FORM 10-Q/A
Amendment No. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission File No. 000-23115
CTI INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
Illinois 36-2848943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22160 North Pepper Road, Barrington, Illinois 60010
(Address of principal executive offices) (Zip Code)
(847) 382-1000
(Registrant's telephone number, including area code)
Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK, no par value, 1,918,420 outstanding Shares, as of March 31,
2004.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements of the Registrant are
attached to this Form 10-Q/A Amendment No. 1:
1. Interim Balance Sheet as at March 31, 2004 (unaudited) and
December 31, 2003;
2. Interim Statements of Operations (unaudited) for the three
months ended March 31, 2004 and March 31, 2003;
3. Interim Statements of Cash Flows (unaudited) for the three
months ended March 31, 2004 and March 31, 2003.
4. Notes to Consolidated Financial Statements
The Financial Statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the periods
presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations
Net Sales. For the fiscal quarter ended March 31, 2004, net sales were
$10,894,000 compared to net sales of $10,162,000 for the three months ended
March 31, 2003, an increase of 7.2%. For the quarters ended March 31, 2004 and
2003, net revenues by product category were as follows:
For the Three Month Period Ended
March 31, 2004 March 31, 2003
-------------- --------------
Laminated and Printed Films $3,674,000 $4,187,000
Metalized Balloons $4,931,000 4,712,000
Latex Balloons $1,685,000 992,000
Other $ 604,000 271,000
During the quarter ended March 31, 2004, sales of laminated and printed
films represented 33.7% of total sales, metalized balloons 45.3% of total sales
and latex balloons 15.5% of total sales other sales consisting primarily of
helium products and accessories represented 5.5% of sales. For the same period
of the prior year, laminated and printed films represented 41.2% of total sales,
metalized balloons 46.4% latex balloons 9.8%, and other sales 2.7%, consisting
primarily of helium products for which we act as a broker for the Eckerd and
Walgreen Drug Store chains. Those sales were approximately $479,000.
2
The decrease in sales of laminated and printed product in the first
quarter of 2004 is the result principally of a decrease in sales to a
significant customer. Sales to that customer for the first quarter of 2004 were
$1,245,000 (or 11.4% of total sales for the quarter) compared to sales to such
customer of $2,593,000 (or 25.5% of total sales for the quarter) in 2003. During
the first quarter of 2004, there were two other customers whose purchases
represented more than 10% of the Company's sales during the quarter: (i) one
customer of laminated film products whose purchases totaled $1,978,000 or 18.2%
of total sales for the quarter, and (ii) a customer of metalized balloons whose
purchases totaled $1,142,000 or 10.5% of total Company sales for the quarter.
Cost of Sales. For the fiscal quarter ended March 31, 2004, cost of sales
decreased to 80.3% of net sales as compared to 80.9% of net sales in the three
month period ended March 31, 2003. This decrease was primarily the result of a
reduction in overhead expense.
Administrative. For the fiscal quarter ended March 31, 2004,
administrative expenses were $989,000, or 9.1% of net sales as compared to
$1,259,000, or 12.4% of net sales for the three month period ended March 31,
2003. This decrease is attributable to decreases in audit expense and salary
expense.
Selling. For the fiscal quarter ended March 31, 2004, selling expenses
were $390,000, or 3.6% of net sales, as compared to $402,000, or 4.0% of net
sales for the three month period ended March 31, 2003. There was no significant
change in the amount or nature of selling expenses in the first quarter of 2004
related to the first quarter of 2003.
Advertising and Marketing. For the fiscal quarter ended March 31, 2004,
advertising and marketing expenses were $393,000, or 3.6% of net sales as
compared to $589,000, or 5.8% of net sales in the three month period ended March
31, 2003. This decrease is attributable principally to a reduction in salaries,
travel, artwork and plate expense.
Other Income. Other income of $446,000 relates primarily to income from
the resolution of vendor and other obligations of CTI Mexico
Net Income or Loss. For the fiscal quarter ended March 31, 2004, the
Company had a net profit before taxes and minority interest of $607,000 as
compared to net (loss) before taxes and minority interest of ($658,000) for the
first quarter of 2003. Income tax expense for the first quarter of fiscal 2004
was $233,000, resulting in net income of $372,000 after minority interest of
$2,000. The income tax expense for the three month period ended March 31, 2003
was $34,000, resulting in net (loss) of ($690,000) after minority interest of
($2,000).
The change in net income before income taxes and minority interest for the
first quarter of 2004 from the first quarter of 2003 is attributable to several
factors: (i) higher sales and increased margins in US operations with the result
that gross profit on sales was increased to $2,147,000 for the quarter ending
March 31,2004 as compared to $1,937,000 for the quarter ending on March 31,
2003, an increase of $210,000; these margin gains were driven by a reduction in
overhead costs associated with more efficient use of equipment and labor and
increased use of temporary labor reducing fringe and overtime costs; (ii) the
recognition of $446,000 of income due to the reduction of debt at our CTI Mexico
facility; and (iii) a reduction in
3
administrative, selling, advertising, and marketing expenses as compared to the
first quarter of 2003.
Liquidity and Capital Resources
Cash Flow Items. Cash flow used in operations during the three months
ended March 31, 2004 was $1,240,000. Cash flow in the first quarter was affected
by an increase in receivables of $1,754,000 and a decrease in accounts payable
of $659,000. During the first quarter of 2003, cash flow used in operations was
$588,000.
Investment Activities. During the three months ended March 31, 2004, cash
flow used in investing activities was $262,000. In the first quarter of 2003,
cash used in investing activities was $333,000 for the purchase of machinery and
equipment. The Company has no commitments for capital expenditures over the
second quarter of 2004.
Financing Activities. For the three months ended March 31, 2004, cash flow
generated from financing activities was $1,421,000. The funds provided were
principally advances on the company's line of credit in the amount of
$1,336,000. Cash flow provided by financing activities during the first quarter
of 2003 was $1,476,000.
Liquidity and Capital Resources. At March 31, 2004, the Company had a cash
balance of $331,000. The Company's current cash management strategy includes
maintaining minimal cash balances and utilizing the Company's revolving line of
credit for liquidity. At March 31, 2004, the Company had a working capital
deficit of $346,000 compared to a working capital deficit of $3,588,000 at March
31, 2003. As of March 31, 2004, there was an additional $312,000 available under
the Company's revolving line of credit.
The Company believes that existing capital resources and cash generated
from operations will be sufficient to meet the Company's requirements for at
least the next 12 months.
Seasonality. In the metalized balloon product line, sales have
historically been seasonal, with approximately 22% to 25% of annual sales of
metalized balloons being generated in December and January and 11% to 13% of
annual metalized sales being generated in September and July in recent years.
With the inclusion of a new major customer in metalized balloons with sales that
are not expected to be seasonal we expect this season effect to be reduced. In
addition, the sale of latex balloons and laminated film products have not
historically been seasonal. As sales of latex balloons and laminated film
products have increased in relation to sales of metalized balloons, the effect
of this seasonality has been reduced.
Critical Accounting Policies
A summary of our critical accounting policies and estimates is presented
on pages 18 and 19 of our 2003 Annual Report on Form 10-K/A, Amendment No. 1, as
filed with the Securities and Exchange Commission.
4
Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements.
The Company operates in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The market for metalized and latex balloon
products is generally characterized by intense competition, frequent new product
introductions and changes in customer tastes which can render existing products
unmarketable. The statements contained in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operation) that are not
historical facts may be forward-looking statements (as such term is defined in
the rules promulgated pursuant to the Securities Exchange Act of 1934) that are
subject to a variety of risks and uncertainties more fully described in the
Company's filings with the Securities and Exchange Commission including, without
limitation, those described under "Risk Factors" in the Company's Form SB-2
Registration Statement (File No. 333-31969) effective November 5, 1997. The
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by, and information currently available to the
Company's management. Accordingly, these statements are subject to significant
risks, uncertainties and contingencies which could cause the Company's actual
growth, results, performance and business prospects and opportunities in 2004
and beyond to differ materially from those expressed in, or implied by, any such
forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying such statements. These risks, uncertainties and contingencies
include, but are not limited to, the Company's limited operating history on
which expectations regarding its future performance can be based, competition
from, among others, national and regional balloon, packaging and custom film
product manufacturers and sellers that have greater financial, technical and
marketing resources and distribution capabilities than the Company, the
availability of sufficient capital, the maturation and success of the Company's
strategy to develop, market and sell its products, risks inherent in conducting
international business, risks associated with securing licenses, changes in the
Company's product mix and pricing, the effectiveness of the Company's efforts to
control operating expenses, general economic and business conditions affecting
the Company and its customers in the United States and other countries in which
the Company sells and anticipates selling its products and services and the
Company's ability to (i) adjust to changes in technology, customer preferences,
enhanced competition and new competitors; (ii) protect its intellectual property
rights from infringement or misappropriation; (iii) maintain or enhance its
relationships with other businesses and vendors; and (iv) attract and retain key
employees. There can be no assurance that the Company will be able to identify,
develop, market, sell or support new products successfully, that any such new
products will gain market acceptance, or that the Company will be able to
respond effectively to changes in customer preferences. There can be no
assurance that the Company will not encounter technical or other difficulties
that could delay introduction of new or updated products in the future. If the
Company is unable to introduce new products and respond to industry changes or
customer preferences on a timely basis, its business could be materially
adversely affected. The Company is not obligate to update or revise these
forward-looking statements to reflect new events or circumstances.
5
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company has not identified any material changes in risk factors
identified in its Form 10-K/A Amendment No. 2 for the fiscal year ended December
31, 2003, which would create any material market risk for the Company.
The Company and its subsidiaries are exposed to market risk in changes of
commodity prices in some of the raw materials they purchase for their
manufacturing needs' particularly nylon film, resin and latex. However, the
risk involved would not have a material effect on the Company's results of
operations or financial condition.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of the end
of the period covered by this report, have concluded that, as of
such date our disclosure controls and procedures were adequate and
effective to ensure that material information relating to the
Company would be made known to them by others within the Company.
(b) Changes in internal controls. There were no significant changes in
our internal controls or in other factors that could significantly
affect the Company's disclosure controls and procedures subsequent
to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or
undertaken.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against CTI Industries
Corporation for claimed breach of contract in the Circuit Court of Lake County,
Illinois claiming as damages the aggregate amount of $162,242. The Company has
filed an answer denying the material claims of the complaint, affirmative
defenses and a counterclaim. In the action, the plaintiffs claim that CTI
Industries Corporation owes them certain sums for (i) helium sold and delivered,
(ii) rental charges with respect to helium tanks and (iii) replacement charges
for tanks claimed to have been lost. The parties are presently engaged in
discovery proceedings, and the case has been set for a final pre-trial
settlement conference on January 3, 2005. The Company, based upon discussion
with counsel, has accrued the amount it estimates will be required to settle or
resolve this matter. The Company intends to vigorously defend this action and to
pursue its counterclaim.
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, we do not believe any of these proceedings will
have, individually or in the aggregate, a material adverse effect upon our
financial condition or future results of operation.
6
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
The Certifications of the Chief Executive Officer and the Chief Financial
Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
are attached as Exhibits to this Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
Exhibit No. Description
----------- -----------
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
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)
11 Statement: Computation of Per Share Earnings
31.1 Sarbanes-Oxley Act Section 302
Certifications for Howard W. Schwan
31.2 Sarbanes-Oxley Act Section 302 Certification
for Stephen M. Merrick
32.1 Sarbanes-Oxley Act Section 906 Certification
for Stephen M. Merrick, Chief Financial
Officer
32.2 Sarbanes-Oxley Act Section 906 Certification
for Howard W. Schwan, Chief Executive
Officer
7
(b) The Company filed a Current Report on Form 8-K on April 16,
2004, reporting its financial results for the fiscal year
ended December 31, 2003. The Company has not filed any other
Current Reports on Form 8-K during the quarter covered by this
report.
* Also incorporated by reference the Exhibits filed as part of
the SB-2 Registration Statement of the Registrant, effective
November 5, 1997, and subsequent periodic filings.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 8, 2004 CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
--------------------------------------
Howard W. Schwan, President
By: /s/ Stephen M. Merrick
--------------------------------------
Stephen M. Merrick
Executive Vice President and
Chief Financial Officer
9
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2004 December 31, 2003
-------------- -----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 331,189 $ 329,742
Accounts receivable, (less allowance for doubtful accounts of $186,215
and $223,220 respectively) 6,129,142 4,620,276
Inventories 9,168,518 9,263,160
Deferred tax assets 361,751 361,751
Prepaid expenses and other current assets 1,125,211 859,635
------------ ------------
Total current assets 17,315,810 15,434,564
Property and equipment:
Machinery and equipment 19,254,421 18,939,535
Building 2,714,301 2,678,581
Office furniture and equipment 1,872,593 1,931,831
Land 250,000 250,000
Leasehold improvements 587,034 582,052
Fixtures and equipment at customer locations 2,286,814 2,232,285
Projects under construction 319,592 408,961
------------ ------------
27,284,755 27,023,245
Less : accumulated depreciation (15,305,718) (14,815,596)
------------ ------------
Total property and equipment, net 11,979,036 12,207,649
Other assets:
Deferred financing costs, net 203,538 222,696
Goodwill 1,113,108 1,113,108
Deferred Income tax asset 803,449 1,012,365
Other assets 354,142 279,800
------------ ------------
Total other assets 2,274,237 2,627,969
------------ ------------
TOTAL ASSETS 31,569,083 30,270,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of bank balance 529,703 341,108
Accounts payable 6,273,299 6,799,490
Line of credit 5,929,714 3,694,241
Notes payable - current portion 2,528,708 2,998,496
Notes payable - officer 0
Accrued liabilities 2,200,412 2,306,745
------------ ------------
Total current liabilities 17,461,837 16,140,080
Long-term liabilities:
Other liabilities 873,815 1,079,041
Notes payable 5,445,151 5,766,091
Notes payable - officers 2,111,999 2,064,126
------------ ------------
Total long-term liabilities 8,430,965 8,909,258
Minority interest 10,230 9,263
Stockholders' equity:
Common stock - no par value, 5,000,000 shares authorized,
2,150,216 and 2,141,882 shares issued, 1,918,420 and
1,910,086 shares outstanding, respectively 3,764,020 3,764,020
Class B Common stock - no par value, 500,000 shares authorized,
0 shares issued and outstanding 0 0
Paid-in-capital 5,554,332 5,554,332
Warrants issued in connection with subordinated debt and bank debt 595,174 595,174
Accumulated deficit (3,156,162) (3,528,063)
Accumulated other comprehensive earnings (152,199) (234,768)
Less:
Treasury stock - 231,796 shares (939,114) (939,114)
------------ ------------
Total stockholders' equity 5,666,051 5,211,581
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 31,569,083 $ 30,270,182
============ ============
See accompanying notes to condensed consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Quarter Ended March 31,
2004 2003
------------ ------------
Net Sales $ 10,893,984 $ 10,162,495
Cost of Sales 8,746,614 8,225,442
------------ ------------
Gross profit on sales 2,147,370 1,937,053
Operating expenses:
Administrative 988,513 1,259,004
Selling 390,556 402,363
Advertising and marketing 393,484 588,894
------------ ------------
Total operating expenses 1,772,552 2,250,261
------------ ------------
Income from operations 374,817 (313,208)
Other income (expense):
Interest expense (331,136) (201,752)
Interest income -- 389
Gain (loss) on sale of assets -- --
Foreign currency (loss) gain 76,756 (108,506)
Other 486,896 (34,884)
------------ ------------
Total other income (expense) 232,516 (344,753)
------------ ------------
Income (loss) before income taxes and minority interest 607,333 (657,961)
Income tax (benefit) expense 233,456 34,245
------------ ------------
Income (loss) before minority interest 373,877 (692,206)
Minority interest in income (loss) of subsidiary 1,976 (2,418)
------------ ------------
Net income (loss) $ 371,901 $ (689,788)
============ ============
Income (loss) applicable to common shares $ 371,901 $ (689,788)
============ ============
Basic income (loss) per common share $ 0.19 $ (0.36)
============ ============
Diluted income (loss) per common share $ 0.18 $ (0.36)
============ ============
Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic 1,918,420 1,917,772
============ ============
Diluted 2,044,501 1,917,772
============ ============
See accompanying notes to condensed consolidated unaudited statements
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Month Period Ended
March 31, 2004 March 31, 2003
-------------- --------------
Cash flows from operating activities:
Net (loss) income $ 371,901 $ (389,788)
Adjustment to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation and amortization 509,280 347,709
Deferred gain on sale/leaseback (7,512) 7,512
Amortization of Debt Discount 62,873 9,072
Minority interest in loss of subsidiary 967 (2,418)
Provision for losses on accounts receivable & inventory 100,000 60,000
Deferred income taxes 233,456 2,885
Change in assets and liabilities:
Accounts receivable (1,753,866) (882,019)
Inventory 39,642 (430,992)
Other assets (139,917) (131,125)
Accounts payable and accrued expenses (657,064) 835,161
----------- -----------
Net cash (used in) provided by operating activities (1,240,239) (588,405)
Cash flows from investing activities:
Purchases of property, plant and equipment (261,510) (295,031)
Purchases of other assets (37,726)
----------- -----------
Net cash (used in) investing activities (261,510) (332,757)
Cash flows from financing activities:
Checks written in excess of bank balance 188,595
Net change in revolving line of credit 2,235,473 539,239
Warrants issued with Debt
Proceeds from issuance of long-term debt 0 1,630,000
Proceeds from issuance of notes due to officer 395,000
Repayment of long-term debt (1,003,442) (1,088,448)
Proceeds from exercise of warrants 15,750
Cash paid for deferred financing fees 0 (15,226)
----------- -----------
Net cash provided by (used in) financing activities 1,420,627 1,476,315
Effect of exchange rate changes on cash 82,569 2,552
----------- -----------
Net increase (decrease) in cash 1,447 557,705
Cash and Equivalents at Beginning of Period 329,742 160,493
----------- -----------
Cash and Equivalents at End of Period $ 331,189 $ 718,198
=========== ===========
See accompanying notes to condensed consolidated unaudited statements
March 31, 2004
CTI Industries Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered to present fairly the financial position and the
results of operations and cash flows for the periods presented in conformity
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
Operating results for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K/A Amendment No. 2 for the fiscal year ended December 31, 2003.
Principles of consolidation and nature of operations:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, CTI Balloons Limited and CTF International S.A.
de C.V., as well as its majority owned subsidiaries CTI Mexico S.A. de C.V., and
Flexo Universal, S.A. de C.V. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Company (i) designs,
manufactures and distributes balloon products throughout the world and (ii)
operates systems for the production, lamination, coating and printing of films
used for food packaging and other commercial uses and for conversion of films to
flexible packaging containers and other products.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Actual results may differ from those estimates.
Stock-Based Compensation
At March 31, 2004, the Company had four stock-based compensation plans. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations. The Company recognizes compensation cost for
stock-based compensation awards equal to the difference between the quoted
market price of the
stock at the date of grant or award and the price to be paid by the employee
upon exercise in accordance with the provisions of APB No. 25. Based upon the
terms of Company's current stock option plans, the stock price on the date of
grant and price paid upon exercise are the same. Accordingly, no stock-based
employee compensation cost has been recognized, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. No stock options were granted during the
three months ended March 31, 2004.
Historically, the Company's option awards have vested at date of grant.
Accordingly, had the Company applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-based Compensation," there is no pro forma
effect on net income to disclose in periods with no option awards.
Note 2 - Legal Proceedings
On September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against the Company for claimed
breach of contract in the Circuit Court of Lake County, Illinois claiming as
damages the aggregate amount of $162,242. The Company has filed an answer
denying the material claims of the complaint, affirmative defenses and a
counterclaim. In the action, these plaintiffs claim that the Company owes to
them certain sums for (i) helium sold and delivered, (ii) rental with respect to
helium tanks and (iii) replacement charges for tanks claimed to have been lost.
The Company intends to vigorously defend this action and pursue its
counterclaim.
In addition, the Company and its subsidiaries are party to certain
lawsuits arising in the normal course of business. The ultimate outcome of these
matters is unknown but, in the opinion of management, the settlement of these
matters is not expected to have a significant effect on the future financial
position or results of operations of the Company.
Note 3 - Comprehensive Income
Total Comprehensive Income was $82,569 for the three months ended March 31, 2004
and was a comprehensive loss of $666,202 for the three months ended March 31,
2003.
Note 4 - Inventories, net
March 31, 2004 December 31, 2003
-------------- -----------------
Raw material and work in process $ 2,619,675 $ 2,231,428
Finished goods 7,071,796 7,523,889
------------ ------------
Inventory, Gross 9,691,471 9,755,317
Less: Inventory Reserves (522,952) (492,157)
------------ ------------
Inventories, net 9,168,519 9,263,160
============ ============
Note 5 - Geographic Segment Data
The Company has determined that it operates primarily in one business segment
which designs, manufactures, and distributes film products for use in packaging
and novelty balloon products. The Company operates in foreign and domestic
regions. Information about the Company's operations by geographic areas is as
follows.
Net Sales to External Customers Total Assets at
For the Three Months Ended March 31, 2004
March 31 March 31
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
United States $ 9,617,000 $ 9,194,000 $ 28,457,000 $ 28,873,000
Mexico 1,532,000 1,180,000 5,605,000 5,584,000
United Kingdom 751,000 681,000 1,801,000 1,275,000
Eliminations (1,006,000) (893,000) (4,299,000) (3,930,000)
------------ ------------ ------------ ------------
$ 10,894,000 $ 10,162,000 $ 31,564,000 $ 31,802,000
============ ============ ============ ============
Note 6 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally limited due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectable. Such losses have historically been
within management's expectations. For the three months ended March 31, 2004, the
Company had 3 customers that accounted for approximately; ($1,979,000) or 18.2%,
($1,245,000) or 11.4%, and ($1,142,000) or 10.5%, respectively, of consolidated
net sales.