724,172 | ||||||
|
TOTAL
ASSETS
|
30,395,309 | 29,988,191 | ||||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Checks
written in excess of bank balance
|
735,257 | 680,348 | ||||||
|
Trade
payables
|
3,236,607 | 3,153,005 | ||||||
|
Line
of credit
|
7,598,671 | 7,960,765 | ||||||
|
Notes
payable - current portion
|
1,111,307 | 1,091,489 | ||||||
|
Notes
payable - officers, current portion, net of debt discount of $89,000 and
$89,000, respectively
|
1,368,964 | 1,363,255 | ||||||
|
Accrued
liabilities
|
2,683,714 | 1,973,318 | ||||||
|
Total
current liabilities
|
16,734,520 | 16,222,180 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Notes
Payable - Affiliates
|
780,087 | 894,620 | ||||||
|
Notes
payable, net of current portion
|
3,108,849 | 4,220,071 | ||||||
|
Notes
payable - officers, subordinated, net of debt discount of $7,000 and
$96,000, respectively
|
992,632 | 903,964 | ||||||
|
Total
long-term liabilities
|
4,881,568 | 6,018,655 | ||||||
|
Equity:
|
||||||||
|
CTI
Industries Corporation stockholders' equity:
|
||||||||
|
Preferred
Stock — no par value 2,000,000 shares authorized 0 shares
issued and outstanding
|
$ | - | $ | - | ||||
|
Common
stock - no par value, 5,000,000 shares authorized, 2,808,720
and 2,808,720 shares issued and 2,738,063 and 2,808,720 outstanding,
respectively
|
3,764,020 | 3,764,020 | ||||||
|
Paid-in-capital
|
8,693,946 | 8,703,265 | ||||||
|
Warrants
issued in connection with subordinated debt and bank debt
|
443,313 | 443,313 | ||||||
|
Accumulated
deficit
|
(2,206,728 | ) | (3,209,868 | ) | ||||
|
Accumulated
other comprehensive loss
|
(1,803,442 | ) | (1,966,130 | ) | ||||
|
Less: Treasury
stock, 70,657 shares and 0 shares, respectively
|
(128,446 | ) | - | |||||
|
Total
CTI Industries Corporation stockholders' equity
|
8,762,663 | 7,734,600 | ||||||
|
Noncontrolling
interest
|
16,558 | 12,756 | ||||||
|
Total
Equity
|
8,779,221 | 7,747,356 | ||||||
|
TOTAL
LIABILITIES AND EQUITY
|
$ | 30,395,309 | $ | 29,988,191 | ||||
See
accompanying notes to consolidated financial statements
F-2
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Income
|
For
the Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
Sales
|
$ | 41,295,152 | $ | 44,980,674 | ||||
|
Cost
of Sales
|
32,081,779 | 34,658,271 | ||||||
|
Gross
profit
|
9,213,373 | 10,322,403 | ||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
4,539,494 | 5,375,526 | ||||||
|
Selling
|
871,258 | 886,391 | ||||||
|
Advertising
and marketing
|
1,576,225 | 1,677,900 | ||||||
|
Total
operating expenses
|
6,986,977 | 7,939,817 | ||||||
|
Income
from operations
|
2,226,396 | 2,382,586 | ||||||
|
Other
(expense) income:
|
||||||||
|
Interest
expense
|
(1,102,662 | ) | (1,037,136 | ) | ||||
|
Interest
income
|
17,555 | 5,679 | ||||||
|
Foreign
currency (loss) gain
|
(19,956 | ) | 50,003 | |||||
|
Total
other expense, net
|
(1,105,063 | ) | (981,454 | ) | ||||
|
Income
before taxes
|
1,121,333 | 1,401,132 | ||||||
|
Income
tax expense
|
114,391 | 246,779 | ||||||
|
Net
Income
|
1,006,942 | 1,154,353 | ||||||
|
Less:
Net income attributable to noncontrolling interest
|
3,802 | 222 | ||||||
|
Net
income attributable to CTI Industries Corporation
|
$ | 1,003,140 | $ | 1,154,131 | ||||
|
Other
Comprehensive Income, net of taxes
|
||||||||
|
Unrealized
gain (loss) on derivative instruments
|
$ | 152,830 | $ | (241,809 | ) | |||
|
Foreign
currency adjustment
|
$ | 9,858 | $ | (1,123,038 | ) | |||
|
Comprehensive
income (loss) attributable to CTI Industries Corporation
|
$ | 1,165,828 | $ | (210,716 | ) | |||
|
Basic
income per common share
|
$ | 0.36 | $ | 0.42 | ||||
|
Diluted
income per common share
|
$ | 0.36 | $ | 0.40 | ||||
|
Weighted
average number of shares and equivalent shares of common stock
outstanding:
|
||||||||
|
Basic
|
2,765,277 | 2,763,017 | ||||||
|
Diluted
|
2,775,062 | 2,898,681 | ||||||
See
accompanying notes to consolidated financial statements
F-3
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss)
|
CTI
Industries Corporation
|
||||||||||||||||||||||||||||||||||||||||
|
Value
of warrants
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||
|
issued
in
|
Other
|
Less
|
||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
connection
with
|
Accumulated
|
Comprehensive
|
Treasury
Stock
|
Noncontrolling
|
||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
subordinated
debt
|
Deficit
|
Loss
|
Shares
|
Amount
|
Interest
|
TOTAL
|
|||||||||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
2,569,124 | $ | 3,764,020 | $ | 6,754,077 | $ | 1,038,487 | $ | (4,363,999 | ) | $ | (601,283 | ) | - | $ | - | $ | 12,534 | $ | 6,603,836 | ||||||||||||||||||||
|
Warrants
Exercised
|
163,000 | $ | 793,810 | $ | 793,810 | |||||||||||||||||||||||||||||||||||
|
Options
Exercised
|
8,357 | $ | 16,775 | $ | 16,775 | |||||||||||||||||||||||||||||||||||
|
Issue
of warrants related to loan guarantee
|
$ | 126,371 | $ | 126,371 | ||||||||||||||||||||||||||||||||||||
|
Shares
issued under SEDA agreement (net of issuance costs)
|
18,239 | $ | 94,500 | $ | 94,500 | |||||||||||||||||||||||||||||||||||
|
Reclass exercised
warrants issued with debt
|
$ | 595,174 | $ | (595,174 | ) | $ | - | |||||||||||||||||||||||||||||||||
|
Stock
issued for services
|
50,000 | $ | 235,188 | $ | 235,188 | |||||||||||||||||||||||||||||||||||
|
Compensation
relating to Option Issuance
|
$ | 58,061 | $ | 58,061 | ||||||||||||||||||||||||||||||||||||
|
Excess
tax benefit - Options
|
$ | 29,309 | $ | 29,309 | ||||||||||||||||||||||||||||||||||||
|
Net
Income
|
$ | 1,154,131 | $ | 222 | $ | 1,154,353 | ||||||||||||||||||||||||||||||||||
|
Other
comprehensive income, net of taxes
|
||||||||||||||||||||||||||||||||||||||||
|
Unrealized
loss on derivative instruments
|
$ | (241,809 | ) | $ | (241,809 | ) | ||||||||||||||||||||||||||||||||||
|
Foreign
currency translation
|
$ | (1,123,038 | ) | $ | (1,123,038 | ) | ||||||||||||||||||||||||||||||||||
|
Total
comprehensive loss
|
$ | (210,494 | ) | |||||||||||||||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
2,808,720 | 3,764,020 | $ | 8,703,265 | $ | 443,313 | $ | (3,209,868 | ) | $ | (1,966,130 | ) | - | - | 12,756 | $ | 7,747,356 | |||||||||||||||||||||||
|
Adjustment
to stock issued for services in the prior year
|
$ | (96,688 | ) | $ | (96,688 | ) | ||||||||||||||||||||||||||||||||||
|
Compensation
relating to Option Issuance
|
$ | 87,369 | $ | 87,369 | ||||||||||||||||||||||||||||||||||||
|
Stock
Buybacks
|
(70,657 | ) | $ | (128,446 | ) | $ | (128,446 | ) | ||||||||||||||||||||||||||||||||
|
Net
Income
|
$ | 1,003,140 | $ | 3,802 | $ | 1,006,942 | ||||||||||||||||||||||||||||||||||
|
Other
comprehensive income, net of taxes
|
||||||||||||||||||||||||||||||||||||||||
|
Unrealized
loss on derivative instruments
|
$ | 152,830 | $ | 152,830 | ||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation
|
$ | 9,858 | $ | 9,858 | ||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 1,169,630 | ||||||||||||||||||||||||||||||||||||||
|
Balance,
December 31, 2009
|
2,808,720 | 3,764,020 | $ | 8,693,946 | $ | 443,313 | $ | (2,206,728 | ) | $ | (1,803,442 | ) | (70,657 | ) | (128,446 | ) | 16,558 | $ | 8,779,221 | |||||||||||||||||||||
See
accompanying notes to consolidated financial statements
F-4
CTI
Industries Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
For
the Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 1,006,942 | $ | 1,154,353 | ||||
|
Adjustment
to reconcile net income to cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
1,958,296 | 1,592,891 | ||||||
|
Amortization
of debt discount
|
88,668 | 88,668 | ||||||
|
Stock
based compensation
|
87,369 | 58,061 | ||||||
|
Excess
tax benefits from stock based compensation
|
- | (12,801 | ) | |||||
|
Provision
for losses on accounts receivable
|
65,380 | 138,657 | ||||||
|
Provision
for losses on inventories
|
25,126 | 178,288 | ||||||
|
Deferred
income taxes
|
(8,947 | ) | 218,080 | |||||
|
Change
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(1,411,267 | ) | (587,572 | ) | ||||
|
Inventories
|
948,311 | (1,380,459 | ) | |||||
|
Prepaid
expenses and other assets
|
(282,618 | ) | 191,606 | |||||
|
Trade
payables
|
47,880 | (783,752 | ) | |||||
|
Accrued
liabilities
|
587,648 | (455,409 | ) | |||||
|
Net
cash provided by operating activities
|
3,112,788 | 400,611 | ||||||
|
Cash
used in investing activity - purchases of property, plant and
equipment
|
(731,596 | ) | (2,200,454 | ) | ||||
|
Net
cash used in investing activity
|
(731,596 | ) | (2,200,454 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Change
in checks written in excess of bank balance
|
53,554 | 79,838 | ||||||
|
Net
change in revolving line of credit
|
(362,095 | ) | 1,214,552 | |||||
|
Proceeds
from issuance of long-term debt and warrants
|
- | 1,224,267 | ||||||
|
Repayment
of long-term debt (related parties $140,000
and $117,000)
|
(1,250,520 | ) | (942,436 | ) | ||||
|
Excess
tax benefits from stock-based compensation
|
- | 12,801 | ||||||
|
Proceeds
from exercise of stock options
|
- | 16,775 | ||||||
|
Proceeds
from issuance of stock
|
- | 94,500 | ||||||
|
Cash
paid for purchase of stock
|
(128,446 | ) | - | |||||
|
Cash
paid for deferred financing fees
|
(40,556 | ) | (19,425 | ) | ||||
|
Net
cash (used in) provided by financing activities
|
(1,728,063 | ) | 1,680,872 | |||||
|
Effect
of exchange rate changes on cash
|
36,739 | (183,564 | ) | |||||
|
Net
increase (decrease) in cash and cash equivalents
|
689,868 | (302,535 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
180,578 | 483,113 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 870,446 | $ | 180,578 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
payments for interest
|
$ | 988,001 | $ | 1,039,433 | ||||
|
Cash
payments for taxes
|
$ | 148,095 | $ | 90,206 | ||||
|
Supplemental
Disclosure of non-cash investing and financing activity
|
||||||||
|
Stock
issued under consulting agreement
|
$ | 69,063 | $ | 69,437 | ||||
|
Exercise
of Warrants and payment of Subordinated Debt
|
$ | - | $ | 793,810 | ||||
|
Issuance
of warrants for guarantee of debt
|
$ | - | $ | 126,371 | ||||
|
Property,
Plant & Equipment acquisitions funded by liabilities
|
$ | 101,835 | $ | 122,757 | ||||
See
accompanying notes to consolidated financial
statements
F-5
Notes to
Consolidated Financial Statements Years Ended
December
31, 2009 and 2008
1. Nature
of Business
Nature
of Operations
CTI
Industries Corporation, its United Kingdom subsidiary (CTI Balloons Limited),
its 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 metalized 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. Summary
of Significant Accounting Policies
Reclassifications
Certain
amounts in the 2008 consolidated financial statements have been reclassified to
conform to the current period presentation. In addition, as of
January 1, 2009 we adopted a new generally accepted accounting principle
related to noncontrolling interest in the consolidated financial statements that
required retrospective application, in which all periods presented reflect the
necessary changes.
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.
F-6
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
valuation allowances for doubtful accounts, lower of cost or market of
inventory, deferred tax assets, 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 through
consideration of the customer’s financial condition, credit history and current
economic conditions and use of 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 customer’s 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. 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 method 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:
F-7
|
Building
|
25
- 30 years
|
|
|
Machinery
and equipment
|
3 -
15 years
|
|
|
Projects
that prolong the life and increase efficiency of machinery
|
3 -
5 years
|
|
|
Light
Machinery
|
5 -
10 years
|
|
|
Heavy
Machinery
|
10
- 15 years
|
|
|
Office
furniture and equipment
|
5 -
8 years
|
|
|
Leasehold
improvements
|
5 -
8 years
|
|
|
Furniture
and equipment at customer locations
|
1 -
3
years
|
Light
machinery consists of forklifts, scissor lifts, and other warehouse
machinery. Heavy machinery consists of production equipment including
laminating, printing and converting equipment. Projects in process
represent those costs capitalized in connection with construction of new assets
and/or improvements to existing assets including a factor for interest on funds
committed to projects in process of $31,000 and $74,000 for the years ended
December 31, 2009 and 2008, respectively. Upon completion, these
costs are reclassified to the appropriate asset class.
Stock-Based
Compensation
The
Company has stock-based incentive plans which may grant stock option, restricted
stock, and unrestricted stock awards. The Company recognizes
stock-based compensation expense based on the grant date fair value of the award
and the related vesting terms. The fair value of stock-based awards
is determined using the Black-Scholes model, which incorporates assumptions
regarding the risk-free interest rate, expected volatility, expected option
life, and dividend yield. See Note 17 for additional
information.
Fair
Value Measurements
FASB GAAP
USA defines fair value, establishes a framework for measuring fair value, and
requires disclosures about fair value measurements required under other
accounting pronouncements. See Note 4 for further discussion.
Goodwill
The
Company applies the provisions of FASB GAAP USA, under which goodwill is tested
at least annually for impairment. Goodwill on the accompanying balance sheets
relates to the Company’s acquisition of Flexo Universal in a prior year. It is
the Company’s policy to perform impairment testing for Flexo Universal annually
as of December 31, or as circumstances change. An annual impairment
review was completed and no impairment was noted for the years ended December
31, 2009 and 2008. (See Note 15) While the Company
believes that its estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect these
evaluations.
F-8
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.
Deferred
Financing Costs
Deferred
financing costs are amortized on a straight line basis over the term of the
loan. Upon a refinancing, existing unamortized deferred financing costs are
expensed.
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, management cannot determine, in its
opinion, that it is more likely than not that the Company will recover that
recorded value of the deferred tax asset. The Company is subject to U.S.
Federal, state and local taxes as well as foreign taxes in the United Kingdom
and Mexico.
Unrecognized
tax benefits are accounted for as required by FASB GAAP USA which prescribes a
more likely than not threshold for financial statement presentation and
measurement of a tax position taken or expected to be taken in a tax
return. See Note 11 for further discussion.
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) collectability 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.
F-9
Research
and Development
The
Company conducts product development and research activities which include (i)
creative product development and (ii) engineering. During the years ended
December 31, 2009 and 2008, research and development activities totaled $360,000
and $357,000, respectively.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expenses
amounted to $240,000 and $346,000 for the years ended December 31, 2009 and
2008, respectively.
Subsequent
Events
Effective
June 15, 2009, the Company adopted the provisions of FASB GAAP USA requires
entities to evaluate subsequent events through the date the consolidated
financial statements are issued. The Company has determined that no
material subsequent events have occurred, except as set forth in Note
21.
3. New Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (FASB) issued new
accounting guidance on business combinations. The new guidance revises the
method of accounting for a number of aspects of business combinations including
acquisition costs, contingencies (including contingent assets, contingent
liabilities and contingent purchase price), and post-acquisition exit activities
of acquired businesses. The Company adopted the new guidance, and the adoption
of the new guidance did not have a material effect on our financial position,
results of operations or cash flows.
In
December 2007, the FASB also issued new accounting guidance on noncontrolling
interests in consolidated financial statements. The new accounting guidance
requires that a noncontrolling interest in the equity of a subsidiary be
accounted for and reported as equity, provides revised guidance on the treatment
of net income and losses attributable to the noncontrolling interest and changes
in ownership interests in a subsidiary, and requires additional disclosures that
identify and distinguish between the interests of the controlling and
noncontrolling owners. The Company retrospectively adopted the presentation and
disclosure requirements of the new guidance. The adoption of the new
guidance did not have a material effect on our financial position, results of
operations or cash flows. Net earnings represent net income attributable to the
Company’s common shareholders
In March
2008, the FASB issued new accounting standards that amend and expand the
disclosure requirements for derivative instruments and hedging activities, which
were effective for fiscal years beginning after November 15, 2008 and
interim periods with those fiscal years. These new disclosure requirements
became effective for the Company January 1, 2009 and are included in Note 4
of the Company’s consolidated financial statements.
F-10
In April
2008, the FASB issued new accounting standards relating to factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. These standards became
effective prospectively for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years. Any future impact of these
standards on the Company’s consolidated financial statements will depend on the
number and size of future acquisitions, if any.
In April
2009, the FASB issued new accounting standards for the initial recognition and
measurement, subsequent measurement and accounting and disclosure of assets
acquired and liabilities assumed arising from contingencies in a business
combination. These standards were effective for the first annual reporting
period on or after December 31, 2008. Their impact on the Company’s
consolidated financial statements will depend on the number and size of
acquisition transactions, if any, engaged in by the company in the
future.
In May
2009, the FASB issued new accounting standards for subsequent events, which
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
These standards were effective prospectively for interim and annual periods
ending after June 15, 2009 and did not have a material impact on the
consolidated financial statements.
In June
2009, the FASB issued new accounting standards that amend the evaluation
criteria to identify the primary beneficiary of a variable interest entity and
require ongoing reassessments of whether an enterprise is the primary
beneficiary of the variable interest entity. These accounting standards are
effective for annual reporting periods that begin after November 15, 2009
and interim periods within those fiscal years. They are not expected to have a
material impact on the Company’s consolidated financial statements.
In June
2009, the FASB established the FASB Accounting Standards Codification (the
“Codification” or “ASC”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with U.S. GAAP. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Codification superseded all existing non-SEC accounting and
reporting standards, with limited exceptions to allow recently issued non-SEC
accounting and reporting standards to be incorporated into the Codification. All
other non-grandfathered, non-SEC accounting literature not included in the
Codification became non-authoritative.
F-11
The FASB
will no longer issue new standards in the form of Statements, FASB Staff
Positions, Emerging Issues Task Force Abstracts, or FASB Interpretations.
Instead, it will issue Accounting Standards Updates (“ASU”), which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the Codification. The
Codification was not intended to change GAAP and did not affect the Company’s
accounting methods, but it did change the way the accounting standards are
organized and presented, particularly in descriptions of significant accounting
policies. The Codification is effective for interim and annual periods ending
after September 15, 2009.
4. Fair
Value Disclosures; Derivative Instruments
Effective
January 1, 2008, the Company adopted the provisions of FASB GAAP USA which
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. FASB GAAP USA also requires
that a fair value measurement reflect the assumptions market participants would
use in pricing an asset or liability based upon the best information
available. In February 2008, the FASB issued guidance now codified in
FASB GAAP USA which provides for delayed application of certain guidance related
to non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).
FASB GAAP
USA establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy categorizes assets and
liabilities at fair value into one of three different levels depending on the
observability of the inputs employed in the measurement. The three
levels are defined as follows:
|
|
·
|
Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets are liabilities in active
markets.
|
|
|
·
|
Level 2 –
inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs are observable for
the asset or liability, or unobservable but corroborated by market data,
for substantially the full term of the financial
instrument.
|
|
|
·
|
Level 3 –
inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of the input that is significant to the fair value
measurement. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the asset or liability. The
following tables presents information about the Company’s liabilities measured
at fair value on a recurring basis as of December 31, 2009 and 2008 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value:
F-12
|
Amount as of
|
||||||||||||||||
|
Description
|
12/31/2009
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Interest
Rate Swap 2006-1
|
$ | (16,000 | ) | $ | (16,000 | ) | ||||||||||
|
Interest
Rate Swap 2006-2
|
(81,000 | ) | (81,000 | ) | ||||||||||||
|
Interest Rate Swap 2008
|
(92,000 | ) | (92,000 | ) | ||||||||||||
| $ | (189,000 | ) | $ | (189,000 | ) | |||||||||||
|
Amount as of
|
||||||||||||||||
|
Description
|
12/31/2008
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Interest
Rate Swap 2006-1
|
$ | (49,929 | ) | $ | (49,929 | ) | ||||||||||
|
Interest
Rate Swap 2006-2
|
(142,351 | ) | (142,351 | ) | ||||||||||||
|
Interest Rate Swap 2008
|
(149,165 | ) | (149,165 | ) | ||||||||||||
| $ | (341,445 | ) | $ | (341,445 | ) | |||||||||||
The
Company’s interest rate swap agreements are valued using the counterparty’s
mark-to-market statement, which can be validated using modeling techniques that
include market inputs such as publically available interest rate yield curves,
and are designated as Level 2 within the valuation hierarchy.
FASB GAAP
USA requires an entity to recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and to measure those instruments
at fair value. Under certain conditions, a derivative may be
specifically designated as a fair value hedge or a cash flow hedge.
On April
5, 2006, the Company entered into two swap agreements with RBS Citizens N.A.
(“RBS”) in connection with portions (original notional amount totaling
$3,780,000) of the principal amounts of a mortgage loan and term loan to the
Company fixing the interest rate on such floating rate loans from prime plus
0.75% to 8.49%. The remaining notional amount at December 31, 2009
and 2008 was $1,953,000 and $2,440,000, respectively. On January 28,
2008, the Company entered into an additional swap agreement with RBS with
respect to a $3,000,000 notional amount of a floating rate revolving loan,
fixing the interest rate on such amount from prime plus 0.75% to
6.17%. The remaining notional amount relating to this swap was
$3,000,000 at December 31, 2009 and 2008. These swap agreements are
designated as cash flow hedges and hedge the Company’s exposure to interest rate
fluctuations on the portions of the principal amount of loans with RBS that are
covered by the swap agreements. These swap agreements are derivative
financial instruments and the Company determines the fair market value of these
agreements on a quarterly basis, based on RBS’s mark-to-market statement,
recording the fair market value of these contracts on the balance sheet with the
offset to other comprehensive loss. As of December 31, 2009, the
Company has recorded the fair value of these swap agreements on the balance
sheet as a liability of $189,000. For the quarter and year ended
December 31, 2009, the Company recorded unrealized gains of $40,000 and
$153,000, and for the quarter and year ended December 31, 2008, the Company
recorded an unrealized loss of $162,000 and $242,000, respectively with respect
to these swap agreements in other comprehensive income, which represents the
change in value of these swap agreements for the quarter and year then
ended.
F-13
The
Company has not had any realized loss from financial instruments during 2009 and
2008.
As a
result of the use of derivative instruments, the Company is exposed to risk that
the counterparty may fail to meet their contractual
obligations. Recent adverse developments in the global financial and
credit markets could negatively impact the creditworthiness of our counterparty
and cause them to fail to perform as expected. To mitigate the
counterparty credit risk, we have only entered into contracts with a major
financial institution based upon their credit ratings and other factors, and
continually assess the creditworthiness of the counterparty. To date,
the counterparty has performed in accordance with their contractual
obligations.
5. Other
Comprehensive Loss
The
following table sets forth the tax effects of components of other comprehensive
loss and the accumulated balance of other comprehensive loss and each
component.
Tax
Effects Allocated to Each Component of Other Comprehensive Income (Loss)
for
the years ended December 31, 2009 and 2008
|
Tax
|
||||||||||||
|
Before-Tax
|
(Expense)
|
Net-of-Tax
|
||||||||||
|
Amount
|
or
Benefit
|
Amount
|
||||||||||
|
2009
|
||||||||||||
|
Foreign
currency translation adjustments
|
$ | 9,858 | $ | - | $ | 9,858 | ||||||
|
Unrealized
gain on derivative instruments
|
152,830 | - | 152,830 | |||||||||
|
Other
comprehensive income
|
$ | 162,688 | $ | - | $ | 162,688 | ||||||
|
Tax
|
||||||||||||
|
Before-Tax
|
(Expense)
|
Net-of-Tax
|
||||||||||
|
Amount
|
or
Benefit
|
Amount
|
||||||||||
|
2008
|
||||||||||||
|
Foreign
currency translation adjustments
|
$ | (1,123,038 | ) | $ | - | $ | (1,123,038 | ) | ||||
|
Unrealized
loss on derivative instruments
|
(241,809 | ) | - | (241,809 | ) | |||||||
|
Other
comprehensive loss
|
$ | (1,364,847 | ) | $ | - | $ | (1,364,847 | ) | ||||
|
Accumulated
Other Comprehensive Loss Balances as December 31, 2009
|
||||||||||||
|
Accumulated
|
||||||||||||
|
Foreign
|
Unrealized
|
Other
|
||||||||||
|
Currency
|
Loss
on
|
Comprehensive
|
||||||||||
|
Items
|
Derivatives
|
Income
|
||||||||||
|
Beginning
balance
|
$ | (1,624,685 | ) | $ | (341,445 | ) | $ | (1,966,130 | ) | |||
|
Current
period change, net of tax
|
9,858 | 152,830 | 162,688 | |||||||||
|
Ending
balance
|
$ | (1,614,827 | ) | $ | (188,615 | ) | $ | (1,803,442 | ) | |||
F-14
|
Accumulated
Other Comprehensive Loss Balances as December 31, 2008
|
||||||||||||
|
Accumulated
|
||||||||||||
|
Foreign
|
Unrealized
|
Other
|
||||||||||
|
Currency
|
Loss
on
|
Comprehensive
|
||||||||||
|
Items
|
Derivatives
|
Income
|
||||||||||
|
Beginning
balance
|
$ | (501,647 | ) | $ | (99,636 | ) | $ | (601,283 | ) | |||
|
Current
period Change, net of tax
|
(1,123,038 | ) | (241,809 | ) | (1,364,847 | ) | ||||||
|
Ending
balance
|
$ | (1,624,685 | ) | $ | (341,445 | ) | $ | (1,966,130 | ) | |||
For the
years ended December 31, 2009 and 2008 no tax benefit for foreign currency
translation adjustments has been recorded as such amounts would result in a
deferred tax asset. For the years ended December 31, 2009 and 2008 no income tax
benefit was recorded for the unrealized losses on the derivative instruments by
reason of the fact that the tax benefit was offset by the valuation allowance
with respect to the related deferred tax asset.
6. Major
Customers
For the
year ended December 31, 2009, the Company had three customers that accounted for
approximately 27.7%, 15.4% and 11.1%, respectively, of consolidated net sales.
In 2008, the top three customers accounted for approximately 20.0%, 16.9%, and
15.5%, respectively. At December 31, 2009, the outstanding accounts
receivable balances due from these three customers were $2,783,000, $574,000 and
$813,000, respectively. At December 31, 2008, the outstanding accounts
receivable balances due from these customers were $2,155,000, $311,000, and
$144,000, respectively.
7. 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,
|
|||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 1,520,000 | $ | 1,676,000 | ||||
|
Work
in process
|
442,000 | 1,075,000 | ||||||
|
Finished
goods
|
8,024,000 | 8,183,000 | ||||||
|
Allowance
for excess quantities
|
(342,000 | ) | (429,000 | ) | ||||
|
Total
inventories
|
$ | 9,644,000 | $ | 10,505,000 | ||||
F-15
8. Notes
Payable
Long term
debt consists of:
|
Dec. 31, 2009
|
Dec. 31, 2008
|
|||||||
|
Term
Loan with RBS, payable in monthly installments of $58,333 plus interest at
prime (3.25% at December 31, 2009 and 2008) plus 0.75% (4.00%) and 0.50%
(3.75%) at December 31, 2009 and 2008, respectively (amortized over 60
months) balance due January 31, 2011
|
$ | 817,000 | $ | 1,517,000 | ||||
|
Mortgage
Loan with RBS, payable in monthly installments of $9,333 plus interest at
prime (3.25% at December 31, 2009 and 2008) plus 0.75% (4.00%) and 0.50%
(3.75%) at December 31, 2009 and 2008, respectively (amortized over 25
years) balance of $2,300,000 due January 31, 2011
|
$ | 2,371,000 | $ | 2,481,000 | ||||
|
(2009)
Asset Financing Loans (Forklift financed with Yale Financial Services;
Pouch Machines financed with RBS): Forklift payable in monthly
installments of $574 (amortized over 5 years); Pouch Machine #6; payable
in monthly installments of $5,626 (amortized over 5 years); Pouch Machine
#7, 8; payable in monthly installments of $9,891 (amortized over 5 years);
Pouch Machine #9, 10,11; payable in monthly installments of $14,111
(amortized over 5 years); (2008) Asset Financing Loans (Forklift financed
with Yale Financial Services; Pouch Machines financed with RBS): Forklift
payable in monthly installments of $426 (amortized over 5 years); Pouch
Machine #6; payable in monthly installments of $5,626 (amortized over 5
years); Pouch Machine #7, 8; payable in monthly installments of $9,891
(amortized over 5 years); Pouch Machine #9, 10,11; payable in monthly
installments of $14,111 (amortized over 5 years)
|
1,033,000 | 1,314,000 | ||||||
|
Subordinated
Notes (Officers) due on demand, interest at 9% (See
Notes 10, 14)
|
$ | 638,000 | $ | 638,000 | ||||
|
Subordinated
Notes (Officers) due on demand, interest at 8% (See Notes 10,
14)
|
$ | 814,000 | $ | 814,000 | ||||
|
Subordinated
Notes (Officers) due 2011, interest at prime (3.25% at December 31, 2009
and 2008) plus 2%, 5.25% as of December 31, 2009 and 2008, net of debt
discount of $96,000 and $185,000 at December 31, 2009 and 2008,
respectively
|
$ | 904,000 | $ | 815,000 | ||||
|
Notes
Payable (Affiliates) due 2013, interest at 8.5%
|
$ | 659,000 | $ | 858,000 | ||||
|
Notes
Payable (Affiliates) due 2021, interest at 11.75%
|
$ | 126,000 | $ | 36,000 | ||||
|
Total
long-term debt
|
$ | 7,362,000 | $ | 8,473,000 | ||||
|
Less
current portion
|
$ | (2,480,000 | ) | $ | (2,174,000 | ) | ||
|
Total
Long-term debt, net of current portion
|
$ | 4,882,000 | $ | 6,299,000 | ||||
F-16
On
February 1, 2006, the Company entered into a Loan Agreement with RBS Citizens
N.A. (“RBS”), Chicago, Illinois, previously referred to as Charter One Bank,
under which, as amended, RBS has agreed to provide a credit facility to the
Company in the total amount of $15,300,000, 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 25 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 $9,000,000, 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. 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:
|
|
|
o
|
Borrow
money;
|
|
|
o
|
Pay
dividends and make distributions;
|
|
|
o
|
Issue
stock;
|
|
|
o
|
Make
certain investments;
|
|
|
o
|
Use
assets as security in other
transactions;
|
|
|
o
|
Create
liens;
|
|
|
o
|
Enter
into affiliate transactions;
|
|
|
o
|
Merge
or consolidate; or
|
|
|
o
|
Transfer
and sell assets.
|
|
|
·
|
Financial
Covenants: The loan agreement includes a series of
financial covenants we are required to meet
including:
|
|
|
o
|
We
are required to maintain a tangible net worth in excess of
$3,500,000;
|
|
|
o
|
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,
|
|
|
o
|
We
are required to maintain a specified level of EBITDA to fixed charges for
the six months ending June 30, 2006, the nine months ending September 30,
2006 and twelve months thereafter.
|
As of
December 31, 2009, the Company was in
compliance with these covenants. On January 26, 2010, the
Company entered into an amendment to the Loan Agreement extending the revolving
loan term to April 30, 2010. Management expects that a similar
agreement with RBS or with another lender will be obtained in the
future.
The
Company used interest rate swaps as a cash flow hedge to manage interest costs
and the risk associated with changing interest rates of long-term
debt. (See Note 4)
John H.
Schwan and Stephen M. Merrick both as officers, directors and principal
shareholders of the Company have each personally guaranteed the obligations of
the Company to RBS up to $2,000,000. (See Note 14)
F-17
As of
December 31, 2009 the balance outstanding on the revolving line of credit with
RBS was $7,599,000 with respect to which $3,000,000 covered by the swap
agreement bears interest of 6.17% and the balance bears interest of
4.00%.
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:
|
2010
|
$ | 2,480,000 | ||
|
2011
|
4,047,000 | |||
|
2012
|
554,000 | |||
|
2013
|
193,000 | |||
|
2014
|
17,000 | |||
|
Thereafter
|
71,000 | |||
|
Total
|
$ | 7,362,000 |
9. Current
Liabilities
As of
December 31, 2009, Accrued Liabilities includes $776,000 in payroll accruals and
$189,000 in mark to market liabilities. As of December 31, 2008,
Accrued Liabilities includes $1,147,000 in accruals and $341,000 in mark to
market liabilities.
10. Subordinated
Debt
In
February 2003, the Company received $1,630,000 from certain shareholders in
exchange for (a) 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
$460,000 calculated using Black-Scholes option pricing formula. The Company
applied the discount against the subordinated debt. The discount is being
amortized using the effective interest method to interest expense over the term
of the debt. These loans are subordinated to the Bank debt of the
Company. On February 8, 2008 those shareholders exercised these
warrants in exchange for a reduction on these notes of $794,000. The
remaining balance of $638,000 is due on demand.
In
February 2006, the Company received $1,000,000 from certain 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. The proceeds were to fund capital improvements and
give additional liquidity to the Company. The value of the warrants
was $443,000 using the Black-Scholes option pricing formula. The Company applied
the discount against the subordinated debt. The discount is amortized using the
effective interest method to interest expense over the term of the debt. These
loans are subordinated to the Bank debt of the Company. The remaining
balance of $904,000 (net $96,000 discount) is due in 2011.
F-18
At
various times from 2003 to 2005, certain shareholders loaned an aggregate of
$814,000 to the Company in exchange for notes bearing interest at an annual rate
of 8%. These notes are subordinated to the bank loan of the
Company. The remaining balance of
$814,000 is due on demand.
11. Income
Taxes
The
income tax provisions are comprised of the following:
|
Dec. 31 2009
|
Dec. 31 2008
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | - | $ | - | ||||
|
State
|
- | - | ||||||
|
Foreign
|
128,155 | 205,089 | ||||||
| $ | 128,155 | $ | 205,089 | |||||
|
Deferred
|
||||||||
|
Federal
|
$ | (13,764 | ) | $ | 41,690 | |||
|
State
|
- | - | ||||||
|
Foreign
|
- | - | ||||||
| (13,764 | ) | 41,690 | ||||||
|
Total
Income Tax Provision
|
$ | 114,391 | $ | 246,779 | ||||
The
components of the net deferred tax asset at December 31 are as
follows:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for doubtful accounts
|
$ | 15,896 | $ | 8,389 | ||||
|
Inventory
allowances
|
125,766 | 126,109 | ||||||
|
Accrued
liabilities
|
66,473 | 60,868 | ||||||
|
Unicap
263A adjustment
|
140,257 | 121,144 | ||||||
|
Net
operating loss carryforwards
|
1,918,524 | 2,451,446 | ||||||
|
Alternative
minimum tax credit carryforwards
|
351,619 | 342,673 | ||||||
|
State
investment tax credit carryforward
|
30,512 | 30,512 | ||||||
|
Foreign
tax credit carryforward
|
298,635 | 298,635 | ||||||
|
Other
foreign tax items
|
43,582 | 43,582 | ||||||
|
Foreign
asset tax credit carryforward
|
(80,368 | ) | - | |||||
|
Total
deferred tax assets
|
2,910,896 | 3,483,358 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Book
over tax basis of capital assets
|
(1,148,598 | ) | (1,276,174 | ) | ||||
|
Other
foreign tax items
|
(165,099 | ) | (288,146 | ) | ||||
| 1,597,199 | 1,919,038 | |||||||
|
Less:
Valuation allowance
|
(528,988 | ) | (902,452 | ) | ||||
|
Net
deferred tax assets
|
$ | 1,068,211 | $ | 1,016,586 | ||||
F-19
The
Company maintains a valuation allowance with respect to deferred tax assets as a
result of the uncertainty of ultimate realization. At December 31, 2009, the
Company has net operating loss carryforwards of approximately $4,703,000
expiring in various years through 2025. In addition, the Company has
approximately $352,000 of alternative minimum tax credits as of December 31,
2009, which have no expiration date.
Income
tax provisions differed from the taxes calculated at the statutory federal tax
rate as follows:
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Taxes
at statutory rate
|
$ | 392,466 | $ | 490,397 | ||||
|
State
income taxes
|
54,026 | 67,507 | ||||||
|
Nondeductible
expenses
|
17,827 | 24,277 | ||||||
|
Decrease
in deferred tax valuation allowance
|
(373,464 | ) | (324,549 | ) | ||||
|
Foreign
taxes and other
|
23,536 | (10,853 | ) | |||||
|
Income
tax provision
|
$ | 114,391 | $ | 246,779 | ||||
The
Company files tax returns in the U.S. federal and U.K and Mexico foreign tax
jurisdictions and various state jurisdictions. The tax years 2006 through 2009
remain open to examination. Our policy is to recognize interest and penalties
related to uncertain tax positions in income tax expense. During the twelve
months ended December 31, 2009 and 2008, the Company did not recognize expense
for interest or penalties, and do not have any amounts accrued at December 31,
2009 and 2008, as the Company does not believe it has taken any uncertain tax
positions.
12. Notes
Payable Affiliates
Items
identified as Notes Payable Affiliates in the Company’s Consolidated Balance
Sheet as of December 31, 2009 include loans by officers/shareholders to Flexo
Universal totaling $659,000. Items identified as Notes Payable
Affiliates in the Company’s Consolidated Balance Sheet as of December 31, 2008
include loans by officers/shareholders to Flexo Universal totaling
$858,000. The remaining balance of $126,000 and $36,000 at December
31, 2009 and 2008, respectively, represents loans from a number of various
employees of Flexo Universal. (See Note 14)
13.
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, 2006, the Company amended its defined contribution
plan. Under the amended plan, the maximum contribution for the
Company is 5% of gross wages. Employer contributions to the plan totaled $99,000
and $118,000 for the years ended December 31, 2009 and 2008,
respectively.
F-20
14.
Related Party Transactions
Stephen
M. Merrick is of counsel to 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 or predecessor, were
$130,000 and $174,000 for the years ended December 31, 2009 and 2008,
respectively.
John H.
Schwan, Chairman of the Company, is a principal of Shamrock Packaging and
affiliated companies. The Company made purchases of packaging materials from
Shamrock of approximately $1,718,000 and $824,000 during the years ended
December 31, 2009 and 2008, respectively.
John H.
Schwan, Chairman of the Company, is one of the owners of White Horse Production,
Inc. The Company made purchases from White Horse of approximately
$44,000 and $46,000 during the years ended December 31, 2009 and 2008,
respectively.
John H.
Schwan, Chairman of the Company, and Howard W. Schwan, President of the Company,
are the brothers of Gary Schwan, one of the owners of Schwan Incorporated which
provides building maintenance and remodeling services to the
Company. The Company made purchases from Schwan Incorporated of
approximately $27,000 and $142,000 during the years ended December 31, 2009 and
2008, respectively.
During
the period from January 2003 to the present, John H. Schwan, Chairman of the
Company, and Stephen M. Merrick, Executive Vice President and Chief Financial
Officer have made loans to the Company and to Flexo which have outstanding
balances, for the Company of $2,356,000 and $2,267,000 (net of discount of
$96,000 and $185,000, respectively) and for Flexo of $659,000 and $858,000 as of
December 31, 2009 and 2008, respectively.
During
2009 and 2008 interest expense to these individuals on these outstanding loans
was $228,000 and $414,000, respectively. (See Notes 10 and
12)
15.
Goodwill
Under the
provisions of FASB GAAP USA, goodwill is subject to at least annual assessments
for impairment by applying a fair-value based test. FASB GAAP USA
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.
F-21
As of
December 31, 2009 and 2008 we determined that the fair value of the Company’s
interest in goodwill related to Flexo Universal as recorded was not
impaired. The carrying amount of goodwill as of December 31, 2009 and
2008 was $989,000.
16.
Commitments
Operating
Leases
In
September of 2005, the Company entered into a lease to rent 16,306 square feet
of space in Cary, Illinois from Trinity Assets. The extended term of
this lease expired in September 2009. The Company’s United Kingdom
subsidiary also maintains a lease for office and warehouse space, which expires
in 2019. In February 2008, Flexo Universal entered into a 3-year
lease to rent 43,000 square feet of warehouse and office space in Guadalajara,
Mexico at the cost of $19,200 per month. The Company leases office
and warehouse equipment under operating leases, which expire on various dates
through December 2011. All of the Company’s lease payments are
recognized on a straight-line basis as none of the leases have escalation
clauses.
The net
lease expense was $511,000 and $445,000 for the years ended December 31, 2009
and 2008, respectively.
The
future aggregate minimum net lease payments under existing agreements as of
December 31, are as follows:
|
2010
|
$ | 329,000 | ||
|
2011
|
$ | 99,000 | ||
|
2012
|
$ | 56,000 | ||
|
2013
|
$ | 47,000 | ||
|
2014
|
$ | 47,000 | ||
|
Thereafter
|
$ | 235,000 | ||
|
Total
|
$ | 813,000 |
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:
|
2010
|
$ | 122,750 | ||
|
2011
|
$ | 103,000 |
F-22
17.
Stockholders’ Equity
Stock
Options
The
Company has adopted FASB GAAP USA which requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
consolidated financial statements based on their grant-date fair
values.
The
Compensation Committee administers the Plans. 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 Compensation Committee at whatever price
the Committee may determine in good faith. Unless the Committee 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 Committee 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. Officers, directors, and
employees of, and consultants to, the Company or any parent or subsidiary
corporation selected by the Committee are eligible to receive options under the
Plan. Subject to certain restrictions, the Committee 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, vesting and other terms.
The
Company has applied the Black-Scholes model to value stock-based
awards. That model incorporates various assumptions in the valuation
of stock-based awards relating to the risk-free rate of interest to be applied,
the estimated dividend yield and expected volatility of our common
stock. The risk-free rate of interest is the U.S. Treasury yield
curve for periods within the expected term of the option at the time of
grant. The dividend yield on our common stock is assumed to be zero
as we have historically not paid dividends and have no current plans to do so in
the future. The expected volatility is based on historical volatility
of the Company’s common stock.
The
valuation assumptions we have applied to determine the value of stock-based
awards were as follows:
Historical
stock price volatility: The Company used the monthly closing price to
calculate historical annual volatility.
Risk-free
interest rate: The Company bases the risk-free interest rate on the
rate payable on US treasury securities in effect at the time of the
grant.
F-23
Expected
life: The expected life of the option represents the period of time
options are expected to be outstanding. The Company uses one half of
the life of the option.
Dividend
yield: The estimate for dividend yield is 0.0%, because the Company
has not historically paid a dividend.
Estimated
pre-vesting forfeitures: When estimating forfeitures, the Company
considers historical terminations as well as anticipated
retirements.
The
Company’s net income for the fiscal year ended December 31, 2009 and 2008
includes approximately $87,000 and $58,000, respectively, of compensation costs
related to share-based payments. As of December 31, 2009, there is
$97,000 of unrecognized compensation expense related to non-vested stock option
grants. We expect approximately $72,000 and $25,000 to be recognized
during 2010 and 2011, respectively. No options were exercised during
2009.
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, 2009, 148,223 shares have been granted
under the 1999 Stock Option Plan and were fully vested at the time of grant,
25,786 remain outstanding.
On April
12, 2001, the Board of Directors approved for adoption, effective December 27,
2001, the 2001 Stock Option Plan (the “Plan”). The Plan authorizes the grant of
options to purchase up to an aggregate of 119,050 shares of the Company’s Common
Stock. As of December 31, 2009, 139,958 shares have been granted and were fully
vested at the time of grant, 19,453 remain outstanding. During 2009,
17,858 shares were cancelled.
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, 2009,
123,430 shares have been granted and were fully vested at the time of grant,
38,500 remain outstanding. During 2009, 10,000 shares were
cancelled.
On June
22, 2007, the Board of Directors approved for adoption, effective October 1,
2007, the 2007 Incentive Stock Plan (“Plan”). The Plan authorizes the grant of
options to purchase up to an aggregate of 150,000 shares of the Company’s Common
Stock. On
October 1, 2007, the company issued 74,000 shares under the 2007
Plan. During 2008, the company issued an additional 77,500 shares
under the 2007 Plan. The fair value of these options was 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%;
dividend yield of 0%; volatility factor of the expected price of the Company’s
stock was 60.67%; and a weighted average expected life of 2.8
years. Under this plan, 137,000 shares remain outstanding, 84,625
shares are vested and 52,375 are not vested. During 2009, 12,000
shares were cancelled.
F-24
|
2007 Stock Incentive Plan Vesting Schedule
|
|||
|
%
|
Years After Grant
Date
|
||
|
25
|
0.5
|
||
|
50
|
1
|
||
|
75
|
2
|
||
|
100
|
3
|
||
On April
10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the
shareholders of the Company approved, a 2009 Incentive Stock Plan (“Incentive
Stock Plan”). The Incentive Stock Plan authorizes the issuance of up
to 250,000 shares of stock or options to purchase stock of the
Company. No stock or options have been granted under this Plan to
date.
The
following is a summary of options exercised during the years ended December
31:
|
2009
|
2008
|
|||||||||||||||
|
Intrinsic
|
Intrinsic
|
|||||||||||||||
|
Shares
|
Value
|
Shares
|
Value
|
|||||||||||||
|
1999
Plan
|
- | $ | - | 3,976 | $ | 13,000 | ||||||||||
|
2001
Plan
|
- | $ | - | 4,381 | $ | 18,000 | ||||||||||
|
2002
Plan
|
- | $ | - | - | $ | - | ||||||||||
The
following is a summary of the activity in the Company’s stock option plans and
other options for the years ended December 31, 2009 and 2008,
respectively.
|
Weighted
|
Weighted
|
|||||||||||||||
|
Avg.
|
Avg.
|
|||||||||||||||
|
Dec. 31,
|
Exercise
|
Dec. 31,
|
Exercise
|
|||||||||||||
|
2009
|
Price
|
2008
|
Price
|
|||||||||||||
|
Exercisable,
beginning of period
|
159,252 | $ | 2.87 | 194,370 | $ | 3.32 | ||||||||||
|
Granted
|
- | - | - | - | ||||||||||||
|
Vested
|
53,625 | 3.03 | 35,750 | 4.76 | ||||||||||||
|
Exercised
|
- | - | (8,357 | ) | 2.44 | |||||||||||
|
Cancelled
|
(32,608 | ) | 2.26 | (62,511 | ) | 5.75 | ||||||||||
|
Exercisable
at the end of period
|
180,269 | $ | 3.03 | 159,252 | $ | 2.87 | ||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Avg.
|
Avg.
|
|||||||||||||||
|
Dec. 31,
|
Exercise
|
Dec. 31,
|
Exercise
|
|||||||||||||
|
2009
|
Price
|
2008
|
Price
|
|||||||||||||
|
Outstanding,
beginning of period
|
272,502 | $ | 2.95 | 268,370 | $ | 3.71 | ||||||||||
|
Granted
|
- | - | 77,500 | 4.75 | ||||||||||||
|
Exercised
|
- | - | (8,357 | ) | 2.44 | |||||||||||
|
Cancelled
|
(39,858 | ) | 2.42 | (65,011 | ) | 5.75 | ||||||||||
|
Outstanding
at the end of period
|
232,644 | $ | 3.04 | 272,502 | $ | 2.95 | ||||||||||
F-25
At
December 31, 2009, available options to grant were 250,000 under the 2009 Stock
Incentive Plan.
Significant
option groups outstanding at December 31, 2009 and related weighted average
price and remaining life information are as follows:
|
Options Outstanding
|
Options Vested
|
|||||||||||||||||||||||||||||||
|
Grant Date
|
Shares
|
Wtd Avg
|
Remain. Life
|
Intrinsic Val
|
Shares
|
Wtd Avg
|
Remain. Life
|
Intrinsic Val
|
||||||||||||||||||||||||
|
Mar
2000
|
25,786 | $ | 1.89 | 0.2 | $ | 10,057 | 25,786 | $ | 1.89 | 0.2 | $ | 10,057 | ||||||||||||||||||||
|
Dec
2001
|
5,953 | $ | 1.47 | 2.0 | $ | 4,822 | 5,953 | $ | 1.47 | 2.0 | $ | 4,822 | ||||||||||||||||||||
|
Apr
2002
|
11,905 | $ | 2.10 | 2.3 | $ | 2,143 | 11,905 | $ | 2.10 | 2.3 | $ | 2,143 | ||||||||||||||||||||
|
Dec
2005
|
52,000 | $ | 2.88 | 6.0 | $ | - | 52,000 | $ | 2.88 | 6.0 | $ | - | ||||||||||||||||||||
|
Oct
2007
|
64,500 | $ | 4.76 | 1.8 | $ | - | 48,375 | $ | 4.76 | 1.8 | $ | - | ||||||||||||||||||||
|
Aug
2008
|
6,000 | $ | 6.14 | 2.6 | $ | - | 3,000 | $ | 6.14 | 2.6 | $ | - | ||||||||||||||||||||
|
Oct
2008
|
2,500 | $ | 4.97 | 2.8 | $ | - | 1,250 | $ | 4.97 | 2.8 | $ | - | ||||||||||||||||||||
|
Nov
2008
|
64,000 | $ | 1.84 | 2.9 | $ | 28,060 | 32,000 | $ | 1.84 | 2.9 | $ | 14,030 | ||||||||||||||||||||
|
TOTAL
|
232,644 | $ | 3.04 | 2.9 | $ | 45,081 | 180,269 | $ | 3.03 | 3.0 | $ | 31,051 | ||||||||||||||||||||
As of
December 31, 2009 the aggregate intrinsic value of options in the money,
outstanding and exercisable were $45,000 and $31,000, respectively.
Warrants
In
February 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. On February 8, 2008 those shareholders exercised these
options in exchange for a reduction on these notes of $794,000.
In
February 2006, certain members of company management were issued warrants, which
fully vested immediately, 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 fair value of the warrants granted on
February 1, 2006, was $443,000 which was estimated at the date of grant using
the Black-Scholes pricing model with the following weighted average
assumptions: risk-free interest rate of 3.9%; dividend yield of 0%;
volatility factor of the expected price of the Company’s stock was 138.9%; and a
weighted average expected life of 5 years. The weighted average fair value of
the warrants granted during 2006 was $2.56 per share.
On
October 1, 2008, the Company issued warrants to purchase 20,000 shares of common
stock of the Company to both John Schwan and Stephen M. Merrick exercisable at
the price of $4.80 per share (the market price of the stock on the date of the
warrants) in consideration for the personal guarantees by each of up to $2
million in principal amount of the bank debt of the Company.
F-26
The
following is a summary of the activity in the Company’s warrants for the years
ended December 2009 and 2008:
|
Weighted
|
Weighted
|
|||||||||||||||
|
Avg.
|
Avg.
|
|||||||||||||||
|
Dec. 31,
|
Exercise
|
Dec. 31,
|
Exercise
|
|||||||||||||
|
2009
|
Price
|
2008
|
Price
|
|||||||||||||
|
Outstanding
and Exercisable, beginning of period
|
343,030 | $ | 3.47 | 466,030 | $ | 3.85 | ||||||||||
|
Granted
|
- | - | 40,000 | 4.80 | ||||||||||||
|
Exercised
|
- | - | (163,000 | ) | 4.87 | |||||||||||
|
Cancelled
|
- | - | - | - | ||||||||||||
|
Outstanding
and Exercisable at the end of period
|
343,030 | $ | 3.47 | 343,030 | $ | 3.47 | ||||||||||
The
warrants, outstanding and exercisable as of December 31, 2009 had zero intrinsic
value since they were out of the money.
SEDA
On
June 6, 2006, we entered into a Standby Equity Distribution Agreement with
Cornell Capital pursuant to which we were permitted, at our discretion;
periodically sell to Cornell Capital shares of common stock for a total purchase
price of up to $5 million. The commitment of Cornell Capital was for
a term commencing on the effective date of our registration statement covering
the shares to be sold and expiring after 24 months from that
date. The commitment expired on January 28, 2009. For each
share of common stock purchased under the Standby Equity Distribution Agreement,
Cornell Capital agreed to 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
was traded for the five (5) days immediately following the notice
date. Furthermore, Cornell Capital received five percent (5%) of
each advance in cash under the Standby Equity Distribution Agreement as an
underwriting discount.
On
December 28, 2006, we filed a Registration Statement for the registration of
403,500 shares of our common stock. On January 26, 2007, the
Registration Statement was declared effective. On July 24, 2008, we
filed an amended Registration Statement, which was declared
effective. As of December 31, 2008 we had sold an aggregate of
341,864 shares of common stock to Cornell under the SEDA and have received net
proceeds from the sale of those shares in the amount of $1,449,000.
18.
Earnings Per Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during each period.
Diluted
earnings per share is computed by dividing the net income by the weighted
average number of shares of common stock and equivalents (stock options and
warrants), unless anti-dilutive, during each period.
F-27
The
number of anti-dilutive shares (not included in the determination of earnings on
a diluted basis) for the three months ended December 31, 2009, were 468,030 of
which 343,030 were represented by warrants and 125,000 were represented by
options. For the twelve months ended December 31, 2009, 479,935
shares were anti-dilutive 343,030 were represented by warrants, 136,905 were
represented by options. The number of anti-dilutive shares (not
included in the determination of earnings on a diluted basis) for the three
months ended December 31, 2008, were 423,030 of which 343,030 were represented
by warrants and 80,000 were represented by options. For the twelve
months ended December 31, 2008, 120,000 shares were anti-dilutive of which
40,000 were represented by warrants and 80,000 were represented by
options.
Consolidated
Earnings per Share
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Basic
|
||||||||
|
Average
shares outstanding:
|
||||||||
|
Weighted
average number of shares outstanding during the period
|
2,765,277 | 2,763,017 | ||||||
|
Earnings:
|
||||||||
|
Net
income attributable to CTI Industries Corporation
|
$ | 1,003,140 | $ | 1,154,133 | ||||
|
Amount
for per share Computation
|
$ | 1,003,140 | $ | 1,154,133 | ||||
|
Net
earnings applicable to Common Shares
|
$ | 0.36 | $ | 0.42 | ||||
|
Diluted
|
||||||||
|
Average
shares outstanding:
|
2,765,277 | 2,763,017 | ||||||
|
Weighted
averages shares Outstanding Common stock equivalents (options,
warrants)
|
9,785 | 135,664 | ||||||
|
Weighted
average number of shares outstanding during the period
|
2,775,062 | 2,898,681 | ||||||
|
Earnings:
|
||||||||
|
Net
income attributable to CTI Industries Corporation
|
$ | 1,003,140 | $ | 1,154,133 | ||||
|
Amount
for per share computation
|
$ | 1,003,140 | $ | 1,154,133 | ||||
|
Net
income applicable to Common Shares
|
$ | 0.36 | $ | 0.40 | ||||
F-28
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 plus a standard markup. 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
years ended December 31, 2009 and 2008, respectively:
|
United States
|
United Kingdom
|
Mexico
|
Consolidated
|
|||||||||||||
|
Year
ended 12/31/09
|
||||||||||||||||
|
Sales
to outside customers
|
$ | 31,873,000 | $ | 1,971,000 | $ | 7,451,000 | $ | 41,295,000 | ||||||||
|
Total
Assets
|
$ | 23,801,000 | $ | 733,000 | $ | 5,861,000 | $ | 30,395,000 | ||||||||
|
United
States
|
United
Kingdom
|
Mexico
|
Consolidated
|
|||||||||||||
|
Year
ended 12/31/08
|
||||||||||||||||
|
Sales
to outside customers
|
$ | 34,701,000 | $ | 2,762,000 | $ | 7,518,000 | $ | 44,981,000 | ||||||||
|
Total
Assets
|
$ | 24,709,000 | $ | 740,000 | $ | 4,539,000 | $ | 29,988,000 | ||||||||
20.
Contingencies
On
December 20, 2006, Pliant Corporation filed an action against the Company in the
Circuit Court of Cook County, Illinois. In the action, Pliant claimed
that there was 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. On September 30, 2009, this action was settled by payment by
the Company to Pliant of the sum of $125,000.
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.
Subsequent Event
On
January 26, 2010, the Company entered into the Sixth Amendment to Loan Agreement
with RBS under which the term of the revolving loan facility of the Company with
the Bank was extended to April 30, 2010.
F-29
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:
|
2009
|
2008
|
|||||||
|
Balance
at beginning of year
|
$ | 39,000 | $ | 312,000 | ||||
|
Charged
to expenses
|
$ | 65,000 | $ | 139,000 | ||||
|
Uncollectible
accounts written off
|
$ | (47,000 | ) | $ | (412,000 | ) | ||
|
Balance
at end of year
|
$ | 57,000 | $ | 39,000 | ||||
The
following is a summary of the allowance for excess inventory for the years ended
December 31:
|
2009
|
2008
|
|||||||
|
Balance
at beginning of year
|
$ | 429,000 | $ | 383,000 | ||||
|
Charged
to expenses
|
$ | 25,000 | $ | 150,000 | ||||
|
Obsolete
inventory written off
|
$ | (112,000 | ) | $ | (104,000 | ) | ||
|
Balance
at end of year
|
$ | 342,000 | $ | 429,000 | ||||
The
following is a summary of property and equipment and the related accounts of
accumulated depreciation for the years ended December 31:
|
2009
|
2008
|
|||||||
|
Cost
Basis
|
||||||||
|
Balance
at beginning of year
|
$ | 31,253,000 | $ | 29,696,000 | ||||
|
Additions
|
$ | 835,000 | $ | 1,557,000 | ||||
|
Disposals
|
$ | - | $ | - | ||||
|
Balance
at end of year
|
$ | 32,088,000 | $ | 31,253,000 | ||||
|
Accumulated
depreciation
|
||||||||
|
Balance
at beginning of year
|
$ | 20,677,000 | $ | 19,600,000 | ||||
|
Depreciation
|
$ | 1,878,000 | $ | 1,077,000 | ||||
|
Disposals
|
$ | - | $ | - | ||||
|
Balance
at end of year
|
$ | 22,555,000 | $ | 20,677,000 | ||||
F-30